ARK’s Cathie Wood: Getting Rich While Losing Money

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ARK’s Cathie Wood: Getting Rich While Losing Money
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Which is a more important measure of an investment manager’s skill – the return on the first dollar invested at inception, or the return on the average dollar?

Return since inception is widely used because it covers the longest period. If performance is reasonably consistent, both methods should tell the same story. That this is not the case is surprisingly common.

It was the motivation behind my 2011 book The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True in which I showed that the average hedge fund investor would have been better off owning treasury bills, even though the industry’s since inception return was good. Although hedge funds generated substantial profits, the 2 and 20 fee structure transferred most of those gains to managers.

The Hedge Fund Mirage received coverage in my favorite magazine, twice (see The Economist Once More Writes About The Hedge Fund Mirage). Since my writing aspires to be as good as theirs while inevitably falling short, I took this as the ultimate endorsement.

Several hedge fund managers told me they fully agreed with the revealed widespread mediocrity, while noting that it didn’t apply to their hedge fund. Hedge fund consultants, who make a living promoting them, were critical (see The Hedge Fund Lobbyists Fight Back). Thus was the gulf in IQ between the two groups confirmed.

The difference between the two measures of performance is explained by the fact that early hedge fund investors did well but weren’t that numerous. As new money flowed in and hedge funds went mainstream, profit opportunities became scarce under the weight of this additional capital. During the 2008 Great Financial Crisis I estimated hedge funds lost $500BN, wiping out all the profits they’d ever made. The promised delivery of absolute returns came up short.

It can be illuminating to apply this analysis elsewhere. Three years ago, I did this for a popular $15BN fund (see ARKK’s Investors Have In Aggregate Lost Money). Equity funds can lose money because of a weak market even if their stock picks are good, so some might say this is an unfair way to look at Cathie Wood’s ARK Innovation ETF (ARKK).

More recently, a team at Morningstar found that Cathie Wood’s firm ARK Invest tops the list of value-destroying fund families at $13.36BN over the past decade. The S&P500 returned 13.1% pa over the same period, a considerable tailwind. It seems Cathie Wood isn’t very good at picking stocks.

At this point a friend of mine who ran government bond trading at JPMorgan decades ago would helpfully say, “Simon, if you had her money, you’d burn yours.” Which is to say that the failure of her investors to avoid poor manager selection hasn’t impeded Ms Woods’ ability to become rich. Her net worth is estimated at over $250 million.

The fortunes of clients and their money manager have rarely diverged so spectacularly.

Inflows to the ARK Innovation ETF (ARKK) peaked in late 2020 following an annual performance of 152.8%. Since then, ARKK has lost over half its value.

Many of those 2020 investors are deeply underwater and are hanging on, waiting for a recovery. Inducing abject hope in your clients can be a powerful asset-retention strategy.

In other news, there are signs that opposition to reliable energy in New England might be softening. A recent conversation took place between NY governor Kathy Hochul and President Trump over the Constitution pipeline.

Intended to deliver natural gas from Pennsylvania to a hub near Albany for further distribution, Williams Companies finally threw in the towel in 2020 after four years of challenging the New York State Department of Environmental Conservation’s 2016 denial of a key water quality permit.

New York and its neighboring New England states have some of the country’s highest energy prices. This is because renewables are expensive, and they sometimes have to import liquefied natural gas. Democrats are worried that working class voters in poor Boston communities won’t prioritize climate change as highly as the college-educated progressives who drive policy.

Much needs to be agreed upon before the construction project can be resurrected. And WMB will worry that the pipeline won’t be fully utilized for its projected 30-40 year useful life if regional policy turns back against hydrocarbons.

But it was surprising that New York’s governor could have a productive conversation with Trump about any topic. Perhaps some pragmatism is intruding.

It also highlights the enduring appeal of natural gas. While US gasoline demand may have peaked in 2019 before the pandemic, natural gas consumption continues to grow along with exports. It’s why we often remind investors that the Natural Gas Transition is the only energy shift of any consequence in the US.

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

Energy Mutual Fund Energy ETF

 

 

Energy Wants To Invest In America

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$1.4TN is a huge sum by any standard. It’s more than Spain’s entire stock market capitalization and just behind Switzerland’s. It’s more than Indonesia’s GDP and not far below South Korea’s. This is the sum that the United Arab Emirates (UAE) has committed to invest in America over the next decade. It’s probably the best way to make and stay friends with the White House.

Details are light, although some of that capital has already been committed. There was an announcement that Emirates Global Aluminium (English spelling) would help finance the first new US aluminum smelter in 35 years.

In January Trump asked Saudi Arabia to spend $1TN in the US over four years. Next time they talk he might say that was too low. The muscular, America First tariff-heavy stance the new Administration has adopted isn’t drawing much love from countries that thought they were friends and allies. But it doesn’t seem to be bad for investment flows.

We like a recently announced partnership between the UAE’s sovereign wealth fund and Energy Capital Partners to invest $25BN in energy infrastructure and data centers. We also like that ADNOC, the UAE’s state oil company, invested last May in NextDecade (NEXT). The alignment of interests between the UAE’s money and Trump’s quest to increase US energy exports should be good for LNG export infrastructure.

JPMorgan has examined the order backlog for gas turbines and estimates this will add 6 Billion Cubic Feet per Day (BCF/D) to domestic gas demand by 2030. Currently 35 BCF/D of gas provides 43% of our power, a share that will likely grow with the insatiable demand from data centers.

Meanwhile Morgan Stanley reports that LNG feedgas flows hit a new record of 15.7 BCF/D.

Infrastructure capex has generally been declining for the past few years. Climate extremists have weaponized the legal system, although this was turned back on them recently (see Greenpeace Picks The Wrong Fight).

To a large degree we have the pipeline network we need for liquids. Growing gas demand does require more investment. 2024 saw 17.8 BCF/D of added natgas pipeline capacity, more than double the prior year. Interstate projects were over 10 BCF/D, almost 5X the 2023 total. Pipelines that cross state lines (interstate)are generally more susceptible to court challenges since their permits are issued at the Federal level.

Capacity additions were led by the Mountain Valley Pipeline (MVP) which was only completed due to Congressional action in 2023 (see A Pipeline Win From The Debt Ceiling). MVP moves 2 BCF/D to connect with Transco for subsequent transit south to the Gulf coast. Another 0.8 BCF/D added capacity to a Transco line between Pennsylvania and New Jersey, although climate extremists tried to block this.

Building intrastate is usually simpler because the prior Democrat Administration had less power to intervene. The Matterhorn Express Pipeline connects the Permian to Katy, TX with 2.5 BCF/D in capacity.

Our growing LNG exports require more feedgas. Venture Global (VG) added the Gator Express pipeline which consists of two pipeline segments with 4 BCF/D of capacity to their Plaquemines, LA LNG export terminal. It illustrates VG’s vertical integration.

Most of the added capacity was in the Texas/Louisiana area supporting the Permian basin, with some in the northeast connected to the Marcellus and Utica shales. New England continues to deny itself access to cheap reliable energy, instead preferring to import LNG and reduce their reserve margins for power generation.

The growth in data centers will force a reality check on expensive, intermittent electricity. The PJM grid which includes mid-Atlantic states New Jersey and Delaware while extending as far west as Illinois and Kentucky estimates they’ll need 40% more power generation over the next decade.

The Midcontinent Independent System Operator (MISO) operates in a swath of central US states adjacent to PJM. They estimate their reserve margin during peak summer demand will drop from 17% to around 4% over the next eight years. There’s little doubt that reliance on intermittent solar and wind is increasing the risk of power shortages, since they operate with far lower utilization than traditional energy – typically 20-30%. Offshore wind can be a little higher but the US has almost none of it and it’s not relevant to MISO’s geographic footprint.

JPMorgan’s 15th annual energy paper, titled Heliocentrism is widely available and a rich source of insights. Mike Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, does world class research presented engagingly. For those without the time to read it, we’ll periodically include charts.

This one shows why Europe is slowly committing industrial suicide with energy policies that enable developing countries to increase their greenhouse gas emissions. California isn’t far behind. Their citizens are beginning to realize it.

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

Energy Mutual Fund Energy ETF

 

 

 

 

Greenpeace Picks The Wrong Fight

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In recent years climate extremists have become adept at weaponizing the legal system in pursuit of their dystopian aims. The Mountain Valley Pipeline (MVP), which was built to move natural gas from West Virginia to Virginia, faced extensive delays with only a few miles left, because climate activists were able to persuade a judge to vacate a previously issued permit. Billions had been spent, relying on the permanence of approvals issued by government agencies.

Nothing chills the appetite for construction projects more than the prospect of a legal fight of unknown duration. Eventually in 2023 Senator Joe Manchin from West Virginia, where the pipeline started, insisted that a bill to raise the debt ceiling include language stating completing MVP was in the national interest.

The pipeline was completed. But the extended project timeline helped limit the midstream energy infrastructure sector’s appetite for big projects, furthering the goals of the environmental extremists who had opposed it. However, several years ago we concluded that it also helped boost dividends and buybacks (see Pipeline Opponents Help Free Cash Flow).

Therefore, it’s appropriate that a $660 million jury award against Greenpeace USA in North Dakota seems likely to put them out of business. Energy Transfer (ET), who sued Greenpeace over damaging protests during the construction of the Dakota Access oil pipeline, doesn’t shy away from conflict. Their pugnacious chairman Kelcy Warren has a long history of falling out with regulators and even his own investors as we noted nine years ago during a dispute over preferred securities issued only to management (see Will Energy Transfer Act with Integrity?).

That dispute was also settled in court, in ET’s favor.

Greenpeace has pursued disruptive stunts such as illegally boarding oil rigs. They share the same ethos with Extinction Rebellion and probably inspired their acts to disrupt civil society, which include defacing works of art and walking on busy highways to prevent people from driving.

Greenpeace and their motley crew are experiencing the consequences of overreach. America will not miss their US affiliate.

The pendulum is swinging back.

Last year another group of climate extremists found a compliant judge to vacate a permit on which NextDecade (NEXT) was relying to build their Rio Grande LNG terminal on the Brownsville ship channel (see Sierra Club Shoots Itself In The Foot). The ensuing uncertainty about the project’s completion hurt the stock, raising NEXT’s cost of capital.

Last week the U.S. Court of Appeals for the D.C. Circuit revised its earlier ruling. NEXT duly rose, and we continue to think it’s an attractive investment.

In another positive development, the US Department of Energy approved Venture Global’s expansion of its Calcasieu Pass LNG terminal (CP2). Energy Secretary Chris Wright said, “The benefits of expanding U.S. LNG exports have never been more clear, and I am proud to be taking action to support the American people and our allies abroad with more affordable, reliable, secure American energy,”

Let’s just say we like his philosophy.

CP2 could export as much as 28 Million Tons per Annum (MTPA) of LNG, or about 3.7 Billion Cubic Feet per Day (BCF/D). For context,  feedstock to US LNG export terminals recently hit 16.6 BCF/D, a record.

VG’s stock duly rose on the permit approval. We think it remains attractively priced.

In Canada the CEOs of their biggest energy companies pushed for improved regulation with speedier approvals which will draw investment and increase production. Canada has long struggled to get its oil and gas to market and needs to diversify its trade links away from the US.

Last week saw a lot of positive news for President Trump’s favorite sector. But our high point was lunch with long-term investor Glenn Hamilton and his lovely wife Ruth, who visited us in Naples from Miami. Theirs is a wonderful American success story. From humble beginnings in Ohio, Glenn became what he describes as a serial entrepreneur, having founded and sold several companies.

Today Glenn runs Amerimet, a full-service metals processor, distributor and exporter of aluminum coil & flat sheet based in Miami. He recently transferred ownership to his employees via an ESOP, which he preferred over a sale to private equity even if it meant passing up on a higher valuation.

Glenn hasn’t only had good timing in business. He increased his investment in midstream energy during the pandemic when crude oil prices briefly turned negative. He figured they couldn’t go much lower. We enjoyed a most convivial lunch discussing energy and Republican politics at Campiello, a popular Naples restaurant. My wife and I look forward to seeing Glenn and Ruth again before too long.

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

Energy Mutual Fund Energy ETF

 

Unloved Tariffs

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There are few parts of America redder than Naples, FL.  Kamala Harris signs were nowhere to be seen last year. Florida has shifted from purple to red in recent years. A friend once received hostile comments from a local who noticed his Connecticut license plate, demanding that he not relocate but should keep his liberal policies in the northeast.

In fact, it’s Republican voters who are heading south. New Jersey is more blue and poorly governed as a result.

Golf clubs in Naples are more red than Naples itself. And yet, even here you’ll find grumbling about tariffs. Nobody is yet disavowing their vote, but equity market volatility is unwelcome to wealthy retirees. This bothers them more than the price of eggs.

My friends here own a lot of stocks.

Some breezily say the rapid policy changes that can occur twice in one day are part of a sophisticated negotiating style honed in New York’s real estate market. Others aren’t so sure, and in any case dealing with countries is not the same as haggling with banks who have lent you money. Discerning a strategy from frequent tactical shifts relies heavily on subjectivity and is challenging the most devout MAGA followers.

If Naples golf club members are unenthusiastic about tariffs, support in the country is shallow.

The S&P500 has lost the gains achieved following the election, at least for now. The US runs a trade deficit of over $900BN. We buy a lot of stuff. So it’s plausible that an aggressive posture on negotiations could lead to improved terms of trade. Canada’s domestic banks dominate and are highly profitable. I’m sure JPMorgan could compete there if allowed.

The EU could surely use cheaper energy, and increased natural gas imports from Russia are implausible no matter what a few German politicians may suggest.

Midstream energy infrastructure has held onto its post-election gains, since it’s less exposed to tariffs as well as being within Trump’s favorite sector. Some may be surprised to learn that the Alerian MLP ETF, AMLP, is outperforming the sector as defined by the American Energy Independence Index (AEITR).

Although this might sound like rare praise from your blogger for AMLP, experienced readers know better. AMLP’s market-beating performance of recent weeks is due to its limited exposure to natural gas (see There’s No AI in AMLP). Power demand from data centers and increasing LNG exports have supported broad midstream for over a year. AMLP’s light natgas exposure and MLP concentration held it to a 22.6% return last year, less than half the AEITR’s 45.5%.

Natural gas oriented names have lagged recently on fears of slower demand growth from data centers and LNG, both of which seem unwarranted to us.

AMLP’s outperformance is because of its shortcomings.

And AMLP now has a healthy unrealized tax liability which will continue to drag on results when the sector performs well (see AMLP Has Yet More Tax Problems).

Data from Wells Fargo shows that large cap MLP valuations are relatively unattractive versus large cap C-corps.

This doesn’t mean MLPs are expensive in absolute terms. Energy Transfer yields 7.1%. It is rated overweight by Wells Fargo’s Michael Blum who likes their 8.6X EV/EBITDA and sees a 28% total return over the next year. Large MLPs are cheap, like c-corps. But from here, c-corps will probably do a little better given their relative valuations.

The S&P Global Clean Energy Transition Index is down 13% since the election. Trump’s attempts to reel back $BNs under the Inflation Reduction Act and his hostility to windpower have not helped sentiment. However, I can report that our neighbors on the Jersey shore (a red part of a deeply blue state) are ecstatic that offshore wind turbines they regard as unsightly will not be spoiling their view any time soon.

Renewables have been a lousy investment for years – it didn’t start in November. Prices peaked in January 2021, around the time of Joe Biden’s inauguration. What followed was capital destruction on an epic scale. S&P Energy Transition has returned –20.0% per annum. Those investors who confused socially conscious investing with the real thing can hardly blame Trump.

If solar and wind really produce such cheap electricity, why hasn’t the sector done better?

Midstream energy as defined by the AEITR and representing the traditional and reliable part of the sector, has returned 25.7% per annum over the same period.

Venture Global has bounced following a 60% collapse after its mis-priced IPO. We made a modest investment on weakness, but more importantly co-CEOs Michael Sabel and Robert Pender also bought. Seems like next time this company wants to sell stock you might want to wait.

The threat of tariffs will unfortunately remain for Trump 2.0. But perhaps their implementation will be more carefully considered and less negative to the stock market.

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

Energy Mutual Fund Energy ETF

 

Discussing Energy In The Caribbean

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I spent a few days last week at the Catalyst Funds National Sales Conference in Puerto Rico. Catalyst is our mutual fund partner. It is about ten degrees warmer than Naples, FL where we’ve spent most of the winter, and the conference was once again thoughtfully located at the Royal Sonesta Hotel on the beach in San Juan.

In spite of the idyllic surroundings and poolside bar your blogger did work, running a grueling series of roundtable presentations with wholesalers explaining why midstream remains very attractive and answering their questions.

Feedback from clients and investors helps us better explain the opportunity. The investment case is not quite brief enough to qualify as an elevator pitch, but we believe is compelling. Investors who have done the homework to understand how it fits in their client portfolios have been handily rewarded in recent years. It’s summarized in The Energy Story’s Trifecta.

Some potential investors remain wary because of the steep drop the sector endured in March 2020, at the height of market concern over the pandemic. We all hope we’ll never again endure the loss of freedom that many states (though not Florida) imposed on their citizens.

But the reason that type of market reaction is highly unlikely in the future is that much of the mismanaged capital that caused it was largely lost (see MLP Closed End Funds – Masters Of Value Destruction). Running a concentrated portfolio of stocks in a single sector with leverage is the pastime of the temporary portfolio manager.

Disaster is certain albeit with uncertain timing, as with a strategy of relentlessly selling put options for example. The PMs who oversaw such lunacy need alternative employment with which their skills are better aligned – perhaps as counselor providing emotional support to formerly wealthy closed end fund investors.

The Darwinian resolution visited on such strategies has rendered them of inconsequential size. It’s hard to be a serial offender at capital destruction. It won’t happen again.

The demand growth in natural gas for power generation drew many questions. Natural gas provides 43% of US electricity, a share that is likely to rise since data centers need reliable energy rather than the intermittent, weather-dependent offering of solar and wind.

Many learned for the first time that the Natural Gas Energy Transition is the big energy story in America. The impact of solar and wind has been less than left-wing media outlets often imply. Natural gas production has grown 8X as much as renewables on an energy equivalent basis throughout the past twenty five years.

In Energy Secretary Chris Wright we have someone who is pro-reliable energy and believes the world should use more natural gas which can displace coal, reducing emissions (see New Energy Policies Are Here).

Was the DeepSeek news of January likely to trim the outlook (No – see Pipelines And The Jevons Paradox). Could small modular reactors compete with natural gas for power generation (not for at least several years – see Why The Navy Can’t Help With Nuclear and watch Why Not Nuclear?). Will Russian gas exports to Europe displace US LNG following peace in Ukraine (unlikely – see Will Europe Feed The Crocodile?).

Some questions came from New Englanders who thankfully don’t share their region’s self-destructive climate views. With natural gas pipelines from Pennsylvania to Massachusetts blocked by progressive energy policies, some wondered why Boston’s imports of LNG don’t come from Texas or Louisiana.

The answer is the Jones Act, which requires trade between US ports to be conducted on ships that are American built, owned and crewed. No such vessels exist, which is why Boston buys LNG from places such as Trinidad and Tobago.

The power needs of data centers were acknowledged by many. One participant from Atlanta, GA commented on the planned 615 acre QTS development in nearby Fayetteville which Google AI estimates will need 250 MW of power, enough to supply a million homes.

Tariffs are on everyone’s mind. Midstream is less exposed than most sectors to capricious and unpredictable policy revisions, because energy consumption is very stable (see Midstream Is About Volumes). Consequently, pipeline stocks are generally trading above their pre-election levels while the S&P500 is not. We think 4.5% yields, 2-3% growth and 2-3% of market cap in buybacks (i.e. 4.5+2.5+2.5) support 9-10% return expectations.

Finally, it was a pleasure to celebrate our ten year partnership with Catalyst Funds CEO Jerry Szilagyi. He’s built a great business with many talented people, and we are looking forward to continuing to grow together.

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

Energy Mutual Fund Energy ETF

 

Natural Gas Is The Future Fuel

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On Monday the market dipped back below its pre-election level. The proximate cause was Trump’s ambiguous response when asked if there will be a recession. He has warned that the tariffs will likely cause “a little disturbance.”

To this observer, the problem is more the rapid unpredictability with which new import taxes are announced and modified than the concept. We hope and expect that perhaps within weeks the desired policy outcomes on immigration and fentanyl will be deemed achieved by the White House.

But Trump 2.0 has discovered a tool that he can wield with relative autonomy, using powers Congress has granted the president in an emergency, which this apparently is. It’s going to be in his toolkit for the next four years, brandished as needed. Investors making long-term capital commitments will contemplate the possibility of further little disturbances for a while yet.

The market must price for this.

Treasury Secretary Scott Bessent has said there’s no “Trump put,” a decline of sufficient magnitude to cause a policy reversal. But then, he could hardly say the opposite without becoming the ex-Treasury secretary.

More correct is to say that falling US stock prices will be more than accompanied by economic pain among our trade partners, the targets of the tariffs. Our trade deficit was $918BN last year. We buy a lot more than we sell. While trade friction is essentially a lose-lose game, the economic pain is likely to be more acute in other countries than in the US.

For the investor seeking relative safety from the carnage that has hit previous market leaders such as Nvidia (NVDA), we think midstream energy infrastructure, especially that supporting natural gas, is worth consideration.

The American Energy Independence Index (AEITR) has outperformed the market since November’s election. Stocks with natural gas exposure including Cheniere, Energy Transfer (ET) and Williams Companies (WMB) have held up better than the overall market because they have limited exposure to tariffs.

Energy is the president’s favorite sector. Buying more US oil and gas is part of the tariff exit ramp for many countries.

As we noted in a recent blog post (see Midstream Is About Volumes) investors in this sector care about quantity not price. The outlook for natural gas is especially good, with new data centers and Liquefied Natural Gas (LNG) exports both driving demand higher.

The US is going to pull ahead of Qatar and Australia (#2 and #3) as the world’s biggest exporter of LNG. Natural gas has long been thought of as a transition fuel by those expecting the world to exist fully on renewables. They suggested it was a transition fuel helping the energy transition. A temporary fuel to enable the eventual move to fully rely on solar and wind.

The opponents of natural gas fear that its market share gains won’t be temporary, and for good reason. If the world had already been carpeted with solar panels and wind turbines before the shale revolution, unleashing reliable energy would have changed that.

Transitioning off natural gas to unreliable power will require big incentives. As we’ve often noted, the Natural Gas Energy Transition is the only one that’s making an impact.

An investor asked me the other day if we should worry about a glut of LNG exports, led by the US and Qatar. We think the opposite is more likely. The world is ramping up its ability to buy. Regassification capacity, the reversal of liquefaction that chills natural gas to –256F in preparation for loading onto an LNG tanker, is growing too. It’s more probable we’ll have a shortage of exports.

Energy Secretary Chris Wright told the CERAWeek energy conference that “We need more energy. Lots more energy.”

Mike Sommers, chief executive officer of the American Petroleum Institute, said “It’s clear now that natural gas is the future fuel.”

Midstream energy infrastructure investments are aligned with US policy as well as commercial incentives.

Tariffs aren’t going to be a big factor for US energy exporters. Most countries aspire to have cheap energy like the US. The EU has done an exemplary job of reducing emissions at great cost, freeing up global capacity to accommodate China’s steady increase from burning over half the world’s coal. They have the world’s biggest EV market, and it largely operates on power from burning the dirtiest fossil fuels.

Many western governments have accepted the huge financial burden of embracing intermittent energy while developing countries across Asia make it worse. Buying US LNG won’t get their power prices anywhere close to ours, but it will at least moderate the economic damage caused by the Energiewende, or energy transition.

Natural gas offers a welcome respite from the daily tariff trauma.

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

Energy Mutual Fund Energy ETF

 

 

 

Midstream Is About Volumes

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Midstream companies are generally unaffected by the current round of daily tariff updates. Their stock prices may gyrate with the rest of the market, but nobody is revising guidance. It’s worth remembering that these are toll businesses, focused on volumes not commodity prices.

Consumption of petroleum products is remarkably stable. It’s been between 20 and 21 Million Barrels per Day (MMB/D) for the past two decades other than falling to 19 MMB/D in 2020 due to the pandemic. This remarkable stability is the result of improved energy efficiencies offsetting growth in GDP and population.

Changes in the supply/demand balance of oil are routinely absorbed by price changes. The value of what’s moving through pipelines sometimes fluctuates widely, but as the consumption chart shows, the quantity hardly budges. This is why midstream infrastructure is such an attractive sector for investors.

It’s behind the robust outlook for dividend growth. Wells Fargo increased their forecast to a sector-wide 5% increase this year. When investors ask me about long term return prospects, the 4-5% dividend yield combined with long-term dividend growth and buybacks each of 2-3% adds up to 9-10% in total. Recent sell-side forecasts suggest that cash returned to shareholders may run somewhat higher than this over the next few years.

Electricity consumption follows a similarly stable pattern to crude oil, at just under 4 trillion kilowatt hours annually. It’s barely moved for over twenty years, although it will move sharply higher over the next few years because of data center demand. As with petroleum products, energy efficiency has neutralized growth in the past.

Natural gas consumption has been rising since the late 1980s. The shale revolution enabled coal to gas switching for power generation. Climate extremists agitate to keep gas in the ground, but without it US CO2 emissions would be higher. That wretched little girl Greta is fortunately sinking into oblivion while switching her attention to support Palestinian terrorists.

The 90 Billion Cubic Feet per Day (BCF/D) of natural gas consumption doesn’t include exports. We produced just over $103 BCF/D last year, with the excess going to our trade partners.

Consumption is going to continue higher because of the need from data centers for reliable power and increased LNG exports. If there’s any sensitivity to prolonged tariffs, it might be here. Signs of weaker growth have not yet curbed the capex plans of hyperscalers to invest in AI. But presumably if downward revisions to growth become meaningful data center construction may moderate somewhat.

LNG exports are for the most part underpinned by long term purchase agreements, which are often required to obtain financing to build the liquefaction terminals. The world wants more energy and the rate at which the US adds LNG export capacity will determine the volumes we send to our trade partners.

I must confess that the FT headline US backtracks on Canada-Mexico tariffs in latest sharp shift on trade left me confused – were we backtracking on softening the tariffs to include all USMCA-compliant goods, or backtracking on the hard line? In this case it was the latter, but the tariff trip is starting to feel as if there’s no strategy and a new twist on import taxes is possible every morning based on one guy’s opinion.

Check the date and time on each tariff story before considering its impact.

Venture Global (VG) has been a challenging stock for sell side analysts. On Thursday they missed expectations on Adjusted EBITDA with $688MM, but the range of forecasts was from $900MM to $2,851MM. Full year EBITDA guidance of $7.1BN disappointed the market, which was looking for $6.2-11.4BN.

JPMorgan lowered their price target from $25 to $16 and Wells Fargo stuck with $18.

Modelling VG is not yet a task of precision.

Having been uninvolved as the stock sank 60% below its $25 IPO price, we thought the EV/EBITDA multiple of 8X was a reasonable discount to best-in-class Cheniere at 11X, and made a modest investment. VG will continue to be a volatile stock.

The tit-for-tat tariffs with Canada have exposed weaknesses in New York’s energy strategy. They have shunned independence in favor of relying on exports of hydropower from Ontario, whose premier Doug Ford responded in Trumpian style by saying, “We will not hesitate to shut off their power as well.”

By next year New York City plans to rely on Canadian imports of hydro, nuclear and solar power for as much as a fifth of its electricity. This is assuming the Champlain-Hudson high voltage transmission line goes into service by then. New York’s Independent System Operator has warned of a power shortfall to the Big Apple by 2033, and by next year if Champlain-Hudson isn’t operating.

If the lights flicker in New York because of their left-wing energy policies, the White House won’t be too bothered.

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

Energy Mutual Fund Energy ETF

 

 

Why The Navy Can’t Help With Nuclear

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Last week I gave a lunchtime presentation to a local investment club organized by Elliot Miller, a friend and long-time investor in midstream energy. Afterwards one of the participants came up to me and, disclosing that he used to work as a nuclear physicist, asked me what I thought of the prospects for Small Modular Reactors (SMRs).

We recently received similar questions in response to a video (watch Why Not Nuclear?). Given my interlocutor’s background, I thought his opinion of SMRs was more relevant than mine, so I turned the question back to him. He was hopeful but not optimistic. SMRs have offered promise for many years. They could power some of the many data centers that are being built. Modular construction has lowered costs in many areas. Venture Global (VG), the LNG exporter that recently IPOd, has shown that modular construction of LNG export terminals can cut costs and construction time in half.

VG’s public flotation was a bust for investors, with the stock soon losing 40% of its initial value. But few dispute that the company has demonstrated excellence in construction.

I’ve sometimes mused that the US Navy, with 99 SMRs powering aircraft carriers and submarines, might have something to teach the civilian sector on the topic. This is not an original thought, and I learned some of the key reasons why it won’t work.

One is that military vessels use highly enriched uranium, as much as 70%. This is far above the levels deployed in civilian reactors and presents the risk of theft by terrorists. It’s covered under nuclear non-proliferation agreements, and there are no civilian reactors anywhere (apparently not even in China) that use this.

Trying to steal weapons grade uranium from an aircraft carrier or submarine would likely be brief and fatal.

There are other challenges. Military SMRs aren’t designed with cost per Megawatt Hour as a major consideration. They also operate under different regulations than the civilian nuclear sector. And they often use proprietary technology. It seems it’s impractical to copy what the US Navy has done.

Returning to VG – we continue to research the stock but haven’t yet invested. As we’ve noted previously, VG upset some of the world’s biggest LNG buyers. Their interpretation of “fully commissioned”, the point at which an LNG export terminal is ready to begin shipments under long term agreements, was different than buyers including Shell, BP, Galp and Repsol (see Nothing Ventured, Nothing Gained).

Arguing that some remaining project elements were not yet resolved, VG sold LNG shipments themselves at the high global prices that followed Russia’s invasion of Ukraine. Their long term contract partners felt those shipments, along with the outsized profits, should have gone to them. The case is now in arbitration. It may cost VG up to $5BN. But they reaped $BNs in profits which they plowed into added capacity.

Perhaps worse than the potential settlement is the reputational hit. There’s aren’t hundreds of LNG buyers out there, and they know each other. Future contract negotiations are likely to eliminate the ambiguity VG relied upon. TotalEnergies CEO Patrick Pouyanné recently said they rejected overtures from VG due to a lack of trust. Pouyanné added, “I don’t want to be in the middle of a dispute with my friends, with Shell and BP.”

Unlike Cheniere, which is the leading LNG exporter with half of US volume, VG doesn’t plan to rely heavily on long term contracts. Cheniere enjoys good cash flow visibility since 90% of its capacity is committed, which eliminates most of their exposure to gas prices. By contrast, VG plans to retain 50% of their capacity for resale in the spot market.

This is similar to Charif Souki’s strategy with Tellurian. If you believe a wide spread will persist between US prices and those in Europe/Asia, it can be attractive to retain this risk. However, Tellurian found it hard to obtain financing, because commodity price exposure can run in both directions. Higher US prices could eliminate the arbitrage, leaving an LNG business reliant on the spot market stranded with no customers.

As it became clear Tellurian couldn’t line up the financing to proceed, Souki memorably confessed in a video that he’d made a big mistake. He was soon forced out and the company was acquired by Australia’s Woodside Energy last year for $900 million.

VG has implemented Souki’s strategy with more success, albeit at the cost of relationships. Perhaps keeping more spot market exposure fits with a more limited set of potential long term customers anyway. Souki must be watching enviously, perhaps claiming insight as the architect of that strategy if not the successful practitioner.

VG remains an interesting stock but with high volatility given their history and embrace of gas price movements. We’ll be watching them closely.

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

Energy Mutual Fund Energy ETF

 

 

What Energy Transition?

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SL Advisors Talks Markets
What Energy Transition?
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Daniel Yergin is right to call it the Energy Addition. In an essay in Foreign Affairs called The Troubled Energy Transition, he notes that since 1990 hydrocarbons have dropped from 85% of primary energy to around 80% today. That can hardly be called a transition. Since 2000 global energy consumption has increased from 397 Exajoules (EJs) to 620 EJs.

Renewables, including hydropower, have met only 27% of this increase. They’ve gone from a 7% to 15% share, but Greenhouse Gas Emissions (GHGs) have gone from 24 to 35 Gigatonnes.

Climate extremists will argue that without the growth in solar and wind it might have been worse, but the numbers show that the strategy of relying fully on these intermittent sources has been a huge failure. And yet renewables promoters continue to assert that solar and wind are the cheapest form of power generation.

The Biden administration sought a 50% market share for EVs by 2030. It’s currently stuck at 10% and no longer an objective of the Federal government. Every EV owner I know keeps a second car for long journeys. This is hardly a transportation strategy for the masses.

Offshore windpower targeted at 30 Gigawatts by 2030 will be missed by at least half.

As Yergin points out, past energy transitions have never seen the displacement of the old by the new (ie wood for coal). The developing world’s six billion citizens want to use more energy. They’re not going to readily swap coal for wind turbines, and the $TNs in subsidies necessary from rich countries to pay for this aren’t forthcoming.

Promises of abundant cheap renewable energy with well-paid union jobs were an empty promise. Perhaps Biden’s dementia was already affecting his judgment when he spoke those words.

Critics argue that prolonging the use of natural gas risks embedding its use and GHG emissions in our energy systems for decades to come. Bill Gates made this flawed argument in his otherwise thoughtful book, How to Avoid a Climate Disaster: The Solutions We Have and the Breakthroughs We Need.

But to reject natural gas is to embrace the fantasy that solar and wind will fully replace them. This has led to an enormous misallocation of resources and subsidies to promote energy sources simply inadequate to the task.

Instead developing countries should be encouraged to prioritize gas, which emits around half the GHGs as coal and is a ready substitute for power generation, heating, cooking and many industrial uses. Emissions will fall, which under current policies they’re not.

There are encouraging signs that commercial choices around the world are pre-empting enlightened policymaking by already moving in this direction. Forecasts for exports of Liquefied Natural Gas (LNG) continue higher. This is aided in part by Trump’s sensible removal of the LNG export pause imposed by Joe Biden in a desperate move to excite progressives about his re-election. The US is leading The Natural Gas Energy Transition.

The US and Qatar are planning increased LNG export capacity. Russia may even manage to export more following peace with Ukraine, although surely the Europeans will have the good sense to shun such a fickle supplier.

What receives less attention is the growth in import terminals to receive LNG. Natural gas is liquefied to 1/600th of its volume before being loaded onto an LNG tanker. At the other end a regassification terminal restores it to its gaseous form for use by customers.

There are often articles projecting a surplus of LNG in years to come, warning that export terminals will struggle to use all that capacity. Less is written about regassification capacity, which is on track to be twice as big. In other words, if every LNG export terminal projected to be operational by 2030 runs at 100% capacity, only half the regassification availability would be needed. It seems more likely that future LNG exports may yet be inadequate to the demand.

For example, India’s LNG imports from the US reached another all time high last year.

The US has reduced emissions by over 15% in the past fifteen years, mostly by coal to gas switching for power generation. The growth in LNG exports will at least keep emissions below where they would otherwise be and may even reduce them if developing countries take advantage of the opportunity to reduce coal use.

In a few years once Energy Secretary Chris Wright gets his hands on the numbers, don’t be shocked to see President Trump lay claim to being the most consequential climate change president in history. Progressives will be left in stupified silence by such a claim, but it’ll be based on promoting what works, which is natural gas.

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

Energy Mutual Fund Energy ETF

 

The Receding Energy Crisis

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The Receding Energy Crisis
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Suppose for a moment that the Sierra Club was a political party, with candidates running and elected officials in government. They might look like Germany’s Green Party, which has drawn support from idealistic German voters since the 1980s. They are politically left, view everything through the narrow prism of environmentalism and have a history of pacifism although in recent years have become less so.

In other words, they promote wholly impractical solutions to the big problems of today. For Germans worried about economic growth, cheaper energy and national security, the Greens have little useful to say.

In 2011 the Greens’ fervent desire to shut down all nuclear power became a reality when Chancellor Angela Merkel led the Bundestag to do just that, forming the cornerstone of the world’s dumbest set of energy policies.

In this weekend’s election their share of the vote slipped by 3.1% to 11.6% compared with 2021. Few other countries are so burdened (see Germany’s Costly Climate Leadership).

European energy companies have adopted more aggressive renewables targets than their US counterparts, which has hurt operating performance and caused their stock prices to lag. BP recently abandoned their target to increase renewables generation 20X by 2030. Despite the claims by many environmental extremists that solar and wind are cheap, profits are elusive in this area and electricity prices where renewables dominate are high.

The only energy transition of any consequence in the US is the one from coal to gas (see The Natural Gas Energy Transition). One of my favorite charts shows the increase in energy output from natural gas consistently running 8X higher than renewables over the past couple of decades.

Many commentators are distracted by % growth rates which always appear impressive from a low starting point, creating the impression of dramatic change. They mistakenly think the country is rapidly shifting to solar and wind, which wasn’t happening even before the election.

Wood Mackenzie offers an interesting perspective on the drivers of natural gas demand in different regions of the world. In the US its reliability in power generation is seen as key to developing the most sophisticated AI models. Data centers are wholly avoiding weather-dependent power, which is useless to them and prohibitively expensive with or without costly back-up for when it’s dunkelflaute (German for calm and cloudy).

In Europe, Wood Mackenzie finds gas-fired power is gaining support to compensate for renewables’ intermittency and seasonal needs. This is where the world’s most expensive power is found. In this blog post, Robert Bryce listens to a London cab driver complaining that his energy bill has more than tripled in four years. The UK is “hurtling toward net-zero oblivion.”

Wood Mackenzie adds that in SE Asia gas is a vital source of baseload power to reduce their reliance on coal, which pollutes and generates as much as 2X the greenhouse gas emissions as natural gas. The US can help lower emissions with LNG exports that displace coal, allowing the region to emulate our success in cutting CO2.

Chris Wright, our new energy secretary and former CEO of Liberty Energy, has a view that’s shared by vast numbers of voters. Human-induced rising CO2 levels are real. But it’s just one of several major global challenges including energy poverty, malnutrition and endemic diseases. In spite of billions of words spilled in the media, our lives haven’t been much affected. It’s hard to maintain a permanent crisis that lasts for generations.

The International Energy Agency (IEA) has morphed into a cheerleader for renewables in recent years. Their annual forecasts omit the most plausible scenarios in favor of absurdly unrealistic ones. Perhaps in response to criticism, the IEA is contemplating restoring the Current Policies Scenario in their next publication. This is the only one remotely worth consideration and restoring it may bring back an element of credibility.

EVs are undergoing a reality check. German automaker Porsche is spending over $800 million this year on traditional engines and hybrids as their EV sales continue to plummet. The most successful EV market is China where a new EV costs under $10K. This seems the right approach. At that price in the US range anxiety wouldn’t matter because households could make 95% of their trips on an overnight charge and still keep a regular car for longer journeys.

The rollout of US charging stations under the Inflation Reduction Act NEVI program has been painfully slow. Politico Energy reports that only 56 new stations were added last year, and now the Administration has ordered states to pause any such spending. With the outlook for EVs uncertain, I can’t see the point in buying much more than the road-worthy golf carts that glide around places like Naples, FL.

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

Energy Mutual Fund Energy ETF

 

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