In this episode of Markets in Focus
“Drill, baby, drill” once was the mantra in the energy patch. But for the past decade, deep value investors have set the tone, demanding dividends and saying, “Show me the money.” Now the industry again is in flux, with no shortage of catalysts: pandemic, war, inflation, looming recession, growth in alternative fuels, and more. Explore headwinds, tailwinds, and trends in the energy sector with Eric Mintz, CFA, Portfolio Manager on the small- and mid-cap growth teams at Eagle Asset Management, and Eric Chenoweth, CFA, Senior Investment Analyst on the mid-cap equity team at Scout Investments.
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It's impossible to ignore what's been happening across the energy complex right now. Oil and natural gas prices have spiked, which has been a tremendous tailwind to energy companies, but a headwind for the consumer in the form of spiking gas prices, utility costs, shipping costs, and so on. As a result, the energy sector rebounded strongly throughout 2021, and has continued to march higher this year despite pretty abysmal returns across the rest of the market. War between Russia and Ukraine has increased already elevated supply concerns and helped push the price of crude to levels we haven't seen in nearly a decade, but increasing fears of recession, both here in the U.S. and abroad, have contributed to increased volatility and sparked a meaningful drawdown across the energy complex. How could recessionary fears impact energy markets going forward, and have we seen the best of times for the energy sector, or is there potential to see further gains going forward?
This is Markets in Focus from Carillon Tower Advisers. I'm your host, Matt Orton. Join me and my colleagues as we discuss the latest trends and developments driving the markets. Visit us at marketsinfocuspodcast.com for additional episodes and insights. As we now sit at the midway mark of 2022, the outlook for the energy sector is a bit less certain than it was back in December, to say the least, and to help answer some of the key questions going forward and dive deeper into the energy trade, I'm very happy to have Eric Chenoweth back with us, who's a Senior Research Analyst at Scout Investments and works on their Mid Cap Equity team, as well as Eric Mintz, Managing Director and Portfolio Manager of the Eagle Growth team.
Both have deep experience covering the energy sector, and I'm excited to dive in. Before we start, some of our most observant listeners may have already noticed that we have two Erics on this podcast, so I'm going to go with Eric C. and Eric M. to make sure we don't have a battle to answer what I hope will be some interesting questions. With that, let's get started. I think one of the key questions on investors' minds is whether the recent gains across the energy complex are sustainable. Eric M., perhaps you can paint a brief picture of how we got to where we are today with such meaningful supply challenges.
Yeah. Sure, Matt. Thanks for having me on the podcast again, and it's a pleasure to be here and speak with you. Most certainly, the energy sector overall is really kind of paying the piper for the abhorrent behavior of most management teams that we witnessed kind of during the last cycle, which really kind of went from, we’ll call it the mid-aughts into sort of the early teens, and I mean, 2012, 2013. And that was just reckless spending, the aggressive forecast of management teams just to grow production at any cost, completely disregarding any type of metric to make sure your return on invested capital exceeded that cost of capital. To a large extent, that behavior was, in fact, encouraged and rewarded by the equity markets.
Obviously, we saw drilling production growth, certainly North American shale strictly for the sake of growth, and obviously, that really came home to roost when we saw OPEC make a significant adjustment in their overall strategy, and they basically flooded the market back in Thanksgiving, I think it was 2012. That really was a watershed event, and it led to a dramatic reckoning in the industry. You saw this shareholder base completely turnover to deep value investors, and people that demanded that these management teams change their ways and actually generate free cash flow and return that cash to shareholders. Now, kind of coinciding with that dynamic, obviously we had this, for lack of a better term, obviously the pandemic, the once-in-a-century type of event that led to just a complete halt in the global economy, and we saw a drop in energy demand, the likes of which have really no precedent whatsoever.
We saw oil demand, if you think about it, running prior to the pandemic in 2020, was about 100 million barrels a day. We saw that basically plunge down into the mid-'80s, and not surprisingly, prices for all commodities, but oil specifically plunged. In fact, I'm sure most people can recall seeing negative prices, where traders were literally paying people to actually take the physical barrels on the date of delivery back in, I guess it was April or May 2020, and then that certainly was a notable event of capitulation. Really, in response to that, we saw a rig count not surprisingly, if you look specifically just at North America, plunge from roughly 650 rigs down to 175 rigs in just a matter of months.
It was an abrupt halt that, really, the industry had not witnessed that dramatic of a decline before, and obviously the market was massively oversupplied. Over the last, call it two-plus years of the healing period following that traumatic event, we've seen a drawdown in inventories, and we've seen supplies gradually tighten over time. One of the big dynamics that not only has been a slow recovery in the rig count, and specifically, if you're looking at North America, the oil rig count, as I just mentioned, it plunged to below 200, it's clawed its way back to about 600 now. Again, going back to 2019, we were kind of running in just under 700 level, and even prior to that 2018, closer to 900. That was with oil prices, I believe in the $60 to $70 range, nowhere near the levels that we're at now with WTI.
At least the front month, about $100, the strip overall, more like in the high 80's, low 90's as you look further out, so certainly, there's been a tremendous response on the supply side, and it's obviously led to a recovery in broader oil prices. I would be remiss if I didn't mention, obviously Russia, Ukraine certainly exacerbating that here in 2022. The geopolitical tensions obviously underpinning that, but it's definitely been a slower recovery, and one of the more interesting aspects of this is it's been done within the context of a large drawdown in what the industry refers to as drilled but uncompleted wells. Those are referred to as DUCs, the acronym. Really, that just refers to a well where you saw the initial wellboard drilled, but there had not been a frack crew to come out, and fracking complete the well, and we've seen a huge drawdown in those DUCs from almost 9,000 DUCs in 2020 to just over 4,000 currently.
A lot of the low-hanging fruit, if you will, has been picked in terms of bringing in the lower cost supply, the uncompleted wells, and we are seeing a little bit of a recovery on the rig count side, but again, you've got management teams that have really learned the hard way what their shareholder base wants, and that again, is a generation of free cash flow and a return of capital to investors. I think that that really has set the stage for this recovery. I think just looking out into what kind of the management teams of the publicly traded entities, the larger companies have told us about their spending plans for the year, we're expecting up 18%, roughly $50 billion spent on drilling activity, but about half of that number comes solely from inflationary pressure, so I guess if you were to just say on a real adjusted basis, you're still talking high single-digit increase in capital spending, but nowhere near what we witnessed in the prior cycle. In fact, just in 2019, prior to COVID, that budget was closer to $60 billion, so we're still running below that number. I think that that's really an important tell, not only on discipline on the management team side, but also uncertainty about energy policy going forward.
I've obviously kind of touched on a number of issues that I'm sure you're going to want to do a much deeper dive into, Matt, but I think that that really does set the table for today's discussion.
Yeah, it does. Thank you, Eric. I think that's pretty powerful information, especially the impact of inflation. I think that's a good segue maybe to Eric C., because the natural follow-up to that is what's happening on the demand side. We haven't really seen that much demand destruction, at least here in the U.S., with much higher gas prices, and now, China is reopening, well, may or may not be reopening depending on the day, but is demand likely to remain elevated for the foreseeable future, especially at the current price levels we have?
Yeah. Thanks for having me back. I'll try to start with what we can see and expect, and then maybe save a potential elephant in the room kind of to think about at the end. As Eric mentioned, oil demand's recovered kind of back to about, just give or take for simplicity's sake, 100 million barrels a day, and that's important context when you think about this latest IEA report, which is a big agency in Europe that kind of represents the demand side of the oil and gas world, kind of the anti-OPEC or the mirror image of OPEC. They just came out and said they expect 1.8 million barrels per day of growth in demand in 2022, and then that will accelerate to 2.2 million barrels per day in 2023.
A lot of that, if you kind of dig to their numbers, is like you mentioned, China ramping back up because they've been a pretty big laggard. Really, when I look at this report, it looks a bit optimistic to me, but generally kind of pointed in the right direction. I think demand is likely to trend higher structurally. The U.S., although it hasn't really had a big reaction, it has kind of been disappointing compared to what we expected earlier this year on the demand side, so there's still room for the U.S. to improve. Now, the big kind of secular bullish factor under all this is jet fuel demand.
It's up 39% year on year, which is about 1.6 million barrels per day, so it's been one of the big recovery factors, but what's important is that there's a lot more room for that to run when you look at the international side. A lot of that jet fuel demand is domestic, what we're seeing right now, but the international side is still only about 30% of 2019 levels. As borders open up and as people start to travel internationally, that's going to really kick that jet fuel demand number up quite a bit more than we've seen so far. One of the other kind of unusual things that you don't usually have to think about with demand, and Eric mentioned, the inventory is getting drawn down. Well, a lot of that is the commercial inventories, which private companies keep, but a big part of it this year, which is the unusual part, is that it's SPR.
It's Strategic Petroleum Reserves. Now, we usually see these drawn down in times of, if there's a big hurricane outage or a war, but we've had one of the biggest drawdowns in Strategic Petroleum Reserves in history this year to help meet demand, and that's been adding one to two million barrels per day of supply. What does that mean? It means by the end of this year, those SPRs are going to be largely drawn down to not empty, but near empty, to a point where they really can't be drawn down much more. What does that mean for demand?
That means that some point, those Strategic Petroleum Reserves will need to be refilled. Now, I don't think it's going to happen right away, but to give you some thoughts on the scope of this and the scale, one to two million barrels per day have drawn the U.S. SPR down from, in the 800 millions down to ... You'll probably get close to 200 to 300 million when it's all said and done by the end of the year. That's a couple years of one to two million barrels per day of demand just to rebuild SPRs. They might have to drag it out more slowly, so that's something that in the future, is a new source of demand that we don't usually think of.
It's not demand to consume, but demand to rebuild all these stockpiles that we've drawn down over the last year. Another thing that's highly unusual and does appear somewhat structural is gas to oil switching for demand, especially in the EU, where as we all know, they're facing a fairly serious natural gas crisis, and that's likely to accelerate this winter and stick with us for at least a year or two after. You ask yourself, "Why would they switch from natural gas to oil?" Well, in the EU, natural gas has been hovering on the $50 to $60 range, which equates to about $330 oil, so $100 oil looks pretty reasonable compared to what they pay for natural gas, so I would expect on the edges, we'll see that substitution effect boost demand. A lot of times, this kind of surprises everybody, including me, so I'm guessing it'll have a pretty significant impact this winter, although it might be hard to really quantify.
It might be another million barrels. One other thing, I think is structural that we've learned, and we've learned a lot about supply chains over the last couple years with COVID, but with EVs, electric vehicles in particular, it looks like their very young and kind of emerging supply chains have a lot of work to do, and I think that's going to be spelled out in years and that might slow that adoption curve down a bit more than we would've thought couple years ago. They've struggled like other industries, but I think they have some unique challenges in various parts of their supply chains to work out, especially with China being kind of right in the middle of that, too. That's kind of a persistent source of uncertainty. There's a really strong secular demand case emerging for the next one to three years when you think of all these different factors, but, and it's a big caveat that needs to be, you need to go eyes wide open to this, is that the cyclical risk of recession has grown recently.
I think, in my view, that's what's really led to the big washout in oil futures and in a lot of the energy stocks in the last month and weeks. That's something that you have to bear in mind, that cyclical risk kind of set against these other stronger secular factors.
Well, great. Thanks, Eric. That's definitely helpful background, and so it seems like your case for strong secular demand, coupled with what Eric M. was discussing about, pretty tight supply, it certainly sets up a recipe for what one would think is strength in the sector going forward, but I do want to go back to something that Eric M. was saying, which related to the newfound discipline that we're seeing across the energy complex, kind of pivoting away from that drill, baby, drill mentality. Eric, what do you think caused the E&Ps (exploration and production companies) to find religion after so many years, and do rising rates pose any sort of marginal concerns for financing or the ability for any of these companies to expand supply even if they wanted to going forward?
Yeah. For lack of a better term, I would describe it as equity investor vigilantism, really kind of instilled the new religion in the mindset of a lot of management teams in this industry. To go back to the era of unrestrained capital spending, growth for the sake of growth, there really was this mantra. It was, "Show me the money." It's not, "Drill, baby, drill," it's, "I need to see free cash flow, and you need to return that to investors." I think I was looking at a slide that was showing in that last boom period, management teams were spending 120 to 150% of their cash flow on drilling, and right now, we're running, I think it's closer to 30 to 40%, so these teams really have learned, and obviously, their share prices have done quite well in response to that, so I think that they've seen the success of this strategy bear fruit and are compelled to maintain that discipline.
That's certainly the messaging that I'm hearing from these management teams. I think as we work our way through the second-quarter earnings, it will be interesting to hear what the commentary is regarding these capital budgets. The easiest way to kind of gauge a stock price response on an earnings report is whether or not production growth expectations for the year were revised up, and also what capital spending budget plans did. I think because of the inflationary pressures we're seeing in the energy patch, expectations have to be for an upward bias to the capital spending budget, but you need to see a commensurate increase in production as well. Typically, companies that report flat production, but rising capital spending typically see their stocks underperform when they report and thereafter.
They're viewed as less capital-efficient, and I really believe that that's the microscope that people are looking at these business models under ... That's the lens that they're being judged by, and they're going to be very reluctant to increase their capital spending in that environment. It's important to understand the way the business model works in the energy patch is that you do have to put capital into the ground well before you see the returns on those investments, and that inherent aspect of the business model does not necessarily lend itself to generating a lot of free cash flow. Meaning, you'll have to get the rig on site and begin, spud a well. It could be nine months before you tie that well in.
It may be even longer. It could be a year before that well is tied in and generating revenues, so I think in that context against a market that is demanding free cash flow and high dividend yields, it's very challenging for management teams to really go out and jack up capital spending and promise these returns, looking out into 2023, which actually ties directly into what Eric was saying, suggesting that the demand outlook based on the yield curve and most economic projections is probably a little iffy right now, at best, right? People are thinking that we could see downward pressure on demand in a slowing economy, if not, an outright recession, so what management team is really going to go out and make aggressive capital spending plans now in light of heightened uncertainty around where oil prices might be 12 months from now and that well is brought online? And I think that that dynamic is almost as important as this newfound religion that they have to return cash to the shareholders, and that's a very important aspect to this. Also, worth noting is the political climate is pretty hostile towards this industry right now. The industry's been completely vilified, and there's discussion of whether you want to put on a tax on excess profits.
I just don't feel like these management teams have confidence in the current energy policy in the country is going to be favorable for this industry and are very slow to accommodate this demand to just go out and drill immediately, and I think that that also needs to be considered. The one offset to all that is that we have seen a shift in the overall makeup in the benchmarks between growth and value. I would just flag that as being important because it really was the value investor base, the shareholder base of these companies that really drove home the need to generate returns in excess of the cost of capital, and also return capital to shareholders. Now, as we've seen, there's been a dramatic adjustment with the re-weighting of the Russell benchmarks, where value funds have seen a big reduction in the overall weight of energy in their benchmark, and growth has seen an increase. Now, it's possible, but I'm not entirely certain, that this is going to lead to a change in that discipline or the operating strategy, but it is possible that you could see the growth investors that are now moving back into the space to what extent remains to be seen, but you could see the growth investors moving back into this group and saying, "We'd like to see production growth."
That would be obviously a call to arms to put some more money into the ground, but I'm not certain that that's necessarily going to be the case, and certainly, the growth investors are going to be given the stronger commodity prices, supporting that growth and cash flows, that that should be adequate, and in fact, going back to the idea of an uncertain outlook into 2023, it does appear that these companies may want to remain prudent with their capital spending plans.
Then, finally, I would just note, to your question regarding interest rate sensitivity, this is definitely a group that has seen their financial overall health dramatically improve. The balance sheets across this industry are not nearly as leveraged as they were in the last cycle, and maybe that sows the seeds for the next cycle, but I'm not entirely convinced that we're going to see much sensitivity to interest rates beyond the fact that interest rates should actually go up because of inflation, and obviously, oil is a huge factor in the CPI. I guess that's the one drawback on the whole industry, is that the Fed is determined to rein in inflation, and you cannot overlook the importance of energy prices in the overall inflationary outlook, and so the old adage, "Don't fight the Fed," it's kind of like they're almost square in the sights of this sector, if you will, just given its overall importance in the inflationary outlook as a whole. That certainly was a long-winded answer to your question, Matt, and I apologize for going so long, but certainly food for thought.
Yeah. No, I think it is, and you brought up a lot of interesting points, particularly with the reconstitution of indices, where we've seen value become growth, and some growth become value. It's an interesting transition that, I would say, we probably won't see play out immediately, but maybe down the road, definitely something to be conscious of. Maybe building on that whole discussion, Eric C., as you think about investing in the energy space going forward, particularly with some of the shifts we've seen and the fact that the sector's up north of 30% in the S&P 500 year to date even after the pullback, where are you seeing some opportunities or compelling opportunities going forward?
Sure, and I do think that recent selloff, kind of tying in a lot of things that have been said, was due to this recession mindset getting pushed to the front of mind and people really taking into account that the Fed is really tightening and is serious about it. That, I think has entered the picture and entered the valuations a bit and has helped make them a bit more attractive than they were a month ago, and we see opportunity. We see E&Ps, even the very high quality ones, still offer 10%-plus free cash flow yields, and the street, we never really incorporated $100-plus oil into our forecast, so these free cash flow yields are still very achievable in an $80 to $100 oil world, if that's indeed where we're headed. And the balance sheets, like Eric talked about, the balance sheets are far healthier than they were in past recessions, and so healthy, they can still probably return significant cash to shareholders even through a modest recession. One of the things that's really hard to fathom, unless you really go and look at it, is just how much more efficient and productive the companies are now, too, if indeed we are headed into a tough spot.
One of our holdings, they employed over 8,000 workers in 2008, going into that 2008 and '09 crunch, and today, they have about 1,500, and yet, they have a production base that's much, much larger than it was back then. While this is probably one of the more extreme cases that we have, it's pretty emblematic of what you see when you look across the space, just leaner organizations doing a lot more with less, balance sheets much healthier, and policies that are returning that cash to shareholders. On the upstream side, it still looks pretty good to us, but we do have to be mindful of the recession in the downside if oil goes below $80 and thinking about that scenario as well. When you look at oil service companies, they're still kind of waiting for their boom, because of all this discipline that Eric was talking about that never really came yet like they normally would get, so they might be exposed to spending cuts if a recession materializes. These companies have a lot more operating leverage than other parts of the industry, so if those orders don't materialize or if the discipline holds or even gets cut a bit, they could have some risk.
Even with all that, we do find some value there. It's just more of a, you have to pick your way through it. Finally, if you go to the refiners, we haven't talked a lot about the refining side, but that's a big part of what's happening today, this incredible shortage of refining capacity. That's led to those companies doing really well and all the integrated companies doing quite well, but when we look at that space, they're likely at peak earnings power. It's hard to imagine.
It's certainly unprecedented, the type of earnings power that they've had so far this year, and it's hard to imagine that that can be maintained sustainably for years. Although we do think they'll have very, very good earnings relative to history, it's hard to imagine that we're not at a peak now, so we think there's probably some downside risk to earnings in the refining space and would probably be more careful there. That's kind of the lay of the land across the different parts of the chain.
Perfect. A quick question for Eric. Building on that, you mentioned earnings and risk to earnings growth, and that's obviously been the theme as we head into the second half of the year, that earnings is for the market as a whole might be too high, as we potentially head into a recessionary environment. Eric M., do you think that earnings might be too high for energy since we haven't really seen meaningful downward revisions, and do you think there's a difference in expectations as you go down the market cap into mid and smaller companies, or do you think valuations and expectations are fair?
Yeah, no. I think valuations are more than fair right now. The risk around earnings, in my estimation, and I guess we'll find out soon enough, is really going to be on the cost side of the equation, and it's all about supply chain bottlenecks and labor shortages are obviously very acute in the Permian Basin, so it is going to be how these teams manage this recovery, this budding recovery in the oil patch on the cost side. Certainly feels like revenues would ... You know the price of the commodity during the quarter.
Volumes should hopefully be pretty intact. I think most people came in to the year with some very modest expectations for minimal volume growth, so it really comes down to the cost side of the equation, and many of these stocks are trading in a single-digit earnings multiples and double-digit multiples on free cash flow. I think as long as that dividend yield is boosted, even from very high levels right now, I think that that should be overall supportive for the group. The dynamic that is concerning is it is a light cycle group, and we have seen the big push into energy that you would witness at the end of many cycles, but at the same time, there's enough dynamics to really support this idea that this should be a much longer, prolonged cycle starting with, as we've already discussed ad nauseam, the discipline that we're seeing on the side of management teams, and then completely ignoring the geopolitical risks that are out there that this certainly isn't a sector you would want to be significantly underweight, even in the context of a deteriorating economic environment as a portfolio manager, just given those risks, coupled with the very reasonable valuations. I think there's always risk around earnings, but relative to other sectors of the market, where things appear to be changing more rapidly, second quarter should be pretty decent for this group.
Again, it does come down to what they say on capital spending for the back half of the year. Again, to go back to reiterate, just given that more iffy outlook on the commodity price for 2023, it just doesn't seem like people are going to get real aggressive on jacking up capital spending in that light, so I'm pretty comfortable with the group going into earnings, so ...
Great. I think then, the kind of follow-up or final question to ask both of you since we're running short on time is your favorite themes or favorite areas for investment going forward and potential risks. I know we haven't had a chance to touch on alt energy, but if there's anything that could look interesting or if you think it's an area to stay away from in the near-term, maybe you can both share some thoughts on that. Maybe I'll let Eric C. start off, and then I'll give Eric M. the final word.
Okay. Sounds good. I think there's two spots that we're most excited about. The first one is kind of we've touched on, but just to reiterate, is those cheap, high-quality E&Ps, where you get the big free cash flow yields at $80 oil. We like the natural gas E&Ps for similar reasons, certain ones, and I think there's just a lot of room in there to find some good opportunities, but if you flip to the renewable side, we're still pretty excited about opportunities in renewable diesel and renewable aviation fuels. In fact, that's one of the only places where you’ve seen M&A this year.
We saw a major integrated company, one of the big ones, acquire a mid-cap biofuels producer this year. I mean, it's really one of the only ways these larger companies can gain that expertise in the EMEA (Europe, Middle East, and Africa) market and the customers, and progress on their CO2 roadmaps, and to really jumpstart it. That was a big sign to us, that these smaller companies, even though they're small and kind of going through their own growing pains, they have a bright future. If you look at a laundry list of things that have happened recently, Canada just passed fresh legislation on road fuels and reducing CO2. That'll be a big driver.
Canada's about as big as California in terms of that end demand, so it's a big mover for that young market. The EU just passed a goal for sustainable aviation fuel. It's a big one that provides a long runway for renewable aviation fuels to kind of grow into this 2050 goal that they put out there. In the U.S., Build Back Better was a flop this last year, and it had a lot of things that would've helped this industry out, but when we move past midterm elections, the one thing that everybody basically agrees on, and people disagree on a lot of things in there, but one thing they all agree on, the ag lobby likes it, the energy lobby likes it, it works for everybody in the business community, is renewable diesel, especially with diesel shortages of being what they are now. I think there's room for maybe some standalone legislation around renewable diesel and renewable fuel, sustainable aviation fuel.
It's really the only way the airline industry can beat its decarbonization goals long-term, given the way airplanes work. Then, one final thing, I think is California, they've been hinting and talking about their plans to even further tighten their CO2 goals for both aviation (and) road fuels, and California's been the pioneer. They've shown a really good path there, and it's really brought the industry up from kind of small to mid-cap land, so I think there's a lot of opportunities still on the renewable fuel side.
Great. Eric M, I'll give you the final word.
For us, investment opportunities in the space, we absolutely love these mineral rights. Companies basically just own ... It's almost like a licensing agreement. They own, as you would expect, the rights to the minerals that are being produced on that land without having to incur any of the costs, so they get basically just checks in the mailbox for all the wells, all the oil production that's produced on the land that they own without having to incur any expenses, and as I mentioned, the big risk in our mind around this cycle, and certainly this quarter is going to be on the cost side of the equation, and because they don't really have exposure on that side whatsoever, it's all about volumes and price per barrel received, so we think that that's really the best way to play this cycle, so there's certainly a number of companies in the small-cap universe that fit into that sphere. Then, as far as alternative energy goes, there was so much hype around that.
They were really one of the big areas of focus with the whole SPAC phenomenon and craze that we just went through. Those are really, in a number of cases, very long duration assets. Those are companies that are not expected to be profitable anytime soon. In an environment with higher interest rates, that's really just completely out of favor, which is a healthy thing for the overall market, but I think the one exclamation point for us when we consider this is that a lot of this is driven by government policy, which on a number of levels, is flawed and certainly fails to consider the importance of this transition period as we move into more sustainable and renewable sources of energy, and it really does create this huge tailwind for natural gas. In that regard, when you think about alternative energy, you have to think about natural gas because these coal-fired power plants are being closed.
As we switch over to more solar and wind, which does sound great and make sense, there is going to be, as we're right in right now, a very bumpy transition period. Just to frame it in terms of what the upside to natural gas, I mean, natural gas today is $7, but on a BTU-equivalent basis, the ratio with oil should be about 6:1, so at $100 oil price, you're looking at natural gas that's twice where it currently is, so obviously, a tremendous amount of upside in the commodity without doing much with oil prices. Oil prices could even go down significantly from here, and you'd still be relatively okay on the natural gas side, and certainly, the need for liquified natural gas exports, LNG exports to appease the shortage that the Europe is facing, given what's going on with Russia and how they're conducting themselves, obviously, that's another big tailwind. When we think alternative, we like free cash flow and very reasonable valuations with a very strong fundamental backdrop, leads us into, directly into the natural gas arena, so I would just leave you with that.
Excellent. Well, thank you very much. Eric Mintz and Eric Chenoweth, I really appreciate your time on this. We probably could have gone another 30 minutes or an hour on this discussion, so we'll have to have a follow-up at some point. I'm sure our listeners found this to be very engaging as well, so thank you both for your time, and for our listeners, until next time.
Take care. Thanks for listening to Markets in Focus from Carillon Tower Advisers. Please find additional episodes and market insights at marketsinfocuspodcast.com. You can also subscribe to our podcast on Apple Podcasts, Spotify, or your favorite podcast app. Until next time. I'm Matt Orton.