Rational Markets is a monthly podcast covering energy markets, upstream valuation, and the analytical frameworks behind institutional-grade research. Each episode works through a specific market theme or investment mechanic — the kind of analysis that usually stays inside a bank portal or a $100,000 data subscription. Hosted by Darrel Koo, CFA, with 15 years of institutional energy research experience and no mandates to protect.
Energy Pragmatism: Why the Market (Not Government) Is Driving the Energy Sector
Mark Carney said "A desired outcome is not a policy." In this video, I break down the coming-of-age story of the energy sector: from the shale boom's "growth at all costs" era, through the reckoning, the rise and fall of ESG, and into today's era of Energy Pragmatism. We cover what led us here, what it means for oil and gas investors, and why financial discipline in the energy sector was enforced by the market, not by government policy.
For more institutional-grade energy sector insights, check out my Substack (link below).
Chapters: 0:00 — Introduction: Energy Pragmatism 0:46 — About This Channel 1:25 — The Problem with Energy Research Access 2:08 — Leveling the Playing Field 2:40 — Mark Carney's Policy Reversal 2:59 — Setting the Stage 3:22 — Phase 1: Growth at All Costs 4:55 — The Spreadsheet Style of Investing 5:35 — Phase 2: The Reckoning 5:52 — Parent-Child Interference & Rising GORs 6:45 — 274 E&Ps Go Bankrupt 7:36 — The New Playbook 8:04 — Phase 3: Rise of ESG & Energy Doomerism 8:55 — ESG Elements: Climate Pressure, Capital Flight, Corporate Shifts 9:28 — ESG Loses Steam 9:53 — Major Shifts: Energy Crisis, Record Profits, Political Pushback 10:44 — Pragmatism Takes Over 10:59 — The Current Reality for Oil & Gas 11:59 — Mark Carney's Words Reenter 12:29 — Hope Is Not an Asset Class 12:45 — Energy Investing Renaissance & Outro
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There's a quote from the Prime Minister of Canada, Mark Carney, from an interview he had with Bloomberg, where he said,"A desired outcome is not a policy." And that quote really stuck with me because I think it really reflects the coming-of-age story that we've seen from both the energy sector as well as government policy towards it. And recently, in his video series called Forward Guidance, the PM posted a video essentially admitting that the previous government's climate goals won't be met, and he confirmed that Canada's emissions will run higher than previously projected So I wanted to make this video to talk about the overall theme underlying that announcement that I'll call energy pragmatism, as well as discuss the events that led us to this point and ultimately what it means for investors. And just to reintroduce myself for those new to the channel, my name is Darrel Koo, and I worked fifteen years across major investment research firms, investment banks, and startups, really covering the energy sector throughout that entire time. And basically, I researched the energy sector to provide investment recommendations to large institutional players like hedge funds, private equity, and large project developers. What I saw during that fifteen years is that these institutions have incredible access to high-quality research and other tools that help them make informed decisions on how to invest their capital. Unfortunately, the same can't be said about individual or retail investors or even wealth managers and small family offices. The reality is that a thirty thousand dollar a year subscription to Bloomberg or a hundred thousand dollar a year subscription for some industry-specific software platform just isn't within reach for the vast majority of investors. That means the majority of good research and investment tools are prohibitively expensive for anyone who isn't managing billions of dollars in assets. So my goal with this channel is to level the playing field by making institutional-grade insights accessible to everyone, regardless of their background or financial situation. And today's discussion, I hope, is an example of these insights. The topic again is energy pragmatism. I wrote a deep dive on this topic on my Substack. The link is below. But to sum it up, Mark Carney is publicly reversing many of the environmental policies that were put in place by the previous Liberal government and is now actively working to accelerate what he calls nation-building projects, which includes oil and gas projects like pipelines and LNG terminals The market has slowly started this reversal years ago. Ottawa is actually one of the last movers to embrace this change, but its recent shift still has significant consequences on energy markets since many large-scale energy projects in Canada ultimately need the government's blessing to move forward So first, we need to set the stage and talk about what led us to where we are today, where energy went from being horribly out of favor to today, where it probably still doesn't give most folks warm and fuzzy feelings, but at least more of the general public and investor community are coming back around to the idea of building and investing in traditional energy So phase one of the story that led us here, and this is what I'll call growth at all costs. New technology, specifically horizontal drilling and multi-stage fracturing, unlocked massive amounts of oil and gas resources in the US and in Canada that were not previously economic to develop. Upstream companies and their investors started frothing at the mouth about this opportunity. The frenzy spiraled out of control since it played perfectly into how most E&P or exploration and production management teams are wired. They want to take risk and they wanna grow, and this gave them the perfect reason they could give to investors to do exactly that. Investors were also fueled by a low interest rate environment. The entire investment industry needed to move up the risk ladder just to achieve some degree of returns. E&P was the perfect vessel. Before data centers and before AI, E&P was the most capital-intensive industry the economy had. And so there was a massive amount of capital that could be deployed Investors, again, were desperate for returns and were lulled into thinking that developing oil through these shale reservoirs and gas was a low risk and repeatable process. And this led to what I'll call the spreadsheet style of investing and operating an energy company. Energy companies and their investors started throwing the kitchen sink into their valuation models. There was so much competition for capital and these oil and gas assets that companies and investors needed to make more and more aggressive assumptions just to justify the prices that were being paid. Meaning they had to believe that the assets they were buying would just keep improving into the future. They would keep growing, and that oil and gas prices would stay high basically forever. And that was the only way to make the math work. Your Excel sheet told you that the company was worth X billion dollars if you just plugged in the assumptions that management gave you, and that made your entry point seem reasonable, and investors bought it up Now, this leads us to phase two, the reckoning. Ultimately, physics caught up with spreadsheets. Companies were far too aggressive with their development strategies and packed too many wells into a single section of land. And the result is something called parent-child interference, where the initial parent well does really well, but the nearby child wells drilled afterwards performed much worse because the wells were effectively draining the same rock as the original well Another side effect of this overly aggressive development practice was rising GORs, or gas oil ratios, where wells would essentially gas out faster than expected. This meant that wells ended up producing far more gas and less oil than originally expected, which made them, less profitable than expected I saw cases of up to 50% degradation in recoveries in the Permian Basin from these parent-child and spacing issues. On top of all this, oil markets hit a major challenge with the 2014 OPEC price war. And the result of these operational and macroeconomic issues was that 274 North American E&Ps went bankrupt. And in what I think was a death knell for the growth at all costs phase was that Equinor published a postmortem analysis of its acquisition of Brigham It was basically an admission from the leadership of a major multinational oil company that it got caught up in the hype and the FOMO, or the fear of missing out, which led it to knowingly pay an acquisition price for Brigham that would be very difficult to justify unless the stars aligned perfectly, meaning their execution had to be perfect and oil prices had to stay elevated forever. And as we know, in a cyclical industry like oil and gas, neither of those assumptions are realistic Which brings us to the new playbook, which is reinvest roughly half of your cash flow and return the rest. And companies from all over the North American shale spectrum, from EOG to ARC Resources in Canada, are adopting this new playbook because they've learned that this growth at all costs way of running their company is no longer, well accepted by the investment community Now on to phase three, rise of ESG and energy doomerism. Investors were already souring on the energy sector because of the overspending and missed expectations during the shale boom. But adding to this was that ESG, or environmental, social, and governance investing, started to become trendy around 2015, where investment firms tried to fight climate change by cutting off capital to the oil and gas sector. And there are a few different aspects to this ESG trend. The first is climate pressure. So investors and environmental activists pushed fund managers to drop fossil fuel stocks, and we saw this from university endowments like Harvard Management Company to even the largest money managers in the world like BlackRock. The second is capital flight. So major banks and asset managers promised to stop funding new oil and gas projects, and they had to divert their capital to other forms of energy like renewables and other, decarbonization efforts. Corporate shifts. This is where oil companies face lawsuits and shareholder revolts, forcing them to promise net zero carbon emissions, even if they may not actually, be achievable within a reasonable timeframe The last point is mainstream popularity. Green energy stocks surge and ESG became basically a marketing tool for global financial firms as well as energy companies. Fast-forward a few years to 2022, the ESG trend has lost steam as a result of some major shifts in the global economy, as well as the overall political environment, particularly in the US So the first major change in the world was the energy crisis. First, the war in Ukraine and later the war in Iran caused global energy shortages and high oil prices in 2022 and even now to today in 2026. The second major change is we started to see record profits from oil and gas. Traditional oil and gas companies made massive profits while green funds and renewable energy companies lagged, making fossil fuels look necessary for economic stability Another major change is political pushback. US conservative politicians started to ban state funds from using ESG rules and really started to tamp down on this ESG style of investing and renewables in general, calling them a form of political activism rather than smart finance And the last major shift in themes that we've seen today is just pragmatism. Investors realize that cutting off oil too fast creates high inflation and power shortages Which brings us to the current reality for oil and gas Governments are now prioritizing stable local energy supplies over strict environmental targets Oil and gas companies still produce fossil fuels while investing smaller amounts in carbon capture and renewable energy rather than quitting their core business, oil and gas, entirely Financial firms have returned to the fundamentals and now talk about things like risk management as opposed to using the controversial label ESG. So the takeaway from the story is the energy sector's current financial discipline was initiated and enforced by the market and not the government. And for that reason, it's durable and it outlasts government or regime changes. While government obviously plays a key role in creating an environment for businesses to either succeed or fail, it's ultimately the investors and the shareholders that drive the decisions being made at companies that ultimately decide where capital flows across the economy. And this is where Mark Carney's words reenter the conversation. Phrases like, "The climate cares about results, not a policy," and,"A desired outcome is not a policy." So what started first in the financial markets is now working its way through to government. The reliability premium has basically replaced the green premium. Low cost, long life energy infrastructure, including oil and gas, is now seen as valuable again by investors and by the government. Which brings us to something that I wrote about in the Substack piece. Hope is not an asset class. The market has already started to reward the oil and gas sector for its newfound financial discipline, and this new policy backdrop is the last part of the equation to catch up. And now with all the pieces in place, I think energy investing is about to enter a renaissance. For those interested in investing in energy but don't know where to start, I've made videos on the basics of investing in oil and gas companies from the perspective of someone who did it professionally for over a decade. So if you like this video, please like and subscribe for more content like this. Thanks so much for watching
