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.

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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:

Energy Mutual Fund

Energy ETF

On Monday Energy Transfer announced the first Behind The Meter (BTM) agreement of the AI era. They’ll provide up to 450 Million Cubic Feet per Day of natural gas to a data center being built by CloudBurst Data Centers in central Texas.

This represents 0.45 Billion Cubic Feet per Day (BCF/D), almost 0.5% of US gas production and a staggeringly large amount for a single location.

As we noted recently (see Hyperscalers Plow Ahead), BTM arrangements don’t spread the cost of new power infrastructure across existing users. This avoids triggering a political backlash since data centers generate few jobs.

A couple of weeks ago DeepSeek cast doubt on the forecast increases in power demand that have helped boost natural gas infrastructure stocks (see Pipelines And The Jevons Paradox). Since then, companies such as Meta and Amazon have reaffirmed their capex budgets on data centers.

Morgan Stanley estimates that the first data centers to support the $500BN Stargate project that President Trump recently announced with require 0.66 BCF/D if fully supported with natural gas driven electricity.

Most observers have concluded that ten-year energy forecasts are uncertain and therefore not much different. Just the Cloudburst and Stargate deals could consume 1% of US gas output and suggest that natural demand forecasts could be revised higher.

The climate extremists’ view of the energy transition is undergoing a reassessment. The Army Corp of Engineers has temporarily paused 168 permits for renewables projects. Total CEO Patrick Pouyanne stopped investment in offshore US wind following the election, although allowed that it could resume after four years.

Shell recently wrote off their investment in the Atlantic Shores wind project that was planned off the coast of New Jersey. Even though New Jersey is unfortunately a very blue state, offshore wind turbines are wildly unpopular with Republican residents of the Jersey shore. Their complaints include the spoiled view and the construction required for high voltage cables to bring the power through beachfront communities.

Atlantic Shores now looks unlikely to progress, cheering the red part of the garden state where we have a summer home. Newark Airport’s Terminal A still sports ads promoting the project. I expect they’ll soon be removed.

We don’t make a living forecasting EV sales, but if pressed would suggest they’re going to be soft. The rollout of charging stations funded under the Inflation Reduction Act has been slow, with only 176,000 in place by October, just 22% more than a year earlier.

The White House wants to stop building new charging stations. Withholding funding may ultimately be over-ruled by the courts, but the uncertainty about charging availability is likely to dissuade many potential EV buyers since range anxiety is one of their biggest concerns.

Volkswagen is slashing capacity at its EV factory in Zwichau, Germany only five years after it was hailed by former Chancellor Angela Merkel for being an EV-only facility. Meanwhile BMW plans to continue investing in internal combustion engines, hedging its bets.

Last year Ford lost $5.1BN on EVs and expects this year to be worse. Western auto companies are switching to EVs faster than consumers, with deleterious financial results.

Many Republican voters were drawn to Trump’s promise to “drill baby, drill” during the election. Energy investors are less enthusiastic. They remember the poor returns under Trump 1.0 that were reversed under Biden, even though in 2019 he pledged to end fossil fuels.

So it was mildly surprising to see Enterprise Products Partners (EPD) cancel their plans to build the Sea Port Oil Terminal (SPOT) off the coast of Texas. This would have accommodated some of the largest crude tankers, but EPD found insufficient customer interest to proceed.

Energy infrastructure usually gets built only when firm commitments to use it are in hand. This shows that in spite of Trump’s pledge to boost oil output, financial returns need to be there. E&P companies are less enthusiastic. Financial discipline continues, which should appeal to energy investors.

Finally, a follow-up to our recent video (watch Why Not Nuclear?). The International Energy Agency found that nuclear plants delivered since 2000 in the US and Europe were on average eight years late and cost two-and-a-half times their original budget.

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The nuclear industry desperately needs to settle on standard designs that will allow economies of scale in components and simplify the regulatory process. Britain’s Sizewell C plant is designed to match as closely as possible the Hinckley Point C reactor where construction began in 2016.

US nuclear manufacturer Westinghouse was forced into bankruptcy in 2017 because of cost overruns at its Vogtle plant in Georgia, where completing units 3 and 4 took twice as long at double the projected cost.

Having learned from this experience, newly capitalized Westinghouse is negotiating to build plants in Ukraine, Poland and Bulgaria based on its AP1000 design. No modifications are allowed. Determined to control costs by sticking with what they know works, CEO Patrick Fragman says, “Basically, you can choose the color.”

The nuclear industry needs more of that.

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

Energy Mutual Fund

Energy ETF

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.

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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.

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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.

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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:

Energy Mutual Fund

Energy ETF

Although the US is energy independent and a net exporter of petroleum products, we still import certain blends of crude. Canadian tar sands oil is the heavy type for which American refineries are configured as is Mexican oil. Shale oil is lighter. So we buy what we are set up to handle and sell what we’re not. This is just one example of the complex set of trade ties that bind the North American continent together.

There’s unlikely to be any economic benefit from tariffs, which can also correctly be termed import taxes. They can further non-economic goals, such as Mexico’s agreement to station 10,000 troops on our border to prevent illegal immigration. Opinions vary as to whether they’re inflationary, although most analysts agree that they’re a net negative on GDP growth. Much depends on whether retaliation leads to a ratcheting up and extended period of trade friction.

Based on the rhetoric leading up to Saturday’s announcement, they’ll be more impactful on Canada and Mexico than the US. Both countries’ currencies initially weakened vs the US$. Theoretically our trading partners could fully absorb the cost of the tariffs. In practice, as with sales taxes, it will be split between producers and consumers.

Goldman Sachs estimates that the 10% import tax (ie tariff) on Canadian crude will be 2/3rds absorbed by Canadian producers and 1/3^rd by US refineries which will presumably pass this on to consumers via price hikes for gasoline and other refined products. Last year we imported 3.8 Million Barrels per Day (MMB/D) of crude and 0.3 MMB/D of refined products from our northern neighbor. Mexico provides just under 0.5 MMB/D of oil.

Canada has long struggled to get its crude oil from Alberta to export markets. They don’t have any good alternatives to shipping to the US for now. The Keystone Pipeline which runs south to the Gulf of America (Chevron recently adopted this new name) runs at close to 100% capacity. It’s why TC Energy tried for years to build the Keystone XL, which Biden ultimately quashed when he took office in 2021.

The Transmountain pipeline runs west to British Columbia. Its expansion project was completed in 2024 at substantial increased expense and after long delays by the Canadian federal government who bought it from Kinder Morgan in 2018 (see A Closer Look At Canada’s Newest Pipeline). This also operates at close to full capacity. Crude oil can move by rail, but that’s substantially more expensive and not as safe. In 2013 a train carrying crude exploded in Quebec, killing 47 people (see Canada’s Failing Energy Strategy).

Canada’s crude oil options are limited.

The Administration’s goals with tariffs aren’t completely clear. Canada’s not a big source of illegal immigration or fentanyl, and there’s zero chance Canadians want to be the 51^st state. Trump has claimed that we subsidize Canada in the form of our deficit with them, but that’s not the right way to think about the purchase of goods in a free market.

If the US is pursuing a narrower trade deficit, a consequence not so far considered publicly is its impact on our fiscal deficit. Over the past twelve months our trade deficit is $879BN. Those US$ that foreigners accumulate have to be invested back in the US, and a significant portion wind up in treasury securities. Canada owns $374BN. Japan owns $1.1TN and China $769BN. If our trade deficit shrinks, foreign countries will have fewer US$ to invest back in the US.

Absent a lower fiscal deficit, US savers will need to provide more of the financing which will require higher bond yields. Today’s interest rates are inadequate to induce sufficient domestic saving. Coupled with this is that an extended period of trade conflict intended to reduce our trade deficit will probably cause some countries to deem US bonds less attractive anyway for political reasons. China has been lowering its US holdings in recent years as trade tensions have risen.

There’s little reason to expect any improvement in the fiscal outlook. Elon Musk’s Department of Government Efficiency will hopefully uncover some savings, but nothing is likely to change about the trajectory without policy changes. Strong GDP growth is our best near term option.

A weaker economy due to trade friction might lower bond yields. Tariffs might be inflationary. But we’ll need people to buy our bonds, and if there are fewer foreign buyers we’ll need to own more here, which will require lower consumption and more saving by US households.

In an unintended consequence, it may turn out that running a trade deficit keeps interest rates lower than they would be otherwise. We may be on track to find out.

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

Energy Mutual Fund

Energy ETF

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.

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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:

Energy Mutual Fund

Energy ETF

Venture capitalist Marc Andreessen called it, ”AI’s sputnik moment.” The news that Chinese start-up Deepseek may have leapt ahead of the US in AI caused an unpleasant start to the week. In 1957 Sputnik’s orbit led to the creation of NASA and fears that Russian satellites could attack the US from space. While Americans have not yet been moved to gaze skyward for Chinese AI-powered threats, its impact was felt by AI-linked sectors of the stock market.

Natural gas pipeline stocks that have enjoyed a tailwind from anticipated data center power demand dropped sharply. At such times it’s worth reviewing valuation and the underlying fundamentals.

The yield on the American Energy Independence Index (AEITR) recently fell below 5% as pipeline stocks continued to appreciate. Last year’s 45% total return was well in excess of cash flow growth but yields at the start of last year were unreasonably high.

Distributable Cash Flow (DCF) yields on the largest pipeline stocks are above 11%, providing ample payout coverage. Some of the lowest-yielding stocks have the highest coverage. For example, Williams Companies yielded 3.6% after its stock dropped almost 10% on Monday. But its DCF yield rose to 7.8%, more than 2X its payout and expected to grow at 7-8% into 2026. They raised their dividend on Tuesday by 5.6%. Kinder Morgan’s (KMI) yield rose to 4.2%, also more than 2X covered by its 8.6% DCF yield.

The data center story boosted both stocks over the past year. Even so, last week’s KMI earnings call was not dominated by AI expectations, with only a couple of questions on the topic which CEO Kim Dang referred to as, “singles and doubles, connecting to power plants, that types of things.”

Energy Transfer’s yield rose to 7%, higher than the sector since it trades at an MLP discount. Its DCF is almost 2X its payout yield at 13.9%. On Monday they announced a 1.6% increase.

Investors will want to assess how much data center power demand is reflected in current valuations. The capex numbers being floated for construction have been startling. Just last week Mark Zuckerberg said Meta could spend up to $65BN this year to achieve its AI goals.

Microsoft (MSFT) expects to spend $80BN this year on data centers. Meta’s stock even rose on the news, as investors contemplated that less compute-intensive AI development could boost free cash flow.

MSFT CEO Satya Nadella tweeted that the Jevons’ paradox could apply, in which efficiency improvements raise overall demand. Perhaps a breakthrough in training AI models will boost their penetration, which could drive power demand even higher than recent projections. DeepSeek’s insights will spread across the industry since it’s open source. It seems incongruous to conclude that better AI will reduce its use or its demand for reliable power.

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Wells Fargo expects that the computational improvements demonstrated by DeepSeek will slow near term power demand but still sees 11 Billion Cubic feet per Day (BCF/D) of additional natural gas consumption by 2035, down modestly from their previous forecast of 12 BCF/D. Still, it’s not often that a single news development results in an altered ten year outlook.

It’s worth remembering that data centers only caught investors’ attention last year. The outlook for natural gas demand was already strong based on rising living standards in developing countries. LNG offers both sellers and buyers flexibility versus pipelines, and the US is increasing its lead as the #1 exporter.

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The world is preparing to buy more. Regassification capacity, which enables importers to turn LNG back into a usable gaseous form, is growing faster than supply. For every Billion Cubic Feet (BCF) the US exports, there will be 2 BCF of regassification available. These projects were not predicated on data centers. The fundamentals for traditional energy remain sound.

Enduring such market corrections is never pleasant. They’re rarely over in a day, but history shows that eventually judgment on valuations prevails and prices respond. One good development is that forced selling from MLP closed end funds isn’t likely to depress prices much. These hapless managers including Tortoise, Kayne Anderson and Goldman Sachs destroyed enough capital during the pandemic-induced collapse that they’re now of inconsequential size (see MLP Closed End Funds – Masters Of Value Destruction).

Recent market action reminds why adding leverage to an undiversified portfolio of stocks simply betrays the hubris of the portfolio manager at the expense of the investors.

The worst performance came from Venture Global which began trading on Friday after pricing its IPO at $25, which we felt was too high (see Nothing Ventured, Nothing Gained). On Tuesday it traded below $18, down 28% over two days and far worse than AI darling Nvidia.

Regardless of the outlook for domestic power demand, growing US gas exports will require a doubling of the natural gas pipelines supply to liquefaction terminals over the next four years. The regulatory environment will be more conducive to growing the production and movement of hydrocarbons. Energy is the president’s favorite sector.

AI is far from the whole story.

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

Energy Mutual Fund

Energy ETF

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.

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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.

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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.

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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:

Energy Mutual Fund

Energy ETF

I was chatting with an investor the other day, and he remarked that there are three powerful legs to the midstream story. They are demand growth for natural gas; attractive valuation; the incoming administration’s support for traditional energy. He felt that there’s too little appreciation of the underlying support from these three elements.

Last year the market began to appreciate the likely impact of new data centers on natural gas demand growth. Renewables remain a footnote in terms of actual US power generation. Solar and wind produce 16% of our electricity while natural gas is 43%.

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We’re enjoying the Natural Gas Energy Transition because growth in production is 8X that of renewables – over the past five years, ten years and for all of the 21^st century.

S&P expects data centers to add between 3 Billion Cubic Feet per Day (BCF/D) and 6 BCF/D to gas demand by 2030.

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Williams Companies expects power demand to grow at 10X the pace of the past decade. Much of this will be supplied by natural gas, but even where intermittent energy plays a role it’ll require natural gas back-up because data centers don’t only run when the weather co-operates.

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Kinder Morgan sees natural gas demand up 19% by the end of the decade (around 20 BCF/D). Increased LNG exports and pipeline sales to Mexico will add to industrial sector demand.

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Canadian pipeline company Enbridge has a similar growth forecast for natural gas across North America.

The demand for US LNG is supported by investments many importing countries have made in regassification facilities that allow them to convert gas from the near-liquid form in which it arrives by tanker back in to the gaseous form required by users.

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Cheniere notes that global regassification capacity is 2X the expected supply of LNG, which shows that demand is likely to be more than equal to supply over the next several years.

The positive demand story would be unremarkable if it was reflected in high valuations for midstream stocks, but it’s not. The S&P500 trades at around 25X 2025 Factset EPS. Although valuation isn’t a good timing tool, this is historically not an attractive comparison with bonds.

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By contrast, large cap pipeline stocks trade on average 10 turns cheaper at a P/E ratio under 15X (see Pipelines Are Cheap; Stocks Are Not).

Distributable cash flow yields, which represent free cash flow less maintenance capex, are over 11%, more than 3X the equivalent for the broader market.

As we often tell people, there’s no irrational exuberance present in this sector. Valuations and fund flows still exhibit excessive caution in our opinion.

Completing the trifecta, we have a new administration that is fully behind US oil and gas production. In his inauguration speech Trump even repeated “drill baby, drill.”

Chris Wright, the new Energy Secretary, brings a pragmatic and refreshing approach. He acknowledges climate change but rejects the dystopian view of progressives. He will be a strong advocate for US LNG exports which will help foreign buyers use less coal. The ludicrously partisan permit pause on new LNG export terminals will finally be lifted.

An improved regulatory environment will lower costs for E&P companies, but all signs are that increased output will need to be profitable.

US energy underpins America’s past decade of strong growth and rising living standards. As Germany has pursued its energy transformation (“Energiewende”), electricity prices have soared and manufacturing has slumped, all while global CO2 emissions have continued rising. It’s a pointless effort while China burns 55% of the world’s coal and plans to go higher.

Democrats and liberal politicians in other western countries have pursued ruinously expensive subsidies for renewables and electrification of transport while applauding China’s auto market where EVs now exceed a 50% market share. This is even though they run on coal which is their dominant source of electricity.

President Trump obviously won’t engage with China on climate change. But had he signed the Inflation Reduction Act with its $TNs of financial support for renewables, you know he would have confronted China over their emissions first.

Compelling fundamentals and attractive valuations co-exist in President Trump’s favorite sector. Energy investors got the election outcome they wanted. Some will recall that Trump’s first term in office coincided with poor returns as executives overspent and overproduced. Profits returned under Biden in spite of his leftward shift once in office.

We think Trump’s second term will be much better for energy investors than the first.

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

Energy Mutual Fund

Energy ETF

Last week the Energy Information Administration (EIA) released their Short Term Energy Outlook (STEO). People are often surprised to learn that US power demand has remained the same for the past couple of decades – at around 4,000 Terrawatt Hours (TwHs). The economy and population keep growing but offsetting this is improving energy efficiency.

Electricity demand changes slowly. Utilities need to plan for new supply years in advance to allow enough time to add new generation and supporting infrastructure. So although the projected increase looks visually small, it’s a long time since the industry has had to plan for any meaningful increase.

The PJM grid system, which extends from mid-Atlantic states to Tennesse and Illinois, is forecasting 2% annual demand growth over the next decade. ERCOT, which covers Texas, is expecting similar annual growth through 2030. The EIA expects 2% demand growth across the country this year and next, although this will be spread unevenly with some areas seeing 2-3X as much.

Renewables’ advocates typically promote added generation capacity as evidence of the energy transition to solar and wind, although as we regularly note the real transition is to natural gas (see The 8X Energy Transition). Last year the US added 50 gigawatts of solar and wind capacity, which produced an additional 50 billion kilowatt hours.

Adjusting for the different orders of magnitude and assuming the new capacity came online smoothly during the year (ie on average was available for half the year) gets to a 28% capacity utilization. That’s less than a third the uptime of natural gas power plants, which are also needed to compensate for the absence of solar and wind during dark and windless conditions (wonderfully named Dunkelflaute in German). We also added 10 gigawatts of battery storage.

Nobody knows if this was money well spent, because cost-benefit analysis doesn’t intrude on the deliberations of climate extremists. But we did use less coal, which was unambiguously good because it’s the highest emitter of greenhouse gas emissions per unit of energy output.

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The EIA STEO is forecasting that this year natural gas derived power generation will drop by 55 TwHs even while total demand rises by around 70 TwHs. They expect increased solar to approximately equal the new demand.

We think that’s an unreasonably pessimistic natural gas forecast. Natgas has been gaining market share over the past decade, rising from 28% in 2014 to 42.5% last year. Over that time it’s captured more than half of the incremental demand and in 2024 was 76%.

We know data centers are driving the increase in power demand, and that they need reliable power that’s not dependent on the weather. Midstream companies such as Williams report high levels of interest in “behind the meter” arrangements by which a data center contracts directly with a gas supplier to supply a dedicated power plant. This bypasses the grid and can offer a faster solution.

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The US Department of Energy thinks AI could consume up to 12% of all US power generation within the next three years.

Energy consulting firm Enervus thinks as many as 80 new gas power plants could be added by 2030, representing 46GW of new capacity. This is almost 20% more than was added over the past five years.

So a forecast that the share of US electricity generated from natural gas will decline this year seems to overlook what we know is happening with AI, and the clear commitment of the incoming Trump administration to favor domestic hydrocarbon production.

The STEO forecasts that LNG exports will reach 16 Billion Cubic Feet per Day (BCF/D) by 2026, up from 12 BCF/D last year. Pipeline exports will also grow, by 1.4 BCF/D as flows to Mexico increase.

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The LNG story received a boost from Trump’s November victory since it assured that the permit pause announced a year ago would be lifted. LNG terminals represent best in class energy infrastructure assets since they have 20-30 year contracts, providing unprecedented cash flow visibility.

Privately held Venture Global, which operates the Calcasieu Pass and Plaquemines LNG export terminals, is planning an IPO that could value the company at over $100BN. The pricing looks a little ambitious to us, but it has drawn attention to publicly traded LNG companies Cheniere and NextDecade, whose comparatively cheap valuations have drawn in new buyers. Both stocks have rallied strongly since Venture Global announced its IPO.

US LNG remains one of the most attractive sectors in our opinion. Cheap US natural gas and a president who wants energy dominance is a powerful combination. We think the return potential from LNG is not yet fully recognized by the market.

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

Energy Mutual Fund

Energy ETF

It’s now less than a week until Donald Trump takes over in the White House. The past couple of months have caused many to wonder why there’s such a long gap between the election and the inauguration. It’s a holdover from the eighteenth century when the time was required to allow messengers to travel to the capital with election results but is clearly no longer required. Joe Biden should have had the good grace to keep a low profile during this interregnum, but instead chose to issue executive orders promoting liberal policies on offshore drilling and immigration.

Biden will soon be gone, and attention is turning to the energy-related executive orders Trump is planning for his first days in office. He’s widely expected to lift the LNG permit pause, which will improve certainty for negotiations on long-term supply agreements.

Chris Wright, Trump’s nominee to head the Energy Department, will bring an articulate voice explaining why US LNG exports are good for everyone involved.  Bettering Human Lives, a report published by Wright’s firm Liberty Energy, recounts the history of hydrocarbons and offers insight into how energy policy is likely to be pursued. It’s well worth reading.

Trump’s opposition to windpower represents a shift from his first time in office when his administration was supportive. Communities are increasingly objecting to the visual intrusion of huge wind turbines. It’s reasonable to ask why supporters of weather-dependent energy in the US don’t first demand reduced coal use by developing countries. Getting emerging Asia to displace coal with LNG is one of the most effective ways to reduce CO2 levels.

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The Energy Information Administration (EIA) published data late last year showing that construction costs for solar and wind have stopped falling, while those for natural gas continue to. This is why clean energy stocks have performed so poorly and why electricity tends to be expensive where renewables provide a high share.

The data is through 2022 so missing the recent demand for electricity from data centers which is driving investment in natural gas power generation. Large providers of such equipment such as Siemens Energy report increasing backlogs, so it wouldn’t be surprising to see the cost of natgas power edge up somewhat when the EIA updates their information.

The other day I was chatting with an investor, and while he’s fully bought in to the primacy of natural gas he wondered whether nuclear power might at some point displace it.

Nuclear energy seems such an obvious solution to the world’s need to deliver reliable carbon-free power. Vocal opponents such as the Sierra Club promote a completely unrealistic view of how the world can generate electricity. I often note that the US navy operates almost a hundred nuclear reactors in aircraft carriers and submarines. There’s no record of any problem with any of these. Perhaps we should just let the US navy run all our civilian nuclear reactors.

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Unfortunately, western countries have a poor record of building new nuclear plants anywhere close to on time and on budget. The most recent nuclear facility completed in the US, the Vogtle plant’s Units 3 and 4 in Georgia, came in seven years late and $17BN over budget. They cost over $15 million per Megawatt of power generation.

The UK’s Hinckley Point C reactor cost $18 million per Megawatt and was built by France’s EDF. France gets around two thirds of its electricity from nuclear. This represents 35% of their primary energy, far more than any other country. Finland is second, relying on nuclear for 26% of their primary energy, but their output is a tenth of France’s.

So it’s disappointing that the leading French company delivered such an expensive result. The French government has even decided to cap nuclear at 50% of total power generation, versus 70% currently.

Western countries haven’t yet figured out how to build commercially viable nuclear plants.

Most of the addition of nuclear power is taking place in developing countries, led by China. Costs are far cheaper at around $2-3 million per Megawatt. This is partly because developers are unburdened by costly legal challenges from NIMBY homeowners. However, they’re also using cheaper technology that relies on sodium cooled fast breeder reactors.  JPMorgan reports that these have been rejected in the US as having shorter useful lives and increased risk of fire.

China is today’s leader in developing new nuclear.

There are numerous efforts to resurrect nuclear power in the US, including restarting old reactors and placing small modular reactors on the sites of decommissioned coal plants where connectivity to the grid is already in place. We should hope these are successful, but given the time involved and cost, natural gas is unlikely to be threatened by nuclear for many years.

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

Energy Mutual Fund

Energy ETF