Renewables Confront NIMBYs

Last week a Federal judge blocked completion of the Cardinal-Hickory Creek high-voltage transmission line. The 102-mile project linking Dubuque County, Iowa, to Dane County, Wisconsin has one mile remaining. Three environmental groups opposed its construction through a Mississippi River wildlife refuge. It’s needed to upgrade an existing transmission line built in the 1950s, add capacity, and bring new solar and wind power to Madison, WI.

Environmentalists are far from one homogeneous group. Locally, they can oppose infrastructure enabling the energy transition they support nationally. An FT video on the Cardinal-Hickory Creek website shows an environmentalist holding a feather (“I found five today”) lost by a bird unsuccessfully navigating the pylons.

Power lines are an unfortunate ugly corollary to electricity use. Because solar and wind need large spaces, their output must travel long distances to customers.  Climate extremists wishing to project a coherent view must reconcile the two. Nuclear and natural gas take up less room so can be placed nearer their customers.

The big problem with energy infrastructure isn’t the opposition from environmentalists. It’s the legal process that allows last-minute delays to projects that are almost complete.

Cardinal-Hickory Creek was first conceived in 2011. Public engagement began in 2014, authorizations were in hand by 2020 and construction began in 2021. 115 renewables projects with 17 gigawatts of capacity depend upon its completion. Nobody will build anything that can be derailed at the finish line when capital has been long committed and spent. But this is America’s process today.

We’re suddenly moving into a period of high demand growth for electricity following decades of flat demand. Electrification, including increased use of EVs was expected to add 1% pa to demand. Data centers are suddenly the new power hogs.

Wells Fargo estimates that AI will add 16% to US power demand by 2030. In less than a year, 1% annual demand growth has become 3%+.

For some this will increase the urgency to add even more solar and wind, although it’s hard to imagine that we could be doing any more. Therefore, it will boost natural gas demand.

Last year the Energy Information Administration (EIA) projected natural gas use in electricity generation was about to peak. The EIA produces unbiased research, unlike the International Energy Agency (IEA) whose publications are mostly fantasy appealing to climate extremists.

This loss of demand will be made up for elsewhere in industry and via LNG exports once the pause on new permits is lifted. But now the trajectory has changed. Wells Fargo estimates that AI will boost natural gas by 7 Billion Cubic Feet per Day (BCF/D) in order to meet just 40% of the incremental power load. Their upside case is 16 BCF/D. Last year the US produced 105.5 BCF/D from the lower 48 states.

This analysis only considers US data centers. But they’re being built all over the world. The AI revolution is global. Projected increases in electricity generation will add to global LNG demand. US natural gas prices are cheap. Chad Zamarin, a senior vice president at Williams Companies (WMB) says, “Domestic U.S. markets are oversupplied.”

Companies that produce electrical equipment should do well. Transformers are on a two year backlog. But assuming this will be good for renewables is to bet on a transformation of how infrastructure gets built.

America’s regional grids are increasing spending. But we’re adding the fewest miles of transmission in a decade. This is the morass into which investors in clean energy and utilities are jumping. Regardless of how strongly you believe in renewables and how sleepless rising sea levels make you, financing solar, wind and new power lines looks like a good way to lose money.

Morocco’s Noor Ouarzazate solar complex, operated by Saudi Arabia’s ACWA Power International, has had to shut down for most of the year because of problems at its storage unit. The facility has suffered repeated problems. A government agency called for its closure in 2020 because of high cost.

Morocco has a goal of getting renewables to half its power capacity by 2030. Their primary energy consumption is 7% renewables, with the balance from fossil fuels. Give them credit for trying. Many Moroccans would likely prefer adding cheap energy over green energy to raise living standards. Per capita energy consumption is a tenth of the US.

It seems increasingly clear that the AI revolution is going to boost natural gas consumption. Adding new pipelines is no easier than adding power lines. But pipeline operators can add small amounts of capacity at the margin. They don’t face any new competitors. Toby Rice, CEO of EQT, said, “Our pipeline infrastructure is maxed out.”

Rather than being compelled to deliver the energy transition, natural gas pipelines are positioned to compensate for the transition’s inability to deliver what politicians have promised.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 




Energy’s Slow Transition

Treasury bills yielding 5.3% are not the worst place to put some cash. Long term expected returns on US large cap equities are generally 5-7%. Schwab expects 6.2%. JPMorgan is at 7%. The Equity Risk Premium is the lowest it’s been in over two decades. S&P500 earnings projections for this year and next are roughly unchanged over the past three months, but stocks are +10% driven by the AI boom.

The Fed doesn’t target asset prices, but the release of the FOMC’s projection materials last week confirmed that they expect to cut rates later this year. Stocks duly rose.

The Fed is walking a precise path. FOMC forecasts for the Fed Funds rate are aligned with the market. December SOFR futures are at 4.5% versus the median blue dot at 4.6%. Policymakers can be forgiven a degree of immodesty. They have quelled inflation without causing a recession.

On the back of this success, they now plan to cut rates with inflation still above their target and the unemployment rate below their projected equilibrium. This drew criticism from Larry Summers who thinks they’re too eager to cut rates. The counter argument is that current Fed policy is restrictive, and having avoided a recession to this point they don’t want to stay too tight for too long.

The economy is doing well, and the margin for error is on the side of slower rate cuts or none this year. If the unemployment rate dropped back to 3.7% the 4.6% year-end projected Fed Funds rate would look optimistic.

With stocks historically expensive against bonds, which themselves don’t look that cheap, there shouldn’t be any great rush among investors to commit new cash to equities.

The exception is midstream energy infrastructure, which has quietly been delivering strong returns for over three years and is drawing the attention of more buyers.

Williams Companies CEO Alan Armstrong told the CERAWeek energy conference that the need for permitting reform has made building infrastructure more difficult. This has reduced competition within the midstream sector, leaving incumbents in a strong position. Climate extremists (hug one) have done this. Armstrong said Boston burns garbage, oil and coal to generate electricity rather than allow pipelines to bring in natural gas from Pennsylvania.

We agree with Armstrong that any serious effort to reduce emissions should exploit cheap natural gas to displace coal. As the world concludes that the UN IPCC “zero by 50” goal is out of reach under current policies, pragmatism will favor solutions like this.

In 2017 we wrote about Stanford University’s Tony Seba (see A Futurist’s Vision of Energy). Seba tells you what the future will look like. His presentations are engaging and his forecasts far from mainstream. This makes them exciting, by forcing the viewer to contemplate a world very different from today.

Seba’s not the only person to have made spectacularly wrong energy forecasts. Vaclav Smil is a brilliant writer on energy whose many books include How the World Really Works. Smil eschews long term forecasts, recalling a 1983 meeting of the Internation Energy Agency (IEA) where he drew some comfort because his, “was less ridiculous than that of the World Bank’s chief economist.”

In 2017, Tony Seba opened his presentation with a photo of horse-drawn carriages in New York’s 1900 Easter parade followed by a 1913 photo of Fifth Avenue with all cars and no horses. It’s great theatre and draws the audience to embrace the notion that dramatic change is all too common.

At the time of that presentation, Seba forecast that by 2030 EVs would be 100% of US auto sales and that global oil demand would be 70 Million barrels per Day (MMB/D). We’re halfway to that deadline. Today US EVs are 10% of sales if you include hybrids. Global oil demand is at a record 103 MMB/D and the IEA regularly revises its forecasts up.

Seba’s website still uses the 1913 photo labelled “Where is the horse?”

Unbowed by the improbability of the 2017 forecasts, Seba currently expects 95% of US passenger miles to be “served by on-demand autonomous electric vehicles owned by fleets, not individuals.” Never mind that the average US car is over 12 years old and that today fleet-owned autonomous cars are limited to a few experiments in places like Tempe, AZ.

Change is coming, and sometimes it’s faster than expected. Tony Seba is not short of invitations to speak at events. However, profits do not come to those following his vision.

Seven years ago, Exxon’s US EV forecast was a 10% market share by 2040, likely to be a big miss. They also forecast 115 MMB/D of global crude oil demand at that time, which is quite possible given recent trends.

Aramco CEO Amin Nasser told CERAWeek that the “current transition strategy is visibly failing” and that emissions will increasingly be determined by the “global south” (meaning the developing world including Asia). He’s right.

This energy transition will last decades as did previous ones from wood to coal to oil and gas. Futurists are fun but the incumbents are where the money is.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 




Renewables Are Pushing US Electricity Prices Up

The Artificial Intelligence boom means the need for vastly more computing power. This is leading to a sharp jump in data centers, with a consequent increase in projected electricity demand (see AI Boosts US Energy). Elon Musk noted the pressure this is putting on the supply of electric infrastructure. Electricity is stepped up to very high voltage for transmission before being transformed back down to the familiar 110V we use. For example, generator transformers now have a two-year waiting list.

Most regions of the US are planning for increased power demand. The PJM region attributes it all to data centers. Virginia has added 75 since 2019. Microsoft plans to use dedicated nuclear fusion plants to power its growing AI business.

Shifting to increased use of electricity is a key pillar of the energy transition, since in theory an EV run on solar or windpower generates no CO2 emissions (although its manufacture does). Utilities are at the forefront of delivering more electricity from renewables. This is part of decarbonizing our economy.

The US Energy Information Administration (EIA) published their 2023  Annual Energy Outlook (AEO) almost exactly a year ago. In it they projected a 0.7% annual increase in power consumption. By July they had concluded that their models needed an overhaul to better model hydrogen, carbon capture and other emerging technologies. So they’re skipping this year’s AEO while they do that and will return next year with the 2025 AEO.

In January last year PJM forecast 1.4% annual demand growth for electricity over the next decade. Two months ago, they raised this to 2.4% over their ten-year planning horizon. It’s safe to assume that next year’s long term outlook from the EIA will assume faster demand growth.

NextEra Energy (NEE) says it “has a plan to lead the decarbonization of America.” On their most recent earnings call, management’s enthusiasm about growth opportunities in renewables reminded me of pipeline companies 7-10 years ago during the dash for growth that was the shale revolution. There’s an unfailing confidence that growth is good. For investors that requires that projects will earn a risk-adjusted return above the company’s weighted average cost of capital.

Alot of shale revolution capital was poorly allocated. Too many projects, both upstream and midstream, failed to generate a return above their cost of capital.

The energy transition and build-out of renewables originally came with much excitement and enthusiasm. Democrat political leaders were partly to blame. Joe Biden promised cheap reliable electricity along with well-paid union jobs. Climate extremists have long misrepresented the actual cost of intermittent solar and wind power.

US electricity prices are climbing. Over the past five years they’ve increased at a 4.9% annual rate, 0.7% faster than the CPI. Renewables’ share of US power generation has been climbing for two decades and is now around 22%. It’s not a coincidence.

The S&P Global Clean Energy index peaked in late 2020. NEE peaked a year later. US electricity prices had long fluctuated between 13.0 and 14.5 cents per Kilowatt Hour (KwH), but around the time that inflated renewables expectation began to sag, power prices rose.

Fortunately we’re nowhere close to Germany, proud leader of the energy transition, where wholesale electricity is around US0.55 per KwH.

This blog is in favor of reducing CO2 emissions. As we tirelessly point out, replacing coal with natural gas remains America’s biggest success on this score. But few consumers want to pay more for energy – and who can blame them when climate extremists have long asserted with no evidence that renewables are cheaper as well as better for the planet. As a result, few expect to pay more for the energy transition.

Climate extremists have overpromised on the solution.

This puts utilities in an unenviable position. They’re at the forefront of what many believe is a vital mission to reduce greenhouse gas emissions, but investors are souring on them. NEE management conceded on their recent earnings call to be disappointed with their stock performance, which is 2.2% pa over the past five years.

The sudden growth in data centers will likely put further upward pressure on electricity prices, since for most utilities at the margin adding new capacity is likely to cost more than their current average cost. Socializing the cost of added data center demand across all their customers will be unpopular, and it will also require more traditional energy. Natural gas infrastructure will benefit, and planned coal plant retirements might be delayed. JPMorgan expects Williams Companies (WMB) could see 0.75 billion cubic feet per day of incremental throughput on their natural gas pipeline network, and projects, “the total national opportunity potentially multiples of this figure.”

Where the pipeline sector differs from utilities is that they’ll often meet incremental demand with small additions to existing capacity, usually funded organically. They don’t have the same pressure to deliver the energy transition at a cheap price.

Utility investors are learning to be less enthusiastic about capex-funded growth.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 




AI Boosts US Energy

In recent years the International Energy Agency (IEA) has moved from providing objective forecasts to championing the world’s shift away from fossil fuels. In embracing a liberal political stance they’ve lost relevance to companies and governments making investment decisions to meet future demand. For example, the IEA projects peak oil demand within the next few years, whereas OPEC sees no visible peak. The IEA’s base case for energy consumption sees annual demand growth of less than 1% even though the past decade was 1.4% pa.

One result is that the IEA often revises its near tern forecasts higher. They now see 2024 global crude oil demand at 103.2 Million Barrels per Day (MMB/D), up 1.3 MMB/D from last year. Although the IEA has raised its growth forecast by half since it was first released last year, they’re still behind others such as OPEC which expects 2.2 MMB/D of growth.

Analysts have long warned that underinvestment in new oil production would push prices higher. Russia’s invasion of Ukraine two years ago briefly took prices near $110 per barrel, but a porous sanctions regime has allowed Russian oil to find its way onto the market. However, over the past month oil futures have edged higher as traders digested the upward revisions to demand forecasts.

It’s part of a growing pattern whereby traditional energy consumption is proving more resilient than many forecasts project.

An example is Shell, which has moderated its carbon intensity targets to incorporate the sale of its retail renewable power business. Investors are rewarding companies that prioritize returns, which for companies like Shell come more reliably from oil and gas. In explaining their changed goals Shell cited, “uncertainty in the pace of change in the energy transition.”

Another area of surprising demand growth is in US power. For over a decade, electricity consumption has hovered just below 4 Trillion Kilowatt Hours. But utilities across the country are preparing for a surge over the next five years. Electric Vehicles (EVs) are only a small part of this. Indeed, Tesla is losing its stature as a growth stock with sales volumes being revised down weekly.

The increased need for US electricity is driven by data centers. Since last year, five year growth in power demand has been revised up by 80%. Virginia has added at least 75 new data centers since 2019. Most regional grids expect increased demand from data centers. California is the exception – the home of computing is a hostile place to build anything.

The Boston Consulting Group expects power demand from data centers to triple by 2030.

In a recent interview, Elon Musk said that AI computing power was increasing at a staggering 10X every six months. Obviously, this isn’t sustainable, but he described it as the fastest growth in a new technology he’s ever seen. Musk has long been optimistic about autonomous driving. He believes Tesla is very close to delivering, although he has said that often over the past several years. He expects self-driving cars using AI to allow much greater utilization of automobiles in the future. While the average car is used for ten hours per week, he expects autonomous cars to move people 50-60 hours a week as they operate like taxis.

Manufacturing is also benefiting from cheap, reliable US energy. New plants to build automobiles and batteries are adding to demand. In the past three years $481BN in new commitments for industrial and manufacturing facilities have been announced. Some of this is the beneficiary of Germany’s slow de-industrialization, caused by years of their disastrous energy policies (see Germany Pays Dearly For Failed Energy Policy).

California, where EVs are popular, expects charging them to consume up to 10% of peak power demand by 2035.

The increased capex among utilities should give investors in that sector pause. But the consequent demand for additional natural gas will further boost utilization of pipelines.

Reducing emissions relies on electrification of activities where it results in a switch to low emission energy. However, renewables are in many cases inadequate to meet this new demand. Georgia, North Carolina, South Carolina, Tennessee and Virginia are planning to add dozens of new natural gas power plants over the next fifteen years.

A challenge to adding renewable power capacity lies in transmission lines. Because solar and wind power require large open spaces, their power must be transmitted often over long distances to population centers. Adding grid capacity is proving difficult. The legal system has been turned into a weapon by climate extremists opposed to traditional energy, but interminable lawsuits are also delaying new power infrastructure.

GridStrategies reports that the U.S. installed 1,700 miles of new high-voltage transmission per year on average in the first half of the 2010s but dropped to only 645 miles per year on average in the second half of the 2010s.

Oil and gas demand remain strong, with many companies finding them the most reliable source of investment returns in the energy sector.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 

 




Who Do Energy Investors Want In November?

Last week I saw some investors in Florida before joining my partner Henry in Puerto Rico at the national sales conference for Catalyst Funds, our mutual fund partner. The warm, sunny weather and ocean breeze stimulated much useful interaction with clients and salespeople about midstream energy infrastructure. It’s always helpful to hear firsthand the questions and concerns investors voice about what we believe is the most attractive sector in the equity markets today.

The Catalyst crowd is one that, as CEO Jerry Szilagyi said, plays hard and works hard. Like at my golf club, the average age keeps getting younger. Following each day of intensive meetings, the local nightlife was fully experienced, albeit not by your blogger whose postprandial preferences exclude casinos and value sleep over shots.

During several roundtables with groups of salespeople we were often asked how the election will impact the sector.

During his 1984 re-election campaign, then 73 year-old President Reagan quipped that he wasn’t going to make an issue out of 56-year-old Walter Mondale’s youth and inexperience. Similarly, we’re not too worried that a Trump presidency will once again decimate energy investors.

Huh?

Democrats don’t like traditional energy, and left-wing progressives would return us all to living standards from the 19th century if their energy policies were followed. Therefore, it’s to their great dismay that pipelines have returned a sparkling 32.1% pa since Joe Biden won the 2020 election. Trump’s time in office was –6.2% pa.

Energy executives cheered when Trump surprised many by beating Hilary Clinton in 2016. They expected a lighter, pro-business regulatory touch. Capital flowed into the ground and hydrocarbons gushed out. The shale revolution was good for consumers but not investors as prices sagged under increased supply. Too often, capital was allocated on optimistic assumptions. And then came covid, with its short but dramatic collapse in economic activity and briefly negative oil prices.

A newly elected President Biden adopted the hostile posture he promised during the campaign, immediately canceling the Keystone XL pipeline. The post-pandemic economic recovery was by then well underway, and a superficial interpretation of the pipeline sector’s performance might conclude that the Democrats have provided benign policy support allowing energy investors to profit.

Pipeline executives understand the reality is more nuanced. Democrat politicians planning to stay in office offer progressives enough to keep alive their dystopian vision of nothing but renewables while ensuring reliable energy remains fully available. Capital expenditures have remained at half the levels of five years ago partly because companies are more focused on returns versus growth. But they’re also wary about making long-term capital commitments that future policy changes may render unprofitable.

Climate extremists have helped create the present cautious attitude towards capital allocation. Hug one and drive them to their next protest.

Trump wasn’t bad for energy any more than Biden has been good. Presidents have less influence over the sector than is sometimes believed. We think midstream energy infrastructure is attractive regardless of who wins in November.

We were asked about the pause on approving new LNG export terminals. US export capacity is set to double over the next four years. The permit pause only affects projects beyond that, where construction hasn’t yet begun. See Struggling To Justify The Pause and LNG Pause Will Boost Asian Coal Consumption. The pause is poor policy and will likely be lifted after the election regardless of who wins. It does remind that Democrat energy policies are always at risk of pandering to left-wing extremists.

Sales of Electric Vehicles (EVs) have been flattening. I regularly hear from happy Tesla owners, all of whom own a second car for long journeys. I also have frequent conversations with investors and others who can’t see the point in dealing with the inconvenience of charging. This view seems to be ascendant. Some states are increasing fees on EV owners to compensate for foregone taxes on gasoline. US crude oil demand looks stable, and globally it’s still rising.

Below are some of the slides we use to highlight the attractive positioning of pipelines today. Dividend yields of around 6% are growing, with buybacks further augmenting the total return of cash to shareholders. While midstream capex is constrained, among utilities it’s being boosted. The energy transition must be paid for, and delivering increased electricity from renewables is their job. It’s not easy to reconcile political promises that solar and wind are cheap with the immutable reality of miserable returns on clean energy.

Energy returns have been the best of all eleven S&P sectors since 2021. Yet the sector still looks cheap, midstream especially so. Many investors already agree.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 

 

 




Book Review — Not the End of the World

There’s no shortage of books, essays and documentaries warning that climate change will make Planet Earth uninhabitable. Therefore, Hannah Ritchie’s Not the End of the World provides a refreshing reminder of how much is going right and likely ways we’ll adapt to a warmer planet.

Ritchie is no climate denier. She studied environmental science at the University of Edinburgh. Like many young people, she initially believed everything was getting worse. Two thirds of Americans aged 16-25 and 72% of Brits responding to a survey agreed that, “The future is frightening.”

Hannah Ritchie eschewed the mindless anti-fossil fuel protests of many contemporaries. Instead, she studied the issues and then wrote a book sharing her generally positive conclusions about our environment while highlighting how much more needs to be done.

Human activity has never been environmentally sustainable. The problems didn’t begin with burning coal for the industrial revolution in the middle of the 19th century. Over thousands of years our ancestors hunted many large animals to extinction, polluted the air by burning wood and cut down huge amounts of forest.

Frustratingly for the 36% of Americans 16-25 (and 38% of Britons) who are hesitant to have children, there has objectively never been a better time to be alive. Globally, child mortality, maternal mortality and life expectancy are all the best they’ve ever been. Hunger and extreme poverty are lower than ever, while access to clean water and education are higher than ever. Just because it’s a great time to be a human doesn’t mean we can’t improve on all these metrics and others.

Negativity is all too common. A recent FT-Michigan Ross poll found that three quarters of respondents described US economic conditions as “negative”. More people describe their own financial situation as “surviving” versus “thriving”. This is with US GDP growing at 3.3% and unemployment at 3.7%.

Social scientists can ponder why surveys seem increasingly detached from the data. Hannah Ritchie is here to drag us out of the gloom.

Many of us are breathing the cleanest air in centuries. 1950s London surrounded by coal-burning power plants and factories had dirtier air than today’s New Delhi. Ritchie makes the obvious point, that ‘Once life is comfortable, our concerns turn to the environment around us.” Reducing CO2 emissions sits near the top of Maslow’s Hierarchy of Needs for most people, which is why emerging Asia still burns so much coal.

London responded to the Great Smog of 1952 with pollution controls. By 2008 living standards were high enough in Beijing that they responded similarly – albeit in a typically Chinese way. Many households had their coal boilers removed before gas replacements were available, enduring a cold winter without heat.

Palm oil cultivation is often criticized as environmentally unsustainable. But one hectare produces 2.8 metric tonnes of oil, compared with 0.3 tonnes of olive oil or 0.26 tonnes of coconut oil. If we used less palm oil, we’d need much more farmland to produce other types of oil.

Ritchie walks through her changing appreciation for the impact of natural disasters. Like almost half of survey respondents, she once thought deaths had more than doubled over the past century. They’ve fallen by 97%, adjusted for population. This is like the point Alex Epstein makes, crediting fossil fuels for providing us with more robust infrastructure and the technology to receive earlier warnings. Fossil fuels have made life immeasurably better. But Ritchie remains firmly convinced we need to reduce emissions. By contrast, Epstein thinks a richer world a couple of generations from now will be better equipped and more motivated to tackle the issue.

Like most who think hard about climate change, Ritchie is a big fan of nuclear power. She believes we need to phase out all fossil fuels eventually but wants to start with coal. She doesn’t think we’ll hit the UN’s target of eliminating greenhouse gas emissions by 2050 but is optimistic that we’re on a good path. In acknowledging the many improvements in quality of life, she wouldn’t regress by limiting energy consumption.

Not the End of the World offers an engaging and optimistic worldview. Bill Gates found it, “A surprising (and surprisingly optimistic) book on climate change.”  He called it, “an essential antidote to environmental doomsday-ism.”

This is true. Too many climate extremists are among those hesitant to have children or unable to see the positives in today’s strong US economy. The world is doing fine, can do better in many ways and will get through climate change.

Hannah Ritchie explains why.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 




Russian Gas Exports Face An Uncertain Recovery

European imports of LNG rose sharply following Russia’s invasion of Ukraine two years ago. The US was well positioned to step in and provided virtually all the additional LNG Europe bought. The current pause on new LNG export terminals runs counter to these trade flows, but it’s increasingly clear this policy has few supporters other than some climate extremists.

Russia has had to pivot towards Asia and FSU (Former Soviet Union) buyers for its natural gas exports. In 2021 Russian exports via both pipeline and as LNG were 244 Billion Cubic Meters (BCM), around 23.6 Billion Cubic Feet per Day (BCF/D). For reference, last year the US became the world’s largest LNG exporter, averaging 11.9 BCF/D.

Last year Russian exports were 142 BCM, down 42% over two years.

Returning gas exports to their previous level will take years if it occurs at all. Negotiations over the Power of Siberia 2 pipeline project with China are moving slowly, and there’s even a suggestion that Russia may begin construction of the pipeline before they have a signed agreement in hand. China clearly feels they have a strong hand to play – and yet China’s own energy strategy is to lessen its dependence on western supplies. Their booming EV market is one way to reduce the need for crude imports. Another is to align more closely with Russia, since on several levels they need one another.

Russia is also expanding its LNG export capability. The Novatek Arctic LNG 2 terminal with annual capacity of 27 BCM (2.6 BCF/D) may start operations as soon as this month. The US has threatened anyone providing “material support” with penalties or criminal prosecution. This apparently hasn’t dissuaded Philip Adkins, CEO of Red Box Energy Services, as described in this FT article.

Other projects that are less far along are vulnerable to sanctions as well as denied access to western liquefaction technology. Russian LNG projects have suffered timing delays. See Russia’s Gas Export Strategy: Adapting to the New Reality for more detail.

Last week the International Energy Agency (IEA) published CO2 Emissions in 2023. In recent years the IEA has moved from providing objective analysis of energy markets to promoting anodyne versions of the energy transition. Few of their projections on energy use are remotely plausible. As a result, some think if Trump wins the election he’ll stop funding the IEA, which seems to have outlived its purpose with its new approach.

The IEA reported that global energy-related CO2 emissions grew by 1.1% last year. Executive director Fatih Birol claimed that increased EV deployment over the past five years had constrained global oil demand, thereby reducing emissions. He overlooked that in the world’s biggest EV market Chinese electricity is 62% derived from coal. At the IEA, cheerleading sometimes beats analysis.

Canada announced that the TransMountain Expansion (TMX) pipeline that they purchased from Kinder Morgan (KMI) in 2018 (see Canada’s Failing Energy Strategy) will finally start operating. It connects oil-rich Alberta with Pacific export terminals in British Columbia.

TMX is planning 2.1 million barrels of linefill next month and another 2.1 in May. Construction has been a financial disaster for taxpayers, with the ultimate cost likely to exceed by 4X estimates when KMI deftly unloaded the project. Alberta has always struggled to get its oil to market. British Columbia’s left-leaning government has long been hostile to TMX, which prompted KMI’s sale. Keystone XL was intended to add southern takeaway capacity until Biden canceled it. Alberta’s oilmen will be relieved.

Canada also intends to expedite approval of new nuclear projects, a pragmatic step that acknowledges the limitations of solar and wind. The Sierra Club Canada is, like its US namesake, opposed to nuclear power. Climate extremists aren’t good for the rest of us.

Carbon Capture and Sequestration (CCS) is often dismissed by those who want the world to rely on intermittent energy. Occidental is building the world’s biggest CCS facility in Texas and is optimistic about licensing the technology. They gave up on one project, named Century, after concluding the economics weren’t attractive enough. However, they drew a $550 million investment from Blackrock in Stratos, which is expected to be commercially operational by the middle of next year.

In Singapore, Exxon and Shell have formed a JV to work with the government on a CCS project. Opponents dislike CCS because it allows fossil fuels to be used without emitting CO2. This is why the rest of us should hope CCS becomes a vital part of the energy chain, since it will preserve our use of reliable energy rather than the intermittent, weather-dependent type.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 




Coal Trade Is Growing

American coal exports are booming. Exports of thermal coal rose 26% last year, to 44 Million Metric Tonnes (MMTs). This is mostly burned to produce electricity. We also exported 46.5 MMTs of metallurgical coal, typically used in industrial processes such as steel manufacture.

Shipments of thermal coal to India doubled, to 14.1 MMTs, close to a third of such exports.

Coal is widely understood to generate roughly twice the Greenhouse Gas emissions (GHGs) as natural gas. In addition, local pollution causes respiratory problems for people living nearby.

US GHGs have fallen over the past 15 years primarily because we’ve been reducing coal-sourced power in favor of natural gas. Increased use of renewables has also contributed, but not as much.

A coherent White House climate policy would encourage developing countries, the main source of demand growth for energy, to follow the US example. This would mean increasing natural gas availability through LNG exports and reducing coal availability.

Instead, we’re doing the opposite. With coal exports reaching a record, the White House injected uncertainty into long term US LNG supply by pausing the approval of new export terminals.

Pakistan announced last year a quadrupling of coal-fired power generation in response to high global LNG prices. Japan recently broke off negotiations with Energy Transfer about buying LNG from their planned Lake Charles facility because of uncertainty over whether it will be built.

India is the second biggest consumer of coal, albeit way behind China who is 4X as big. A new round of Ukraine-related sanctions on Russia is intended to impede their exports of coal to India, which will presumably further boost their appetite for US shipments.

India plans to increase LNG imports so as to increase fertilizer production. This is needed to feed their growing population whose diets will include more protein as living standards rise (see LNG Pause Will Boost Asian Coal Consumption). Urea is a nitrogen-based fertilizer derived from natural gas via the Haber-Bosch process.  It provides plants with nitrogen which promotes growth. Solar and wind power cannot produce fertilizers, other than providing heat energy to enable the chemical processes.

To put the export statistics in perspective, the 44 MMTs of thermal coal we exported, which will mostly be burned to generate power, have the same energy equivalent as 9.4 Billion Cubic Feet per Day (BCF/D) of LNG exports. We currently export 12-13 BCF/D of LNG, mostly to Asian buyers who use less coal as a result. This figure will double over the next four years or so as export terminals at various stages of construction reach completion. But the DOE pause on new approvals has cast uncertainty.

Nobody wants to sign a 20 year commitment to purchase LNG without knowing that the proposed facility will actually be built. According to the Energy Institute’s 2023 Statistical Review of World Energy, global coal trade grew at 0.6% pa over the past decade.

It’s fair to say that US climate policy is not closely aligned with trade policy as it relates to energy exports. We are encouraging purchases of the fossil fuel that generates the most GHGs while impeding its replacement with cleaner-burning LNG.

US climate extremists including TikTok boy Alex Haraus (see White House Adopts An Energy Policy Where Everyone Loses) have promulgated a flawed policy that will increase emissions by encouraging coal use.

When people disagree with you it’s tempting to question their intelligence. This is quicker than considering whether their alternate view holds some insight. It’s also intellectually lazy.

However, in the case of climate extremists I have concluded that factual analysis informs their views to an inconsequential degree. They exhibit a Pavlovian opposition to any form of reliable energy. They know little of how the world works. They think everything can run on solar and wind even though 80% of the world’s energy today comes from fossil fuels. Many of them even oppose nuclear power, so beholden by the purist belief in intermittent energy.

In short, climate extremists are not the smartest people you’ll meet.

Electoral enthusiasm is the lowest I can recall in over four decades living in the US. It’s why Biden grasped at the LNG permit pause as an opportunity to energize progressives. But it’s poor policy, and after the election if the current octogenarian occupant of the Oval Office wins, a more effective policy prescription will likely follow. This should include more gas and less coal.

Trump has already said he’ll lift the pause.

So the investor’s perspective should be to look past the current short term thinking and consider what a thoughtful policy will look like. Those who think hard about how the world can reduce GHGs expect climate extremists to be drowned out by pragmatic solutions.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 

 




4Q Earnings Wrap

Earnings for 4Q23 are almost complete. Most companies came in at or a few per cent ahead of market expectations. Cheniere (CEI) beat sell-side estimates by 11%, continuing a remarkable run. They are targeting a 1:1 ratio between buybacks and debt reductions and based on their long run desired share count should be retiring 12-13% of outstanding shares over the next few years.

CEI’s FY2023 EBITDA came in at $8.77BN. The stock dipped last week as 2024 EBITDA guidance came in a little below expectations at $5.5-6.0BN. Last year they benefitted from large regional price differences in natural gas on the portion of their LNG capacity not committed under long-term agreements. They have not assumed the same opportunity this year. Despite CEI’s flat stock performance over the past year, JPMorgan and Wells Fargo continue to rate them Overweight. It’s one of our bigger holdings.

Plains All American (PAGP) came in 10% ahead of expectations as their crude oil and Natural Gas Liquids segments both reported strong results. They increased their distribution by 19%.

PAGP stock has performed strongly in the past year, +31% versus the American Energy Independence Index (AEITR) at +17%. We tend to underweight crude oil businesses in favor of natural gas where we believe the long-term growth prospects are more assured. Nonetheless, the softening of US demand for electric vehicles will encourage the view that US crude oil demand is not going to fade away.

Energy Transfer’s (ET) 4Q EBITDA came in close to consensus at $3.6BN. However, 2024 EBITDA guidance was slightly below expectations while capex was somewhat higher. The stock remains attractively priced in our view, and any disappointment over the guidance was short-lived. It’s up 26% over the past year, including that high dividend which currently yields 8.4% and is covered 2X by Distributable Cash Flow (DCF). ET is rated Overweight at JPMorgan and Wells Fargo.

Targa Resources (TRGP) is another strongly performing stock, +33% over the past year including its low dividend which currently yields 2%. TRGP is well positioned to transport NGLs from the Permian to export terminals on the Gulf coast, providing an integrated service to customers with multiple opportunities to add value.

JPMorgan expects 9%+ EBITDA growth this year and next. With management committed to returning 40-50% of cash from operations to shareholders via dividends and buybacks, there is plenty of room for TRGP to increase its quarterly payout.

The Canadians have been lagging the sector because of market concerns about their capex. Enbridge’s (ENB) C$19BN acquisition of three utilities from Dominion last year wasn’t well received. They’ve raised 85% of the funds needed through debt, equity and asset sales. ENB stock is -4% over the past year, meaningfully underperforming the sector. Their 7.8% yield is 1.4X covered by DCF. Analyst opinion is mixed – JPMorgan is Overweight while Wells Fargo is Underweight.

TC Energy (TRP) has also lagged the sector, +4% over the past year. Their capex has been higher than investors would like over the past couple of years, but projects are nearing completion and spending is coming down. Coastal GasLink was completed late last year and will provide natural gas to LNG Canada’s export terminal in Kitimat, BC for export to Asian customers. The Southeast Gateway project will connect customers in Mexico with domestic supply. It is scheduled to be completed next year. This year capex is forecast to be C$8-8.5 and closer to C$6BN next year. Their 7% dividend yield is 1.5X covered by DCF.

Overall earnings confirmed the predictability of cashflows in the midstream sector. It is often described as a “toll-like” business model. The pandemic-induced collapse in 2020 challenged this description, but performance since then has shown that the description remains apt. Attractive dividends with ample coverage from DCF is common across the sector.

I was struck by a chart the other day showing a sharp drop in the price of used Teslas. A couple of years ago wait times of as much as a year were common for buyers to take delivery of their new vehicle. Nowadays it’s a few weeks, and sales have slowed so that Electric Vehicles (EVs) are taking dealers longer to shift than conventional cars.

The halving of resale values for EVs reflects consumer realization that they’re nice to drive but charging is inconvenient. Cold weather reduces their battery range, as does age. As suggested in this video (see Stop Paying For Overpriced EVs), these are the reasons they ought to be cheaper than an equivalent gas-powered car. Reduced resale value boosts annual depreciation, increasing the cost of ownership.

EVs are gradually finding a more appropriate price point.

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

Energy Mutual Fund

Energy ETF

Inflation Fund

 




What Investors Ask Your Blogger

Recently I’ve given presentations to a couple of investment clubs in Naples, FL. Usually I speak about midstream energy infrastructure, but I was also asked to expand on Our Darkening Fiscal Outlook, recently published on our blog,

The Q&A is always enjoyable at such events. Below are some common themes that came up.

Don’t weak natural gas prices show that Biden’s pause on approving new LNG export terminals is hurting US producers?

The White House directed the Department of Energy (DOE) to consider the overall climate impact of approving further LNG exports. They didn’t cancel existing approvals, so North American LNG export volumes are still on track to roughly double over the next four years. This includes new terminals in Canada and Mexico.

As noted previously, the pause is unlikely to reduce emissions since Asia will simply burn more coal. Pakistan announced last year a quadrupling of coal-generated power because of high LNG prices. But it is causing uncertainty. For example, Japan’s Kyushu Electric is postponing negotiations with Energy Transfer about buying LNG from their planned Lake Charles terminal until it’s clear it will be built.

Today’s weak US natural gas prices aren’t related to the DOE pause, since it only affects the construction of new terminals which are several years out. Prices are weak because of a relatively mild winter (although I can report Naples has been unusually cold). Chesapeake recently announced they’ll be reducing natural gas production because of low prices. With natural gas well below $2 per Million BTUs, it’s clear that domestic producers and foreign buyers would both benefit from increased trade.

Will there be more mergers in the midstream sector?

Investment bankers have been busy in the energy sector over the past six months or so. The number of MLPs keeps shrinking although we expect Enterprise Products and Energy Transfer to retain their pass-through status given high insider ownership. Western Midstream Partners (WES) might be sold at some point, and that would further reduce the number of MLPs. It would also create a deferred income tax recapture event for holders if bought by a c-corp. Magellan Midstream agreed to Oneok’s acquisition last year despite the tax bill it created for long-time investors. Presumably WES holders might similarly accept a merger-induced tax bill if they felt the terms were right.

When will our dire fiscal outlook provoke a crisis?

A chart showing the stratospheric path of US indebtedness is sufficient to make the case that a debt crisis is inevitable. So why hasn’t it already happened? Thirty year bond yields of 4.5% do not reveal reluctant buyers. But then Argentina has defaulted nine times since independence in 1816 and is always able to come back for more. It’s unclear why any return-oriented investor would ever buy Argentine debt, but there are sufficient undiscerning bond buyers that in 2017 they issued 100 year bonds.

Bond underwriters know how to have fun at others’ expense. Let’s hope there were no CFA charterholders making such purchases.

Since at least as far back as the Great Financial Crisis of 2008-09, a surplus of return-insensitive capital (central banks, sovereign wealth funds) along with inflexible mandates at others such as pension funds has kept yields low.

The Federal Reserve owns almost a fifth of our Federal debt, a portion the Congressional Budget Office expects to remain unchanged. Research suggests that quantitative easing reduced bond yields by as much as 1%. This contributes to the present conundrum whereby monetary policy is generally regarded as restrictive whereas the inverted yield curve leaves ten year treasuries at 4.3%, or 2% above expected inflation over their lifetimes.

3.3% GDP growth, 3.7% unemployment and a stock market at new highs all suggest that rates are not much of an economic headwind.

Can I trust the inflation numbers?

It’s always fun to demonstrate why inflation statistics are deceptive. See Why It’s No Longer Enough To Beat Inflation. In brief, there is no government conspiracy to understate inflation. It’s just that the economists at the Bureau of Labor Statistics measure what they can, not what you think.

“A basket of goods and services of constant utility” is what they measure. Statisticians strip out quality improvements, because they provide more utility. So consumer electronics such as iphones show up as falling in price because more features for the same cost equals a price cut in BLS-land.

What most investors want to know is the rate at which their spending capacity needs to grow so that they don’t feel any poorer. Since living standards grow, simply keeping up with CPI will leave you worse off relative to the median.

Whenever you read “in today’s dollars” the writer isn’t giving a true picture of what it felt like to buy, say, a color TV in 1953 which cost $1,500.

That’s around $15,000 “in today’s dollars” because using CPI you need $10 today to buy what $1 did back then.

2022 median household income was $92,750, so that TV looks as if it cost about two months pay for the typical family. But in 1953 median household income was $4,242, so it really took over four months of pay to buy the TV.

The correct comparison would keep the portion of household income needed to buy the item the same as in 1953. Multiplying the $1,500 1953 TV by $92,750/$4,242, or 21.86, gives almost $33K. That’s the more meaningful representation of what a 1953 TV cost. It keeps the portion of household income needed to buy the TV the same in 2022 as in 1953.

There’s no need to mistrust the BLS. But if your purchasing power doesn’t keep up with median household income, you’ll gradually become poorer by comparison with the rest of the country.

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

Energy Mutual Fund

Energy ETF

Inflation Fund