SL Advisors Talks Markets

Is Capex Back?

Play Episode Pause Episode

Mute/Unmute Episode Rewind 10 Seconds 1x Fast Forward 30 seconds

00:00 / 00:05:42

RSS Feed

Share

Link

Embed

It seems a lifetime ago, but in the latter stages of the capital bust that was the shale revolution, capex plans were often poorly received. In late 2018 Targa Resources (TRGP) drew the ire of investors when then-CEO Joe Bob Perkins dismissed criticism by calling their spending plans “capital blessings” (see 4Q18 Energy Infrastructure Earnings Wrap Up).

It was around this time that Energy Transfer CEO Kelcy Warren said, “A monkey could make money in this business right now.” following a strong quarter earlier in the year.

Nonetheless, capex plans often failed to draw enthusiasm, and the pandemic was yet to come. On March 20, 2020 when MLP closed end funds were self-immolating (see MLP Closed End Funds – Masters Of Value Destruction), TRGP traded as low at $3.66. Last Wednesday it traded at $211. Your blogger doesn’t regret missing that buying opportunity – I’m happy enough not to have had to sell at the time.

Since then, capital discipline has provided a tailwind for sector performance. Investors cheered reduced spending plans. That wretched little girl Greta and her miserable cohort helped by protesting against reliable energy, which motivated companies to trim spending. Leverage fell, dividends grew and companies began buying back stock.

Hug a climate protester and offer to drive them to their next protest

The sector is moving into a new phase. Climate protesters with their dystopian world view have been discredited. Traditional energy is back in fashion. Trump promotes US oil and gas exports at every opportunity. Data centers are spurring growth in gas-generated power.

Reflective of this emerging trend, Energy Transfer (ET) surprised with an increase in growth capex to $5BN for 2025 along with $1.1BN in maintenance capex. Prior expectations had been for around $4BN in total capex. Among their projects was the first of eight gas power plants that are supporting their own operations. They’ve received requests from 62 power plants and 70 data centers to date.

Williams Companies (WMB) announced two small acquisitions totaling $632MM. Although they have yet to announce a specific data center related deal, the company expects to meet significant new natural gas demand from data centers.

Given the almost 58X recovery in TRGP since the 2020 low, Joe Bob Perkins can probably claim that he was right and his critics, including your blogger, were wrong. Targa became fully integrated from the Permian basin to the Gulf of America in 2019 with the completion of its Grand Prix Natural Gas Liquids (NGL) pipeline.

Subsequent investments including the Daytona NGL Pipeline to expand the Grand Prix system further improved vertical integration. This allowed them to provide services to E&P companies all along the value chain from gathering and processing to fractionation, storage, transportation, and across their export docks. Midstream companies call this multiple opportunities to “touch the molecule.”  TRGP’s Grand Prix network moved 872K barrels per day of NGLs during 4Q, with capacity estimated at 1.1 million.

TRGP’s 2025 capex was increased above the $2.3BN expected figure to $2.6-2.8BN. JPMorgan reported this as bringing forward later years’ spending in response to increased producer activity, which sounds like a good thing. They recently announced Delaware Express a 30-inch, 100mile pipeline expansion of Grand Prix into the Delaware Basin in Texas.

Wells Fargo calculates that over the past five years TRGP has invested $13BN to earn a 20% return on invested capital. Only WMB and Cheniere can boast higher returns.

To quote my partner Henry Hoffman, “TRGP is just a wonderful example of how this franchise model works with full integration.”

In spite of these examples, capex is not growing across the sector. Wells Fargo sees little if any increase over the next several years. The opportunities are limited to companies in the natural gas business and others like TRGP that have created a uniquely integrated value chain that is drawing additional demand. Growth spending remains tied to clearly identified projects, which should assure attractive returns.

In other news, President Trump is using every opportunity to promote exports of US oil and gas. At a recent lunch with his Japan counterpart they discussed sending LNG from Alaska. This would require completion of an 800-mile pipeline across Alaska’s north slope, a difficult project that has been contemplated many times over decades but not yet attempted because of difficult terrain.

High level discussions have also taken place with India. Currently there are no US LNG export terminals on the Pacific, although Sempra’s Costa Azul project in Mexico, fed by U.S. gas, is expected to start commercial operations next year.

Given the attention Trump is lavishing on LNG exports, it still seems to us that any indication Europe is planning to increase gas imports from Russia will be poorly received in the White House.

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

SL Advisors Talks Markets

Gas Projections Keep Going Up

Play Episode Pause Episode

Mute/Unmute Episode Rewind 10 Seconds 1x Fast Forward 30 seconds

00:00 / 00:05:27

RSS Feed

Share

Link

Embed

On Thursday morning Williams Companies released their earnings without the rumored announcement of a Behind The Meter (BTM) deal. The stock briefly dipped as algos reacted to the news release but was soon rallying because the broad outlook for natural gas demand remains strong.

It’s turning into a global high tech arms race. Proliferation of data centers is driven by two factors: (1) every country wants to control the physical location of the AI that’s increasingly viewed as crucial to growth (2) keeping the physical distance between data centers and users short enough to eliminate any noticeable latency.

Last week French President Macron announced that 1 Gigawatt of nuclear power would be dedicated to support $BNs in investments in AI projects. Along with other initiatives from Brookfield Asset Management and Middle Eastern investors, these will be part of $113BN in commitments that Macron will unveil next week.

The reliance on nuclear power, which provides over 60% of France’s electricity, is the European way of building data centers while maintaining fealty to their green ambitions. Macron even offered his own version of drill baby, drill: “Plug baby, plug.”

Vice President JD Vance was at a French AI summit warning  against Europe’s desire to impose regulations that would affect US technology companies.

The proliferation of new data centers is making it hard to estimate the growth in global power demand. The Energy Transfer deal with Cloudburst announced on Monday promised 450 Billion BTUs of natural gas every day to run a gas turbine. This is almost 0.5% of daily US gas production, a huge amount (see AI Demand Ramps Up).

However, there was some confusion because reports estimated this would produce 1.2 Gigawatts (GW) of power daily, whereas most observers would expect the amount of natural gas contemplated to produce three times as much power.

ET’s earnings call includes the term “data center” 27 times, reflective of the mix of questions the management team fielded from analysts. They’ve received requests from 70 prospective data centers across 12 states. If each one was the same size as the Cloudburst BTM agreement (ie 0.45 Billion Cubic Feet per Day, BCF/D) that would add up to 31 BCF/D of gas demand.

It shows the uncertainty around forecasts related to data centers. Wells Fargo revised their ten year growth forecast for US natural gas consumption from 12 BCF/D to 11 BCF/D in the wake of the DeepSeek news a couple of weeks ago (see Pipelines And The Jevons Paradox).

The 1 BCF/D reduction by Wells Fargo suggests a precision that doesn’t exist for 2035 gas consumption. They’re simply registering their view that DeepSeek is a net negative to earlier projections.

Data centers need 24X7 power which is why they’re not planning to rely on solar and wind. Even combined cycle natural gas plants have downtime for maintenance – typically around 5%. Diesel generators and batteries are typically planned for back-up. Using batteries 5% of the time seems much more sensible than the 60-70% that they’re needed for weather-dependent solar and wind.

ET’s CEO Marshall “Mackie” McCrea couldn’t resist commenting: “How wonderful is life after this election when we have a President and an administration that loves this country that fully recognizes how blessed we are with…fossil fuel resources.”

The International Energy Agency (IEA) published a report forecasting global electricity demand will grow at 4% per annum to 2027. 85% of this growth is expected to be in emerging economies. The additional 3,500 Terrawatt Hours of power needed is equivalent to adding a new Japan every year.

The US is expected to continue the 2% growth of last year following a couple of decades of flat consumption. GDP and the population grow, but energy efficiencies offset the increase in power demand that would otherwise result.

In 2023 EU power demand slumped to the levels of two decades ago and only managed 1.4% growth last year. European industry still pays around 2X the US price for electricity and 50% more than China.

The IEA is forecasting 1% annual growth in global natural gas power generation through 2027. This is probably too low. Last year was +2.6%. The IEA retains their cheerleading role for renewables.

We’ve been bulls on natural gas demand for years. We think even we underestimated the potential.

Finally, we were very saddened to lose long-time friend Austin Sayre who died peacefully at the age of 94. Austin asked me to manage his portfolio back in 2009 when I wasn’t giving any thought to managing other people’s money. He was our first client.

Austin was witness to my early efforts at golf, having generously offered to sponsor me at our local club in New Jersey. When I once took seven strokes on a par 3, he memorably commented, “You sure got your moneysworth on that hole!”

Austin was an unfailingly charming and upbeat man. I feel privileged to have known him. Austin will be sorely missed by many people. A life well lived.

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

SL Advisors Talks Markets

Hyperscalers Plow Ahead

Play Episode Pause Episode

Mute/Unmute Episode Rewind 10 Seconds 1x Fast Forward 30 seconds

00:00 / 00:05:00

RSS Feed

Share

Link

Embed

On Friday both the Wall Street Journal and the Financial Times ran stories about planned capex on data centers by the big US tech companies. The DeepSeek news of two weeks ago hasn’t resulted in any discernible change. The case for increased power generation remains intact.

On Wednesday Williams Companies will report their quarterly earnings. They have hinted that they may announce a “behind the meter” (BTM) deal to provide natural gas for a dedicated power station co-located with a new data center. They have in the past said there are numerous discussions under way. BTM arrangements bypass the existing grid, which speeds up approvals and installation.

Electricity grids operate with high fixed costs that are broadly shared across customers, commensurate with their usage. Adding significant new infrastructure to accommodate growth in demand spreads that new expense across the user base, in effect subsidizing the new users at the expense of the existing ones. Regulators will look carefully at this to ensure rates don’t go up unreasonably.

Talen Energy and the PJM grid plan to provide nuclear power to a new data center being built by Amazon Web Services. FERC rejected the agreement, finding it was potentially adverse to utility customers because it would require additions to the existing grid infrastructure and possibly increase rates for everyone. BTM is a way to avoid that.

However, it means the data center is exposed to downtime on its co-located power source. Natural gas combined cycle power plants typically run 95% of the time, far better than the 20-35% common with solar and wind, which is why renewables aren’t much use to data centers. Nonetheless, even 5% downtime for maintenance leaves a coverage gap that a grid connection could otherwise alleviate. As further announcements are made we’ll see how the industry is addressing the challenge.

Liquefied Natural Gas (LNG) stocks slipped last week on reports that the White House is negotiating directly with Russia to end the war in Ukraine. There’s some speculation that the conclusion of hostilities could prompt a resumption of EU imports of natural gas from Russia, reducing the need for US LNG.

The Nord Stream gas pipelines that sent Russian gas to Germany rank up there among the dumbest energy policies in history. Trump railed against this dependency during his first term in office, rightly asking why US troops were stationed in Germany to protect against an attack from their gas supplier. Since the invasion Russia’s natural gas exports have fallen by more than half. It has struggled to find buyers and to get its gas to market.

We think any natural gas agreement as part of a Ukraine ceasefire is more likely to embed EU imports from the US not Russia. Thoughtful European policymakers won’t want to repeat the misplaced trust in Russia of former German Chancellor Angela Merkel, who should be spending her retirement giving speeches apologizing for her strategic blunders.

Venture Global (VG) has traded off sharply since its IPO. The market is applying a management discount based on how they’re perceived by customers. Last week Total CEO Patrick Pouyanné said they decided not to become a long term buyer of LNG from VG because they didn’t trust the company. This was in spite of the attractive terms being offered.

Once an LNG “train” or export facility is fully commissioned it is generally expected to begin shipping LNG under the terms of its long term contracts. VG’s interpretation of commissioning for its Calcasieu Pass terminal has resulted in a dispute over $BNs in profits that Shell, BP, Galp and Repsol believe they should have earned. VG said the terminal wasn’t complete, allowing them to reap huge profits following the spike in gas prices after Russia invaded Ukraine (see Nothing Ventured, Nothing Gained).

The dispute is in arbitration. Even if VG prevails, their reputation is in shatters. Some of the biggest buyers of LNG won’t do business with them. Even if they do, it’s likely that they’ll negotiate from the perspective that good faith isn’t in the VG lexicon.

Add to this VG’s initial IPO price target which would have valued the company at over $100BN, more than double Cheniere who handles half of America’s LNG exports. Even at its greatly reduced IPO price it was still, briefly, the most valuable publicly listed LNG company. Since then it’s slumped, to the chagrin of IPO buyers who are down by a third.

It seems that if VG shows you an attractive LNG export proposal, you’re supposed to be wary. And if the founders want you to buy some of their stock, the profitable move is to go short.

Founders Michael Sabel and Robert Pender have become billionaires while alienating a lot of key industry figures. VG’s management discount to its valuation is going to be around for a long time.

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

SL Advisors Talks Markets

Cheaper AI Probably Means More

Play Episode Pause Episode

Mute/Unmute Episode Rewind 10 Seconds 1x Fast Forward 30 seconds

00:00 / 00:05:23

RSS Feed

Share

Link

Embed

Following Monday’s “sputnik moment” for AI the market has had a few days to consider the ramifications of DeepSeek’s apparent breakthrough. Mark Zuckerberg reaffirmed Meta’s plans to spend $60-65BN on data centers. They have embraced an open-source approach to AI, believing that sharing code freely will drive penetration. Since DeepSeek also published their code any insights will spread to other platforms.

On Tuesday Chevron announced plans to partner with GE, Vernova and investor Engine No 1 to build gas-powered data centers. So far there’s little sign that capex plans are being trimmed, although as Zuckerberg noted it’s still too early to judge the full impact of DeepSeek.

Meanwhile Microsoft (MFST) is probing whether DeepSeek improperly used OpanAI’s proprietary model to improve its own. Energy investors are educating themselves on the power needs of AI.

Wells Fargo trimmed their forecast of the long term boost to US natural gas consumption from 12 Billion Cubic Feet per Day (BCF/D) to 11 BCF/D in 2035. Although directionally it’s not what energy investors would like, an 8% revision a decade out comes with substantial uncertainty.

In 1865 British economist William Jevons observed that improved efficiency in coal use led to greater consumption. Appropriately I asked ChatGPT to explain: … as technology improves the efficiency with which a resource is used, the overall consumption of that resource may increase rather than decrease.

Jevons Paradox simply means if demand elasticity exceeds supply elasticity consumption will rise, something taught in every beginner’s Economics class. This prompted MSFT CEO Satya Nadella’s tweet that the same effect might add a further boost to AI use.

We’ll just have to monitor developments in the months ahead.

Meanwhile the LNG export story continues to unfold positively. Morgan Stanley has buy recommendations on Cheniere and NextDecade (NEXT). They have a $10 price target on NEXT assuming Train 4 is completed, but they go on to add that they also expect Train 5 and that would push their price target to $15.

FERC is expected to issue their preliminary supplemental Environmental Impact Statement (EIS) by the end of March with the final one in July. Current expectations are for the issue to be resolved by the end of the summer.

Last year environmental extremists persuaded a judge to issue a stay on the original EIS that NEXT had relied on to move ahead with the project (see Sierra Club Shoots Itself In The Foot). It’s hard to see how the world gains from being denied cheap US natural gas. It makes energy more available to those without in emerging countries and provides a cleaner alternative to coal.

For example, India is boosting its use of domestic coal for power generation while it reduces imports, hitting another record high for coal-derived electricity last year. Renewables boosters continue to assert that solar and wind are the cheapest form of power generation, while developments relentlessly show the opposite. High renewables penetration comes with higher prices.

The Alerian MLP ETF (AMLP) is losing another constituent as the remaining outstanding shares of Enlink are absorbed into Oneok (OKE). This follows a well-established trend of publicly traded partnerships going away and the pipeline sector increasingly being made up of conventional c-corps, a trend we’ve noted since 2018 (see Are MLPs Going Away?).

For investors in MLP-dedicated funds it exacerbates the problem of concentration (see AMLP Is Running Out Of Names). This is compounded by their costly non RIC-compliant structure (see AMLP Has Yet More Tax Problems). Add to these shortcomings that MLPs are generally more involved in crude oil than natural gas, which left many of them bystanders to last year’s big story (see There’s No AI in AMLP).

We are having more conversations with investors about ways to avoid these three problems.

Lastly, at the time of writing the White House is preparing to impose tariffs on imports from Canada and Mexico. US refineries are configured to process Canadian heavy crude more readily than the light crude that comes from shale formations. Concern about tariffs is more prevalent outside the country than here, which suggests who’s more vulnerable.

Canada’s Energy Minister Jonathan Wilkinson reminded listeners on a recent Politico Energy podcast that tariffs on Canadian crude will increase US gasoline prices, especially in the mid-west where refineries import Canadian crude. He also suggested that Canada might slow exports of hydro-based electricity from Quebec to northeastern states and natural gas to the Pacific northwest. This is ironic, since both regions have robust political commitments to renewables and are generally blue states.

Trump has suggested that oil imports may be exempted from the tariffs. There’s little apparent concern among US energy companies about the potential for economic disruption. We’ll see how it plays out, but the US looks to be in a strong position.

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

SL Advisors Talks Markets

Nothing Ventured, Nothing Gained

Play Episode Pause Episode

Mute/Unmute Episode Rewind 10 Seconds 1x Fast Forward 30 seconds

00:00 / 00:05:13

RSS Feed

Share

Link

Embed

One source of recent volatility in midstream has come from a stock that wasn’t even listed – Venture Global (VG), the LNG exporter whose IPO priced on Thursday. The fundamentals could not be more positive. Trump has reversed the LNG export pause, wants US energy dominance and asked our trading partners to buy more American oil and gas. It’s hard to conceive of a better environment to launch an LNG IPO.

VG rather overplayed their hand though, originally seeking a valuation of over $100BN, double Cheniere’s (symbol: LNG) who handles half of all US LNG exports.

As investors contemplated VG’s proposed valuation, the effect was to highlight how cheap Cheniere is. Its stock duly rose, along with NextDecade (NEXT), a company we like that is building its first LNG export terminal.

Underwriters found quite a pushback from potential buyers on VG’s lofty pricing, and repeatedly lowered the target range. On Friday it priced at $25 – far below the mid 40s valuation underwriters had been suggesting a week earlier. Gains in other LNG stocks quickly evaporated. LNG and NEXT have gyrated without any actual trading in VG.

We still think the IPO price for VG is high – or more accurately, we think it highlights how cheap Cheniere is, at around 11X EBITDA vs 14X for VG. IPO buyers should still prefer these two stocks in our opinion.

VG also has a mixed reputation with its customers. While they have the same type of long-term sale-purchase agreements common to the industry, the spike in global natural gas prices following Russia’s invasion of Ukraine enabled them to delay commissioning of their Calcasieu Pass terminal. Although the facility was exporting LNG, VG said it wasn’t yet fully operational, and they were therefore not bound to supply gas under the long term contracts. Instead they sold supplies on the spot market, reaping $BNs of additional profit.

Shell, BP, Galp and Repsol initiated arbitration proceedings claiming that this gas should have been supplied to them. The plaintiffs claim VG improperly gained $3.5BN. This dispute is a risk factor in VG’s S1 filing with the SEC.

It seems that Shell and the other buyers are guilty of not negotiating a tight enough contract. VG offered attractive liquefaction pricing, and perhaps the buyers accepted more delivery risk as a result. VG also took an aggressive interpretation of their obligations, evidently surprising their customers. It looks like VG’s CEO Michael Sabel is cut from the same cloth as Energy Transfer’s chairman and former CEO Kelcy Warren. It’s great to be in business with him as long as you’re sure your interests are aligned (see from 2018: Energy Transfer: Cutting Your Payout, Not Mine).

Last week in Naples, FL was miserably cold, a condition that drew little sympathy from family and friends enduring single digit morning temperatures in the northeast. The freezing weather once again showed the importance of reliable, dispatchable energy. The PJM grid, which extends from NJ to Illinois and Tennessee used record amounts of natural gas to generate the electricity customers needed to stay warm.

The claims of climate extremists that solar and wind are cheaper than traditional energy have been thoroughly discredited. Opportunistic power that’s only available when the weather co-operates requires natural gas back-up. This surplus capacity raises costs, as the chart from Bjorn Lomborg illustrates.

It’s fortunate that in the US progressives haven’t done any lasting damage with their policies, other than in a few liberal states such as California, Massachusetts and New York. Our friends on the Jersey shore are certainly happy that plans for offshore windpower appear to have stalled.

Some solar and wind can work as long as a grid doesn’t become too reliant on them. At low levels they can drift in and out of the supply mix. Dependence is costly.

It’s one of the reasons the FT wrote Davos hits ‘peak pessimism’ on Europe as US exuberance rises. Former climate czar John Kerry made time to fly there in his private jet to talk about climate change. The European energy policies that he no doubt admires prompted Christine Lagarde, president of the European Central Bank, to say it was “not pessimistic” to say that Europe was facing an “existential crisis”.

Lastly, the FT wrote something we’ve long noted – US stocks at most expensive relative to bonds since dotcom era. Valuation isn’t a good timing tool, and stocks have been relatively expensive for at least a year. But it’s worth noting, because midstream energy looks like the exception to us (see Pipelines Are Cheap; Stocks Are Not).

Last week’s post, The Energy Story’s Trifecta, makes the case and has generated a lot of positive feedback.

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