Coronavirus approached us like a distant wave earlier this year. Initially it was remote and unthreatening, as we viewed developments far away in Asia. But it soon engulfed us, making our lives unrecognizable and crushing economic activity everywhere. As the first wave recedes, individuals and businesses are adapting to the new normal, while contemplating a second one later this year.

Demand for transportation collapsed, with global crude oil demand down a record 25% in April. Working remotely has been far less disruptive than many expected. While it’s probably now a permanent feature, I suspect most businesses will adopt a hybrid model. In-depth discussions, training and relationship building are all richer in person, when conditions allow.

Brazil’s Petrobras plans to keep half its administrative staff working from home permanently, one of the first big companies to make such an announcement. This will impact over 10,000 employees. A new risk for large businesses is the possibility that an entire department could be incapacitated by a virus super spreader – and even after we’ve vanquished Covid-19, the hypothetical risk of a new virus will remain. Imagine the trading room of a global bank becoming infected. Traders can work remotely, but that presumes they’re not already sick. A dispersed department is a safer one. Downtown real estate owners shudder. In the future, every business meeting will need to be of sufficient value to justify a possible exposure.

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Aviation is years away from a return to normalcy. Qantas has now pushed back the resumption of international flights until at least October. Passenger volume through TSA checkpoints remains down 83% from a year ago.

Electric vehicles are not immune to weaker demand either. Sales of rechargeable batteries are forecast to fall for the first time in history, by 14% this year.

The energy sector is adapting. After losing over half its value through mid-March, the North American pipeline sector is the new momentum play, easily outperforming the overall market on the rebound. The International Energy Agency recently forecast that crude demand in 2021 will jump by 5.7 Million Barrels per Day (MMB/D), recouping two thirds of this year’s projected drop of 8.1 MMB/D. U.S. shale production, which dropped by 2 MMB/D during the lockdown, is expected to recover a quarter of this drop by the end of the month.

The increase in Free Cash Flow (FCF) at pipelines is a result of lower spending on new projects (see Pipeline Cash Flows Will Still Double This Year). Similarly, upstream investment is also slowing. Goldman Sachs expects capex for big oil projects to halve over the next couple of years, and fall by a third for liquefied natural gas. This structural under-investment will mean less new non-OPEC supply in the coming years, which Goldman argues will cause a multi-year cyclical upswing in commodity prices and better returns on invested capital. As energy investors, the last few years of poor returns have led us to regard almost any reduction in growth capex positively.

BP took a $17.5BN writedown as they expect oil demand to remain on a permanently lower trajectory. They were still able to raise $12BN in hybrid debt, equity-like securities which give BP the option to repay but may be perpetual. With coupons as low as 3.25%, there was clearly strong demand.

Lower crude oil production in the Permian in west Texas has reduced flaring, since less associated gas is being produced as well. The Texas Railroad Commission (RRC) is exploring ways they could limit flaring – since they’ve never rejected a flaring application, they are hardly a vigorous enforcer. Now at least one commissioner is considering the reputational harm flaring causes, which is at least a step in the right direction. We have long called for greater control (see Texas Reconsiders Flaring, listen to Stop Flaring Natural Gas and watch Stop Flaring).

Businesses are adapting, and the brisk recovery in economic activity is helping. The new normal is almost here.

Last week Oneok (OKE) did a secondary offering of 26 million shares. It was priced at $32, and diluted existing shareholders by around 7%. Although a healthy discount from two years ago when they raised $1BN at $54.50, it was nonetheless encouraging that a pipeline company could raise equity. On March 18, when the sector was roiled by desperate selling from incompetent closed end fund managers (see The Virus Infecting MLPs), OKE traded at $12.16.

In reviewing OKE’s recent stock price performance, a good friend of mine recounted some sage wisdom he once heard from a big investor: It’s never a bad thing to let your new investors make money.

Like most of the sector, OKE rallied strongly from late March. Energy led the rebound in stocks, and on Monday, June 8 OKE traded briefly over $48, almost 4X its low in March. This would have been a great opportunity to do a secondary offering, within touching distance of the price from two years earlier.

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OKE management may have been thinking about it – judging from the stock’s subsequent fall, they were likely even discussing it, and perhaps injudiciously. But the announcement finally came two days later, after trading last Wednesday, June 10, when OKE closed at $41.98.

OKE quickly sank on Thursday, dropping $4 on the open and closing down $6.65 at $35.33. The secondary was later priced at $32, a third lower than its price at the beginning of the week.

Most of those involved must be very happy. Buyers of the secondary never saw a loss on their investment, and by Tuesday 16th the stock had rebounded to $38. The underwriters clearly did well, and even existing holders who didn’t participate in the offering can draw comfort from OKE’s now improved financial strength. OKE followed my friend’s advice to let its new buyers make money.

Nonetheless, a more adept management team would have been preparing earlier to fully exploit the market’s newfound passion for pipeline stocks. They would have been ready at $48, rather than chasing the market down to $32. Secondary offerings can be executed quite quickly.

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By contrast, consider Tesla (TSLA). Given the trouncing he has handed short selling hedge funds and other skeptics, it’s likely CEO Elon Musk’s photo adorns many dartboards in Greenwich. The case for shorting TSLA was widely made and not that complicated – they were going to run out of cash. It was just a matter of when. Inconveniently for naysayers, this date with financial destiny kept being pushed off, as TSLA’s operating results continued to surprise.

Losses on short positions expanded steadily late last year as TSLA rallied. In January, as the stock exploded upwards like a SpaceX launch, shorts capitulated and joined the indiscriminate buying. On February 4^th, the day TSLA traded at $969. Elon Musk gracefully allowed the shorts an exit, via a $2BN secondary offering of 2.65 million shares. This was priced $200 lower, at $767, but since it was less than 1.5% of shares outstanding the dilution was inconsequential.

Coronavirus subsequently wiped out half the company’s value, which likely caused the embittered hurling of a few more darts at Musk’s likeness in Greenwich. But TSLA, like OKE and the rest of the market, has made a strong recovery since. However, the buyers of OKE’s secondary are probably happier than the buyers of TSLA’s. We think they’ll have more to cheer.

We are invested in OKE

On Sunday we reviewed Vaclav Smil’s Natural Gas: Fuel for the 21st Century. Smil writes about how the world uses energy, well supported by useful facts and figures. Our original review was a brief summary of the book. Below, we highlight some of the fascinating proof statements Smil includes in his book.

For example – as a drill bit advances into a rock formation, the weight of the drill string above it increases such that it would surpass the 6.5-9 tons of weight that is optimal for fast rock penetration. So the block assembly atop the derrick on the drill pad needs to support the weight of the entire drill and string combination.

Computer-generated 3D visualizations of rock formations include large-scale, immersive displays where people can walk inside the imagery.

There are about 3 million miles of mainline and other pipelines that link natural gas production areas and storage facilities with consumers (EIA, 2019, updated from lower figures in Smil’s book).

We often note that pipelines can provide many decades of operational life, depending on construction techniques and subsequent maintenance. Smil quotes a report from The Role of Pipeline Age in Pipeline Safety by Kiefner and Rosenfeld, “…a well-maintained and periodically assessed pipeline can safely transport natural gas indefinitely because the time-dependent degradation threats can be neutralized with timely integrity assessments followed by appropriate repair responses.”

Smil estimated that pipeline transport of oil was 40 times safer than by rail and 100 times safer than by road, something climate extremists should consider since their pipeline opposition often leads to less safe modes of transport. The same analogy isn’t possible for compressed natural gas because rail and road transport are so rare.

Many industries rely on natural gas for heat. The food industry uses pasteurization (heating to 72°C) for virtually all canned and conserved items, as well as dairy products, juices, wines and vinegar eliminate harmful pathogens.

Paper manufacturing requires heat to dry wet paper. Typically 1.1-1.3 lbs of water are removed for every 1lb of paper.

80% of U.S. bricks are made in gas-fired kilns where temperatures reach up to 1,360°C.

Methane (CH4) is the most important input for the synthesis of ammonia (NH3) via the Haber-Bosch process, which has boosted agricultural productivity, without which the world couldn’t feed its current population.

Ethane and propane, both natural gas liquids, are often found in natural gas along with more voluminous methane (known in isolation as dry gas). These are feedstocks for the production of polyethylene, polypropylene and polyvinyl chloride – in other words, plastics. The U.S. petrochemical industry has been a big beneficiary of these cheaper inputs, and the U.S. is easily the biggest exporter of natural gas liquids (of which ethane and propane are the two most important). For a fascinating view of the plastics business, check out Jordan Blum’s terrific piece from 2018 in the Houston Chronicle’s Texas petrochemical plants turn ethane into building blocks of plastic. It shows how ethane from Texas is formed into polyethylene pellets, then shipped to Vietnam where it’s turned into plastic packaging for frozen shrimp. It finally returns to a Houston-area grocery store.

Ethane production is part of the Shale Revolution. If you’re wondering what its growth prospects are, consider that consumption is growing at almost 4% annually, and that per-capita consumption in non-Japan Asia is around a quarter of the developed world. Plastics use rises with living standards – clearly, much more re-use is required given consumption patterns.

The Center for Strategic and International Studies reports that there are 70 cross-border pipelines for natural gas, NGLs and petroleum products between the U.S. and Canada (Smil counted 31 crossing points just for natural gas). When considering U.S. energy security, Canadian-sourced imports are practically riskless.

Although LNG transport has been thankfully safe, back in 1944 a poorly constructed storage tank in Cleveland failed. The resulting explosion killed 128 people. In 2004 an explosion at an LNG plant in Algeria killed 26 people. I grew up 22 miles from Canvey Island in the UK, an LNG delivery point since 1964 with little else to attract a visitor. My childhood was happily free of LNG incidents. Facilities that handle LNG in the U.S. undergo an exhaustive Federal permitting process.

Long before fracking, more quixotic attempts had been made to extract natural gas held tightly in shales. Incredibly, the U.S. experimented with explosions of nuclear devices. Three tests took place 1967-69 in New Mexico and Colorado using devices 3-9 times as powerful as Hiroshima. Full scale production envisaged 40-50 such detonations annually, but the early results were so far below expectations that the project was abandoned.

Vaclav Smil is a prolific writer of books that explain how the world uses energy. Past titles include Making the Modern World – Materials and Dematerialization, Energy Transitions, Energy Myths and Realities, Energy: A Beginner’s Guide and Energy and Civilization: A History. If you want to understand the physics, chemistry and economics of energy, you need go no further. Natural Gas: Fuel for the 21st Century is four years old, but still provides a solid grounding in its importance for many decades to come.

What we call natural gas is mostly methane (CH4), and it’s been produced by the decomposition of organic matter on earth for at least 3 billion years. Rising concentrations of atmospheric methane can be traced back to the expansion of rice cultivation in Asia, thousands of years ago, and didn’t just begin with the industrial revolution. Ethane and propane are often present in the natural gas mix, although methane dominates. Methane is burned in power plants to produce electricity, and is used for heating and cooking in most homes. Ethane tends to be most valuable as a petrochemical feedstock into plastics, while propane is used to generate heat in various industrial processes, in backyard barbecues and in some cases for transportation.

The Shale Revolution in America has been as much about natural gas as crude oil, although it’s the latter that draws more attention. Natural gas relies heavily on pipelines for transportation, so long term purchase agreements are common in order to justify the significant capital investment in necessary infrastructure. One of the most remarkable energy stories in the last decade is how the U.S. switched from planning greater natural gas imports to becoming a major exporter, as domestic production swelled. Greg Zuckerman’s The Frackers recounts how Cheniere Energy turned reoriented Liquified Natural Gas (LNG) terminals from import to export.

Facts and figures are the very essence of Smil’s books, providing support for every statement. Methane has relatively low energy density, which is why it has to be converted to near liquid form before loading onto LNG tankers; otherwise, the economics of shipment would be unattractive. This is also why it’s not used in road vehicles, where propane’s higher energy density makes it preferable although gasoline dominates because it has even higher energy density.

Natural gas storage is often underground, in depleted natural gas reservoirs, porous rock formations or salt caverns. A giant aboveground tank 100 meters in diameter and 100 meters tall would only hold enough natural gas to heat around 500 Canadian homes during a typical winter. Methane’s high combustion efficiency has led modern residential natural gas-fired furnaces to reach efficiencies of 95-97%. No other fuel is this efficient. In power plants it generates less than 60% as much CO2 as coal. Developing technology may bring further, dramatic improvements (see Clean Fossil Fuels May Be Coming). America’s switch from coal to natural gas for electricity generation is why greenhouse gas emissions have fallen. It’s also why getting China and India, the world’s big coal users in the coming decades, to rely more on natural gas is one of the most important ways the world can combat global warming.

Today’s Energy Transition anticipates the global economy’s move from fossil fuels to zero-carbon based energy. The role of natural gas in this transition is hotly debated – as the cleanest burning fossil fuel, Smil believes (as do we) that it’s going to be part of the solution to lowering emissions. The religious zeal of climate extremists makes no distinction between coal and natural gas, or the impracticality of eliminating 80% of the world’s energy sources. Because this is so unappealing to most people, global emissions grow and Greta lectures ineffectively to virtue-seeking audiences (listen to Davos Talks Climate Change).

Smil provides many more useful insights about natural gas, which will be discussed in a later blog. For a highly informative read, pick up a copy of Natural Gas: Fuel for the 21st Century.

Most energy investors wish the Shale Revolution had never happened. Energy independence was realized through sharply higher oil and gas output. But the promise of similarly bountiful investment returns was not. U.S. E&P executives have overspent and overproduced. Unfortunately, the midstream infrastructure sector too often followed along. Drilling and building infrastructure is in the DNA of many industry executives.

Spending on growth projects is how companies with capital discipline increase their profits. Because so many energy companies, both upstream and midstream, have been poor at capital allocation, investors now regard growth projects with suspicion. When it comes to growth capex, less is more.

In the years preceding the Shale Revolution, midstream companies (then predominantly MLPs), weren’t investing heavily in new projects. There wasn’t the need. America was obtaining its oil and gas from roughly the same places in the same amounts year after year. Pipelines were about running a toll-model: charging fees for use of infrastructure, raising prices annually, spending on maintenance capex and finding productivity improvements to boost profits.

That’s the pipeline business that attracted older, wealthy, K-1 tolerant income seeking investors. They’ve mostly left, because the industry abandoned the stable distributions they’d s ought in favor of growth. The MLP model has lost favor to the traditional corporation, with its ability to access a far wider set of investors.

The 2014-16 energy downturn, which now seems like a fond memory compared with this year’s rout, saw a fall in growth capex as pipeline companies responded to the collapse in crude prices. But it wasn’t long before spending on new projects recovered along with energy prices, and the industry returned to its new ways. By 2018 the industry was spending more than at the sector’s peak in 2014. Investors were increasingly boycotting energy names as a protest at continued new projects.

By 2019, pipeline execs who had long complained that the market undervalued their stocks, were at last taking some value-enhancing actions while still lamenting the absence of investor affection. Growth capex was coming down, and the downward path was already expected to continue this year before Coronavirus scrambled everyone’s plans.

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Since March, when U.S. economic activity halted in response to the pandemic, the energy business has rapidly altered its plans. Shale production is now expected to exit 2021 at 2.5 Million Barrels per Day (MMB/D) lower than pre-Coronavirus forecasts. Given the sharp decline rates common with shale, caused by the high initial pressure at which its hydrocarbons are released, new wells are constantly required to maintain production. Goldman Sachs estimates that last year 70% of new well capacity was offset by base declines, with only 30% feeding growth in output. As drilling activity plummets, depletion will quickly lower U.S. production.

Future energy demand from the transportation sector is highly uncertain. Working remotely, with the daily commute now a memory, has been welcomed by many – with the possible exception of families with small children at home. Many companies are rethinking their use of expensive downtown office space. Cramming all your workers together also exposes a business to a sudden loss of an entire department to illness if an infection spreads. Dispersing your workers may become smart risk management. Client visits and business travel of all kinds may reset permanently lower. Mass transit use remains very low as other forms of travel show signs of recovery. If the perception of crowded subway trains as carrying high risk of infection persists, gasoline use may surge as commuters resort to driving. The energy requirements of moving people are changing.

The top five midstream companies have all responded to all this by reducing 2020-22 spending by almost $3BN a year. If This 16% reduction applies across the industry, growth spending will be close to the $32BN low of 2016. By next year it’ll be $5BN below that.

Some companies have been disciplined about requiring investments to generate a risk-adjusted return above their cost of capital. The Canadians are prominent in this group. But many have not, which is why falling growth capex is likely to be welcomed by investors. As midstream companies are faced with fewer uses for the cash they generate, investor-friendly uses such as dividend hikes and debt reduction will benefit.

It’s probably no coincidence that the recovery in pipeline stocks has coincided with more modest growth spending. By lowering the need for spending on new projects, the pandemic just might provide investors with long overdue strong returns.

On Thursday my wife and I boarded a plane from Newark, NJ to Charlotte, NC. Although Governor Murphy is slowly relaxing the lockdown restrictions that have been imposed on New Jerseyans, it is an incremental process. Each minor restoration of a freedom lost is quietly celebrated. Restaurants will soon be allowed to open for outdoor dining. Hair salons will reopen with limited capacity,  but no news yet on dentists. The sequence is slow and opaque.

We’re in the minority, believing living in a free country includes selecting your risks. Frequent hand washing, masks in public places and social distancing are completely reasonable and courteous. Those at high risk of serious illness are generally in well-defined groups. If you’re worried, stay home. Destroying so many small business owners’ life’s work deserves more consideration than it’s getting.

We await each new missive from the governor without much idea of their framework or schedule. Little is said of the destruction to New Jersey’s already precarious fiscal outlook, but we know eventually the Coronavirus bill will come due. Expect much complaining as ruinously high property and income tax rates are tweaked even higher.

NJ has suffered around 12,000 deaths, 80% of whom were over 65. It doesn’t need saying but I shall anyway, that each death is tragic and my heart goes out to every family. Related but not comparable is that 1.2 million NJ residents have filed for unemployment.

The fatalities didn’t cause the job losses. We shut the economy down to prevent more deaths. Suppose without lockdown, it would have been twice as bad. The lockdown meant 12,000 people survived who otherwise wouldn’t have. Let’s suppose this lucky group is also 80% over 65.

In this scenario, the ratio of jobs lost to coronavirus fatalities avoided is 100:1. Versus working age fatalities it’s 500:1. These ratios have no optimal value, and some may find the concept crass. But they do seem high.

Since we long ago flattened the curve and a vaccine is a 2021 event at best, life needs to rapidly adapt to whatever new normal is.

Newark airport was eerily quiet. Everyone is required to wear a mask. The TSA estimates passenger volumes at 15% of normal, which looked about right. There was virtually no line at security, even for the non Pre-check crowd. Most airport stores were closed. Restaurants had plastic wrapped their seating to further dissuade visitors, even though no meals are on offer. It was rather sad.

On hearing we’d be flying, most friends commented on the risk of infection. Modern aircraft have HEPA air filters which are apparently fine enough to catch the virus. Fear is constraining all kinds of travel, but most have nowhere to go. Pandemic restrictions in some form are everywhere.

But the choice to endure lockdown in New Jersey from early March would have few takers. For several weeks even walking in a forest or park was forbidden. We vowed then to visit somewhere else, almost anywhere, once my wife’s obligations as an online pre-school teacher were complete. North Carolina, a rental car and a plan to drive south to Charleston, SC and then beyond, beckoned.

When we exited the plane at Charlotte, two passengers walked 40 feet and sat down at the first bar they’d seen in three months.

Coronavirus has constrained life in South Carolina too. Museums are closed, but restaurants are open for indoor seating with socially distanced tables. As we were walking through historic Charleston, we excitedly pointed through a window at four people sitting at a restaurant table indoors. The diners looked back, regarding us with some amusement.

South Carolina has less than a fifth as many cases as NJ, and 8% of the fatalities, adjusted for population. Of course, NJ has fared worse than anywhere except neighboring epicenter New York City. So just traveling away from NJ was likely to be an improvement.

Visitors to Charleston are way down. Our original hotel reservation was canceled because the owners suddenly decided to carry out renovations.

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Nonetheless, life in Charleston is more agreeable and probably our new normal. We ate our first meal out in three months. Tables were generously distanced and the waiter wore a mask. Turns out he and his girlfriend fled Queens, NY two months ago. We understand.

There’s rarely a shortage of bearish articles. The recent batch incorporates a tone of pleading, or at least reasoning, with investors to acknowledge our circumstances when choosing investments. One of my favorites is a New Yorker essay from mid-May, which asked Have The Record Number Of Investors In The Stock Market Lost Their Minds? The writer meets a retiree over socially distanced golf who is spending his free time trading stocks. No wonder the market’s been rising.

The underlying theme of all these articles is that, since we can all see the economic destruction ourselves, through shuttered businesses and a record leap in unemployment, how can the stock market be so stupid. Some concede that markets only react to surprises, not what’s expected. But being bearish nowadays seems the only socially acceptable view. It’s rather like wearing a mask if you’re near other people – being considerate towards all the victims of the pandemic and their families requires masking up and dumping your investments.

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Journalists are expected to explain events as well as report them. So in early May, following six weeks of an inconsiderate market rally and an increase of U.S. deaths from below 1,000 to over 80,000, the New York Times published Repeat After Me: The Markets Are Not The Economy. This followed on April’s failure to inspire reasoned judgment, led by articles such as Everything Is Awful. So Why Is the Stock Market Booming?

The Wall Street Journal feels little compunction to put their humanity on display, so their offerings are less judgmental and more businesslike, such as The Stock Market Is Ignoring The Economy.

Forbes followed their practice of presenting all possible views, which ensures at least some will be right. In early March, The Stock Market Is Still Overvalued, Here’s Why preceded the actual low by a couple of weeks, but was still published some 300 S&P500 points below where we are now. This was only helpful for the most agile investor. But a couple of months later Forbes offered more optimism, with, 5 Explanations For The Disconnect Between The Stock Market And The Economy. By coincidence, the S&P500 was roughly back to where it had been two months earlier, so these two articles book-end the V-shaped drop and recovery. In case this sounds overly critical of Forbes, I should note that your blogger occasionally writes for them as well, a fact some may feel says much about their standards.

But my favorite article is from the New York Times magazine: What Is the Stock Market Even for Anymore? What stronger indictment can be leveled at investors if they stubbornly refuse to sell everything, than to find them irrelevant? The writer starts out by correctly predicting the market’s fall, but then his prescience drives increasingly confident, more dire predictions that are badly wrong. It leads him to search for experts that are more bullish.

A crash surely won’t help our situation, but at least will affirm its gravity. A resurgent market supports the view that this too shall pass, that the world over-reacted. If the virus was that bad, surely stocks would be lower.

So the market grinds higher, confounding a great many. Prices still look attractive to us (see Stocks Look Past The Recession and Growing Debt). But pipelines look like a screaming buy, with yields well over 9% and the momentum of leading the rally since March, with the American Energy Independence Index having almost doubled. What seems certain to us is that, if the S&P500 continues to climb its wall of worry, it will still be outpaced by midstream energy infrastructure, with its recently reaffirmed and excessively high dividend yields.

We publish the American Energy Independence Index and are invested in the ETF that tracks it.

It’s surprisingly difficult to figure out what dividends are doing for midstream energy infrastructure. Just about every company has a free pass on cutting its payout nowadays. Prudent cash management isn’t going to draw much criticism with the size of the economic shock we’re enduring. Given the beating energy stocks suffered during 1Q20, a few dividend cuts would have been forgiven.

In spite of this, the biggest midstream energy infrastructure companies have maintained their payouts. In 1Q earnings calls, the overall message was that while it was hard to make confident long term forecasts, management teams felt comfortable with the resiliency of their businesses. The result is that the top ten midstream energy infrastructure companies by market cap have raised their payouts by an average of 4.7% over the past year.

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None of them reduced dividends at their most recent announcement dates. Cheniere Energy, Inc. (LNG) doesn’t pay a dividend. Kinder Morgan (KMI) raised theirs by 5% compared to the prior quarter.

As we noted recently, free cash flow growth remains a positive story for these companies (see Pipeline Cash Flows Will Still Double This Year).

Alerian has echoed the positive news about distributions. They noted that, “The majority of midstream constituents grew or maintained dividends over 1Q19.” This was supported by a chart showing 68.5% of Alerian MLP Infrastructure Index (AMZI) components by market cap did just that. It sounds like a great story.

Unfortunately, characterizing distributions in this way presents a misleading picture. A majority maintaining or growing suggests that aggregate payouts for the group are similarly stable. They are not.

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Distribution cuts at MLPs have been far more prevalent than at corporations – because the AMZI index consists of MLPs, it is more exposed to crude oil pipelines and to gathering and processing than the American Energy Independence Index (AEITR), which reflects the North American midstream sector as a whole. AMZI doesn’t reflect the industry. MLPs also tend to have lower credit ratings. As a consequence, MLP distributions are turning out to be less resilient than those paid by pipeline corporations.

Most companies tend to raise distributions/dividends gradually, by a few percent at time. By contrast, cuts are often 50-100%. So even though the majority of AMZI by market cap maintained or raised their distributions, the payout on the Alerian MLP ETF, AMLP, has just been cut again.

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The AMZI is down to only 20 constituent companies now, and because 11 of them slashed their distributions, this was enough to force AMLP to cut its payout. This contrasts with the story for AMLP’s index, AMZI, which is being spun to sound superficially good.

It turns out that size matters. The three biggest MLPs, which are in the top ten midstream companies by market cap, all maintained or grew their payouts. The biggest companies in this sector tend to be more stable and have higher credit ratings.

AMLP investors care more about another cut than the spin being put on its index.

SL Advisors publishes the American Energy Independence Index

We are invested in KMI and LNG

The energy sector has been leading the market’s rebound from the lows of March. Demand for crude oil plummeted, and the Saudi decision to simultaneously increase supply caused prices to briefly go negative. No investment sector in energy was safe, including midstream infrastructure.

U.S. oil production has already dropped by 1.6 Million Barrels per Day (MMB/D), from 13.1 MMB/D in mid-March to 11.5 MMB/D now. First quarter earnings calls updated investors on the collapse in demand. Magellan Midstream reported gasoline demand was down 24% in April (see More Solid Pipeline Results). Jet fuel was down by 75%.

However, there’s more to the U.S. energy business than crude oil. Natural gas demand has remained solid, helped by continued substitution away from coal. And propane exports have risen – as India’s refineries are producing less gasoline, they’ve also cut propane production which is often part of the same process. So we are exporting more propane to India, where it’s widely used for cooking.

The continued rise in the American Energy Independence Index (AEITR), which includes all the biggest pipeline companies in North America, reflects increasing optimism that economic activity is returning. The charts below show interesting data from Apple that estimate how much people are traveling based on their requests for directions from Apple Maps.

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People are walking and driving more, although Atlanta is closer to normal than New York. What’s also interesting is that mass transit use isn’t recovering as quickly. Almost 21 thousand people have died in New York City, about a fifth of the U.S. total. There are many reasons for this concentration, but extensive use of mass transit is likely one of them. The public has clearly reached that conclusion. Although many expect working from home to reduce energy consumption for commuting, if large numbers of people avoid mass transit it’ll boost gasoline consumption, to the extent that it results in more road trips.

All 50 states are relaxing constraints. I for one have been amazed – shocked, in fact – at how easily state governors can restrict our freedom for an extended period of time with seemingly little legislative oversight. The gradual recovery in travel is a welcome sign that we’re emerging onto the other side of the pandemic.

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Airline activity is starting to pick up as well – in recent days the TSA reports air passenger traffic reached 15% of normal, doubling from early May. Signs are that America is gradually emerging from its lockdown. The consequent increase in energy use is drawing investors to the sector.

We are invested in Magellan Midstream, and all the components of the AEITR.

The International Energy Agency (IEA) expects CO2 emissions to fall 8% this year. This is six times the reduction that followed the 2008 financial crisis, reflecting the far greater drop in economic activity. Transportation has plummeted — peak congestion on roads in March was estimated down 50-60% in major cities around the world including Los Angeles, Sao Paolo and Mumbai. The IEA estimates that aviation fuel demand was down 27% in March. This likely understates the actual fall. TSA figures show passenger traffic through security checkpoints down over 95% in March and April.

Even the most die-hard climate extremist can hardly cheer this news, given the circumstances. But the size of the drop will take emissions back almost a decade. If the world had only twelve years left before climate change catastrophe, as Alexandra Ocasio-Cortez (AOC) asserted last year, we can now make it to 2040.

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Energy demand from the transportation sector may never fully recover. Working from home has been less disruptive than imagined. On earnings calls with pipeline companies, whenever the topic came up CEOs noted that working remotely was fine. Facebook is just one company whose workforce will largely be remote for the rest of the year. Less commuting, less business travel and vacations closer to home could become permanent. Declining use of public transport for fear of infection may partially offset this, but overall the pandemic’s impact on energy demand will most likely be a long-lasting reduction.

Coal demand has also been hit hard. China burns half the world’s coal, and it produces around 70% of their electricity. Nothing meaningful can happen on climate change without China (listen to our podcast: China Keeps Warming the Planet).  The lockdown lowered Chinese power demand, shrinking coal consumption. In the U.S., coal-fired power demand in 1Q was down by a third compared with a year ago (a mild winter, cheap natural gas and greater use of renewables helped).

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Climate extremists will continue to press their case, but they’re unlikely to gain new adherents in the next few years. Falling emissions and the urgency of repairing the huge economic damage we’re enduring will drive public policy. As we count the human cost of the lockdown in terms of neglected health, business failures and emotional trauma, returning to the economy we had will be a priority.

We need to be better prepared for the next pandemic. The World Health Organization (WHO) called climate change the biggest global health threat of the 21^st century. They warn of 250,000 additional deaths annually from climate sensitive diseases starting in 2030 (like AOC, they believe we have around a decade left). Coronavirus deaths will be multiples of this figure when the numbers are finally added up.

The WHO’s website on climate change adds that, “The direct damage costs to health is estimated to be between USD 2-4 billion per year by 2030.” This number is derisively insignificant compared to the trillions we’re spending in America in financial support alone. Similar fiscal support along with economic losses are occurring globally.

The WHO pursued politically correct groupthink (listen to our podcast: Climate Change Was Never Our Biggest Threat). They were trying to be woke. It’s time they woke up.

This reordering of priorities is bullish for the energy sector. Jim Cramer often points out that young money managers won’t invest in fossil fuels because of climate change. Many will retain that bias, but that’s now yesterday’s trade. At the margin, rebuilding our economy and the current sharp drop in emissions will trump global warming. High school dropout Greta can resume her education — remotely. The world’s focus has shifted.