Energy 2025 Outlook: Macro Positioning

• • In 2025, the gas macroeconomic outlook appears more favorable compared to the crude macro, marking a shift from recent trends. Gas macro was the primary focus during the December outlook conference and dominated discussions in the third and fourth quarters. A bearish view on natural gas for 2025 was presented, with a more optimistic outlook for 2026 and 2027. The 2025 strip received a cold weather boost to $3.60, exceeding previous estimates, while the 2026/2027 strip increased to $3.75-$3.80.
  • The crude markets continue to face oversupply issues, with potential downward pressure on prices. Factors include uncertainty around Chinese demand, tariff impacts under a new administration, and the duration of OPEC+ market support. WTI prices remain in backwardation throughout 2025 and 2026 and declined to an average of $70/bbl in 2024, aligning with expectations for 2025.

Relative Value

The IG Energy sector is maintaining a Market perform status. The sector is trading ~15 bp behind the overall Corporate Index at +96, compared to wider spreads in previous years. The macro environment, stronger credit metrics, and capital allocation plans reflect fair value at these tighter spreads. However, Midstream currently offers a small spread pickup compared to IG Energy.

Over the past few years, the IG Energy sector has focused on improving balance sheets, with most issuers maintaining a stable leverage outlook for 2024 after reaching targets. Larger issuers like OXY, EQT, OKE, TRP, and ENB are expected to continue reducing leverage through EBITDA growth and debt reduction. While shareholder rewards are increasing, these are anticipated to be funded with excess cash flow, with balance sheets remaining intact. The majors plan to maintain robust buyback programs, and EOG intends to increase gross debt to fund buybacks or M&A.

The HY Energy sector also holds a Market perform status, trading 30 bp tight to the HY Index and 70 bp wide to the BB index. The fundamental outlook remains positive, focusing on balance sheet improvement and cash flow management. Issuer selection will be crucial for achieving outperformance going forward.