The Long Term LNG Outlook Keeps Improving

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The Long Term LNG Outlook Keeps Improving
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LNG export terminals usually have the ability to export more than their nameplate capacity. This is how we exported a record 18.8 Billion Cubic Feet Per Day (BCF/D) of natural gas in March, compared with FERC’s estimated sustainable limit of 14.6-15 BCF/D.

Venture Global’s (VG) Plaquemines facility was the strongest at exceeding stated capacity. Cheniere’s Sabine Pass and Corpus Christi terminals were also above. This allowed both companies to take advantage of the spike in European LNG prices caused by the disruption of flows through the Strait of Hormuz.

VG expects more long term tightness in the LNG market over the long run (i.e. past 2030). Cheniere sees the need for increased supply but has a more cautious outlook. Reflecting these different opinions, VG keeps 30% or so of its liquefaction capacity uncommitted, which looks good at times like this. Cheniere keeps less than 5%. VG has more volatile earnings and stock price but expects to generate higher returns per unit of capacity than their rival.

Consequently, as the European TTF benchmark dipped last week, VG pulled back sharply and disproportionately in response to the move in spot prices. It creates trading opportunities for those so inclined.

The longer term outlook for these two companies and global LNG demand in general remains strong. The EU is extraordinarily naive in their energy strategy. For years Germany has relentlessly promoted solar and wind. Under former Chancellor Angela Merkel, they decided to shut down their nuclear reactors in 2011, with the last unit closing in 2023.

Germany’s Economy Minister recently called for a rethink.

The EU has long insisted that natural gas consumption was temporary, to be phased out as part of their climate change goals. This prevented them from signing long-term contracts. Morgan Stanley says their last Qatari LNG cargo will be received on April 13th, after which they will lose 9% of their supply. They see European LNG prices reaching €90 per MWh by the fall, which would be up 80% from current levels and triple their pre-war price.

The bloc produces 43% of its primary energy consumption, because renewables are too expensive and inadequate to meet their needs. They are the most successful at de-carbonizing their economy, but at an enormous cost in output and energy security.

With imports from the Persian Gulf disrupted, the EU Energy Commissioner is warning that fuel rationing may be necessary. Having depended on the US for a credible defense against Russian aggression for decades, they don’t have the military capability to unblock the Strait of Hormuz and free up their energy imports.

President Trump’s flip comment that Europe should come and get its own oil is, as usual, outside the norms of discourse among national leaders but nonetheless highlights the EU’s strategic weakness.

VG, Cheniere and NextDecade (NEXT) are among the beneficiaries. VG CEO Mike Sabel is, “…tremendously optimistic about the middle- and long-term strength of the market.”

Cheniere has long argued that U.S. LNG is a reliable, flexible supplier that will benefit from any supply disruptions.

Other than the LNG exporters, midstream management teams have generally been quiet about how the Iran war is boosting their bottom-lines. US propane exports are running at 1.9 Million Barrels per Day (MMB/D), up a modest 3.8% year-on-year. Enterprise Products Partners and Energy Transfer, who do most of this business, have said little publicly since the war began.

Neither natural gas nor propane prices in the US are showing any response to tightening supplies globally, reflecting the regional nature of these markets and the difficulty of sharply increasing exports over the short run. Energy executives are probably happy to avoid headlines with gasoline prices ratcheting higher. The President’s TV speech on Wednesday did little to calm markets, and Iran continues to show resilience in its ability to hit back.

The Economist and the Financial Times, two publications I have enjoyed for decades, recently examined the effect of US tariffs a year after their implementation and arrived at opposite conclusions. This need not be surprising, except that both use manufacturing data to support their view.

The Economist (see “Liberation Year” has not freed American factories) notes that the US has shed 100K manufacturing jobs since Trump took office, even though the point was to boost domestic production. By contrast, the Financial Times (see The case for Trump’s tariffs looks strong a year on from ‘liberation day’) highlights that industrial production is +1.6% over the past year following decades of decline. They see a resurgence in manufacturing employment, pointing out that manufacturing jobs shrank by 93K since tariffs took place eleven months ago, compared with 167K over the eleven months prior.

Purchasing manager surveys show “increasing optimism” according to the FT, while the Economist finds the same survey, “…suggests that the sector spent most of 2025 in recession.”

Both articles overlook the biggest impact of tariffs, which was to impose a consumption tax on imported goods. This boosted customs duties by $185BN last year versus 2024. Given our fiscal outlook, such prudence is welcome if uncharacteristic. Moreover, Trump hails the extra revenue as sourced from foreigners while both the New York Federal Reserve and the Congressional Budget Office both find the burden overwhelmingly falls on US consumers.

A populist president has imposed a highly regressive tax that is paid disproportionately by low and middle income Americans and is barely noticed by the 1% (at least among those I know living in Naples, FL).

That he has pulled this off while maintaining his populist credentials is quite a feat.

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

Energy Mutual Fund Energy ETF

 

LNG Investors Contemplate The Long Run

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The disruption of Liquefied Natural Gas (LNG) exports from Qatar has a short term and long term consequence. As spot benchmark prices rose in Europe and Asia, traders focused on the near-term profit opportunity. LNG export terminals contract most of their capacity for long periods (10-20 years) to reduce their exposure to gas prices. Of the two major exporters, Cheniere is more conservative than Venture Global (VG). Cheniere has pre-sold 95% of their capacity through 2035.

VG has greater risk tolerance, with around 30-35% of their 2026 capacity not yet committed. Some spare capacity might be needed if unexpected downtime impacts facilities that are already committed. But VG is comfortable taking the spot market risk, for times like this when there is a major disruption.

VG was similarly positioned in 2022 when European gas supplies from Russia were cut. Some buyers claimed breach of contract and pursued arbitration cases against VG. So far, the outcomes have been mixed (see Nothing Ventured, Nothing Gained).

On Friday VG announced a settlement with Italian LNG importer Edison over the latter’s claim in arbitration. As more of these cases are resolved, the worst case outcome that worried many analysts is receding.

During the first couple of weeks of the war, markets focused on this short term opportunity. The spread between the US natural gas price and foreign benchmarks widened by 50%, creating a substantial profit opportunity for the two leading LNG exporters. Buyers like India whose shipments have been canceled by Qatar’s declaration of force majeure have to scramble to source alternative supplies.

On Friday Qatar extended the force majeure declaration to June.

Little thought was initially given to the longer term impact on Qatar as a supplier of LNG. The Iran War will end sooner or later. Qatar’s Ras Laffan LNG export terminal will start up again, albeit at 83% of capacity while repairs are made. The Strait of Hormuz will open for commercial shipping. But Iran will retain the ability to close it, or to once more target regional energy infrastructure. Those buyers who have long term contracts with Qatar must now consider the possibility of another disruption in the future.

For the first couple of weeks of the war, Cheniere and VG rallied, but NextDecade (NEXT) appreciated only modestly. Investors assessed the windfall gains from selling into an elevated spot market. VG will benefit more because they have greater available capacity. NEXT won’t start shipping LNG until next year, so has little if anything to gain from today’s high prices in Asia and Europe.

Around March 17, NEXT began to appreciate. Cheniere and VG went up further. This showed that LNG investors were looking beyond the next year and pricing in a benefit from US exporters offering buyers a more reliable supply source than Qatar.

Early last week, global benchmarks slipped, but VG continued higher while Cheniere and NEXT held their gains. This further showed that the market is beginning to price in the long-term challenges facing Qatar. Later in the week as the news showed prospects for a ceasefire receding, LNG benchmarks and US exporters rose together.

The news that the US expects the war to last another 2-4 weeks further delays the reopening of the Strait of Hormuz to energy shipments. Nobody knows when Qatar will restart LNG shipments, further benefitting US exporters.

Although LNG names have been the strongest performers in recent weeks, they’re not the only midstream names to benefit from the Iran War. Supplies of propane to Asia have been curtailed, which has hurt India more than any other country since a large portion of the population relies on it for cooking and heating. Enterprise Products Partners and Energy Transfer dominate US propane exports. Export capacity is constrained as for LNG, but they’re still able to profit from higher arbitrage margins. Targa Resources has similar exposure.

It’s also worth remembering that many pipelines operate under contracts governed by the Federal Energy Regulatory Commission (FERC) which link price increases to PPI. On Thursday, the IMF forecast US inflation would reach 4.2% this year. JPMorgan sees CPI peaking at 3.6% during 2Q26, dropping to 3.4% by the end of the year. Such forecasts rely on predicting crude oil prices, not easy at the best of times.

The inflation link to pipelines is another example of how an allocation to midstream can act as a powerful diversifier. If inflation remains elevated, most other sectors of the equity market will be under pressure.

US midstream energy infrastructure offers one of the few bright spots in equity markets.

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

Energy Mutual Fund Energy ETF

 

 

Higher For Longer

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Trump 1.0 was not kind to energy investors. Although the sector welcomed his pro-energy regulatory approach, it came with a desire for low oil prices. Covid was the final straw as lockdowns forced everyone to stay at home, crushing oil demand and briefly sending crude prices negative. The American Energy Infrastructure Index (AEITR) delivered –6.2% pa during his first term in office.

Joe Biden’s administration was great for energy, much to the chagrin of his supporters. His hostility to fossil fuels tempered capex, boosting cashflows. We paid for it with uncontrolled illegal immigration and a president suffering cognitive deterioration, but +33.8% pa during Biden’s term offered at least some compensation.

Trump 2.0 is looking more promising. Following a mediocre 2025 midstream started the year strongly, and the Iran war has improved the position of US energy exporters. It probably wasn’t his intention, but the effective closure of the Strait of Hormuz along with attacks on regional energy infrastructure are boosting profits for the sector and rendering Qatar an unreliable exporter of LNG. So far Trump 2.0 has seen a 26.0% pa return on the AEITR.

Analysts have been worrying about oversupply in the LNG market as more liquefaction capacity grows. We have never felt this was a big risk, because the export facilities are backed by long term (ie 20+ years) contracts. If there is oversupply, it would hurt the LNG buyers, such as TotalEnergies or Trafigura.

Qatar’s Ras Laffan LNG facility suffered “extensive damage” following an Iranian missile attack on Wednesday. They had stopped operations two weeks ago due to a drone strike. Restarting takes several weeks and is unlikely before the shooting stops. Expansion plans have been pushed back and nobody knows what the revised plan will look like.

In January Morgan Stanley published On the Crest of a Supply Wave in which they argued that there was too much new LNG coming online. By 2030 Qatar was expected to add 54 Million Tonnes per Annum (MTPA) of LNG exports, second only to the US at 129. Morgan Stanley calculated this would leave a supply overhang of 25 MTPA with demand at 560 and supply at 585.

Forecasts like these have been scrambled by the Iran War. Qatar’s ultimate capacity additions and the world’s appetite to sign additional contracts with a country permanently within Iranian missile and drone range are unlikely to be as robust as before.

On Thursday Morgan Stanley issued Multi-Year Tightening, revising their bearish January outlook.  They no longer see any excess supply through at least 2028 and see further upside risk to the non-US benchmarks. Missile strikes damaged two of the 14 trains at Ras Laffan, “…tightening the global market not just for 2026, but also the next several years.”

QatarEnergy announced that they had lost 17% of the facility’s output and repairs would take three to five years.

Global LNG prices rallied further last week, as did US LNG stocks. The widening spread between US natural gas and foreign benchmarks in Europe and Asia has increased the opportunity for US LNG exporters to profit. Cheniere, Venture Global and NextDecade are worth more because of recent events, and the global LNG market has changed in a fundamental way.

The mainstream media is focused on oil, although as described above global natural gas prices have moved further. Propane, which in the US is used for backyard BBQs and crop drying, has rallied 20%, almost double the increase in natural gas. Bloomberg incorrectly said that propane is derived from natural gas (methane), suggesting this link was responsible for the jump. It is not.

Propane is often found in the same place as natural gas but isn’t produced from it. In the rest of the world, propane is refined from crude oil. The closure of the Strait of Hormuz is making US propane more attractive. Like natural gas exports, propane requires specialized terminals, and so while operators can temporarily run at more than 100% of nameplate capacity, meaningful increases require more infrastructure.

Enterprise Products and Energy Transfer are the two companies most involved in propane exports. They already have expansion projects underway.

Exports are running at about 1.9 Million Barrels per Day (MMB/D), although have at times exceeded 2 MMB/D.

The US is by far the biggest exporter of propane, with small amounts coming from the Persian Gulf which are presumably shut in like crude oil at the moment. China and India are the two biggest importers, where it’s widely used for cooking where retail distribution of natural gas doesn’t exist.

Our propane exports are 60-65% of domestic production, far higher than is the case for natural gas, which explains why domestic propane prices have risen more sharply.

Farmers and outdoor chefs are paying the price, along with homeowners in southwest Florida where the natural gas supply is limited, so we rely on propane for cooking and heating swimming pools.

The outlook for US energy exporters looks encouraging.

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

Energy Mutual Fund Energy ETF

 

Not Yet A Crisis

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It’s not easy to make the Persian Gulf safe for commercial shipping. On Wednesday a Thai vessel was hit by three “unidentified projectiles” near the Strait of Hormuz and caught fire. Several other vessels were hit towards the end of the week. In total 22 civilian ships have been hit in the Persian Gulf since the start of the war.

Iran has also had some success targeting US military and diplomatic assets. The NYTimes calculated 17 such attacks, including on the US Navy’s Fifth Fleet headquarters in Manama, Bahrain. The Pentagon estimated the cost of damage in Bahrain alone at $200million.

The US is running out of military targets to hit in Iran, and drone strikes are reportedly down 90% from the peak. But they’ll need to be almost completely eliminated in order for commercial ships to feel safe resuming transit. Drones are especially hard to intercept when traveling relatively short distances such as from the Iranian Persian Gulf coast to ships or infrastructure on the other side. They can often reach their targets within minutes, allowing little time for defenders to react.

Tactics are changing rapidly. Ukraine has teams in the region advising Gulf states on how to stop the Iranian Shaheed drones, variations of which Russia has been using. Maritime traffic around Yemen has still not recovered to its 2023 levels, when Houthi rebels began targeting ships. Suez canal traffic is down 60% over this time.

In recent days shipping activity has dropped again, reflecting fears of resumed Houthi rebel attacks. Shipowners are protective of their assets and crews, with little tolerance for operating in war zones.

Crude oil prices sank following Monday’s wild market but edged up later in the week. But adjusted for inflation, they are below the average of the past quarter century, and still well below the levels hit in 2022. Energy analyst John Kemp argues that this reflects complacency among many market participants about how long the disruption will last. He points to May 2027 oil futures which have risen by $15, less than half the increase in May 2026 futures.

Global LNG prices remain elevated. Qatar’s closure of its LNG liquefaction facility in Ras Laffan almost two weeks ago caught European and Asian importers exposed. Even though LNG trade is still only 14% of global consumption, replacing those canceled cargoes is hard.

Cheniere and Venture Global (VG) are among those best positioned to profit from higher European and Asian prices, by using uncommitted liquefaction capacity to sell cheap US gas themselves. VG has outperformed Cheniere because they tend to retain more spare capacity to use opportunistically. Cheniere prefers the stability of visible cashflows. 95% of their liquefaction capacity is committed through 2035.

Long term supply contracts are common in the LNG business, but Europe has continued to use them less than others because of their conviction that they won’t need gas in ten or twenty years. By relying on spot market purchases they’ve left themselves more exposed to disruption, which is why the European TTF benchmark has remained above Asian JKM since hostilities began. European energy policies are confused and dysfunctional.

Venture Global (VG) confirmed that LNG deliveries from its Plaquemines export plant under development in Louisiana will begin on October 31, as promised. The significance of this announcement is that four years ago they delayed deliveries when Russia invaded Ukraine, taking advantage of the spike in global prices to earn a windfall estimated at $3.5BN. Arbitration claims followed, with mixed results so far. But it seems VG wants to improve its reputation as a trustworthy supplier.

The effects of the war are rippling across the global economy. TotalEnergies announced their output is down 15%. China’s refiner Sinopec is cutting refining runs by more than 10%. Malaysia may suspend some flights. Gasoline prices are creeping up everywhere.

We continue to think the asymmetric war Iran is waging isn’t yet fully appreciated by markets. We are not yet in an energy crisis. Qatar has not announced when they expect to resume LNG shipments – until the drone attacks stop, they can’t. We think ship owners will need some convincing that the Persian Gulf is safe before anything like normal trade can resume. The US gas business, especially exporters, is in a good position.

Last week, the CFA Naples was privileged to feature Jim Murchie at a Lunch and Learn session. Jim runs Energy Income Partners and knows more about electricity markets than anyone I’ve talked to. He gave a fascinating presentation on the topic. I was the moderator, but my job was really just to let Jim talk because he has so many insights to share.

If you’d like to gain more understanding of electricity, including the real reason prices are rising, read his two informative papers which are here.

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

Energy Mutual Fund Energy ETF

 

 

The Long Term Bullish LNG Story

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The negative correlation between energy and the stock market that we highlighted last Sunday (see AI Moves The Energy Sector) continued last week, unsurprisingly given the news. We had thought global natural gas markets were more vulnerable than crude oil to conflict, and this turned out to be true.

Qatar represents only 20% of global LNG trade and less than 3% of global gas consumption. So the closure on Monday of the Ras Lafan export complex, the world’s biggest LNG export facility, following an Iranian drone attack might have struck some as having only a minor impact on global supply.

Nonetheless, by Tuesday the Asian JKM benchmark had jumped 47%. The European TTF doubled before slipping to close +58% for the week. The US Henry Hub benchmark rose 2%, reflecting that there was limited extra gas that could quickly move from North America.

Our liquefaction capacity is around 15-17 Billion Cubic Feet per Day (NCF/D). It’s rising and will likely reach 30 BCF/D by 2030, but it’s not a spigot.

Russia has helpfully suggested it might cut pipeline gas supplies to Europe, home of the world’s dumbest energy policies. Its Europe-bound LNG tankers appear to be rerouting around southern Africa and avoiding the Suez Canal after a tanker was sunk in the Mediterranean. Russia blamed a Ukrainian maritime drone.

The spike in global LNG prices shows that even though Qatar supplies a small portion of total demand, replacing it isn’t easy. It’s expected to be several weeks before liquefaction restarts at Qatar’s Ras Lafan.

Most US liquefaction capacity is contracted out, but Venture Global (VG) retains more spot market risk than most, and investors quickly priced in a windfall gain for the company in selling that spare capacity at high prices.

Iran’s missile capability is already being neutralized. But drones are a different matter, offering an asymmetric means of combat as we’ve seen in Ukraine over the past four years. Drones are cheap and can be launched from a small area. While militarily they don’t represent much of a threat to US forces, Iran could deploy them in a form of guerilla warfare from near the Persian Gulf.

Identifying and destroying the drone manufacturing and storage facilities in Iran will be challenging. We think investors may be underestimating how long it will take for shipping to return to the Persian Gulf. Commercial maritime insurance rates rose from 0.25% of the value of a ship to 3%, a 12X increase.

Charter rates for Very Large Crude Carriers have more than doubled. Energy supplies from the region may be impeded for some time.

If a sustained period of high oil prices causes a big drop in the market – say, 10% or more – that will likely lead to a truce, since the White House uses the S&P500 as a report card more than past administrations.

VG and Cheniere both rallied on the expectation of profiting from the near term price spike in natural gas. But there’s a long-run bullish story here too. The force majeure declared by Qatar on its LNG exports highlights that it’s in a dangerous neighborhood. LNG contracts are 10-20 years. You can imagine VG adding a map of the Persian Gulf to its marketing materials. How sure can an Asian buyer be that Qatar’s supplies over two decades will be unimpeded by regional conflict? No similar risk exists for US shipments.

JPMorgan published their 16th Annual Energy Paper last week. Mike Cembalest, Chairman of Market and Investment Strategy for JP Morgan Asset Management, does fantastic work and his latest piece is no exception. Cembalest casts a wide net and does note the looming overcapacity in the LNG market. This is a common concern of investors. Energy Transfer halted their Lake Charles LNG project in part because of this, although rising construction costs were also a concern.

Regassification capacity (i.e. imports) is growing too, although the chart shows liquefaction (export capacity) growing faster over the next few years. US exporters such as VG and Cheniere contract out capacity via Sale/Purchase Agreements (SPAs) for 10-20 years, so if LNG prices do fall due to oversupply, the SPA counterparties are the ones with exposure. Just last week Trafigura signed a five year deal with VG. The loss of Qatar’s LNG shipments is an additional long term benefit to US and Australian exporters.

We think the over-capacity fear is overdone.

Naples, FL draws a lot of visitors this time of year. It was my good fortune to have dinner recently with Jamie Schade from Miamisburg, OH, along with his good friends Phil Voelker and Les Berthy. A fascinating conversation covered the outlook for energy markets and LNG but also allowed time for market anecdotes since we’re all in finance.

Jamie has been a long-time investor in midstream, including for one client who has a cost basis around a seventh of current levels (he invested during the pandemic in 2020). Jamie’s clients have been well served by his sustained interest in, and exposure to, the sector.

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

Energy Mutual Fund Energy ETF

 

AI Moves The Energy Sector

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Forty years ago, when I was trading eurodollar interest rate futures, it was routine to respond to a sudden unexplained move in the market by calling the floor of the CME and talking to our broker. Caught up in the excitement of the loud heaving mass of brokers and locals in the pit*, he would breathlessly explain that, “Refco came in to sell 10,000 and Goldman followed with 15 after that. Cargill pulled their bid and it was all offered.”

This nugget of market intelligence was somehow intended to help guide me as I managed our interest rate risk. The broker was telling me what happened but had no idea why. This market color was almost completely useless, but somehow the broker and I felt that we were better off sharing the information.

Sometimes it feels like that when explaining moves in the energy sector. Prices fluctuate, and often out of all proportion to developments. There can be days with little news of importance, and yet pipeline stocks react as if there was.

Last week was one of those times. We recently highlighted the low correlation between energy and the overall market (see Midstream Dances To A Different Tune). There’s a great AI story for midstream since data centers will rely principally on natural gas to generate power. But it’s still a value sector, and the emotional turbulence of growth investors remains dominant.

The low correlation between energy and the market means their daily moves are less in sync. February showed this dramatically: midstream and the S&P500 moved in the same direction on fewer than half the days of the month. In other words, a bad AI day was more likely than not a good day for midstream.

Over the past decade, changes in the American Energy Infrastructure Index (AEITR) have matched the market’s daily direction over two thirds of the time. Last month it was only 37%, 7 out of 19 trading days. It’s as if when AI stocks are down traders rush for the security of midstream with its stable cash flows. When AI stocks are up they dump these slow moving cash machines. I doubt such manic behavior is very satisfying or profitable.

The driver of returns in energy lies outside the sector.

Midstream wasn’t completely the marionette to the AI puppeteer. Cheniere reported strong earnings, repurchasing $1BN in stock during 4Q25, more than expected, making it $2.7BN for the year. They also announced authorization for $10BN more in repurchases through 2030.

Cheniere expects Asian LNG demand to grow at 12-15% through 2030, which would take it from 270 Million Metric Tonnes (MMTs) to 400. Global LNG trade last year was around 430 MMTs.

Nonetheless, we think Cheniere’s buyback program suggests their capex plans may slow somewhat, a development welcomed by investors concerned about excess capacity among LNG exporters in the years ahead. Cheniere rose over 5% on Thursday following their earnings release and conference call.

Kinetik (KNTK) is an acquisition target of Western Gas (WES), and the interest has prompted KNTK to explore a sale process, inviting other companies to make proposals. The stock has rallied 14% since the news of WES’ interest first broke.

The American Energy Infrastructure Index (AEITR) is +20% YTD and the S&P500 is flat, approximately reversing last year’s relative performance (+2% and +18% respectively).

Regular readers know we often refer to the American Energy Independence Index. We started publishing it in 2017 because we recognized that the market was missing a truly representative index for midstream energy infrastructure, one that wasn’t dominated by Master Limited Partnerships (MLPs) but also didn’t omit them entirely.

The AI revolution is boosting the demand for natural gas to generate power, benefiting those midstream companies that focus on gas. America’s shale revolution is also creating more opportunities to export Liquefied Natural Gas (LNG). The large price difference between the US and overseas markets is driving a substantial increase in US liquefaction capacity to meet foreign demand.

These two trends are more beneficial to midstream gas companies than those focused on oil, and investors are recognizing the opportunity to benefit from these twin growth stories. Therefore, we have modified the AEITR to become the American Energy Infrastructure Index, with an overweight towards names that we believe will benefit from increased gas consumption for power and LNG exports. The ETF that seeks to track this index will similarly rebalance at the end of the first quarter.

We are long term bulls on US natural gas consumption. Our index and our investments are aligned with this outlook.

*for those too young to remember, the Chicago futures exchanges were once cavernous rooms with several “pits”, consisting of ledges arranged in an octagon that descended in steps towards the center. Brokers were arranged around the periphery where they could easily see and communicate with their colleagues on the phone with clients, and locals (independent market makers) were within although the best spots were near the brokers executing the biggest volume. In this tightly packed environment, physical heft offered a commercial advantage. It’s now all computerized and impersonal.

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

Energy Mutual Fund Energy ETF

 

Midstream Dances To A Different Tune

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The performance of midstream last year didn’t align with the fundamentals. This is clear when you consider the periods either side (2024 and 2026YTD). Last year, the sector lagged and many investors became frustrated with the underperformance versus the S&P500, which really means versus the big AI hyperscalers.

In 2024 midstream investors grasped the need of data centers for more power, and how this would inevitably lead to increased natural gas demand since it’s cheap, reliable and abundant in the US.

Companies such as Williams (WMB) developed Behind The Meter (BTM) solutions under which a dedicated gas supply feeds a power plant that provides electricity to the data center. This avoids connecting through the grid and potentially driving up prices for all consumers, an issue that’s drawn much unwelcome attention recently.

Oddly, this positive sentiment didn’t persist into 2025 in spite of the AI story leading the overall market higher. Data centers still needed power and the role of gas-oriented midstream companies such as Energy Transfer (ET) and Kinder Morgan (KMI) in providing BTM solutions.

Not that many years ago, the big IT firms were sitting on enormous cash piles and faced pressure from investors to deploy or return it. The AI revolution has at least provided a use for some of that cash.

This year’s concerns about spending have caused sector rotation from growth to value. Midstream, along with energy stocks more broadly, has benefited. Over the past year or so, midstream performance has been driven by sentiment shifts leading to sector rotation more than changing fundamentals for the pipeline sector itself.

The result is that the correlation between the American Energy Infrastructure Index, representing the midstream sector, and the S&P500 has been falling over the past year, defined here using daily returns over the prior month. This year at times it’s been negative, and it’s fair to say that midstream and the stock market have no meaningful correlation.

Fundamentally, it shows that the concern about returns on AI-related capex doesn’t extend to the companies who will provide the natural gas infrastructure to power centers. Hyperscalers are expected to spend $450BN on AI capex this year. But BTM deals will typically require long term contracts that ensure an adequate return on the infrastructure, similar to the take-or-pay contracts commonly used for pipeline capacity.

It means midstream can act as a useful diversifier in a portfolio. The underlying fundamentals are strong, but in addition it’s not that exposed to the shifting sentiment among growth stock investors.

The low correlation with the market is less useful when overall returns are strong. But the tide is shifting as concerns grow about the scale of the hyperscalers’ capex plans.

Technology has been highly correlated with the S&P500, at above 0.8 for the past several months and often above 0.9. Energy along with the pipeline sector has generally not been correlated. This frustrated investors when tech stocks were hot, but it’s now turning out to be a more valuable feature.

For long term performance, the Targa Resources (TRGP) chart is quite a sight. My partner Henry and I have often debated the merits of this position. In late 2020 I flippantly called TRGP a “perennial misallocator of capital” (see Pipeline Buybacks and ESG Flexibility) as they initiated a buyback program with the stock price at $15 (Friday’s close was $231).

Former CEO Joe Bob Perkins frustrated many investors when he dismissed critics of their capex plans, saying their opportunities were really “capital blessings.”

Fortunately for our clients, Henry’s articulate defense of retaining our TRGP position was invariably convincing.

At the worst of the pandemic, TRGP lost 86% of its value from its previous high two years earlier. It subsequently rebounded to 38X that level. TRGP has developed a vertically integrated business in the Permian basin focused on natural gas and natural gas liquids (i.e. ethane and propane).

In early 2023 they acquired the remaining 25% of the Grand Prix NGL pipeline in Texas that they didn’t already own from Blackstone. Full ownership allowed them to improve their margins. Their stock is up 3.5X since then. Their quarterly dividend has grown from $0.35 to $1, although given the stock performance this still leaves it with paltry 1.8% yield.

But in recent years they’ve been buying back stock in similar amounts to their dividend payout. Last year they spent $755MM and the prior year $642MM. Distributable cash flow growth is solidly in the teens.

TRGP is quite a story.

Last week we had the opportunity to catch up with long-time friend and investor Dave Pasi and his charming wife Diane. At the risk of upsetting our friends up north, al fresco dining is thriving in Naples, FL. Dave was pushing his clients to add to their midstream positions last year, advice that looks especially good right now.

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

Energy Mutual Fund Energy ETF

 

 

Gas Production Is Our Strategic Advantage

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Gas Production Is Our Strategic Advantage
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Williams Companies’ (WMB) youthful President and CEO Chad Zamarin gave an inspiring presentation to kick of their Investor Day last week. He described US energy infrastructure as a blessing, and natural gas as our competitive advantage. Zamarin traced the company’s origins back to World War II, when German U-boats were sinking US ships transporting fuel from the Gulf to New York, imperiling the war effort.

The construction of War Emergency Pipelines was contracted by the Federal government, and within a year fuel was moving by pipeline from Texas to New York. Zamarin thinks we need a similar sense of urgency today around infrastructure. For example, their Atlantic Sunrise project went into service in 2018, but 13 years of litigation surrounding the project only finished last year.

John Williams led Williams Brothers, founded in 1908 and one of the key construction companies on the war-time project. D-Day might not have been possible without it, and naturally Williams subsequently saw combat with the D-Day landings.

After the war, Williams Brothers moved from construction to pipeline operations and became Williams Companies. Cementing his legacy as a member of the Greatest Generation, the pipeline John Williams built is still in service today, showing the long-lived nature of midstream assets when properly maintained.

In 1947, the pipeline was sold by the Federal government to Texas Eastern Transmission, now a subsidiary of Enbridge. Chad Zamarin tells the 118-year story of Williams Companies like a political candidate, and at 48 has plenty of runway ahead of him if he ultimately runs for public office. He described their financial goals as not an aspiration but a destination.

This sector needs inspirational leaders, and Zamarin can marshall solid fundamentals into a compelling vision.

Having chronicled the company’s history, Zamarin walked through the strong fundamentals underpinning the natural gas business. Powering data centers and LNG exports are the two big drivers of natural gas demand, along with resurgent US manufacturing due to cheap domestic energy. Natural gas demand is expected to rise by 35% over the next decade.

The doubling of US gas production so far this century is the most important change in the global gas market. We surpassed Russia as the biggest producer fifteen years ago and now hold a 25% market share.

Gas is cheap and energy dense, which is why we often note that the true energy transition in the US is the one towards natural gas, whose output has grown 8X as much as renewables on an energy equivalent basis since 2000. It’s by far our most important source of power generation. Following Russia’s invasion of Ukraine, the US doubled LNG exports to the EU. No other country could do that.

WMB builds energy infrastructure, and Zamarin pressed the case for permitting reform which has widespread industry support but is still short of votes in Congress. He noted that winter gas prices are significantly higher in New England than the rest of the nation, a result of regional constraints on new infrastructure that raise prices for consumers.

In the Q&A in response to a question about the importance of permitting reform, Zamarin cited gas prices in New England that reached $200 per Million BTUs, more than 50X the price in gas-producing Pennsylvania. He argued that price spikes in gas are caused by inadequate infrastructure.

China produces more than 2X the electricity as the US, up almost 10X over the past quarter century. The global AI race will turn on who has the cheapest, most accessible electricity for data centers. This makes improved access to natural gas a national security imperative.

You’d expect the CEO of a gas pipeline company to make this argument. But it’s one that’s likely to find support in Washington, and as investors, we find the tailwind of regulatory support another reason to commit capital to the sector.

Over the years we’ve found that forecasts of natural gas demand have been consistently too low. Many have lazily bought into the narrative that electricity generation from renewables undercuts traditional power, in spite of abundant evidence from Germany, the UK and California among others that when climate change dominates energy policy, consumers pay more.

The result is that gas demand forecasts keep getting revised up. They’re probably still too low. Apart from the US, the world has barely begun to displace coal with gas for power generation. This has been our biggest source of emissions reduction, and while US policy currently dismisses greenhouse gases as a problem, many other countries disagree.

As countries buy more US LNG to reduce their coal consumption and fight climate change, this White House should retain enough intellectual agility to have no problem supporting that.

The US natural gas story remains compelling, and we think WMB represents a good way to gain exposure to it.

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

Energy Mutual Fund Energy ETF

 

 

What’s Your Inflation Rate?

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What’s Your Inflation Rate?
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The other day I was chatting with a retired friend about the inflation rate he should assume when analyzing his investment portfolio and its ability to fund his retirement. The Fed’s stated inflation goal is 2%, so my friend felt that 3% was a conservative assumption.

There are several problems with using the CPI to estimate future living expenses, described in prior blog posts (see Why Keeping Up With Inflation Isn’t Enough, Why Inflation Isn’t What You Think and Economists Having Fun With Inflation).

These blog posts and others explain that inflation statistics are based on a basket of goods and services of constant utility. They strip out the quality improvements in the products and services we buy that steadily raise living standards. Simply keeping up with inflation means not participating in the improved quality of life.

Today’s median household income gives you a better standard of living than the one from a decade ago. Keeping pace with inflation isn’t enough, even though for many retirees that’s a challenging goal after taxes. Assuming your living expenses will grow in line with median household income is a better bet. Over the past quarter century, that’s 2.9%, slightly ahead of inflation at 2.7%.

Readers of this blog are not representative of the broader population. You are on average richer, smarter, older and more politically right-leaning than the rest of the country. And, in my personal experience, unfailingly good company too. You’re well above the median household income. Unfortunately, it turns out that for higher percentiles, income, and therefore you can assume consumption, is growing faster than the median.

My new toy ChatGPT suggests many adjectives for Naples, FL, where we live. I especially like sun-drenched, refined, affluent and idyllic. It is therefore a completely unrepresentative town, and retirees here face an even greater challenge in maintaining their lifestyle.

Income dispersion is increasing, and it is boosting the cost of what 95th percentile households buy faster than the median, and well ahead of the CPI.  Dining out, first class airfares, country club memberships and tickets to live concerts are all reported to be noticeably higher than a year ago. Flying private is up 28% since 2020, although not your blogger’s problem. Call it the Naples Conundrum. The higher your income percentile, the higher the inflation rate in your own consumption basket of goods and services.

The Naples Conundrum is a lighthearted way to illustrate an important consideration for anyone in retirement. You should assume that your expenses will grow faster than CPI and at least as fast as household income. You should further consider that increasing income dispersion will make it harder to stay at the same percentile.

The problem has become more acute. Inflation over the ten years to 2024 (aligning with the most recent household income data) was 2.9% versus 2.7% over the past 25 years. Median household income grew at 4.1% (versus 2.9%). But for the 95th percentile it grew at 5.3% (versus 3.7%).

The income data is from ChatGPT, but because different AI models can provide different results, I also looked at Grok which found a 4.4% ten year income growth rate for the 95th percentile of households.

On top of all this, the future retiree needs to consider what our relentless Federal fiscal profligacy means for long run inflation. As this blog regularly argues, the reliable solution to excessive debt has historically been currency debasement through higher inflation. Few would confuse President Trump with a hard money man. His views on Fed policy are well known.

With Federal interest expense over $1TN annually, lower rates could help (see Monetary Policy Is Increasing The Deficit). Higher inflation would better accommodate rates on our debt below inflation (i.e. negative real rates). It’s easy to criticize this as a misguided policy, but what’s important is to assess its likelihood and consequently the impact on inflation and investment returns.

I think 4% inflation is more likely than 2%. If the Fed began targeting stable inflation around 3%, they’d find many economists cautiously supportive.

As far as what a saver should assume for the increase in their living expenses to preserve their relative standard of living, 3% would seem to be the low end of the range. 4-5% is more appropriate.

Some might respond to this by thinking they need to generate higher returns from their portfolio, meaning take more risk. However, this would be flawed thinking. Assets don’t return more just because you need them to. A higher return requirement doesn’t alter the return set available. Adopting a riskier portfolio can also increase the probability of significant underperformance.

For some, delayed retirement and working longer may be the answer.

Alternatively, and as we’ve noted before (see Inflation Protection From Pipelines), midstream energy infrastructure with the prevalence of inflation-linked contracts is, we believe, better situated than most sectors to offer protection against higher inflation.

Think of it as the Naples Solution to the Conundrum.

Last week we had the opportunity to catch up in San Juan, Puerto Rico, with Jerry Szilagyi, owner of Catalyst Capital Advisors our mutual fund partner. We’ve been in business together for eleven years, and Jerry along with his team have been great partners. This summer they’ll be celebrating the company’s twentieth anniversary, and we’re looking forward to being there with them.

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

Energy Mutual Fund Energy ETF

 

 

Energy Is The New Market Leader

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January was a good month for midstream energy infrastructure. The American Energy Infrastructure Index was +9%, the 10th best month of the past decade and the best since November 2024. For those who like simple statistical patterns, over the past ten years the direction of January’s performance has correctly predicted the full year 70% of the time.

Put another way, annual performance and January’s are both usually up.

Energy is back in favor. The S&P500 Energy Sector (XLE) was +14% last month. Exxon Mobil (XOM) and Chevron (CVX) represent 42% of its holdings, and investors have been encouraged by rising oil production even with soft prices. Continued efficiency improvements are boosting sentiment, perhaps helped by signs that CVX can increase Venezuelan oil output without following the White House’s desire that they ramp up capex there.

XLE fund flows were consistently negative last year. Perhaps the strong start to the year will draw in buyers to upstream and midstream who like to see good price action before committing capital. Over the past twelve months it’s now beating the market.

The news for midstream was generally good in January, although to us the sparkling performance was a belated recognition of the already positive fundamentals. ChatGPT guided me to a wildly bullish article from an obscure website (see The Gilded Age of Infrastructure: Why 2026 is the Breakout Year for US Midstream and Energy).

Venture Global stood out at +43%, buoyed by a positive arbitration outcome (see Energy Leads The Market). Energy Transfer responded to the strong seasonal pattern that usually boosts MLPs. Even though Winter Storm Fern doesn’t seem to have created the type of energy market dislocations seen five years ago that netted them $2.4BN, ET held on to the gain registered in anticipation.

Last week Abu Dhabi’s state oil company ADNOC added 7.6% to its stake in Phase Two of NextDecade’s Rio Grande LNG export terminal. ADNOC acquired the stake from Global Infrastructure Partners by exercising an option they acquired back in May 2024 when they invested in Phase One.

ADNOC is presumably pleased with the progress to date.

Natural gas oriented capex plans from Kinder Morgan and Energy Transfer were both positively received. The underlying demand from LNG exports and power generation for data centers is no less compelling than for the past couple of years. But perhaps when hyperscaler Microsoft can shed in value half the midstream’s entire market cap, as the stock did following earnings on Thursday, it can reflect favorably on an un-hyped sector.

Although Winter Storm Fern didn’t result in the widespread loss of power that Uri caused five years ago, it did once again highlight vulnerabilities in the reliability of the country’s grid.

New England relied on fuel oil to generate as much as 40% of its electricity. Other than in the Middle East where crude is cheap and abundant, oil isn’t used for power generation. Progressive energy policies in Massachusetts and across the region have raised prices and the risk of disruption for little discernible benefit.

The North American Electric Reliability Corporation (NERC) released their 2025 Long Term Reliability Assessment in January. They found that 13 of the 23 assessment areas will face resource adequacy challenges over the next decade. Grid planning takes place over years, so while warnings such as this rarely appear urgent, much of the US faces a growing risk that power supply will become less reliable.

There can be no doubt that left wing energy policies are the cause. NERC blames the increased investment in solar and the requisite battery backup along with decreasing investment in reliable gas-fired power. This is reducing the overall capacity utilization of the nation’s power–generating assets, creating grid complexity because of the increased reliance on intermittent generation and raising costs.

The PJM Grid, the country’s biggest which extends from the md-Atlantic as far west as Illinois and includes New Jersey, our summer home, is rated as High Risk from 2029. Recently elected NJ governor Mikie Sherril looks set to continue Phil Murphy’s misguided policies based on recent executive orders she issued to favor renewables. A mandate that 100% of electricity be generated from carbon-free sources by 2035 has disincentivized any investment in gas-powered generation.

There are some encouraging signs. NERC found that retirements of peak seasonal capacity, while still high at 105 Gigawatts (GW), were down by 10 GW from a year earlier as some power plants had their useful lives extended. PJM and other grids such as MISO (midwest) and ERCOT (Texas) have started addressing the biggest vulnerabilities noted by NERC and implementing plans to curtail power to certain users.

Underlying these challenges is the growing demand from data centers, some of which are accepting that at times of high usage they’ll need to rely on alternatives, such as diesel.

Natural gas looks like a clear winner as grid operators and customers look for reliable power. It’s why we’re invested there.

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

Energy Mutual Fund Energy ETF

 

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