Tellurian Drifts Into Stronger Hands

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Tellurian Drifts Into Stronger Hands
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Tellurian finally put its investors out of their misery, selling to Woodside for $1 per share. The 75% premium to the prior day’s close is only impressive because the stock has sunk so low to this point. Founder Charif Souki was never able to obtain financing for this LNG wannabe. In 2022 in one of his regular videos on Youtube he memorably issued a mea culpa (see What’s Next For Tellurian?) for insisting on retaining natural gas price exposure in the Sale Purchase Agreements (SPAs).

This made the business model riskier because the future cashflows from liquefaction were less certain. Potential investors balked; SPAs expired because Tellurian hadn’t started work on their Driftwood LNG terminal.

Souki is a visionary with an excessive risk appetite. At Cheniere he wanted to start a natural gas trading business, which would have introduced more earnings volatility to a company with visible, long term cashflows from liquefaction. He was eventually pushed out.

At Tellurian the collapse in energy stocks during the pandemic resulted in a margin call on his personal, leveraged holdings in the company. Souki persuaded TELL’s board to compensate him for successfully getting the Driftwood LNG terminal started even though he hadn’t (watch Tellurian Pays For Performance in Advance).

Souki was pushed out in a repeat of his exit from Cheniere. Like Joe Biden, he stayed at it for too long.

TELL’s price drifted lower as the odds of Driftwood being completed receded. The LNG permit pause added further uncertainty.

A couple of years ago TELL was trading at $4.50. Its acquisition by Woodside more than 75% below that price reflects the low odds of Driftwood ever being financed. Woodside is betting that the LNG permit pause will be lifted, most likely by an incoming President Trump. Kamala Harris, younger and to the left of Biden, might even keep it in place if she’s elected.

The most likely outcome is that the Driftwood LNG export terminal, now in the hands of a company with the resources to finance it, will be completed. This will be a win for the climate by allowing LNG buyers to use less coal, and for our domestic energy sector.

With all the chatter of the Trump Trade and the inflationary impact of a Republican-controlled White House and Congress, the bond market is remarkably non-plussed. For the past year, ten-year inflation expectations as derived from the TIPs market have stayed in a tight range between 2.15% and 2.5%.

The Personal Consumption Expenditures (PCE) deflator, the Fed’s preferred measure, runs around 0.25% to 0.5% lower than CPI. This is because it’s constructed using dynamic weights that reflect actual spending patterns rather than the fixed weights in the CPI.

So as a practical matter bond investors are endorsing the Fed’s desired inflation objective of 2%. Given that monetary policy allows for some asymmetry – an inflation overshoot is less problematic than an undershoot – you could even argue that bond investors think there’s little asymmetry in the outlook.

Stocks have rallied during the summer, due to indications from Fed chair Jay Powell that rate cuts are coming but also because the odds of a Trump election victory have increased. Trump’s odds of winning didn’t dip with Biden’s withdrawal over the weekend.

VP Kamala Harris is a great opportunity for Trump to run against a liberal Democrat from California. She may yet turn out to be a better campaigner than she was during the primary four years ago, when she withdrew at an early stage. Otherwise, Republicans look set to sweep both houses of Congress too.

Container rates have been moving steadily higher this year, reaching levels last seen during the pandemic. There are signs that companies are building inventories of goods in the US, anticipating sharply higher tariffs after the election. Shipping rates from Shanghai to Los Angeles have more than quadrupled this year.

Ten year yields at 4.38%, approximately unchanged over the past month, don’t reflect the Trump Rally that is apparently driven in part by higher inflation expectations. Betting markets favor Trump over Harris by roughly a 2:1 margin. Democrats appear to be rejecting a competitive convention, thus foregoing the opportunity for a more centrist candidate to emerge.

Long term bond yields offer scant compensation for America’s fiscal outlook and there’s a good possibility of one party controlling both the White House and Congress. Therefore, shorting long term treasury notes expecting deficits and inflation to move higher looks like a good trade to this blogger.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

 

Trading On Trump

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SL Advisors Talks Markets
Trading On Trump
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Press reports suggest President Biden will bow to the inevitable and withdraw from the election – the first time since Lyndon Johnson an eligible president has declined to run. Betting websites and financial markets have been pricing for a new Democrat candidate since the debate. Presidential candidate Kamala Harris is unlikely to fare much better, so whether Biden drops out as he should or defies almost the entire Democrat party, they’re in for a drubbing. It’s plausible that the Republicans could regain Congress, enabling policy shifts in several areas.  

Trump’s first term in office wasn’t good for energy investors. “Drill baby, drill” doesn’t align with capital discipline, and the pandemic completed the trifecta with over-spending and energy transition fears that had depressed returns. An observer blissfully unaware of America’s politics might infer that Democrats are good for traditional energy.  

Although climate extremists helped induce caution among energy executives, the last four years of strong performance are more accurately viewed as the result of a switch to financial discipline and positive cashflow. The current administration’s policies have not been intentionally good for the energy sector, and recent strength in the American Energy Independence index (AEITR) is attributable to the recognition that Republicans are in the ascendancy.  

A lighter regulatory touch will boost energy sector profitability at the margin. More Federal land will be opened for drilling, although much of America’s E&P activity falls under state oversight. For example, the Marcellus shale extends into New York state, but the prohibition on fracking will remain regardless of who’s in the White House.  

The pause on new LNG export permits will be lifted, which will benefit just about everyone by eventually allowing cheaper, low emission US natural gas to displace polluting coal in developing countries. This will eventually push domestic gas prices higher but even over the next five years exports will go from 12% to maybe 22% of supply, so any effect will be small and slow to appear.  

Globally, Iran will probably face increased barriers to its oil exports. A cessation of hostilities in Ukraine will allow a resumption of Russian exports. US output may increase but shale faces the tyranny of decline curves much steeper than conventional drilling, which impedes sustained higher levels of output. Fears of lower prices from increased supply could be negated with surprisingly robust demand in emerging economies as they seek higher living standards.  

So far the bond market hasn’t considered the outlook for inflation. Having grown up in fixed income I naturally retain the bias that bonds represent the cool-headed unemotional investors while equities are full of manic-depressives. Because markets are connected, the recent strength in energy must be attributable to a more positive regulatory environment and not the inflation protection that the sector offers.  

A Republican sweep in November will introduce asymmetric inflation risk. Neither party has shown much interest in fiscal discipline, concluding correctly that there are few votes to be gained in promising to tax more and spend less. As a debt-financed real estate developer, Trump probably appreciates the asset appreciation inflation brings as well as its erosion of the real value of debt.  

A recent interview with Business Week offered a summary of inflationary policies. These include tariffs and tax cuts including a renewal of the 2017 Tax Cuts and Jobs Act. Curbs on immigration will push wages higher. Fed chair Jay Powell can expect public pressure to cut rates as soon as the election is over, and when his term ends in May 2026 he’s unlikely to be replaced with a hawk.  

Moderately higher inflation is the least painful solution to our fiscal outlook. Trump will like that foreign investors will figure prominently among those enduring an erosion of the real value of their holdings. He’ll blame the Fed for higher treasury bill yields (see Monetary Policy Is Increasing The Deficit).  

One thing about divided government is that gridlock constrains the ability of either party to press forward with its agenda. There’s nothing about Trumponomics that should provide comfort to the fixed income investor. The first 100 days of a Trump presidency with an aligned Congress could quickly adopt policies that are pro-growth with little regard for fiscal prudence.  

This blog offers no view on the rightness of such policies, although our personal investments are positioned for them. You take the world as you find it. Investments in real assets would seem to offer the best protection. Midstream energy infrastructure, with its barriers to entry and inflation-linked contracts, is in our opinion an inevitable beneficiary as the market outlook adjusts.  

For now inflation has receded as a concern. The disarray in the Democrat election campaign could enable policies that rekindle it. Owning US midstream energy infrastructure is, in our opinion, part of the solution.  

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

Energy Racks Up Steady Outperformance

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Energy Racks Up Steady Outperformance
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As we head into earnings season, Kinder Morgan will as usual kick off the reports from midstream energy infrastructure. The appeal of pipelines has always been their predictable earnings underpinned by long term contracts. Earnings surprises have been rare for several quarters, except for Cheniere which regularly beats to the upside.

Many investors continue to regard energy with trepidation. Uncertainty over the path of the energy transition is a major reason. A period of poor returns caused by too much capex exuberance during the shale revolution and culminating in the 2020 pandemic is another.

Ben Graham once said that in the short run the market’s a voting machine but in the long run it’s a weighing machine. Sentiment is ephemeral, and financial performance long ago overwhelmed the disfavor many felt towards midstream infrastructure.

The response to covid was excessive once the data showed that most people weren’t going to die. We needed to protect older people and those with co-morbidities. The sharp but short drop in markets reflected the realization that our economic response was more damaging than the virus itself.

Hence the S&P500 recovered to its 2019 year-end level by June 2020. Midstream took until February 2021. But relative performance since pre-pandemic has favored the American Energy Independence Index (AEITR) over the market.

By March 2022 the AEITR had recovered so strongly that it was ahead of the S&P500 from their YE 2019 levels and it’s never looked back. Stocks have performed well over this period, and the S&P500 has been boosted by AI stocks, none of which are in the AEITR. Midstream has powered along anyway, with the added benefit of a low correlation with the market.

During the 2022 inflation contracts that often incorporate PPI-linked price hikes drove a 21% return, 39% ahead of the S&P500. So, if you’re worried about a resurgence of inflation or a dip in AI stocks, midstream could offer useful diversification.

The inability of solar and wind to displace fossil fuels is apparent in the most recent BP Energy Outlook. Since 2000, primary energy derived from renewables has grown at a 2.5% annual rate, barely faster than natural gas, coal or hydro each at 2.3% pa. Given the low starting point of renewables and $TNs in subsidies, it shows how hard it is to displace reliable energy with something that’s intermittent, requires enormous space and consumes substantial minerals.

This blog is in favor of sensible measures to reduce emissions. The most positive development has been the growth in natural gas. Increased output since 2000 of 57 Exajoules (EJs) is almost twice that added by renewables at 29 EJs, which have been able to meet only 15% of the increase in global energy consumption over this time. Fossil fuels have gone from providing 85% of global primary energy to 84%.

The biggest failure is the world’s inability to cut back on coal, which remains the energy of choice for developing countries. China receives misplaced praise for its investments in solar and wind but derives nearly 9X as much primary energy from coal as from renewables (89 EJs vs 10 EJs).

Blog readers often send me interesting material. Mark Mills is a senior fellow at the Texas Public Policy Foundation and often writes about energy. Here’s a link to a concise, clear video explaining the impossibility of pursuing energy policies embraced by progressives. Thanks to Dave Bachmann from Westfield, NJ for sharing.

I also discovered Konstantin Kisin, a wonderfully articulate critic of wokeness and its chief concern, climate change. My thanks to Gene Muenchau of GHJ Financial Group in Oakdale, MN for bringing him to my attention. In his engaging style Kisin reminds that billions of people in emerging economies are going to prioritize energy to support the health of their children and higher living standards over reducing CO2 emissions. New York’s banning of natural gas in new buildings will create inconvenience without impact, because most of the world simply wants more energy.

Konstantin Kissin talks a lot of sense.

The widespread discrediting of wokeness, ESG and Diversity, Equity and Inclusion (DEI) are coinciding with more realism about the energy transition. The E in DEI promotes socialism by seeking equal outcomes instead of equal opportunities. The I is intended to exclude white males so as a practical matter is racist. This is not how America became the great country it is.

The rejection of progressive left-wing philosophies that demand guilt instead of fostering pride over humanity’s achievements and opportunities is a recognition of their negativity and inutility.

This overall shift away from the group-think of university faculties is refreshing because it is overdue. Along with the disastrous investment returns on renewable energy, it is making reliable energy and its supporting infrastructure ever more appealing to thoughtful investors.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

 

 

A Gassier World

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A Gassier World
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BP’s 2024 Annual Outlook continues to navigate carefully the political minefield that faces any big energy company in making projections about energy consumption. They’ve simplified their scenarios – in 2022 Accelerated, Net Zero and New Momentum all sounded faintly hopeful and for the first two totally unrealistic. New Momentum was the scenario intended to present the way things are currently moving, but nonetheless sounded optimistic.

BP points out that these are projections not forecasts – the subtle difference intending to persuade progressives that they are bought into the energy transition even while they’re not making money from it. BP’s market cap of £75BN ($96BN) is the lowest in two years and back to where it was 25 years ago. They’ve lagged their peers by 50-75% over the past five years. The green strategy they adopted four years ago hasn’t excited their investors.

BP’s Annual Outlook now has two scenarios: Current Trajectory and Net Zero. They’re self-explanatory – one projects what’s likely to happen on current policies and the other overlays policies consistent with the UN IPCC’s Zero by 50 goal.

They are miles apart.

There are some interesting differences between the current path presented today versus what BP thought in 2022. US natural gas production by 2035 is now forecast to be 10% bigger than back then, at 1,168 Billion Cubic Meters (BCM), or about 113 Billion Cubic Feet per Day (BCF/D).

Global natural gas production is expected to grow, albeit less quickly, meaning the US share will grow to 25%.

Growing Asian demand for natural gas and the disruptions to Russian exports to Europe have caused LNG demand to grow at 8X the rate of natural gas overall.

Climate change forecasts are dominated by the interplay of emerging country GDP growth versus increased energy efficiency and decarbonization. The world has never experienced a decline in energy consumption as far back as meaningful records exist. BP’s Current Trajectory scenario now sees global energy consumption peaking around 2040.

Two years ago none of their scenarios contemplated reduced energy consumption. Even in Net Zero it was roughly flat.

Energy consumption grew at 1% pa over the past four years, slower than over the prior decade. But the pandemic was a big factor, and absent another global disruption it’s hard to envisage demand growth disappearing within the next decade or so.

Coal is one sector where optimism about its demise continues to look premature. 84% of global production is in emerging economies, and because coal reserves are so widely distributed it is mostly consumed where it’s mined. Coal-to-gas switching for power generation remains the most effective way to reduce emissions. The US is helping by growing its LNG exports, despite the Administration’s efforts to impose constraints on new permits.

Nonetheless, the world is using more coal than ever. BP still projects consumption to decline, albeit from a higher level than a couple of years ago. Its use in developed countries is going to shrink by half over the next decade, which seems plausible. Developing countries are projected to peak within a couple of years. Two years ago BP thought the peak was happening right then. This most damaging fossil fuel consistently pushes back forecasts of its demise.

If coal use does drop it’ll be because increased natural gas production has been able to fill the gap.

Renewables growth is projected to be slower in developed countries than BP thought two years ago. Higher interest rates and the dismal investment returns on solar and wind are hurting. Across emerging economies, 2025 renewables output is now expected to be double what BP expected only two years ago, a remarkable shift. Projections for China have been revised lower, meaning their share across all developing countries will drop from around a half to 15% by 2035.

China’s energy policies still prioritize energy security over emissions reduction, a long term preparation for conflict over Taiwan. Nobody should confuse their solar and wind investments as anything but a push for energy independence, insulation from the western sanctions that will inevitably follow any conflict with their island neighbor.

The bottom line is that traditional energy is going to dominate for the foreseeable future. Fossil fuels represent 84% of primary energy as calculated by BP, and they expect this share to be 77% by 2035. A couple of years ago their projection was 70%. Natural gas is the only fossil fuel projected to grow. It will eventually be the world’s favorite source of energy.

On my trip to Minneapolis last week, I had the opportunity to see long-time investor Scott Mundal. Scott grew up on a farm in South Dakota, and now runs his own investment business in Morris, MN. His life is a wonderful American success story illustrating what hard work and ability can achieve. We had a most enjoyable dinner.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

Natural Gas Demand Keeps Growing

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Natural Gas Demand Keeps Growing
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The White House pause on LNG permits has impacted negotiations. Poten and Partners, a research firm, estimates that Sale Purchase Agreement (SPA) volumes are –15% in 1H24 versus a year ago. It’s hard to get buyers to commit to buying LNG from a new export terminal without certainty about when it’ll be constructed.

Fortunately, last week a Federal judge lifted the pause. Appropriately, it was U.S. District Judge James Cain in Lake Charles, Louisiana, the site of Energy Transfer’s proposed LNG terminal whose planning has been impacted by the pause.  Cain said the pause was, “completely without reason or logic” and described it as, “arbitrary, capricious, and unconstitutional.”

The LNG export opportunity persists because US prices are cheap while production remains robust. Output is running at 107 Billion Cubic Feet per Day (BCF/D), but demand has grown from 95 BCF/D a year ago to 102 BCF/D now. Power consumption is the biggest driver, up from 40 BCF/D to 45 BCF/D.

AI data centers are going to consume increasing amounts of power, which will support natural gas demand. We may already be seeing this. Texas recently announced plans to double their low-interest loan program that supports the construction of natural gas power plants, from $5BN to $10BN.

Governor Abbot thinks they may need as much as 130 Gigawatts (GW) of power capacity by 2030 from all sources, versus the 85 GW they have now. Even after doubling the loan program it’s likely to be several times over-subscribed.

Texas is a good example of how growing power demand will flow through to natural gas. Texas has had good success with windpower which provided 28% of its electricity last year. Natural gas was 40%. Regardless of goals to increase the share of power provided by renewables, natural gas remains a convenient, reliable and clean resource.

Fracking has unleashed cheap, secure energy for the US. Germany is de-industrializing because of high power prices. Britain’s new Labor government is committed to becoming a “clean energy superpower” and is centralizing the approval of new wind farms to speed up construction. The US is reducing emissions with natural gas and attracting FDI because it’s cheap. No other country has adopted such a pragmatic yet self-interested energy policy, albeit one that’s the result of policies from both parties.

US natural gas prices have surprised many analysts by staying low, with the Henry Hub benchmark at around $2.50 per Million BTUs (MMBTUs). It’s cheaper elsewhere, with the basis reflecting transportation costs to the Henry Hub distribution point in Louisiana. Gas from western Canada is priced $1.80 per MMBTUs below the benchmark. Associated gas is often produced with crude oil and is unwanted but must be dealt with. Flaring has come down sharply, from 1.3% of production five years ago to 0.5% now. It’s become harder for E&P companies to obtain a flaring permit by arguing that needed infrastructure is unavailable.

The Energy Information Agency is forecasting $2.90 per MMBTUs for 2H24, up from $2.10 in 1H24.

As we head into earnings season the phrase “upside risk” is showing up in JPMorgan’s outlook. It sounds like a high class problem unless you’re a short seller. For several quarters pipeline companies have delivered results that were largely in-line with some modest surprises, except for Cheniere who consistently beats forecasts. We’ll be interested to hear from Energy Transfer (ET) whether the court-ordered lifting of the LNG pause has helped them progress with their Lake Charles project.

Williams Companies (WMB) won their legal dispute with ET over WMB’s ability to build a gas pipeline that crossed over an existing one owned by ET. It was either unsafe or anti-competitive, depending on which side was talking. With a judge having concluded the latter, WMB is suing ET for damages. Sometimes it seems that ET is involved in half the energy sector’s disputes.

I visited Minneapolis and had the opportunity to visit long-time blog readers and pipeline investors GHJ Financial Group in Oakdale, MN with Andrew Freiberg, our regional wholesaler from Pacer Financial. It’s always a great pleasure to meet people who have been following us for a long time online. We had a most enjoyable chat, and I shall look forward to stopping by again in the future. The background for the photo was selected to show Big Ben.

In discussing EVs, I learned that charging stations are increasingly being targeted by criminal gangs. There are lots of stories of vandalism and theft of the copper that’s used. But EV owners are wealthier than average and can represent a target themselves while they’re waiting…and waiting for their cars to recharge.

The outlook for reliable energy has never looked brighter.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

 

We Need Much Cheaper EVs

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We Need Much Cheaper EVs
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93% of car trips are less than 25 miles, according to data from the Bureau of Transportation Statistics. The problem with EVs in America is with the other 7%. That’s where the range anxiety and charging infrastructure become an issue.  

According to a recent survey from McKinsey, the US has among the least satisfied EV owners, with 46% intending to switch back to an Internal Combustion Engine (ICE) with their next purchase. Only Australia, another big country with high average mileage, reports more dissatisfied EV owners at 49%.  

It’s a failure of the EV industry that almost half their customers are unhappy with their purchase. Along with poor charging options, cost is another factor. US sales rely heavily on altruistic choices by customers who are virtue-signaling. Research has shown that blue-leaning regions are far more likely to buy EVs than red. It’s why California dominates EV registrations. This is a problem for future sales, similar to subscription churn. If half of your subscribers don’t renew, it’s hard to grow your customer base.  

Hybrid plug-in electric vehicles (HPEVs) are thought to be a good compromise. You can always rely on filling up with gas, but by keeping the battery charged you can minimize use of the conventional engine. The problem is that HPEV owners tend to not bother recharging, because (shockingly) it’s so convenient to stop by a gas station. So owners often fail to achieve the EPA mileage estimates that are advertised. 

We’re running out of buyers who are willing to pay more for faster acceleration or to show they care about climate change. Like solar and wind power, reducing greenhouse gas emissions costs more than business as usual.  

Except with EVs it could be different. Almost half of US households own two or more cars. The EV industry is selling expensive vehicles intended to replace one of the two ICEs a household owns.  

There’s a market for very cheap EVs, perhaps souped-up golf carts, for the 93% of journeys that are local and don’t rely on charging infrastructure. As a policy matter, this could induce consumers to add a car that covers most of their driving needs while keeping the ICE for longer trips. The EV would be a compliment to the ICE, rather than trying to be a substitute.  

These cheap EVs would need to be bigger than a golf cart – half of US auto sales are light trucks and minivans. But cheap EVs would compensate for the range anxiety. Even if we carpet the country with charging stations and speed them up, Americans are just not going to spend twenty minutes recharging.  

BYB’s Seagull sells in China for around $12K. They’d sell millions at that price in the US. They could, except for the tariffs imposed on them, because the White House has a flexible concern about climate change. Red state energy workers aren’t much use to this White House. Blue state auto workers may be. So the latter are protected with tariffs, at the expense of higher US GHG emissions.  

Joe Biden told everyone the energy transition will be painless. So far it’s not.  

More coherent energy policies are looking more likely since the debate. Guy Caruso served as administrator of the U.S. Energy Information Administration (EIA) from July 2002 to September 2008. In a recent WSJ op-ed he argued that US LNG exports provide energy security to our allies and lower GHG emissions by displacing coal. We’re betting that the LNG permit pause will be lifted by next year, part of a more pragmatic policy approach to climate change. 

If President Biden could struggle out of bed in time for an abbreviated day to consider the issue carefully (see Biden Tells Governors He Needs More Sleep and Less Work at Night) he would never have imposed the pause.  

Midstream continues to perform well, with the American Energy Independence Index +18.6% for the first half of the year. Wells Fargo points out that the sector’s correlation with the S&P500 has been falling and is only 0.33 in 2024 versus 0.51 over the past five years. 

Part of the reason is in the inflation protection that pipelines offer. Because tariffs are so often regulated with an inflation price escalator built in, cash flows responded positively when inflation surged in 2022. Investors have started to take note, which has underpinned performance.  

Midstream has also closed most of its valuation gap with utilities, with EV/EBITDA of 9.3X compared to utilities of 9.6X. But leverage is lower (Debt:EBITDA 3.4X vs 5.2X) and dividend yields higher (5% vs 3.8%).  

In our opinion, there remains plenty of upside. 

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

Happy Independence Day!

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Happy Independence Day!
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This is the time of year when friends ask me if I’ll be celebrating July 4th, in a wry dig at the losing side of that war. As a transplanted Brit I have more to celebrate than most – I point out that had the War of Independence turned out differently, emigrating to the US might not have held the same appeal.

The whole world has reason to celebrate July 4th. It created that shining city on a hill, that refuge for the “huddled masses yearning to breathe free” as inscribed on the Statue of Liberty. This is the world’s most watched country. If our too-porous borders were thrown open tens of millions would come here. Even those who dislike America aspire to live more like us.

If you grew up in America, you don’t know what it’s like to be on the outside looking in. A country where people are proud of its values, that stands up for freedom, where opportunity beckons and where most cool things begin.

In 2021 Roger Bennett, of Men in Blazers (a show about English football) and another transplanted Brit, wrote (Re)Born in the USA: An Englishman’s Love Letter to His Chosen Home. It was about growing up in Liverpool before emigrating to the US. Bennett yearned to leave dull, rainy northwest England for America — “with its sunny skies, beautiful women, and cool kids with flipped collars who ate at McDonald’s.”

Everything here looked better from across the pond, and Bennett describes what were for me familiar urgent teenage feelings of desire, the certainty that life was better in America, and I had to get here. Both of us were consumed with making it to the new world, and we both did. Roger Bennett brought his enthusiasm to Chicago and would probably agree that he has enjoyed more success as broadcaster, podcaster and filmmaker here than he would have in the old country.

Being an immigrant means never forgetting the huge thrill of arriving; of a dream fulfilled. Ronald Reagan was my first president. His sunny optimism epitomized my new country when I moved here, and I readily embraced his positivity. Life has its ups and downs, but, as Reagan wrote when announcing his Alzheimer’s diagnosis in 1994, “…for America there will always be a bright dawn ahead.”

Since arriving in May 1982, I have never doubted for a moment it was the right move.

In recent years the growing negativity of so many has astounded me. It was made most clear in a WSJ survey a few weeks ago in my responses to the Civics questions. They included “How proud are you of America’s history (answer: Very). Compared with the 1,200 respondents I am at the optimistic extreme, the 99th percentile.

We’re not short of problems that need solving. I can name a few myself, starting with our catastrophic immigration policies that allow in too many phony asylum seekers. But great countries become that way by aspiring to greatness, and that doesn’t happen without striving to be better. We can confront and beat the challenges we face.

Jobs are plentiful. We’re not at war and the pandemic with its shocking loss of liberty is a distant memory. Living standards are the highest in the world and the highest in history.

If you’re not happy in America, right now, where and when would you rather live?

Social media and the proliferation of news outlets have allowed us to choose the news sources that incorporate our biases. And nothing helps ratings as much as getting your viewers riled up.

I have commented to my partner Henry that the country seems as polarized as it’s ever been. Henry is from North Carolina and like most southerners has a keener sense of civil war history than we northerners. He points out that the 1860s were worse.

We’re self-segregating to live amongst people that think like us. Our clients are energy investors and much of my social life revolves around golf clubs. Unsurprisingly, I spend most of my time with Republicans and I like that. It’s comfortable. I think conservatives see more things going right than wrong. But I have good friends that are Democrats and I enjoy their company too. We don’t have to be defined by our politics,

Your friends and the people around you are the real America. Don’t be depressed by the extremism that both blue and red leaning news outlets push. Angering viewers is their business model.

Enjoy Independence Day with friends. Because Americans are overwhelmingly good, friendly people. Look around you. It’s why there’s always a bright dawn ahead.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

POTUS Should Have Called in Sick

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POTUS Should Have Called in Sick
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For those wondering how the election will affect the energy sector, Thursday’s presidential debate offered some clarification but also added some uncertainty. Following Biden’s stuttering performance, he’s a poor bet to return to the White House after November. It must be more likely than not that his party will find a way to dump him before their convention in August, since he’s leading his party to electoral disaster with countless down-ticket Democrat candidates now at risk.  

Joe Manchin would be an interesting centrist choice that would scramble projections, but he’s repeatedly disavowed any interest. Biden’s best case to remain in the race is that the alternatives are so poor.  

It’s pretty clear that Joe Biden’s too old and senile to be president for another four years. From an energy perspective, a more friendly administration with a lighter regulatory touch is likely.

Republicans are associated with “Drill Baby, Drill” and it’s worth remembering that the last Trump presidency wasn’t kind to energy investors. The euphoria of a supportive government led to oversupply, depressing prices and returns. The pandemic didn’t help. 

Energy companies embraced financial discipline, prioritizing per share returns over volumes. This took hold during Biden’s presidency and coupled with the continuing recovery from Covid returns have been very good. 

When investors ask if we’re worried about a second Biden term, we often point to the “blue rally.” It must be endlessly frustrating to progressives that their political ascendancy has been so profitable for traditional energy despite their efforts to achieve the opposite.  

While energy executives will welcome a more supportive administration, we don’t expect a return to euphoric production growth. Ample dividend coverage, buybacks and declining leverage continue to be rewarded by the market. The energy cycle is longer than four years. There seems little reason to expect substantial change in how companies allocate capital. 

Betting markets immediately responded to Thursday’s debate, and financial markets soon followed. Energy was Friday’s strongest performer, but also notable was the S&P Clean Energy Index which lost 2.5%. First Solar lost 8%. Profits from renewables have been elusive for some time, which is why this sector has lost a quarter of its value over the past year. But it’s also pricing in the likelihood that Republicans will be returning to office.  

The American Energy Independence Index finished the week +3%.  

Friday morning’s Supreme Court ruling added to the constructive political news. They overturned a precedent from 1984 (Chevron v Natural Resources Defense Council, known as the Chevron Doctrine) which gave Federal agencies broad discretion in setting regulations where the underlying statute was unclear or silent. This has led to policy changes when the White House changes hands even when underlying laws have not been affected.  

Generally, Democrat administrations have been more inclined to pursue an agenda via regulation. Under this ruling, a politically motivated regulatory interpretation of an ambiguous statute will be more easily challenged. This is a positive development for traditional energy since it favors less regulation. 

One example concerns the EPA’s reliance on the Chevron Doctrine to recently issue a regulation requiring any new natural gas power plant to capture its CO2 emissions by 2034. The increase in power demand due to the AI boom was already expected to increase natural gas demand even with this added expense, which now may not be required. The Supreme Court ruling is positive for natural gas.  

The pause in LNG permits that Biden announced earlier this year should be rescinded once Trump takes office. Some negotiations over long-term LNG supply had been halted due to uncertainty over when the permit pause would be lifted. Energy Transfer’s planned Lake Charles facility was one whose future was left in limbo. Japan’s energy minister publicly worried about the delay. Japan is the world’s second biggest LNG importer, and they’re attracted to cheap US prices.  

It wouldn’t be surprising for the debate to reinvigorate some negotiations over long term LNG supply that had been stalled.  

Making more US natural gas available to Asian buyers allows them to reduce their dependence on coal. Because gas burns with roughly half the CO2 emissions of coal, this is the most powerful way to reduce greenhouse gases and is the biggest factor driving US emissions lower.  

Perversely given how progressives have pushed climate change policies, in lifting the LNG export pause a re-elected President Trump would be doing more to help the rest of the world lower emissions than anything the current administration has done.  

And there will no longer be a US climate czar praising China’s progress on emissions, as John Kerry did. He regularly overlooked their growing fleet of coal burning power plants. Kerry also mistakenly regarded China’s renewables ambitions as reflecting concern for the planet whereas it’s part of their drive for energy security. They’re planning for eventual conflict over Taiwan.  

Thursday night’s debate was painful to watch. A poorly advised old man was shown to be well past his political sell by date. We’ll learn how easily a presidential candidate can be dropped when his primary delegates have been pledged but not formally voted. 

It was a lousy week for Democrats, but a good one for energy investors. It provided more certainty about the future political and regulatory environment we’ll face. If a strong replacement candidate for Biden does emerge, their chances will improve. But for now, reliable energy stocks are benefitting from slipping Democrat support.  

There can be little debate about that.  

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

Monetary Policy Is Increasing The Deficit

SL Advisors Talks Markets
SL Advisors Talks Markets
Monetary Policy Is Increasing The Deficit
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Last week the Congressional Budget Office (CBO) released their latest ten year budget projection. It invariably makes for depressing, if unsurprising reading. Significant deterioration in our fiscal outlook is visible with every release.

For example, in February we noted that one particular milestone, the year in which interest on the Federal debt exceeds $1TN, keeps moving closer (see Our Darkening Fiscal Outlook).

In 2022, this was forecast for 2030. A year later the date had drawn two years closer, to 2028. In February it was projected to happen in 2026. And in the CBO’s latest release they now expect Federal interest expense to exceed $1TN next year.

It seems our fiscal outlook is not just getting worse – it’s deteriorating at an increasing pace. Two years ago, 2025 Federal revenues (mostly taxes) were projected to be 17.6% of GDP. Now it’s 17.0%. 2025 spending has gone from 22.3% to 23.5%. Mandatory, discretionary and net interest have all increased – the latter from 2.1% to 3.4% of GDP.

The pandemic-related inflation surge was hugely damaging. It’s consistently among the top concerns of voters, which augurs poorly for Joe Biden’s re-election hopes. It’s made worse because traditional inflation gauges don’t correspond with how consumers experience higher prices. Hedonic quality adjustments, owners’ equivalent rent and even insurance (see Another Inflation Omission) are all subjected to statistical purity which renders them less comprehensible to non-economists. Higher inflation has exacerbated the metric’s impenetrability for many.

On top of that, Democrat policies have been inflationary, starting with the $1.9TN stimulus package signed within a few months of Biden’s inauguration. The energy transition is also inflationary – it’s increasing electricity prices and pumping hundreds of billions of dollars into the economy through tax breaks and subsidies.

The resulting tighter monetary policy has been costly. Two years ago, the CBO was projecting the average rate on public debt in 2025 at 2.39%. Now they expect it to be 3.55%. Monetary policy caused the recent fiscal deterioration and is driving our debt higher.

Fed chair Powell has argued that our economic future can only be assured by returning inflation to 2%. A less robust monetary response would have reduced the damage to our debt outlook, but orthodoxy holds that we would ultimately have been worse off.

There are no votes in fiscal prudence. Bill Clinton was the last president to make a serious attempt at reducing the deficit. Our current path is democratic if ill-advised. It demonstrates that democracies are ill-suited to tackle long term problems whose benefits accrue to later generations while the costs are incurred today.

Climate change shares this generational misalignment of interests. The warnings of climate catastrophe are persistent, yet coal consumption continues higher as poorer countries value higher living standards today over a cooler future.

Fiscal catastrophe gets no coverage – on this issue the warnings have worn themselves out. Because we’ve continued to muddle through there’s no urgency to address the issue.

The long term investor has to ponder how this will resolve itself. An onslaught of selling by foreign central banks abandoning hope of fiscal reform was once felt to be a threat. Japan owns $1.1TN and China just under $800BN. They couldn’t sell that much if they tried, and in any case the Fed’s $7.3BN balance sheet could absorb it. If bond yields spiked, the Fed would step in to assure an orderly market. Quantitative Easing has emasculated the bond vigilantes.

Currency debasement has been the refuge of profligate governments for centuries, as I explained over a decade ago in Bonds Are Not Forever; The Crisis Facing Fixed Income Investors. Higher inflation allows for negative real interest rates on debt, a stealth default that is less painful than a sudden one.

The CBO expects the cost of financing our debt to average around 3.4%, 1.4% above the Fed’s inflation target. A 3-4% inflation target would lower the real cost by making it easier for short term rates to be below inflation, if only the Fed would accept it. The support among monetary thinkers for such flexibility is growing. Jay Powell has already modified the FOMC’s interpretation of its dual mandate to allow for temporary inflation overshoots in the interests of maximizing employment. Because this is an asymmetric shift, it means higher than 2% inflation over a cycle.

The voter dissatisfaction with higher inflation is supportive of the Fed’s monetary response but makes it tricky to accommodate the negative real interest rates that will ameliorate our debt outlook.

US Debt:GDP is 1.0X and the Fed owns 15% of our bonds. In Japan the equivalent metrics are 2.4X and 43%. Deflation has been a persistent problem for Japan. But US voters would not long tolerate the anemic GDP growth that accompanied it — 0.6% pa over the past decade in Japan vs 2.5% pa in the US. Fiscal stimulus would be an electoral winner.

This is why higher US inflation remains likely.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

Cheniere Keeps Returning Cash

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SL Advisors Talks Markets
Cheniere Keeps Returning Cash
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Cheniere Energy Inc (CEI) has come a long way since its founding by Charif Souki in 1996. Three decades ago the US looked likely to be an importer of Liquefied Natural Gas (LNG) as demand outgrew dwindling domestic production. CEI planned to meet the gap with LNG imports. By 2008 the company’s LNG import terminal was ready at Sabine Pass, LA just as the shale revolution was boosting US production. Domestic gas was cheaper than imports.

By 2011 Cheniere was preparing to reverse its flow – planning to export US LNG which was becoming abundant and cheap. Today CEI has 30 Million Tonnes per Annum (MTPA) of capacity at Sabine Pass and another 25 MPTA at its Corpus Christi, TX facility. Their $45BN investment in infrastructure allows them to export 8% of US production.

Souki long ago left CEI, forced out by activist shareholder Carl Icahn in 2015. They disagreed over Souki’s desire to add a marketing capability to CEI which would have provided the ability to speculate on natural gas prices. CEI’s business model is to charge a liquefaction fee for chilling natural gas to around –260 degrees Fahrenheit so it can be loaded onto a tanker.

The long term contracts CEI signs with highly rated counterparties provide cashflow visibility that can justify a high multiple on CEI stock. Speculating on natural gas prices offered less certain results and in Icahn’s view would have depressed the valuation.

We always felt Souki’s risk appetite was excessive. After being fired by CEI he founded Tellurian (TELL). Souki’s bullish view on natural gas prices led him to agree Sale Purchase Agreements (SPAs) with buyers that left Tellurian with the price risk.

During the pandemic TELL’s collapsing stock price resulted in a margin call on Souki, who had leveraged his personal holdings.

Investors didn’t share his enthusiasm for betting on higher prices, and TELL’s failure to secure financing led several SPAs to be canceled as the construction timeline was repeatedly pushed back. Souki was once again pushed out.

Earlier this year the Biden administration announced a pause on new LNG permits. This has left TELL languishing in limbo, unable to make commitments to deliver LNG in the future to potential buyers because there’s no visibility on when their proposed Driftwood LNG terminal will be built.

By contrast NextDecade (NEXT) which was once competing with TELL to sign up buyers, has moved ahead with construction of Stage 1 of their Rio Grande LNG terminal and looks likely to move ahead on Stage 2 by the end of this year.

Creating another CEI is the goal of both companies. With their recent update on capital allocation, CEI showed why others want to emulate them.

Although CEI’s $45BN outlay shows LNG terminals require enormous capital commitments, once built the ongoing maintenance capex is modest. CEI reinvests the smallest percentage of EBITDA in the midstream infrastructure sector on upkeep of their existing assets.

This has led free cash flow to boom. They increased their share buyback authorization by $4BN and are aiming to retire 10% of their outstanding shares by 2027. Past share repurchases since 2022 have already retired over 10% of their sharecount.

Having instituted a dividend in 2021, CEI is targeting 10% growth and a 20% payout ratio. They expect to deploy $20BN in new capital on expansion projects by 2026 while also reaching >$20 per share in Distributable Cash Flow (DCF), around a 12% DCF yield based on their current stock price. They’re targeting an investment grade balance sheet with 4X Debt:EBITDA which will further reduce their cost of financing.

CEI plans to add 35 MTPA of capacity to the 55 MTPA already in operation, maintaining their dominant position in US LNG exports. Their shipments are 95% contracted through the mid 2030s with highly rated counterparties including Petrochina, South Korea’s Kogas, Spain’s Iberdrola and Shell. Williams Companies and Kinder Morgan are among those providing supporting natural gas infrastructure.

Exporting LNG is an attractive business model because the infrastructure only gets built when enough SPAs are in hand to obtain financing. 75% of recoverable US natural gas can be profitable at under $4 per Million BTUs, assuring US LNG exports will benefit from cheap supply.

Investors didn’t lose $BNs on TELL because they couldn’t raise much capital. Construction barely started on Driftwood. The cash wasn’t there.

Global coal consumption continues to grow. Natural gas burns with around half the greenhouse gas emissions and can substitute for power generation and many other uses. People who think seriously about the most effective ways to mitigate global warming know US LNG is an important part of the solution. Cheniere’s exports will be in demand for decades to come.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF Real Assets Fund

 

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