SL Advisors Talks Markets

Anniversary Celebrations

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Around this time of year, I’m often asked if we celebrate July 4^th. Since it is the anniversary of America’s Declaration of Independence, in Britain it receives scant attention. But I often note that had the war turned out differently I might not have emigrated to America in 1982.

We have much to celebrate in this country. As an immigrant I’ve always found America welcoming. Memorial Day weekend fell within a couple of weeks of my arrival 43 years ago, and the “new English guy” was invited to a home in Brooklyn where a friendship began that continues to this day.

I’ve never felt like a foreigner or an outsider.

The US is very good at assimilating newcomers. Beginning with reciting the Pledge of Allegiance every day, I watched proudly as our three children born of English parents grew up to be Americans like so many millions before them. Nonetheless they did receive a healthy dose of English culture. Just the other day we watched an episode of the brilliantly funny 1970s Britcom Fawlty Towers, for at least the hundredth time, so a close family friend might better appreciate our sense of humor.

Britain is a great country, but America is the greatest country. I love trips back to the UK, timed as much as possible to enable me to watch an Arsenal game. I’ll keep returning and I’m proud to have grown up in England, but America will always be my home.

We have our political differences to be sure. I once remarked to my business partner Henry, who’s from North Carolina, that the country had probably never been so divided as it is now. Henry retorted that the 1860s were worse, and of course he’s right, as he usually is. The south was more impacted by the Civil War, which is perhaps why Southerners more readily refer to it.

I have friends on both sides of the political divide, although since I predominantly interact with energy investors and golf club members my world is overweight Republicans. I think the Red tribe is fundamentally more optimistic about the future, and since I know America’s best days are still ahead, I feel comfortable there. But my Blue tribe friends correctly note our shortcomings, sometimes bitterly.

Maybe the key difference is in our assessment of whether what’s bad will be made good. Ronald Reagan was my first president. His sunny optimism was mine and remains so today. It’s always Morning Again In America.

That political ad from 1984 still gives me goosebumps.

To say we’re more united by shared values than we are divided by politics sounds uncomfortably like a campaign speech. But ahead of anything else, Americans are good, generous people. Most casual interactions with a stranger confirm that. Families across the country are raising children, instilling their values and hoping a bright future awaits them while enjoying the highest living standards in human history.

In recent weeks my wife and I attended a series of year-end school concerts and recitals. With eight grandchildren aged nine months to nine years old, the events come thick and fast.

As I watched those youngsters perform alongside their classmates, I thought how that next generation is growing up with the shared experiences and values of being first and foremost Americans. I looked at all those bright, smiling faces accepting the applause and thought about how this was happening at thousands of school halls across the country. They’ve completed another year of growing up in this great country.

Can you think of anything more powerfully filled with hope and optimism?

Every year in early July, the Queen Mary 2 operates a seven day cruise from New York up to New England and Nova Scotia and back. My wife Karen and I boarded the ship on July 1 to celebrate our fortieth anniversary.

Like America on July 4^th, we also had much to celebrate on our anniversary, July 6^th.

I’m sure there have been moments when it seemed to Karen we long ago passed that forty-year milestone. At such times I indulge my romantic side and note there are many oil and gas pipelines that have lasted even longer, including the original elements of the Transco network operated by Williams Companies. That such news leaves her non-plussed I attribute to poor delivery on my part, not irrelevant content.

Sometimes I think I have confirmed Warren Buffett’s advice that the secret to a happy marriage is to find a woman with low expectations. But in truth we both had high hopes when we married in 1985, and here we are still together.

Optimism isn’t always rewarded. But positivity is better for you, and life is more enjoyable if you can find it in others.

I hope your July 4^th left you still feeling Ronald Reagan’s sunny optimism.

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

SL Advisors Talks Markets

Energy By The Numbers

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The Energy Institute’s (EI) Statistical Review of World Energy provides a wonderfully detailed view of what’s actually happening, mostly untainted by any political bias. The world is using more of all kinds of energy, raising living standards across the developing world. Hydrocarbons still dominate and will for the foreseeable future. 

There’s still a tendency even at the EI to focus on percentage increases rather than absolute values when it comes to renewables. For example, while “…wind and solar grew nearly nine times faster than total energy demand” is a true statement, it compares the percentage growth rates and so isn’t that meaningful. The pressure to express optimism around intermittent energy sources extends broadly. 

More accurate is to note that renewables production increased by 2.8 Exajoules (EJs) last year. One can cheer the 9.2% increase, or note that global energy production increased by 11.9 EJs last year and renewables were just under a quarter of this. Natural gas production grew at only 2.8%, but provided 4.1 EJs of additional energy, almost half as much again as renewables.  

Natural gas met over a third of the world’s growth in energy demand last year and provided a quarter of the total. Overall, hydrocarbons fell from 87% to 86.6% of the total. It’s a true statement to say that renewables are gaining market share, reaching 5.5% last year from 5.2% in 2023. This also means that an investor in hydrocarbon energy infrastructure with a bias towards natural gas doesn’t need to be too concerned about solar and wind becoming dominant.  

In 2006 Al Gore’s documentary An Inconvenient Truth raised public awareness about the risks from climate change. It also predicted that Arctic sea ice would disappear by 2013 and that Florida would disappear within decades. These were wrong in timing, but directionally had some merit.  

Four years before Gore’s documentary, developed country emissions (defined as OECD) were bigger than emerging countries’ (non-OECD). If your goal was reducing them, the rich world needed to play a role. In 2003 non-OECD emissions became the larger of the two. In 2007, the year after the documentary, rich world emissions peaked. 

Last year, Greenhouse Gas emissions (GHGs) increased by 1.3% to 40.8 Gigatonnes (GTs, billions of metric tonnes) on a CO2 equivalent basis (CO2e). OECD countries were 12.0 GTs, non-OECD 28.8 GTs. Whatever the moral argument that per capita emissions are bigger in rich countries and should shoulder more of the burden, non-OECD populations and emissions overwhelm. Liberal efforts to block natural gas hookups and build offshore wind raise costs, reduce reliability and are irrelevant until poorer countries can change their trend. 

Coal is the problem, both because of local pollution as well as emissions. It’s cheap, easy to use and needs to be cut. Emerging countries increased their coal use by almost three times the reduction among rich countries. China burns 56% of the world’s output. India is 14%. Both are growing. There’s little point in having the world’s biggest EV market if they run on coal, which provides 58% of China’s electricity and 75% of India’s.  

Coal displacement with natural gas in emerging Asia and elsewhere is our biggest opportunity to lower GHGs.  

America’s LNG exports will keep growing, solidifying our role as the world’s biggest exporter. Some criticize the sector for methane leaks and the GHGs emitted in liquefaction. But the industry is addressing the issue, recognizing that many of their buyers want the full benefit of a fuel that generates roughly half the emissions of coal.  

Last week Energy Transfer announced that Chevron has increased the LNG it will buy from their planned Lake Charles export facility. The twenty year offtake agreement now covers 3 Million Tons per Annum (MTPA), up from 2 MTPA.  

Global electricity production grew by 4% last year, well ahead of the ten year 2.6% CAGR (compound annual growth rate). Much has been written about the impact of data centers, which are causing a sharp jump in demand in the US. OECD power consumption grew at a 0.4% CAGR over the past decade, and 4.2% in emerging countries.  

AC is a big driver in countries such as India, which makes increased LNG exports critical to curbing their voracious appetite for coal.  

Naples, FL is one of the most politically conservative places in America. It’s very red, and its population includes quite a few who would assert climate change isn’t real. Nonetheless, one local church that has endured repeated flooding from storm surges, including last October, has concluded that such events are more likely and has decided its best defense is to raise the entire building. For some, pragmatism trumps conviction.  

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

SL Advisors Talks Markets

LNG Keeps Growing

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Conflict in the Middle East invariably leads to concern about disruption to crude supplies that pass through the Strait of Hormuz. Oil prices duly rose once Israel launched its surprise attack on Iran. Around 20% of total oil consumption comes through this narrow waterway. It’s unlikely Iran could close it for long if at all.  

Sell side firms have estimated that the market’s assessed probability of a closure is around 15-20%, based on comparing the recent move up in crude versus where it would go if a fifth of global supplies were stopped. Crude is up about 20% this month. 

Around 20% of the world’s Liquefied Natural Gas (LNG) also passes through the same bottleneck. Nonetheless, the reaction of regional LNG benchmarks in Asia and Europe, where most imports go, has been muted, with prices rising around 3% this month. 

Maritime insurance rates have gone up, and ships are being asked to arrive at export terminals in the Arabian Gulf only when called to minimize the number of vessels concentrated together.  

Although 20% of oil and LNG pass through the Strait, LNG is only 14% of global gas consumption. This explains the difference in market response to the Israel-Iran war, since only 3% of the world’s gas is at risk.  

Oil is easier to move than gas, so around 40% of the world’s oil is traded before being refined. Because natural gas isn’t very energy-dense, its volume has to be significantly condensed to make movement by ship commercially attractive.  

Twenty five years ago the trade in gas via inter-regional pipelines was more than 2.5X as big as LNG. Pipeline volumes peaked just prior to the pandemic when they fell 10%. A brief rebound in 2021 ended with Russia’s 2022 invasion of Ukraine. By 2023 pipeline gas volumes were 24% lower than in 2019. The loss of Russian gas exports to the EU was the proximate cause.  

By contrast, LNG volumes have climbed steadily, and didn’t even drop in 2020. Energy security became more important following the Russian invasion. A pipeline connecting two countries doesn’t allow any flexibility if relations between the supplier and buyer break down. This was the case with Nordstream before it was mysteriously blown up. China and Russia have been negotiating for years over additional Russian gas supply via the Power of Siberia 2 pipeline, with China showing less urgency than Russia to reach an agreement.  

Both countries must consider how they’d cope if a dispute caused flows to stop. A Russian adviser suggested that Middle East tensions would spur an agreement so that China could reduce its exposure to the Strait of Hormuz, although this looks like wishful thinking.  

LNG trade is around 40% bigger than inter-regional pipeline volumes, and that gap is likely to grow. Moving natural gas by ship allows trade between countries too far apart to be connected via a pipeline. LNG also enhances energy security for both parties, since once the necessary infrastructure is in place, both buyer and seller can negotiate agreements with multiple counterparties.  

We often note the projected growth in US LNG export capacity, driven by abundant domestic supply. The Asian JKM benchmark is $13.80 per Million BTUs (MMBTUs), and the European TTF is $13.25 per MMBTU. With US natural gas at around $4, the price differences are easily big enough to make US exports attractive.  

Our current LNG exports of around 15 Billion Cubic Feet per Day (BCF/D) are limited by liquefaction capacity. We expect this to roughly double by 2030 based on projects already under construction.  

There are many other projects that have not yet reached Final Investment Decision (FID), so export capacity is likely to continue growing into the next decade.  

The US is the world’s biggest LNG exporter with 21% of the market but is not alone in growing. Around half of the “aspirational” capacity as estimated in the International Gas Union’s 2025 World LNG Report is outside North America.  

China is 19% of LNG imports, followed by Japan at 16%. Global LNG trade has grown at 6% pa since 2000. 

Because there will be more LNG available, some analysts predict this will lead to a global surplus that will depress prices and profitability for exporters. However, receiving capacity is also growing. The facilities that regassify LNG for injection into their distribution networks are more numerous than the liquefaction export terminals. They generally operate at around 40% capacity,  

By contrast, global liquefaction facilities operated at 87% of capacity last year. There’s more than 2X as much import capability as export. The world is preparing to use more natural gas, as the unmet promises of renewables mount up. For example, Malaysia just announced a 50% increase in gas-fired electricity to meet rising demand from data centers.  

LNG exports will be part of the solution.  

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

SL Advisors Talks Markets

Strengthening Your Portfolio With Pipelines

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When conflict occurs that might disrupt global oil supplies, portfolios that include an allocation to midstream energy infrastructure usually enjoy some modest protection. Crude traded up 14% on Thursday night as the Israeli attack unfolded. Some opportunistic hedging by producers trimmed those gains during the day. Energy stocks as usual responded positively.

The effect on midstream is more subtle. The sector is less responsive to commodity prices than in the past. It may enjoy a brief lift as positive energy sentiment spills over, but management teams don’t generally obsess too much about oil. This time may be different, because weak crude prices have constrained US oil production with some even forecasting it may drop next year. Friday’s higher prices benefitted Oneok and Plains All American, which might see more robust volumes through their systems if higher prices persist.

Crude weakness this year has also curbed inflation expectations. The partial reversal explains Friday’s weakness in bonds. According to Wells Fargo, around half the midstream sector’s EBITDA is tied to contracts that allow price hikes linked to the PPI. In 2022 this was a significant benefit since midstream companies were able to raise prices in line with inflation. This supported the sector’s 22% return that year, a sharp contrast with the S&P500’s -18% return as the Fed tightened rates.

On Friday, midstream outperformed the S&P500 by 1.5%. But the diversification benefits of midstream last for more than a couple of days. Most investors have significant technology exposure, since it’s now almost a third of the S&P500. Several articles have been written about the evolution of the market’s leading index towards a basket of growth stocks.

Midstream energy infrastructure, defined here as the The American Energy Independence Index (AEITR), is less correlated with most S&P500 sectors than is the Technology sector. The two sectors where this is significantly not the case are the energy sector itself and financials. It has only half the correlation to the S&P500 as Technology, unsurprisingly given the shifting composition of the index. But for Communication Services, Consumer Discretionary and Healthcare the AEITR is also less correlated to these sectors than is the Technology sector.

It also doesn’t hurt that when markets are considering whether Israel will strike Iran’s energy infrastructure, the AEITR is all in North America well out of harm’s way. The Strait of Hormuz is widely recognized as a chokepoint for Middle East oil exports. Less attention is paid to the vulnerability of trade in Liquefied Natural Gas (LNG), 20% of which passes through the same stretch of water from Qatar and the UAE.

Last year Qatar exported 80 million metric tons of LNG, making them the third biggest exporter behind the US and Australia, with 19% of global trade. 70% of Qatar’s exports go to Europe and 20% to Asia. We were surprised that so far neither of the regional LNG benchmarks have responded much to the same concerns that have boosted oil prices, even though buyers have limited alternatives.

US LNG exports don’t face the risk of a Middle East war disrupting supplies. We think that the reliability of the US as a supplier could become more highly valued as buyers contemplate worst case scenarios for the product.

We still see attractive opportunities among LNG stocks.

Venture Global received a boost last week when they withdrew their application to build the Delta LNG terminal, because they believe they can achieve an equivalent capacity increase by expanding their Plaquemines facility. VG has earned the respect of many for their relatively fast project execution.

NextDecade announced that they have reached agreement with Bechtel Energy to build Trains 4 and 5 of their Rio Grande LNG terminal. We think it’s possible that NEXT will make a Final Investment Decision (FID) to go ahead with this second stage before the end of the year.

Israel halted production at its Leviathan natural gas field, operated by Chevron, due to security concerns. Within hours Egypt, which depends on gas imports, began shutting factories.

Russia’s invasion of Ukraine made energy security a higher priority. The war in the Middle East will likely add to that. We continue to think that US LNG exports will be highly valued by America’s friends and allies around the world.

For many investors, midstream appeals because of the stable dividends well covered by cashflow and declining leverage. Few consider the diversification benefits of an allocation or the sector’s resilience to disrupted energy supplies. The events of recent days have highlighted these additional positive features.

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

SL Advisors Talks Markets

Gas Exporters Keep Growing

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Venture Global (VG) continued its post-IPO recovery last week. Back in January price talk was above $50 which would have valued the company at double market leader Cheniere. Pushback from institutional investors reduced the IPO price to $25, but it quickly sank below this (see Nothing Ventured, Nothing Gained).

VG has earned a reputation for fast construction of LNG terminals using a modular approach. They’ve also been willing to antagonize big customers. When European LNG prices spiked in 2022 following Russia’s invasion of Ukraine, VG held off making contracted deliveries so they could take advantage of the suddenly high prices themselves. S&P Global estimates this netted them windfall profits of $3.5BN, which their contracted buyers including Shell and BP believe should have been theirs.

VG was contracted to start LNG deliveries once Calcasieu Pass LNG was “commissioned” (fully operational). The parties have different interpretations of what this means, and the dispute has gone to arbitration. The downside case for VG is they have to pay $3.5BN. Future LNG buyers are likely to negotiate quite carefully with them. TotalEnergies has said they don’t want to do business with them.

VG is looking like another Energy Transfer – a combative approach to business combined with great execution.

Regular readers know we like exposure to America’s growing LNG story, but we initially avoided VG because we thought it was overpriced. We later took a small position.

Last week FERC gave final approval to VG’s third export facility, CP2 LNG. The company announced that construction would begin immediately. VG and Cheniere are competing to be the biggest US exporter. As each company makes a new announcement, they leapfrog the other.

Once completed, CP2’s 28 Million Tons per Annum (MTPA) will take VG’s total capacity to 66.5 MTPA. The company expects it to begin operations in 2027. Whether contracted buyers actually take delivery will depend on the strength of their contracts and whether geopolitical events have created a lucrative spot market.

Cheniere’s current capacity is 46 MTPA with another 8 MTPA under construction. CEO Jack Fusco has said the company plans to double its capacity by expanding their existing facilities at Sabine Pass and Corpus Christi on the Texas gulf coast.

Between the two companies, they plan to have capacity of almost 19 Billion Cubic feet per Day (BCF/D)

US natural gas production averaged 113 BCF/D last year, with LNG exports taking 12 BCF/D. Cheniere was around half of that. The US Energy Information Administration (EIA) expects 14.2 BCF/D of exports this year. At last year’s rate European buyers will account for three quarters of this.

The US is the world’s biggest LNG exporter and looks likely to stay that way.

Given the increasing demand from export terminals as well as data centers, US natural gas prices are likely to move higher over the next couple of years.

The power needs of data centers are about to become a political issue. PJM Interconnection, which operates the country’s largest grid across a swathe of the eastern US extending from Illinois, expects costs to rise by $9.4BN. This has been blamed on new data centers by PJM’s watchdog. Much of this is attributed to Virginia and Maryland, where data centers proliferate.

Brian George, who leads global energy market development and policy at Google, conceded that, “We are now imposing a significant cost on the system.”

New Jersey’s Democrat governor Phil Murphy has announced a $430 million initiative to subsidize bills for poorer households. Your blogger lives in New Jersey, doesn’t like Phil Murphy and doesn’t expect to receive a reduced electricity bill. However, the increased demand for natural gas is welcome.

Tier 4 data centers have an expected uptime of 99.995%, which equates to about 26 minutes of downtime annually. According to Morgan Stanley, Bill Schweber, an electronics engineer, wrote for EE Times that AI data centers require 99.99999% uptime, which equates to being down only 3 seconds a year.

Renewables are entirely inadequate in this regard. The hyperscalers building data centers are quickly compromising their green energy goals. Because combined cycle natural gas turbines have a backlog of as much as five years, smaller single cycle turbines are being snapped up. These are less efficient, but there’s a scramble for electricity.

Congressional support for solar and wind is crumbling as the 1BBB makes its way through the Senate. Some Republican legislators from states benefitting from tax credits in the Inflation Reduction Act (IRA) have been pushing back against plans to cut or eliminate them. But a  Politico Energy podcast reported last week that Senator James Lankford (R-OK) from a windy state thinks they need more reliable energy such as natural gas to provide baseload power and meet the needs of data centers.

Gas demand continues to grow.

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