Episode Archive - SL-Advisors

The World’s Only Shale Revolution

June 1, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

The World’s Only Shale Revolution

00:00 / 00:04:57

In conversations with investors the Shale Revolution is acknowledged as driving US hydrocarbon production up. What is less appreciated is how much this has been a US phenomenon, with no equal anywhere else in the world.

The technologies of hydraulic fracturing (“fracking”) and horizontal drilling were developed sufficiently that they allowed access to enormous reserves that were otherwise out of reach. Although such geological formations are not unique to America, nowhere else has been able to harness all the other requirements necessary for exploitation.

Least appreciated is privately owned mineral rights. Americans take for granted that a gusher of oil on their property will make them rich. But in the rest of the world the government takes ownership – even in the UK, upon whose legal system the US is based.

This has enabled private landowners to negotiate deals with Exploration and Production (E&P) companies. The activity is regulated and taxed by the state and provides royalties to the landowner. I’ve chatted with beneficiaries of this common arrangement, and they typically report that oil or gas production takes up a tiny portion of their land. Drilling a well is noisy and disruptive but once completed there’s not much further impact.

The US has other advantages, including a highly skilled energy labor force, a culture of entrepreneurialism, technological excellence and the world’s deepest capital markets. We also have ample supplies of water. It’s estimated that fracking the typical well requires around 4 million gallons.

These are all the reasons Why the Shale Revolution Could Only Happen in America as we explained in a 2016 blog post.

It wasn’t always good for investors. The opportunities for increased production drew too much capital, and the damage from the subsequent crash hung over the sector for years. The fear of stranded assets kept many away from traditional energy. A nascent recovery in 2019 was crushed by lockdowns during the pandemic, a low point in public health policy that wrongly imprisoned everyone in their homes instead of just the most vulnerable.

Because many investors are unaware of how uniquely American the Shale Revolution is, they also don’t appreciate how much it has impacted global energy markets. In 2014 OPEC saw the threat posed by US shale and pushed oil prices down in an effort to bankrupt these new market entrants. Within 18 months crude fell from $100 per barrel to $25.

Although there was widespread financial pain, the move was too late. Over time giants like Exxon and Chevron moved in, bringing financial heft and technological expertise that lowered costs. US shale was here to stay.

The global impact shows up on production charts covering the last quarter century.

In crude oil, the US is responsible for 53% of the growth in production since 2000. In natural gas we’re 31%. In Natural Gas Liquids (NGLs, which include ethane, propane and butane) the US is 47% of global production and 60% of the growth over this time.

We produce a quarter of the world’s natural gas and are the biggest exporter of Liquefied Natural Gas (LNG).

The result is that increased US production of hydrocarbons is the biggest energy story in the world. Without it, most manufactured goods would be more expensive because transportation (oil), plastics (ethane or crude oil) and power (electricity from natural gas) would all cost more. Lower prices have boosted living standards everywhere.

While America is the world’s biggest energy story, natural gas is the biggest energy story in America. US media relentlessly covers the energy transition towards renewables, ignoring the fact that natural gas production has increased at eight times the rate of solar and wind over multiple time periods extending back 25 years.

The Natural Gas Energy Transition, as we explained last year, is the only energy transition of any consequence going on in the US. It’s protected us from the disastrous energy policies of Europe (see Germany’s Costly Climate Leadership).

Which naturally brings us to midstream energy infrastructure, the enabler of the world’s biggest energy story. Gas demand from power hungry data centers and LNG export terminals underpin growth. Valuations are not as cheap as two years ago but by no means expensive. And energy is the president’s favorite sector, with many countries advised to avoid high tariffs on their US exports through buying more of our oil and gas.

Fund flows show that retail investors have only recently become net buyers of the sector, which should comfort those wary of being late to follow the crowd.

Explaining to investors why America is the world’s biggest energy story invariably grabs their interest.

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

Energy Mutual Fund Energy ETF

Investors Warm To Gas Exposure

May 28, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Investors Warm To Gas Exposure

00:00 / 00:05:16

The mood was reportedly upbeat at the 22nd Annual Energy Infrastructure CEO & Investor Conference (known as the EIC) in Aventura, FL last week. Performance has been good. The American Energy Independence Index, which reflects the overall industry, has a five year trailing return of 27% pa, easily beating the S&P500’s 16%.

Management teams provided plenty to support an optimistic outlook. The election brought a welcome reset of government policy towards reliable energy. One of the president’s first moves was to lift the poorly conceived ban on new LNG export terminals. Energy Secretary Chris Wright has a background in oil and gas, having founded Liberty Energy. Among the many sensible policies being embraced is support for nuclear energy. President Trump signed an executive order intended to boost nuclear, although actual progress will require a rethink of the current approval process.

The opposition of the Sierra Club and the rest of their left-wing climate cohort to nuclear energy has always betrayed a desire to impoverish humanity with mandatory solar and wind. Their irrelevance to public policy is to everyone’s benefit.

Ignoring that wretched little girl Greta and the rest of the Progressives can be hard, but it’s worth the effort.

Natural gas demand was a big topic of conversation at the EIC. This is coming from data centers and LNG exports. Energy Transfer seems to report more interest every week – the company reports discussions covering gas supply to up to 150 data centers just in Texas, although they do caution that only a modest percentage of these will be completed.

The AI story began to resonate with pipeline investors early last year. It’s not just the Mag 7 that were the beneficiaries. Midstream is the seller of pickaxes to gold miners. Those data centers need electricity, 43% of which in the US comes from natural gas.

It’s caused the sector to become bifurcated. There’s no AI-angle in liquids – improving vehicle efficiency has capped transportation gasoline demand for years.

This has shown up in the performance of the Alerian MLP ETF (AMLP) , which tracks the Alerian MLP Infrastructure Index, albeit from a distance. AMLP, like its index, is underweight natural gas exposure and has half its assets in oil-based names as well as gathering and processing, because that’s generally where the remaining MLPs are to be found. Since the beginning of last year, AMLP has returned 19% pa, slightly ahead of the S&P500 because it does have some gas exposure via Energy Transfer and Cheniere Energy Partners (CQP).

The midstream sector returned 31% pa over this time, led by corporations such as Williams Companies (returned 70% pa since the beginning of last year), Targa Resources (59% pa), Kinder Morgan (47% pa) and Cheniere Inc (25% pa, ahead of its MLP CQP at 19% pa).

AMLP’s underperformance of the sector does overstate the case somewhat, because fees and expenses (5.5% over the past year) create a significant gap versus its own index. Unusually for an ETF, those fund expenses include corporate taxes, whose calculation sometimes trips them up (see AMLP Fails Its Investors Again).

The point remains though that neither a diversified portfolio of MLPs nor the concentrated form offered by AMLP provides much AI exposure (see There’s No AI in AMLP). AMLP is 49% allocated to just four holdings (see AMLP Is Running Out Of Names).

A couple of midstream companies reported some interest from New England states (not mentioning names) in improved gas supply. Perhaps the challenges with offshore wind or the rising costs of power to their residents are a cause for concern.

Attempts to connect the region with gas from Pennsylvania were abandoned several years ago because of regulatory impediments at the state level. The list of canceled projects includes Williams Companies’ Constitution Pipeline, which faced years of delays over a water permit in New York.

Interior Secretary Doug Burgum suggested that there may be an agreement with New York State governor Kathy Hochul that would allow construction of a new pipeline.

A gas pipeline from Pennsylvania across New York could potentially reach Massachusetts. Using more Appalachian gas would at least save Boston from relying on expensive and embarrassing LNG imports. But no midstream company is likely to commit to a large infrastructure project across a swathe of liberal states without clear support from state governments.

Properly maintained, gas pipelines last for decades. For an example, here’s a 1950 documentary about the Panhandle Eastern Pipe Line Company. I love these old videos. They remind us how long energy infrastructure lasts. Seventy five years later Panhandle is still operating, owned by Energy Transfer. Its construction costs were undoubtedly fully depreciated a long time ago, and it’s still making money.

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

Energy Mutual Fund Energy ETF

Notes From The Midstream Industry Conference

May 25, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Notes From The Midstream Industry Conference

00:00 / 00:05:52

My partner Henry Hoffman attended the 22nd Annual Energy Infrastructure CEO & Investor Conference in Aventura, FL last week. Below are Henry’s notes from presentations and meetings.

The mood at this year’s conference was upbeat, with natural gas demand driven by data center power requirements and the next wave of LNG projects taking center stage. Interestingly, crude oil and even crude prices were scarcely mentioned in many discussions. Below are highlights from meetings with several management teams:

Williams Companies (WMB)

WMB stood out as one of the most engaging discussions of the conference, offering unique insights into data center-driven power demand. CEO Alan Armstrong emphasized that hyperscalers (companies such as Amazon, Microsoft and Google) are seeking fast, reliable, full-scope solutions where trust and execution matter more than cost. Chad Zamarin, the incoming CEO, underscored their close, integrated work with hyperscalers.

He dismissed concerns about stranded assets from behind-the-meter power solutions, explaining that their 10-year deals are designed for flexibility, resilience, and the opportunity to scale on-site relationships. CFO John Porter highlighted the steady ramp expected in power demand, with investments that are capital-efficient, economically attractive, and not a strain on the balance sheet.

The Williams team also expressed confidence in gas turbine supply, noting Williams’ scale as a major turbine customer across its compression and power systems. There was clear enthusiasm for permitting reform — particularly legislation that would limit legal challenges to parties with actual harm—citing the potential to significantly reduce costs and delays in infrastructure development. The bill passed by the House on Thursday included a provision allowing certain pipelines to benefit from an expedited permitting process.

WMB CFO John Porter said he’s a subscriber of our blog and is a fan. As we often tell people, once signed up and on the Friends of Simon list, there’s no getting off.

Energy Transfer (ET)

ET echoed similar enthusiasm around data center growth. Adam Arther, who heads up datacenter discussions for the company, noted that they’re actively engaged with 150 data center projects in Texas and another 150 outside the state. He outlined a clear customer preference hierarchy: (1) hyperscalers, (2) utilities, (3) legacy data center developers, and (4) speculative real estate players aiming to flip early-stage projects. ET’s differentiator, he said, is its reliability and redundancy—proven during Winter Storm Uri in 2021.

CFO Dylan also discussed progress at their Lake Charles LNG export terminal, highlighting strong commercial momentum and growing equity interest from strategic and private equity investors.

Enterprise Products (EPD) & Targa Resources (TRGP)

Both EPD and TRGP emphasized robust global demand for Natural Gas Liquids (NGLs, which include ethane, propane and butane). EPD noted that Chinese buyers are still active with volumes that have simply been rerouted to minimize tariff exposure. Ethane appears to be exempt from tariffs in practice, despite the lack of a formal declaration from China. EPD remains comfortable with its industry-leading low leverage and is signaling higher buybacks ahead. Management believes this will support a faster pace of dividend growth by retaining more cash, as equity is viewed as the company’s most expensive capital source.

TRGP CEO Matt Meloy offered a noteworthy counterpoint to concerns about a slowdown in Permian oil production. With TRGP processing 25% of Permian gas volumes, he reported ongoing volume growth on their system—suggesting the production outlook may be more resilient than bearish oil-price narratives suggest. Permian oil wells produce associated gas, and over time the mix becomes more gassy because output from gas wells declines more slowly than oil. This is why TRGP and others see gas volumes growing even with declining oil output.

NextDecade (NEXT)

NEXT remains confident in taking Final Investment Decision (FID) on Train 4 of their Rio Grande LNG export terminal by year-end, with hopes to sanction Train 5 concurrently. They report negotiations with general contractor Bechtel about a “price refresh” are on track for completion by the end of June. Given that Train 5 is nearly identical to Train 4 and located adjacent to it, pricing and execution should move quickly. Management also indicated they plan to secure FERC and DOE approvals for the remaining trains after finalizing FID on Trains 4 and 5. Last year a DC Circuit Court vacated an environmental permit which caused a delay in construction. The upside of this is that Train 5 contracting now benefits from higher pricing.

DT Midstream (DTM)

CEO David Slater reiterated his preference for working with utilities rather than pursuing behind-the-meter opportunities. Given his utility background, this traditional, lower-risk approach of helping utilities expand grid capacity is unsurprising and aligns with DTM’s overall strategy.

The conference made clear that natural gas demand—particularly from data centers and LNG—is a defining growth theme. Companies expressed confidence in NGL market strength, emphasized their differentiated value propositions, and shared optimism about meaningful permitting reform. In contrast, crude oil and pricing barely registered as topics of interest.

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

Energy Mutual Fund Energy ETF

Worrying Inflation Forecasts

May 21, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Worrying Inflation Forecasts

00:00 / 00:05:09

In early April JPMorgan reacted to Liberation Day by forecasting a recession in the second half of the year. They assumed the tariffs would cause a drop in business investment. They also raised their inflation forecast. They didn’t reckon on the President’s tariff flexibility, and so dropped their recession call following the 90 day moratorium agreed with China.

Nonetheless, it looks as if 10% tariffs will be the minimum to sell into the US. The Fed thinks this may boost inflation in the short term. They banished the word “transitory” in 2022 when the inflation spurt started to look permanent. But they may settle on “temporary” to explain tariff inflation.

Barry Knapp of Ironsides Macroeconomics believes tariffs won’t boost inflation because money supply growth is much lower than during the pandemic-inspired fiscal uber-stimulus. However, the budget negotiations in Congress don’t incorporate much fiscal discipline, hence the Moody’s downgrade.

Bond investors have long granted the US a free pass on our dismal budget trajectory. Lending the Federal government long term funds at 4-5% has never appealed to me, but foreign central banks, sovereign wealth funds and other institutions own $TNs of our debt.

Economist Ken Rogoff, who recently published Our Dollar, Your Problem estimates that the dollar’s reserve currency status reduces the yields on our bonds by around 0.5%. With $36TN of indebtedness that’s worth $180BN annually. The jump in yields that followed the downgrade won’t help.

The University of Michigan consumer survey revealed a startling jump in inflation expectations last month (see Stagflation). A quarter of respondents think five-year inflation will exceed 10%. The average is 4.1%, the highest it’s been in over thirty years. That’s not good for those expecting the Fed to pursue multiple rate cuts this year.

It turns out that the survey’s a good predictor. The one-year outlook and annual inflation three months later have a correlation of 0.7. It may be somewhat self-fulfilling in that consumers behave consistent with their expectations. As the chart shows, they track each other closely and actual inflation reliably follows the forecast.

Given his background in real estate and penchant for debt-financed tax cuts, Trump is unlikely to be too concerned about higher inflation. Your blogger’s investments are arranged accordingly.

For owners of pipelines, inflation isn’t the scourge that it is for most investors. Companies generally have pricing power because of limited alternatives, with the regulations designed to curb excesses while assuring an adequate return on invested capital.

In 2022 the ceiling on fee hikes for liquids pipelines was 13.3%, which supported subsequent earnings growth. The Bureau of Labor Statistics began publishing a natural gas pipeline transportation index three years ago. It’s volatile. The most recent year-on-year increase was 4.2%.

Forecasts of peak oil production from shale have weighed on midstream recently. But the outlook for natural gas production remains strong. Morgan Stanley reports that Enterprise Products Partners expects 1.5 Billion Cubic Feet per day (BCF/D) of additional associated gas from the Permian over the next two years. Targa Resources expect 0.8-1.2 BCF/D over the next one year.

In spite of this, Morgan Stanley’s E&P team thinks the domestic market will be short 3 BCF/D next year because of growing Liquefied Natural Gas (LNG) demand. The Golden Pass LNG export terminal owned by Qatar and Exxon Mobil is expected to begin production late this year or early 2026. It has a capacity of 2.4 BCF/D.

Although we often remind investors that pipelines are generally not that exposed to commodity prices, unmet demand for natural gas is unlikely to be an adverse scenario.

Taiwan closed down their last nuclear reactor recently and is seeking imports of LNG as a replacement. Following the Fukushima disaster in 2011, public concern about nuclear energy increased. Unfortunately, this has left the country almost completely dependent on imported hydrocarbons. In 2023 Taiwan relied on gas and coal for 80% of its electricity. Solar and wind were 8%.

Progressives must regard this as a policy win. They are best described by an Oscar Wilde quote: “Some cause happiness wherever they go; others, whenever they go.”

More accurate is to quote JPMorgan’s Mike Cambalest who wrote in March:

“What was Taiwan thinking by shutting down nuclear power which has fallen from 50% to 5% of generation? Taiwan is now one of the most energy dependent countries in the world, resulting in rising economic costs if China were to impose a blockade.”

Inflation and more natural gas demand are a good combination for midstream.

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

Energy Mutual Fund Energy ETF

The Coming Energy Backlash

May 18, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

The Coming Energy Backlash

00:00 / 00:05:19

New Jersey, where your blogger resides when temperatures allow, had a good story to tell on energy until recently. Power generation relies heavily on natural gas and nuclear (38% and 56% respectively in February). Residential electricity prices are 19.7 cents per Kilowatt Hour (KwH), above the US average of 16.4 cents but well below neighboring blue New York state’s 26.2 cents.

New England, where energy masochism is an art form, averages 29.7 cents led by Connecticut at 33.3 and Massachusetts at 30.4.

However, New Jersey’s Democrat governor Phil Murphy has been leading a left-wing assault on the Garden state’s satisfactory power supply. It began with the 2019 Energy Master Plan: Pathway to 2050. Executive Order 315 issued in February 2023 went further, mandating that 100% of electricity be derived from clean energy by 2035.

Offshore windpower is supposed to be the major source. Currently, non-hydro renewables provide 3.6% of the state’s electricity. The state’s goal is to add 7,500 megawatts of offshore wind by 2035 which they say will power 3.2 million homes, out of a total of 3.8 million. So the plan is that within a decade more than four homes in five will run on windpower.

Almost all the windpower in the US is onshore (see Offshore Wind vs Onshore). Texas generates the most, and Iowa relies on it the most at 64% in 2023. Offshore wind is more expensive to install, and several projects have collapsed. Equinor is taking a big loss on New York’s Empire Wind Offshore project (see Pipelines Will Get a Lift From Gas) because the US Interior Department ordered them to stop construction.

Apparently, the previous administration’s environmental review was hasty and incomplete. Equinor has said the delay is costing them $50 million a week and they’ll pull the plug within days without a resolution.

Plans to add offshore wind in New Jersey were wildly unpopular with coastal communities who opposed a blighted view and disruption where infrastructure would bring the power onshore (see Windpower Faces A Tempest). In 2023 Orsted abandoned two large projects citing increased costs and delays.

The Garden State may be politically blue, but the Jersey shore is decidedly red.

Given Equinor’s losses and the US administration’s opposition to offshore wind, it’s hard to see any enthusiasm for new projects. There’s too much execution risk with a potential change in government every four years.

Which brings us back to New Jersey, whose stated policies make clear the government’s antipathy towards traditional energy including natural gas. Residents are about to be hit with utility bill hikes of 17%-20%. Supply constraints are part of the reason. PJM Interconnection, the grid operator whose footprint includes New Jersey, has warned of insufficient generation capacity if the summer is hotter than average. Given the state’s energy goal to move away from hydrocarbons, adding natural gas infrastructure has limited appeal.

Democrat energy policies are leading to a jump in prices even though the state hardly uses windpower. My friend Jon Bramnick is running for governor and released this short video explaining the problem. It will be to New Jersey’s great benefit if he wins the election.

Even though this may look like a polemic against left wing politicians and not an investment blog, the rest will look familiar.

Energy planners in New Jersey and New York have created a developing problem for their residents. Because of their assumption that wind power will provide a meaningful share of electricity they’ve often blocked additions of natural gas infrastructure. By planning to reduce and eventually eliminate gas they’ve made it less attractive for new investment.

Much of the intended offshore wind capacity is now unlikely to be built. Therefore, both states’ demand for natural gas will be higher than expected. It may first require a political backlash against today’s flawed and expensive policies. The looming price hikes in New Jersey will be another confirmation that progressives have disingenuously promoted solar and wind as cheap.

The pendulum has swung back against a price-insensitive pursuit of intermittent, weather-dependent electricity (see Energy Policies Are Moving Right). As former UK Prime Minister Tony Blair pointed out in The Climate Paradox: Why We Need to Reset Action on Climate Change, the current approach is failing.

This is long term bullish for natural gas demand and its related infrastructure. The failure of left wing energy policies to generate widespread public support will be a tailwind for reliable energy. The investment outlook for energy infrastructure is more constructive than reflected in market prices, because many have been wrongly persuaded that renewables will displace everything else.

We never accepted the view that the US would abandon reliable energy in favor of the intermittent, expensive alternative.

Ignoring progressives can be hard but is always worth the effort.

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

Energy Mutual Fund Energy ETF

Pipelines Will Get a Lift From Gas

May 14, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Pipelines Will Get a Lift From Gas

00:00 / 00:05:21

Following Sunday night’s 90-day agreement on tariffs between the US and China, the S&P500 sailed back above its pre-Liberation Day levels. All is right with the world. Sentiment seems weaker than data, so one will correct. After Liberation Day JPMorgan called for a 2H25 recession. Following the tariff news they dropped that forecast. Fed Funds futures are projecting only two rate cuts by year-end, versus four a couple of weeks ago.

Midstream has not yet recovered its tariff-trauma losses. Crude oil has been more consequential, with the May 3rd OPEC+ announcement adding downward pressure. Last year’s US oil production of 13.2 Million Barrels per Day (MMB/D) was expected to grow by 0.2-0.3 MMB/D this year, but forecasts are being modified. This will modestly impact Gathering and Processing (G&P) businesses that are sensitive to volumes from individual wells.

Some think output may even fall and at current prices at least one analyst thinks US shale has peaked. However, cheaper oil will stimulate demand. The prospect of continued delays at Newark airport through the summer will cause some to drive instead of fly.

Interestingly, Enterprise Products Partners CEO Jim Teague recently commented that even flat oil production out of the Permian basin would cause, “…rich natural gas to grow between 1.3 and 1.5 Bcf a day” and, “…a couple of hundred thousand barrels a day of natural gas liquids.” That’s because oil wells become more “gassy” as they age.

There’s much more to midstream than crude oil.

To us the pessimistic view overlooks the sector’s huge tailwind, which is gas demand from data centers. I listened to Liz Reid, head of Google Search, on a recent Economist podcast. AI is regarded by some as a direct threat to Google’s business model, since as Reid explains the Google AI search result taps into multiple websites, reducing the opportunity for advertising revenue. I’m not too worried about Google, but users are learning to ask more complicated questions.

For example, in response to “Which midstream companies mentioned data centers on their earnings calls”, I was presented with a list of names and summaries from their call transcripts. Previously I would have laboriously found each transcript online and done a word search (Ctr-F “data centers”) to find the relevant dialogue. But the AI-aided search is more efficient.

Results included:

Williams Companies (WMB) discussed their ability to bring around a gigawatt worth of power online for data center use by the end of 2027 on an earnings call.

Kinder Morgan (KMI) highlighted how AI-driven energy needs are boosting their business on recent earnings calls.

Energy Transfer (ET) during its earnings call on May 6, said it has roughly 200 data center opportunities in 14 states across its footprint.

Enbridge (ENB) noted the company is well-positioned to fuel escalating AI and data center needs.

Gas demand for data centers is the midstream story.

When asked on the podcast if Google search users were being “retrained” to use AI, Liz Reid cleverly responded that they were trying to “untrain” users from prior habits and encourage them to raise their expectations of search results by asking more complex questions. I’m doing that myself with narrower queries that generate AI-driven complex results drawing on numerous individual websites.

Your blogger’s narrow experience doesn’t settle whether AI will add sufficient value to justify all the investment in data centers and associated supporting infrastructure, including power. But it’s working for me.

Retail electricity prices vary widely across the US. Generally, more renewables penetration correlates with higher prices. This must mystify left-wing advocates of solar and wind.

New York State faces an interesting challenge. They’ve passed legislation requiring 70% of their power to come from renewables’ sources by 2030. It’s currently 29%, or 50% if you include nuclear.

Today New York state sensibly relies on natural gas for 46% of its electricity, slightly above the US average of 43%. It’s why New Yorkers enjoy relatively low prices. Unfortunately, public policy is to reduce gas in favor of renewables. To this end, new building construction in New York City can no longer include a gas connection.

The 800 MW Empire Wind Offshore wind farm being built by Norway’s Equinor is expected to power up to 500K homes in Brooklyn. But construction has stopped, because the US Interior Department thinks the Biden administration approved the project without an adequate environmental assessment. Equinor has said the delay is costing them $50million a week and unless it’s resolved within days they’ll pull the plug.

Electricity customers in the Empire state may soon find themselves squeezed between an aspirational policy on renewables unable to deliver and self-imposed constraints on using cheap natural gas. It is democratic, if poorly conceived.

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

Energy Mutual Fund Energy ETF

Tariff Trauma Is Receding

May 11, 2025/1 Comment/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Tariff Trauma Is Receding

00:00 / 00:04:51

Americans visiting Europe know that Republican presidents are generally less popular than Democrat ones, since Europe’s political center of gravity is left of ours. This is especially true of President Trump, which didn’t surprise us on a recent trip with friends to the UK and Belgium. Trade policy is largely how Europeans experience US presidential power, so Liberation Day was poorly received.

Observers on both sides of the Atlantic have been critical of how tariffs have been implemented, including this blog (see Tariffs And Mismanaging The Economy). While tariff dysfunction remains, the S&P500 has recovered its post-Liberation Day losses on hopes of trade deals. Britain was the first to reach agreement, albeit limited in scope. The UK still exerts some soft power in that an invitation to visit the King and accents that Americans find appealing hold some sway.

Midstream energy fell 13.5% over the two trading sessions following Liberation Day, more than the S&P 500’s 10.5% loss. There were concerns of reciprocal tariffs targeting our LNG exports although if anything countries seem more inclined to buy US energy exports than before.

Unlike the broader market, midstream has yet to recover its Liberation day losses. That’s probably due in part to weaker crude oil, which has investors worried about volumes. Oneok (OKE) and Plains (PAGP) are both down around 12% over the past three months. Gas-exposed names such as LNG exporter Cheniere (LNG) and pipeline company Williams (WMB) are +8% and 4% respectively over the same period.

Since the election gassier names have held their gains. The weakness in crude prices has dampened some of the election excitement. But gas volumes continue to grow steadily, underpinned by LNG exports and data centers.

Earnings have been providing generally good news. Cheniere easily beat expectations, increased buybacks and is on track with its expansion plans. Energy Transfer disclosed on their earnings call that they are discussing supplying gas to 150 data centers just in Texas! Not all of these will become reality, but it is representative of the positive fundamentals for gas.

The sector’s failure to recover its Liberation Day drop reflects investor unease over the drop in crude. In our opinion this represents an opportunity.

Natural gas producers have performed well, with EQT even recouping all of its early-April tariff trauma losses.

The strength in gas names aligns with the demand outlook. This is at odds with the natural gas futures curve which suggests that supply will be plentiful in the years ahead. The December 2025 futures contract trades at $5 per Million BTUs (MMBTUs), and December 2028 at only $4, projecting a modest decline.

The idea that US gas prices will be lower in the years ahead than today seems implausible given prices elsewhere. The TTF European benchmark and the JKM Asian benchmark both trade at around $12 per MMBTUs.

The result is that stock prices for gas producers have run ahead of the value of their proved reserves. A PV-10 is the net present value a company can realize from its proved reserves using current technology, and a 10% discount rate. Using JPMorgan PV-10 estimates, Range Resources (RRC) trades at almost $38 versus a PV-10 of $27. Expand Energy (EXE) is at $113 ($82) and EQT at $55 ($35).

Undeveloped/Unproved reserves could, in the upside scenario, justify current valuations if what their geologists think is there can be extracted profitably. But using the more conservative estimate they look expensive. And EXE, even if all their unproved reserves came through, has a PV-10 of $120.

That doesn’t seem to leave much room for anything to go wrong.

An alternative explanation is that the futures curve is wrong. Hedging more than two years out is impractical. For example, the May 2027 futures contract has only 5K outstanding, versus 207K for the most liquid July 2025 contract. It’s also likely that producers are keener to hedge their exposure by selling than consumers are through buying, which at the margin would depress prices.

JPMorgan calculates PV-10 values using both the futures curve and their own estimates, with the latter resulting in somewhat higher values.

Higher domestic natural gas prices seem very likely to us. As long as the huge spread exists between the US and other regional markets, companies will be looking to add LNG export capacity. The lower prices in the futures market almost assure they won’t be correct, since they’ll induce more exports. The message from the E&P names is more accurate than commodities markets.

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

Energy Mutual Fund Energy ETF

Drama-Free Energy Stocks

May 7, 2025/1 Comment/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Drama-Free Energy Stocks

00:00 / 00:05:15

Supplies of crude oil were already set to increase by 2.6 Million Barrels per day (MMB/D) year-on-year before the OPEC+ announcement on Monday. Demand is growing in emerging economies across Asia, Africa and South America, but not fast enough. This has led to forecasts of stocks increasing by 2 MMB/D this year.

Last year we noted that the International Energy Agency (IEA) was consistently promoting a politically motivated outlook for global energy based on strong growth in renewables (see Serious Energy Forecasts Are Rare). They expect an 8 MMB/D imbalance between supply and demand in 2030.

Meanwhile the world’s producers of oil expect the opposite and have been increasing output. Spending by international majors on upstream capex in the Middle East this year is likely to be double the low hit during the pandemic, led by TotalEnergies and Exxon. The UAE will add 0.4 MMB/D of capacity over the next couple of years and Iraq 0.3 MMB/D.

North American output is also increasing, with US production forecast to rise around 0.3 MMB/D and Canada by 0.2 MMB/D. However, the enthusiasm with which energy executives received Trump’s win in November is moderating with lower prices, and forecasts of US output will likely be trimmed. In a sign E&P companies are becoming more cautious about capital allocation, Chevron cut 2Q25 stock buybacks by around a third versus the previous quarter. Shale operator Diamondback Energy just cut their output forecast.

Drill baby, drill isn’t resonating. Lower prices are needed to bring the market back into balance, and this will further stimulate demand.

The contrast between the oil and gas business is striking. Because crude oil is a global market, its price reflects energy sentiment around the world. Oil is relatively easy to transport and the cost of doing so is a small percentage of the value of the commodity.

Natural gas moves through pipelines or on an LNG tanker if going overseas. The combined cost of liquefaction and transport can exceed the cost of the gas, which is why it’s around $4 per Million BTUs (MMBTUs) in the US and $11 in Europe. That gas can be shipped to Europe for much less than the $7 difference is driving the sharp rise in US LNG export capacity.

Natural gas trades as regional markets because it’s so difficult to transport. Its price moves rarely reflect any change in sentiment by energy investors. At times crude oil and pipeline stocks have been correlated, although declining company leverage has weakened the relationship. Last year was a good example, with oil down and midstream up strongly. Gas prices rarely share any relationship with pipelines

Natural gas feedstock to LNG terminals is running at 15 Billion Cubic Feet per Day (BCF/D), up from 12.5 BCF/D last year. By 2030 exports will have doubled from 2024.

Australian LNG giant Woodside Energy bought Tellurian last year as it was teetering towards bankruptcy, or “circling the drain” as RBN Energy puts it. Tellurian’s fatal error was to favor contracts that retained price risk. This reflected then-CEO Charif Souki’s long term bullish view on gas prices but impeded financing because of their increased risk profile.

Woodside just announced Final Investment Decision (FID) on the LNG Louisiana terminal, formerly called Driftwood when it was Tellurian’s chief asset. Ironically, they’ve moved ahead with only 1 Million Tons Per Annum (MTPA) of capacity contracted out, from a total of 16.5 MTPA. This is rare because LNG terminals are only good for one thing, so most operators ensure they’ll have enough long-term customers before starting construction.

Woodside believes they’ll negotiate better terms by assuring buyers the LNG really will be delivered. It’s a choice that was never available to Tellurian, whose failure to raise capital and reach FID meant some contracts were later voided. Woodside is a much bigger company but nonetheless S&P changed their credit outlook from stable to negative on the news. They may also calculate that competing projects that have not yet reached FID may now face increased hurdles to line up financing.

The news does assure that gas flows to the Gulf will continue higher.

Tariff uncertainty has caused many companies to suspend earnings guidance for the year, most recently Ford who estimate a $2.5BN impact. Contrast this with Williams Companies, gliding through the market turmoil with equanimity. Much of the gas feeding Gulf coast LNG terminals will pass through their pipeline network. They raised full year guidance by $50MM to $7.7BN.

The energy sector is diverse. Gyrations in crude prices and fears of slower growth are impacting the big integrated oil companies. But the outlook for domestic gas infrastructure remains positive with no visible impact from the macro issues driving equity markets. It’s free of drama from oil prices or tariffs, the calm port in the storm.

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

Energy Mutual Fund Energy ETF

Tariffs Not Biting Yet

May 4, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Tariffs Not Biting Yet

00:00 / 00:05:12

On Friday the market achieved a welcome milestone in that the S&P500 rose above its pre-Liberation Day level. The unemployment report suggested that we’re not yet falling into a recession. Signs that trade negotiations with China may start was encouraging.

Midstream earnings have been coming in with little discernible impact from the tariff trauma. Worth noting is that TC Energy (TRP) is investing $0.9BN adding capacity to their ANR gas pipeline which connects Texas and Louisiana to the midwest. It’s to provide power for data centers and TRP estimates a 6X EBITDA multiple which is pretty accretive. AI-driven demand for natural gas still seems robust. They don’t see much near-term impact from tariffs.

Oneok reaffirmed 2025 full year guidance of $8-8.45BN and is close to a 10% EBITDA growth forecast for 2026. Targa Resources modestly beat expectations and reaffirmed full year EBITDA guidance of $4.7-4.9BN. 1Q adjusted EBITDA was +22% versus the prior year. They noted that they had accelerated purchases of steel to limit the exposure of capital projects already under way to tariffs.

On the Enterprise Products earnings call, co-CEO Jim Teague spoke to the uncertainty caused by tariffs. Many companies have suspended earnings guidance for the year, although no midstream companies have. Teague said, “I have the core belief that when the dust settles the aim of this administration’s policies, laws and regulations is intended to promote U.S. energy, not just for the next four years, but for decades.”

EPD is one of America’s biggest exporters of hydrocarbons. Along with Energy Transfer and Targa Resources they own 90% of the LPG export capacity along the US gulf coast. EPD is a significant exporter of ethane, and China is a significant buyer as feedstock for their petrochemical industry.

EPD said they have no contracts with any Chinese entities, which will come as good news to EPD investors. Volumes are typically routed through international trading companies. Moreover, the ethane tariffs that China initially said they’d impose look set to be lifted, since there are few near term alternatives to buying ethane from America.

What’s notable about all these companies’ earnings is that when asked about tariffs they focused very narrowly on the possible impact on their own purchases. Midstream executives are not overly concerned about declining volumes of hydrocarbons. As we’ve noted before, energy quantities are surprisingly stable (see Midstream Is About Volumes). In addition, if China imposes tariffs on US imports, flows will generally be rerouted to minimize the impact. And in the case of ethane, China’s dependence makes an import tax self-defeating.

The Tony Blair Institute for Global Change published The Climate Paradox: Why We Need to Reset Action on Climate Change last week. Tony Blair became a political pariah after leading the UK into the 2^nd Iraq war in 2003 on a futile search for weapons of mass destruction. He’s been repairing his reputation ever since.

The Climate Paradox is a welcome addition. In the US neither political party has much useful to say on the topic. Democrats beholden to left-wing progressives maintain that solar and wind will solve everything. Republicans generally ignore the issue entirely. Blair has upset fellow left-wingers, which is usually time well spent, by asserting that rising CO2 levels prove the current approach is failing. His policy prescriptions include accepting that hydrocarbon use will continue to rise and we need to invest heavily in carbon capture.

Most significantly, he notes that regardless of the past history of CO2 emissions, the growth is coming from emerging economies led by China and India. Therefore, efforts to reduce emissions should start there.

Like the EU, the UK’s energy policies mean they’ll incur the cost of decarbonization without seeing the benefit, a sure way to lose popular support. California is following a similar path. Cutting emissions while China raises theirs was embraced by left-wing climate negotiators but never made sense to the rest of us.

Spain’s recent blackout was likely caused by over-reliance on solar power whose volatile output crashed the system. The all-renewables advocates keep losing credibility with voters worldwide.

Tony Blair has made a refreshing contribution to the climate change debate, one that aligns with our conviction that natural gas consumption will continue to grow for the foreseeable future.

Finally, most journalists and bloggers occasionally struggle for a topic but usually come up with something. I recently came across this BBC report that is a contender for least newsworthy story of the year. Rest assured that if your blogger ever plumbs such journalistic depths, readers will be sure to let me know.

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

Energy Mutual Fund Energy ETF

The Iberian Grid Warning

April 30, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

The Iberian Grid Warning

00:00 / 00:05:01

It’s too early to say what caused the loss of power across Spain and parts of Portugal, but early signs are that it was linked to a disruption in solar supply. Some will soon blame it on global warming. But reducing greenhouse gas emissions (GHGs) requires increased electrification of energy systems. European governments are pushing heat pumps and EVs, all with the goal of increasing the use of electricity, more of which will come from solar and wind.

Spain gets 21% of its primary energy from renewables, significantly higher than Europe’s 15%. Red Eléctrica de España, which operates Spain’s grid, estimates that 56% of power generation was from renewables last year, significantly above the EU which was about a third.

Whether or not Spain’s heavy reliance on renewables is to blame, the bigger lesson is that increased electrification means the grid needs to work all the time. EV penetration is relatively low in Spain, but the country’s extensive public transport system runs largely on electricity. Travelers were stranded. Those pushing decarbonization will be increasingly marginalized unless they’re honest about the importance of grid reliability.

Across the US, independent system operators are warning that reserve margins are declining. This measures the amount of excess capacity that is available during peak demand, which typically occurs during hot summer days when AC units are cranked up.

The North American Electric Reliability Corporation’s (NERC) most recent Long-Term Reliability Assessment makes for grim reading. Throughout the continent, the margin for error is decreasing. The Midcontinent System Operator (MISO) is projected to have no reserve margin at all by 2034, which means that it will be unable to meet peak demand. On current trends, power outages on such days are virtually certain.

The PJM system, which includes New Jersey where your blogger resides when it’s warm enough for golf, will see its reserve margin drop from 35% to 10% by 2034. NERC warns that, “Resource additions are not keeping up with generator retirements and demand growth. Winter seasons replace summer as the higher-risk periods due to generator performance and fuel supply issues.”

We heat our home with natural gas, which is always available. A heat pump would increase our exposure to the grid, which looks increasingly ill-advised.

There’s no doubt that increased use of renewables is causing this. Natural gas power plants typically operate 95% of the time. Solar and wind are 20-35%. Moreover, if it’s cloudy solar output in a region can drop to zero, whereas it’s rare for gas power plants to all stop production at the same time.

In places where renewables are a significant source of electricity, consumers are increasingly facing compromises on reliability and cost.

Electrification is leading to a concentration of risk on a single energy system. During Superstorm Sandy in 2012, the basement of a house we owned flooded because the loss of power meant the sump pump didn’t work. We now have one that relies on water pressure.

The NERC is warning that we’re likely to endure more power outages in the future. Climate change has lost its political relevance in the US for a host of reasons, and energy reliability will displace CO2 levels as a concern if it’s not there 100% of the time.

Declining grid reliability is a good reason to stick to natural gas for heating rather than heat pumps. Otherwise, a power outage in the winter assures residents of northern states burst water pipes.

After Sandy, sales of gas-powered home generators soared. Some diversification of energy sources seems sensible.

Gas production in the US continues to grow. In their Annual Energy Outlook 2025, the US Energy Information Administration (EIA) forecasts 1.6% annual growth through 2030. They expect Residential, Commercial and Industrial demand to all grow, but see declining use for power generation.

Unlike the EIA, we think power generation will use more gas, not less. It’s reliable and not weather-dependent. It’s what data centers will favor. It’s cheap, and it’s here in the US. Unlike the EU, American voters are not going to sacrifice reliability or price to accommodate China’s relentlessly increasing GHGs.

Cheniere Energy trades at 12.6X Enterprise Value/EBITDA (EV/EBITDA), marginally above the sector median but with double-digit projected growth in Distributable Cash Flow (DCF). Williams Companies is a little more expensive at 13.2X EV/EBITDA but offers DCF growth in the mid-teens. With these rates of cash flow increase, over time their valuations will normalize.

Both companies are levered to increased consumption of natural gas both in the US and via exports. This is a better bet than assuming increasing dependence on stretched power grids.

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

Energy Mutual Fund Energy ETF

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