BP’s 2024 Annual Outlook continues to navigate carefully the political minefield that faces any big energy company in making projections about energy consumption. They’ve simplified their scenarios – in 2022 Accelerated, Net Zero and New Momentum all sounded faintly hopeful and for the first two totally unrealistic. New Momentum was the scenario intended to present the way things are currently moving, but nonetheless sounded optimistic.

BP points out that these are projections not forecasts – the subtle difference intending to persuade progressives that they are bought into the energy transition even while they’re not making money from it. BP’s market cap of £75BN ($96BN) is the lowest in two years and back to where it was 25 years ago. They’ve lagged their peers by 50-75% over the past five years. The green strategy they adopted four years ago hasn’t excited their investors.

BP’s Annual Outlook now has two scenarios: Current Trajectory and Net Zero. They’re self-explanatory – one projects what’s likely to happen on current policies and the other overlays policies consistent with the UN IPCC’s Zero by 50 goal.

They are miles apart.

There are some interesting differences between the current path presented today versus what BP thought in 2022. US natural gas production by 2035 is now forecast to be 10% bigger than back then, at 1,168 Billion Cubic Meters (BCM), or about 113 Billion Cubic Feet per Day (BCF/D).

Global natural gas production is expected to grow, albeit less quickly, meaning the US share will grow to 25%.

Growing Asian demand for natural gas and the disruptions to Russian exports to Europe have caused LNG demand to grow at 8X the rate of natural gas overall.

Climate change forecasts are dominated by the interplay of emerging country GDP growth versus increased energy efficiency and decarbonization. The world has never experienced a decline in energy consumption as far back as meaningful records exist. BP’s Current Trajectory scenario now sees global energy consumption peaking around 2040.

Two years ago none of their scenarios contemplated reduced energy consumption. Even in Net Zero it was roughly flat.

Energy consumption grew at 1% pa over the past four years, slower than over the prior decade. But the pandemic was a big factor, and absent another global disruption it’s hard to envisage demand growth disappearing within the next decade or so.

Coal is one sector where optimism about its demise continues to look premature. 84% of global production is in emerging economies, and because coal reserves are so widely distributed it is mostly consumed where it’s mined. Coal-to-gas switching for power generation remains the most effective way to reduce emissions. The US is helping by growing its LNG exports, despite the Administration’s efforts to impose constraints on new permits.

Nonetheless, the world is using more coal than ever. BP still projects consumption to decline, albeit from a higher level than a couple of years ago. Its use in developed countries is going to shrink by half over the next decade, which seems plausible. Developing countries are projected to peak within a couple of years. Two years ago BP thought the peak was happening right then. This most damaging fossil fuel consistently pushes back forecasts of its demise.

If coal use does drop it’ll be because increased natural gas production has been able to fill the gap.

Renewables growth is projected to be slower in developed countries than BP thought two years ago. Higher interest rates and the dismal investment returns on solar and wind are hurting. Across emerging economies, 2025 renewables output is now expected to be double what BP expected only two years ago, a remarkable shift. Projections for China have been revised lower, meaning their share across all developing countries will drop from around a half to 15% by 2035.

China’s energy policies still prioritize energy security over emissions reduction, a long term preparation for conflict over Taiwan. Nobody should confuse their solar and wind investments as anything but a push for energy independence, insulation from the western sanctions that will inevitably follow any conflict with their island neighbor.

The bottom line is that traditional energy is going to dominate for the foreseeable future. Fossil fuels represent 84% of primary energy as calculated by BP, and they expect this share to be 77% by 2035. A couple of years ago their projection was 70%. Natural gas is the only fossil fuel projected to grow. It will eventually be the world’s favorite source of energy.

On my trip to Minneapolis last week, I had the opportunity to see long-time investor Scott Mundal. Scott grew up on a farm in South Dakota, and now runs his own investment business in Morris, MN. His life is a wonderful American success story illustrating what hard work and ability can achieve. We had a most enjoyable dinner.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

The White House pause on LNG permits has impacted negotiations. Poten and Partners, a research firm, estimates that Sale Purchase Agreement (SPA) volumes are –15% in 1H24 versus a year ago. It’s hard to get buyers to commit to buying LNG from a new export terminal without certainty about when it’ll be constructed.

Fortunately, last week a Federal judge lifted the pause. Appropriately, it was U.S. District Judge James Cain in Lake Charles, Louisiana, the site of Energy Transfer’s proposed LNG terminal whose planning has been impacted by the pause.  Cain said the pause was, “completely without reason or logic” and described it as, “arbitrary, capricious, and unconstitutional.”

The LNG export opportunity persists because US prices are cheap while production remains robust. Output is running at 107 Billion Cubic Feet per Day (BCF/D), but demand has grown from 95 BCF/D a year ago to 102 BCF/D now. Power consumption is the biggest driver, up from 40 BCF/D to 45 BCF/D.

AI data centers are going to consume increasing amounts of power, which will support natural gas demand. We may already be seeing this. Texas recently announced plans to double their low-interest loan program that supports the construction of natural gas power plants, from $5BN to $10BN.

Governor Abbot thinks they may need as much as 130 Gigawatts (GW) of power capacity by 2030 from all sources, versus the 85 GW they have now. Even after doubling the loan program it’s likely to be several times over-subscribed.

Texas is a good example of how growing power demand will flow through to natural gas. Texas has had good success with windpower which provided 28% of its electricity last year. Natural gas was 40%. Regardless of goals to increase the share of power provided by renewables, natural gas remains a convenient, reliable and clean resource.

Fracking has unleashed cheap, secure energy for the US. Germany is de-industrializing because of high power prices. Britain’s new Labor government is committed to becoming a “clean energy superpower” and is centralizing the approval of new wind farms to speed up construction. The US is reducing emissions with natural gas and attracting FDI because it’s cheap. No other country has adopted such a pragmatic yet self-interested energy policy, albeit one that’s the result of policies from both parties.

US natural gas prices have surprised many analysts by staying low, with the Henry Hub benchmark at around $2.50 per Million BTUs (MMBTUs). It’s cheaper elsewhere, with the basis reflecting transportation costs to the Henry Hub distribution point in Louisiana. Gas from western Canada is priced $1.80 per MMBTUs below the benchmark. Associated gas is often produced with crude oil and is unwanted but must be dealt with. Flaring has come down sharply, from 1.3% of production five years ago to 0.5% now. It’s become harder for E&P companies to obtain a flaring permit by arguing that needed infrastructure is unavailable.

The Energy Information Agency is forecasting $2.90 per MMBTUs for 2H24, up from $2.10 in 1H24.

As we head into earnings season the phrase “upside risk” is showing up in JPMorgan’s outlook. It sounds like a high class problem unless you’re a short seller. For several quarters pipeline companies have delivered results that were largely in-line with some modest surprises, except for Cheniere who consistently beats forecasts. We’ll be interested to hear from Energy Transfer (ET) whether the court-ordered lifting of the LNG pause has helped them progress with their Lake Charles project.

Williams Companies (WMB) won their legal dispute with ET over WMB’s ability to build a gas pipeline that crossed over an existing one owned by ET. It was either unsafe or anti-competitive, depending on which side was talking. With a judge having concluded the latter, WMB is suing ET for damages. Sometimes it seems that ET is involved in half the energy sector’s disputes.

I visited Minneapolis and had the opportunity to visit long-time blog readers and pipeline investors GHJ Financial Group in Oakdale, MN with Andrew Freiberg, our regional wholesaler from Pacer Financial. It’s always a great pleasure to meet people who have been following us for a long time online. We had a most enjoyable chat, and I shall look forward to stopping by again in the future. The background for the photo was selected to show Big Ben.

In discussing EVs, I learned that charging stations are increasingly being targeted by criminal gangs. There are lots of stories of vandalism and theft of the copper that’s used. But EV owners are wealthier than average and can represent a target themselves while they’re waiting…and waiting for their cars to recharge.

The outlook for reliable energy has never looked brighter.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

93% of car trips are less than 25 miles, according to data from the Bureau of Transportation Statistics. The problem with EVs in America is with the other 7%. That’s where the range anxiety and charging infrastructure become an issue.  

According to a recent survey from McKinsey, the US has among the least satisfied EV owners, with 46% intending to switch back to an Internal Combustion Engine (ICE) with their next purchase. Only Australia, another big country with high average mileage, reports more dissatisfied EV owners at 49%.  

It’s a failure of the EV industry that almost half their customers are unhappy with their purchase. Along with poor charging options, cost is another factor. US sales rely heavily on altruistic choices by customers who are virtue-signaling. Research has shown that blue-leaning regions are far more likely to buy EVs than red. It’s why California dominates EV registrations. This is a problem for future sales, similar to subscription churn. If half of your subscribers don’t renew, it’s hard to grow your customer base.  

Hybrid plug-in electric vehicles (HPEVs) are thought to be a good compromise. You can always rely on filling up with gas, but by keeping the battery charged you can minimize use of the conventional engine. The problem is that HPEV owners tend to not bother recharging, because (shockingly) it’s so convenient to stop by a gas station. So owners often fail to achieve the EPA mileage estimates that are advertised. 

We’re running out of buyers who are willing to pay more for faster acceleration or to show they care about climate change. Like solar and wind power, reducing greenhouse gas emissions costs more than business as usual.  

Except with EVs it could be different. Almost half of US households own two or more cars. The EV industry is selling expensive vehicles intended to replace one of the two ICEs a household owns.  

There’s a market for very cheap EVs, perhaps souped-up golf carts, for the 93% of journeys that are local and don’t rely on charging infrastructure. As a policy matter, this could induce consumers to add a car that covers most of their driving needs while keeping the ICE for longer trips. The EV would be a compliment to the ICE, rather than trying to be a substitute.  

These cheap EVs would need to be bigger than a golf cart – half of US auto sales are light trucks and minivans. But cheap EVs would compensate for the range anxiety. Even if we carpet the country with charging stations and speed them up, Americans are just not going to spend twenty minutes recharging.  

BYB’s Seagull sells in China for around $12K. They’d sell millions at that price in the US. They could, except for the tariffs imposed on them, because the White House has a flexible concern about climate change. Red state energy workers aren’t much use to this White House. Blue state auto workers may be. So the latter are protected with tariffs, at the expense of higher US GHG emissions.  

Joe Biden told everyone the energy transition will be painless. So far it’s not.  

More coherent energy policies are looking more likely since the debate. Guy Caruso served as administrator of the U.S. Energy Information Administration (EIA) from July 2002 to September 2008. In a recent WSJ op-ed he argued that US LNG exports provide energy security to our allies and lower GHG emissions by displacing coal. We’re betting that the LNG permit pause will be lifted by next year, part of a more pragmatic policy approach to climate change. 

If President Biden could struggle out of bed in time for an abbreviated day to consider the issue carefully (see Biden Tells Governors He Needs More Sleep and Less Work at Night) he would never have imposed the pause.  

Midstream continues to perform well, with the American Energy Independence Index +18.6% for the first half of the year. Wells Fargo points out that the sector’s correlation with the S&P500 has been falling and is only 0.33 in 2024 versus 0.51 over the past five years. 

Part of the reason is in the inflation protection that pipelines offer. Because tariffs are so often regulated with an inflation price escalator built in, cash flows responded positively when inflation surged in 2022. Investors have started to take note, which has underpinned performance.  

Midstream has also closed most of its valuation gap with utilities, with EV/EBITDA of 9.3X compared to utilities of 9.6X. But leverage is lower (Debt:EBITDA 3.4X vs 5.2X) and dividend yields higher (5% vs 3.8%).  

In our opinion, there remains plenty of upside. 

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

This is the time of year when friends ask me if I’ll be celebrating July 4^th, in a wry dig at the losing side of that war. As a transplanted Brit I have more to celebrate than most – I point out that had the War of Independence turned out differently, emigrating to the US might not have held the same appeal.

The whole world has reason to celebrate July 4^th. It created that shining city on a hill, that refuge for the “huddled masses yearning to breathe free” as inscribed on the Statue of Liberty. This is the world’s most watched country. If our too-porous borders were thrown open tens of millions would come here. Even those who dislike America aspire to live more like us.

If you grew up in America, you don’t know what it’s like to be on the outside looking in. A country where people are proud of its values, that stands up for freedom, where opportunity beckons and where most cool things begin.

In 2021 Roger Bennett, of Men in Blazers (a show about English football) and another transplanted Brit, wrote (Re)Born in the USA: An Englishman’s Love Letter to His Chosen Home. It was about growing up in Liverpool before emigrating to the US. Bennett yearned to leave dull, rainy northwest England for America — “with its sunny skies, beautiful women, and cool kids with flipped collars who ate at McDonald’s.”

Everything here looked better from across the pond, and Bennett describes what were for me familiar urgent teenage feelings of desire, the certainty that life was better in America, and I had to get here. Both of us were consumed with making it to the new world, and we both did. Roger Bennett brought his enthusiasm to Chicago and would probably agree that he has enjoyed more success as broadcaster, podcaster and filmmaker here than he would have in the old country.

Being an immigrant means never forgetting the huge thrill of arriving; of a dream fulfilled. Ronald Reagan was my first president. His sunny optimism epitomized my new country when I moved here, and I readily embraced his positivity. Life has its ups and downs, but, as Reagan wrote when announcing his Alzheimer’s diagnosis in 1994, “…for America there will always be a bright dawn ahead.”

Since arriving in May 1982, I have never doubted for a moment it was the right move.

In recent years the growing negativity of so many has astounded me. It was made most clear in a WSJ survey a few weeks ago in my responses to the Civics questions. They included “How proud are you of America’s history (answer: Very). Compared with the 1,200 respondents I am at the optimistic extreme, the 99^th percentile.

We’re not short of problems that need solving. I can name a few myself, starting with our catastrophic immigration policies that allow in too many phony asylum seekers. But great countries become that way by aspiring to greatness, and that doesn’t happen without striving to be better. We can confront and beat the challenges we face.

Jobs are plentiful. We’re not at war and the pandemic with its shocking loss of liberty is a distant memory. Living standards are the highest in the world and the highest in history.

If you’re not happy in America, right now, where and when would you rather live?

Social media and the proliferation of news outlets have allowed us to choose the news sources that incorporate our biases. And nothing helps ratings as much as getting your viewers riled up.

I have commented to my partner Henry that the country seems as polarized as it’s ever been. Henry is from North Carolina and like most southerners has a keener sense of civil war history than we northerners. He points out that the 1860s were worse.

We’re self-segregating to live amongst people that think like us. Our clients are energy investors and much of my social life revolves around golf clubs. Unsurprisingly, I spend most of my time with Republicans and I like that. It’s comfortable. I think conservatives see more things going right than wrong. But I have good friends that are Democrats and I enjoy their company too. We don’t have to be defined by our politics,

Your friends and the people around you are the real America. Don’t be depressed by the extremism that both blue and red leaning news outlets push. Angering viewers is their business model.

Enjoy Independence Day with friends. Because Americans are overwhelmingly good, friendly people. Look around you. It’s why there’s always a bright dawn ahead.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

For those wondering how the election will affect the energy sector, Thursday’s presidential debate offered some clarification but also added some uncertainty. Following Biden’s stuttering performance, he’s a poor bet to return to the White House after November. It must be more likely than not that his party will find a way to dump him before their convention in August, since he’s leading his party to electoral disaster with countless down-ticket Democrat candidates now at risk.  

Joe Manchin would be an interesting centrist choice that would scramble projections, but he’s repeatedly disavowed any interest. Biden’s best case to remain in the race is that the alternatives are so poor.  

It’s pretty clear that Joe Biden’s too old and senile to be president for another four years. From an energy perspective, a more friendly administration with a lighter regulatory touch is likely.

Republicans are associated with “Drill Baby, Drill” and it’s worth remembering that the last Trump presidency wasn’t kind to energy investors. The euphoria of a supportive government led to oversupply, depressing prices and returns. The pandemic didn’t help. 

Energy companies embraced financial discipline, prioritizing per share returns over volumes. This took hold during Biden’s presidency and coupled with the continuing recovery from Covid returns have been very good. 

When investors ask if we’re worried about a second Biden term, we often point to the “blue rally.” It must be endlessly frustrating to progressives that their political ascendancy has been so profitable for traditional energy despite their efforts to achieve the opposite.  

While energy executives will welcome a more supportive administration, we don’t expect a return to euphoric production growth. Ample dividend coverage, buybacks and declining leverage continue to be rewarded by the market. The energy cycle is longer than four years. There seems little reason to expect substantial change in how companies allocate capital. 

Betting markets immediately responded to Thursday’s debate, and financial markets soon followed. Energy was Friday’s strongest performer, but also notable was the S&P Clean Energy Index which lost 2.5%. First Solar lost 8%. Profits from renewables have been elusive for some time, which is why this sector has lost a quarter of its value over the past year. But it’s also pricing in the likelihood that Republicans will be returning to office.  

The American Energy Independence Index finished the week +3%.  

Friday morning’s Supreme Court ruling added to the constructive political news. They overturned a precedent from 1984 (Chevron v Natural Resources Defense Council, known as the Chevron Doctrine) which gave Federal agencies broad discretion in setting regulations where the underlying statute was unclear or silent. This has led to policy changes when the White House changes hands even when underlying laws have not been affected.  

Generally, Democrat administrations have been more inclined to pursue an agenda via regulation. Under this ruling, a politically motivated regulatory interpretation of an ambiguous statute will be more easily challenged. This is a positive development for traditional energy since it favors less regulation. 

One example concerns the EPA’s reliance on the Chevron Doctrine to recently issue a regulation requiring any new natural gas power plant to capture its CO2 emissions by 2034. The increase in power demand due to the AI boom was already expected to increase natural gas demand even with this added expense, which now may not be required. The Supreme Court ruling is positive for natural gas.  

The pause in LNG permits that Biden announced earlier this year should be rescinded once Trump takes office. Some negotiations over long-term LNG supply had been halted due to uncertainty over when the permit pause would be lifted. Energy Transfer’s planned Lake Charles facility was one whose future was left in limbo. Japan’s energy minister publicly worried about the delay. Japan is the world’s second biggest LNG importer, and they’re attracted to cheap US prices.  

It wouldn’t be surprising for the debate to reinvigorate some negotiations over long term LNG supply that had been stalled.  

Making more US natural gas available to Asian buyers allows them to reduce their dependence on coal. Because gas burns with roughly half the CO2 emissions of coal, this is the most powerful way to reduce greenhouse gases and is the biggest factor driving US emissions lower.  

Perversely given how progressives have pushed climate change policies, in lifting the LNG export pause a re-elected President Trump would be doing more to help the rest of the world lower emissions than anything the current administration has done.  

And there will no longer be a US climate czar praising China’s progress on emissions, as John Kerry did. He regularly overlooked their growing fleet of coal burning power plants. Kerry also mistakenly regarded China’s renewables ambitions as reflecting concern for the planet whereas it’s part of their drive for energy security. They’re planning for eventual conflict over Taiwan.  

Thursday night’s debate was painful to watch. A poorly advised old man was shown to be well past his political sell by date. We’ll learn how easily a presidential candidate can be dropped when his primary delegates have been pledged but not formally voted. 

It was a lousy week for Democrats, but a good one for energy investors. It provided more certainty about the future political and regulatory environment we’ll face. If a strong replacement candidate for Biden does emerge, their chances will improve. But for now, reliable energy stocks are benefitting from slipping Democrat support.  

There can be little debate about that.  

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Last week the Congressional Budget Office (CBO) released their latest ten year budget projection. It invariably makes for depressing, if unsurprising reading. Significant deterioration in our fiscal outlook is visible with every release.

For example, in February we noted that one particular milestone, the year in which interest on the Federal debt exceeds $1TN, keeps moving closer (see Our Darkening Fiscal Outlook).

In 2022, this was forecast for 2030. A year later the date had drawn two years closer, to 2028. In February it was projected to happen in 2026. And in the CBO’s latest release they now expect Federal interest expense to exceed $1TN next year.

It seems our fiscal outlook is not just getting worse – it’s deteriorating at an increasing pace. Two years ago, 2025 Federal revenues (mostly taxes) were projected to be 17.6% of GDP. Now it’s 17.0%. 2025 spending has gone from 22.3% to 23.5%. Mandatory, discretionary and net interest have all increased – the latter from 2.1% to 3.4% of GDP.

The pandemic-related inflation surge was hugely damaging. It’s consistently among the top concerns of voters, which augurs poorly for Joe Biden’s re-election hopes. It’s made worse because traditional inflation gauges don’t correspond with how consumers experience higher prices. Hedonic quality adjustments, owners’ equivalent rent and even insurance (see Another Inflation Omission) are all subjected to statistical purity which renders them less comprehensible to non-economists. Higher inflation has exacerbated the metric’s impenetrability for many.

On top of that, Democrat policies have been inflationary, starting with the $1.9TN stimulus package signed within a few months of Biden’s inauguration. The energy transition is also inflationary – it’s increasing electricity prices and pumping hundreds of billions of dollars into the economy through tax breaks and subsidies.

The resulting tighter monetary policy has been costly. Two years ago, the CBO was projecting the average rate on public debt in 2025 at 2.39%. Now they expect it to be 3.55%. Monetary policy caused the recent fiscal deterioration and is driving our debt higher.

Fed chair Powell has argued that our economic future can only be assured by returning inflation to 2%. A less robust monetary response would have reduced the damage to our debt outlook, but orthodoxy holds that we would ultimately have been worse off.

There are no votes in fiscal prudence. Bill Clinton was the last president to make a serious attempt at reducing the deficit. Our current path is democratic if ill-advised. It demonstrates that democracies are ill-suited to tackle long term problems whose benefits accrue to later generations while the costs are incurred today.

Climate change shares this generational misalignment of interests. The warnings of climate catastrophe are persistent, yet coal consumption continues higher as poorer countries value higher living standards today over a cooler future.

Fiscal catastrophe gets no coverage – on this issue the warnings have worn themselves out. Because we’ve continued to muddle through there’s no urgency to address the issue.

The long term investor has to ponder how this will resolve itself. An onslaught of selling by foreign central banks abandoning hope of fiscal reform was once felt to be a threat. Japan owns $1.1TN and China just under $800BN. They couldn’t sell that much if they tried, and in any case the Fed’s $7.3BN balance sheet could absorb it. If bond yields spiked, the Fed would step in to assure an orderly market. Quantitative Easing has emasculated the bond vigilantes.

Currency debasement has been the refuge of profligate governments for centuries, as I explained over a decade ago in Bonds Are Not Forever; The Crisis Facing Fixed Income Investors. Higher inflation allows for negative real interest rates on debt, a stealth default that is less painful than a sudden one.

The CBO expects the cost of financing our debt to average around 3.4%, 1.4% above the Fed’s inflation target. A 3-4% inflation target would lower the real cost by making it easier for short term rates to be below inflation, if only the Fed would accept it. The support among monetary thinkers for such flexibility is growing. Jay Powell has already modified the FOMC’s interpretation of its dual mandate to allow for temporary inflation overshoots in the interests of maximizing employment. Because this is an asymmetric shift, it means higher than 2% inflation over a cycle.

The voter dissatisfaction with higher inflation is supportive of the Fed’s monetary response but makes it tricky to accommodate the negative real interest rates that will ameliorate our debt outlook.

US Debt:GDP is 1.0X and the Fed owns 15% of our bonds. In Japan the equivalent metrics are 2.4X and 43%. Deflation has been a persistent problem for Japan. But US voters would not long tolerate the anemic GDP growth that accompanied it — 0.6% pa over the past decade in Japan vs 2.5% pa in the US. Fiscal stimulus would be an electoral winner.

This is why higher US inflation remains likely.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Cheniere Energy Inc (CEI) has come a long way since its founding by Charif Souki in 1996. Three decades ago the US looked likely to be an importer of Liquefied Natural Gas (LNG) as demand outgrew dwindling domestic production. CEI planned to meet the gap with LNG imports. By 2008 the company’s LNG import terminal was ready at Sabine Pass, LA just as the shale revolution was boosting US production. Domestic gas was cheaper than imports.

By 2011 Cheniere was preparing to reverse its flow – planning to export US LNG which was becoming abundant and cheap. Today CEI has 30 Million Tonnes per Annum (MTPA) of capacity at Sabine Pass and another 25 MPTA at its Corpus Christi, TX facility. Their $45BN investment in infrastructure allows them to export 8% of US production.

Souki long ago left CEI, forced out by activist shareholder Carl Icahn in 2015. They disagreed over Souki’s desire to add a marketing capability to CEI which would have provided the ability to speculate on natural gas prices. CEI’s business model is to charge a liquefaction fee for chilling natural gas to around –260 degrees Fahrenheit so it can be loaded onto a tanker.

The long term contracts CEI signs with highly rated counterparties provide cashflow visibility that can justify a high multiple on CEI stock. Speculating on natural gas prices offered less certain results and in Icahn’s view would have depressed the valuation.

We always felt Souki’s risk appetite was excessive. After being fired by CEI he founded Tellurian (TELL). Souki’s bullish view on natural gas prices led him to agree Sale Purchase Agreements (SPAs) with buyers that left Tellurian with the price risk.

During the pandemic TELL’s collapsing stock price resulted in a margin call on Souki, who had leveraged his personal holdings.

Investors didn’t share his enthusiasm for betting on higher prices, and TELL’s failure to secure financing led several SPAs to be canceled as the construction timeline was repeatedly pushed back. Souki was once again pushed out.

Earlier this year the Biden administration announced a pause on new LNG permits. This has left TELL languishing in limbo, unable to make commitments to deliver LNG in the future to potential buyers because there’s no visibility on when their proposed Driftwood LNG terminal will be built.

By contrast NextDecade (NEXT) which was once competing with TELL to sign up buyers, has moved ahead with construction of Stage 1 of their Rio Grande LNG terminal and looks likely to move ahead on Stage 2 by the end of this year.

Creating another CEI is the goal of both companies. With their recent update on capital allocation, CEI showed why others want to emulate them.

Although CEI’s $45BN outlay shows LNG terminals require enormous capital commitments, once built the ongoing maintenance capex is modest. CEI reinvests the smallest percentage of EBITDA in the midstream infrastructure sector on upkeep of their existing assets.

This has led free cash flow to boom. They increased their share buyback authorization by $4BN and are aiming to retire 10% of their outstanding shares by 2027. Past share repurchases since 2022 have already retired over 10% of their sharecount.

Having instituted a dividend in 2021, CEI is targeting 10% growth and a 20% payout ratio. They expect to deploy $20BN in new capital on expansion projects by 2026 while also reaching >$20 per share in Distributable Cash Flow (DCF), around a 12% DCF yield based on their current stock price. They’re targeting an investment grade balance sheet with 4X Debt:EBITDA which will further reduce their cost of financing.

CEI plans to add 35 MTPA of capacity to the 55 MTPA already in operation, maintaining their dominant position in US LNG exports. Their shipments are 95% contracted through the mid 2030s with highly rated counterparties including Petrochina, South Korea’s Kogas, Spain’s Iberdrola and Shell. Williams Companies and Kinder Morgan are among those providing supporting natural gas infrastructure.

Exporting LNG is an attractive business model because the infrastructure only gets built when enough SPAs are in hand to obtain financing. 75% of recoverable US natural gas can be profitable at under $4 per Million BTUs, assuring US LNG exports will benefit from cheap supply.

Investors didn’t lose $BNs on TELL because they couldn’t raise much capital. Construction barely started on Driftwood. The cash wasn’t there.

Global coal consumption continues to grow. Natural gas burns with around half the greenhouse gas emissions and can substitute for power generation and many other uses. People who think seriously about the most effective ways to mitigate global warming know US LNG is an important part of the solution. Cheniere’s exports will be in demand for decades to come.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

It says something about one company’s dominance of AI chips when a presentation on power demand growth starts with Nvidia’s revenue forecast. But that’s how John Schultz of the Advanced Data Center Consulting Group opened a recent webinar. Unit volumes can be derived from sales, and the number of chips being bought determines the amount of new power demand.

Consequently, AI electricity use is forecast to more than double this year versus 2023.

Blackstone is investing $8BN with data center provider QTS preparing for the AI boom.

AI chips are power hogs, but less appreciated is the need for electricity to cool them as well.  As more computing is packed into smaller spaces, the physical limits of blowing cold air on the equipment are being reached. Combining water with data centers was long rejected by the industry as too risky, but direct to chip liquid cooling is becoming the only practical way to stop the expensive kit from from melting.

Microscopic fragments in the cooling fluid can damage the chips, so stainless steel pipes are required to move PG25 (85% water/15% anti-freeze).  Mesh filters with openings measured at 100 microns – ten times the size of a human blood cell — are used to trap particulates.

Schultz reviewed some of the AI uses already deployed.

Microsoft Office uses Copilot (dubbed “AI for the workplace”) to create powerpoint presentations, write in Word based on an outline and build Excel macros. Google’s Duet aims to compete.

There are important applications in drug research, where development times are coming down sharply. Terray Therapeutics captures 50 terabytes of raw data (more than 12,000 movies) on billions of molecular interactions every day in their quest for new treatments. McKinsey thinks pharmaceuticals have a “once in a century” opportunity.

Interpretation of medical images is 2.5X more effective since AI can learn from 10,000 examples in less than three months whereas a radiologist would need twelve years to see the same number of images.

Finance is using AI-powered chatbots for customer service, to detect fraud and to evaluate investments.

Data center location depends on proximity to its customers. AI training can be done anywhere as long as the data consists of words and text that can be moved easily. Video data requires far more bandwidth, so this type of AI training happens where the video is stored.

Latency is another issue. Microsoft’s Copilot can tolerate latency of 100-250 milliseconds, which means they need fewer data centers (Schultz believes four) across the US to serve most of their customers. Applications requiring less latency need more data centers across the country to reduce the physical distances data must cover to the customer.

Powering the AI revolution will be challenging. Some data centers will rely on dedicated electricity generation, with natural gas an obvious choice. Given the sensitivity of many IT companies to their green credentials, expect much buying of carbon credits and other efforts to offset CO2 emissions.

Solar and wind will require excess generation capacity to compensate for their intermittency. And nobody likes power lines passing over their land.

Microsoft is considering using small modular reactors, but given popular opposition to nuclear power, they’ll need to be in rural areas.

The scale of the jump in power demand is already a political issue. The Electric Reliability Council of Texas (ERCOT) now expects electricity demand to increase to 150GW by 2030, up from 85GW today. Last year their 2030 forecast was for 130GW.

This will challenge the current approach whereby customers sign up for power supply whenever they’re ready. ERCOT CEO Pablo Vegas said more than half the new demand will come from crypto-miners and data centers. Bitcoin production is a misallocation of resources and should be near the bottom of any priority list.

Data centers create few local jobs once they’re built, so there’s the potential for a political backlash if retail electricity prices are perceived to be rising because of AI. Some new customers, such as hospitals, schools and residential areas may receive priority in connecting to the grid.

It is somewhat reminiscent of the dot.com excitement 25 years ago. The internet brought hype but was hugely consequential. Overbuilt fiber-optic networks led to sharply lower communications costs which stimulated demand.

AI hasn’t yet had a discernible impact on how we do our jobs at SL Advisors. I still type every word of every blog, and the videos are me. But the use case examples provide compelling evidence that another computing revolution is underway. Increased power demand will boost natural gas consumption, benefiting companies such as Energy Transfer, Kinder Morgan and Cheniere.

Try googling will AI boost natural gas demand?

Pipeline multiples are still too low, with 6% dividend yields plus 4% growth providing a potential 10% total return.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

The International Energy Agency (IEA) issued a report forecasting an oil glut by 2030, with 113.8 Million Barrels per Day (MMB/D) of supply capacity versus demand of only 105.4 MMB/D. They expect oil demand to plateau over the next few years. By contrast, OPEC sees continued demand growth, albeit slowing to around 1 MMB/D by 2030.  

The IEA has taken on the role of energy transition cheerleader, and their forecasting is increasingly colored by an optimistic view of the penetration of renewables and EVs. By contrast, capital is flowing more freely towards traditional energy. This is most clearly seen in transactions such as Exxon’s acquisition of Pioneer Natural Resources, or Chevron’s deal to buy Hess.  

Most long term energy forecasts are intended to support the narrative of a rapid energy transition away from fossil fuels. Few offer a neutral, plausible scenario. The IEA is not alone in their partisan stance. European energy firms are especially sensitive to criticism and understand that the media equates their public outlook with their future exploration and production. BP is so cowed by environmental extremists that all their public forecasts show declining oil and gas consumption. Their Net Zero 2050 scenario sees even less than the IEA’s Net Zero and less than a quarter the demand of ExxonMobil’s outlook. 

My partner Henry and I watched a webinar organized by Wells Fargo featuring Amrita Sen of Energy Aspects. One thing that struck us was how the Administration is trying to control oil prices. They have shown a willingness to vary the imposition of sanctions on Russia to keep prices below $90 a barrel. Sen recounts how a US delegation visited India during a run-up in oil and told them it was now fine to buy Russian oil, sanctions notwithstanding. Lower oil prices allow tighter sanctions.  

Another useful insight concerned the growing caution of refineries to invest in costly upgrades given the uncertain long term outlook for refined product demand. Sen thinks this will lead to a tighter global market for gasoline within the next five years.  

The IEA also has an optimistic EV outlook. Energy Aspects sees an increasing shortfall in actual sales versus the IEA, with the EV fleet by 2030 being less than two thirds of the IEA’s forecast. This underpins the warning of an “oil glut” that provided the headline for coverage of the IEA’s latest forecast.  

The US should stop funding the IEA. It’s a waste of money.  

NextDecade (NEXT) had more good news with South Korea’s Hanwha Group announcing a 6.83% stake in the LNG company. Through various subsidiaries Hanwha expects its holding in Next to reach 15%.  

Last week the WSJ published an interactive poll (see What Type of Voter Are You?). If you subscribe to the online version you can see where you rank compared with 1,200 respondents on economic, social and civic dimensions. The point is that only a small minority of us fall neatly into red or blue voters, even though those are the choices on offer. 

I’m on the extreme right on economic issues, favoring deregulation and low taxes; dead center on social issues; and in the 1% of most optimistic on the civic scale. This includes questions such as “How proud are you of America’s history (answer: Very) and agreeing with the statements “The US stands above all countries in the world” and “Life in America is better than 50 years ago for people like you.” 

The last question is self-evidently true based on incomes. But I’m regularly surprised at how negative polls are. Things could always be better, but jobs are plentiful, we’re not at war, life expectancy is improving (although it dipped with the pandemic and opioid crisis) and there’s never been a better time or place to be alive. Things could be a lot worse. I generally see the glass as half full – for most Americans this is easily supported by the facts, and anyway life is more fun that way. Try the survey – it’s brief and your result will probably be interesting.  

Elections overseas reveal voters to be in a surly mood. Right wing parties achieved surprising gains in EU elections. France’s President Macron called a snap election which is looking like a poor decision. Britain’s ruling Conservative party, having delivered Brexit with no discernible benefits, is heading for their biggest loss in a century. And Mexico just elected a populist whose agenda doesn’t look encouraging for the owners of capital.  

These are country-specific issues and don’t represent a political shift. The UK is moving left while France is moving right. But the dissatisfaction perhaps you and your friends feel isn’t limited to the US. You’re just not going to hear it from me.  

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

The trend of positive assessments is continuing for the pipeline industry. Sell-side analysts are pressing the case for their favorite names. JPMorgan sees further upside for Targa Resources (TRGP) even though it’s returned 40% YTD. They have a $140 price target for the end of next year, up from ~$120 today. They cite a “fully integrated well-to-dock Permian NGL value chain” and attractive Enterprise Value /EBITDA multiple of 9.0X (2025E) versus a peer group median of 9.7X.

NGLs are natural gas liquids, mostly ethane and propane. The latter is used in agriculture (for crop drying) cooking and heating where natural gas isn’t available, and also as a petrochemical feedstock. NGLs get less attention than oil and gas, but their production has also grown through fracking. US propane exports are now well above 1.5 Million Barrels per Day. They’ve more than tripled in the past decade. TRGP is one of the beneficiaries.

Years ago when MLPs were overinvesting and investors wanted to see reduced capex, then-CEO Joe Bob Perkins would flippantly talk about “capital blessings” on earnings calls where he defended unwelcome big outlays.

Today TRGP has a greater focus on capital discipline, but it’s also fair to note that many of those prior investments have worked out fine.

Wells Fargo recently upgraded several natural gas-oriented names based on attractive valuations and power demand from AI data centers. Some investors are skeptical that enough new power plants will be built to drive the 7 Billion Cubic Feet per Day of increased natural gas demand they expect. New rules from the Environmental Protection Agency require all coal-fired and any new gas-fired power plants operating past 2039 to control 90% of their CO2 emissions, meaning capture and sequestration.

Regulations can always be changed, but the counter is that enough existing power generating plants have available capacity to drive gas demand higher anyway.

Morgan Stanley expects the median pipeline stock to return 21% over the next year, including a 6.1% median dividend yield. Buybacks are supportive of this, with $1.5BN of stock retired during 1Q24. Cheniere was $1.2BN of this and TRGP $124MM.

Some of the best energy analysts in the market remain constructive on the sector.

I’ve been searching for a good energy podcast. Progressive “renewables will solve everything and the world’s on fire” podcasts are abundant and useless. I did stumble on the educational Energy Policy Now and found Power Struggle: The Electric Grid’s Natural Gas Challenge informative. AI will drive the increased demand for natural gas. This drills down into some of the consequences.

When Storm Uri hit Texas in 2021 it didn’t only highlight the need for winterized natural gas production facilities. Many power plants had natural gas contracts that didn’t guarantee supply, because there’s a big price difference. The Texas grid, run by ERCOT, has tended to place less importance on reliability than the rest of the country in exchange for low prices. Uri led to a reassessment.

At the Federal level, NERC, which oversees electricity, prioritizes reliability while FERC, which regulates interstate natural gas, values safety most highly. Electricity “days” that govern contracts start and end at midnight, whereas gas “days” begin at 10am ET. So a gas-fired power plant faces a mismatch between its pricing for inputs versus outputs.

These problems can be solved more easily than coping with the 20-35% utilization that burdens intermittent solar and wind.

If you enjoy learning about the intricacies of the energy business, you’ll enjoy the podcast. Or you can rely on me to chronicle the highlights.

Once or twice a year I play golf with my old boss from JPMorgan, Don Layton. In 1986 he decided to hire a 23 year old derivatives broker as a trader. It was to my great benefit and hopefully not something he had later reason to regret. Don (often referred to by his initials, DHL) went on to become vice-chair of JPMorgan, running the investment bank. I soon took over interest rate derivates trading in NY.

Later in his career Don was CEO of E*Trade and then Freddie Mac, from 2012-2019.

Don was a terrific leader, with the rare ability to combine strategic vision with command of detail. I’ve remained in touch with many who used to work for Don in the 1980s and 90s. We all retain fond memories and great respect for him. On Monday we reminisced with two other former colleagues, Don Taggart and Don Allison.

DHL remains strongly competitive and draws unseemly pleasure from beating me at golf on one of his home courses. The nostalgia easily compensates.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund