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.  

.avia-image-container.av-1jfnc3s-1f5dec8f0d8189a01bf982cf2515d098 img.avia_image{ box-shadow:none; } .avia-image-container.av-1jfnc3s-1f5dec8f0d8189a01bf982cf2515d098 .av-image-caption-overlay-center{ color:#ffffff; }

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.  

.avia-image-container.av-14nz8w8-7ed56845ab3b2a1642217c9a19a78af5 img.avia_image{ box-shadow:none; } .avia-image-container.av-14nz8w8-7ed56845ab3b2a1642217c9a19a78af5 .av-image-caption-overlay-center{ color:#ffffff; }

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. 

.avia-image-container.av-kujip4-67082ee5d45c43f16a44e07da7224b98 img.avia_image{ box-shadow:none; } .avia-image-container.av-kujip4-67082ee5d45c43f16a44e07da7224b98 .av-image-caption-overlay-center{ color:#ffffff; }

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.

.avia-image-container.av-zwzjy2-cd4a458a9cc2cbe6dac413af27577471 img.avia_image{ box-shadow:none; } .avia-image-container.av-zwzjy2-cd4a458a9cc2cbe6dac413af27577471 .av-image-caption-overlay-center{ color:#ffffff; }

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.

.avia-image-container.av-n0jaxm-e90d3ddeeed2b2655d616346b83e21dd img.avia_image{ box-shadow:none; } .avia-image-container.av-n0jaxm-e90d3ddeeed2b2655d616346b83e21dd .av-image-caption-overlay-center{ color:#ffffff; }

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

The inflation statistics offer a rich trove of counterintuitive methods that often inspire this blogger. It’s an important issue because voters cite inflation, for which they blame Joe Biden, as one of their top concerns. Inflation reports show it’s coming down, although that doesn’t mean earlier price hikes are being reversed, simply that prices are going up more slowly.

The latest statistician’s gem is how the CPI treats insurance, something noted recently in the NYTimes (see Home Insurance Is Clobbering Consumers. Yet It’s Barely Counted in Inflation).

The article notes that the typical homeowner with a government-backed mortgage has seen a 41% increase over five years, 7.1% pa. Many parts of the country have seen bigger increases. This is especially true in Florida, where the only reasonable coverage comes from state-backed Citizens. Our condo building’s policy in Naples is up 54% over the past two years.

The CPI only picks up what renters pay for insurance. This comes back to how economists at the Bureau of Labor Statistics (BLS) treat housing (see Why You Can’t Trust Reported Inflation Numbers). Since the CPI measures goods and services, the BLS estimates the value of shelter (a service) provided by a home (an asset). It’s not an intuitive approach since two thirds of Americans obtain shelter by owning their home. But the BLS uses Owners’ Equivalent Rent which in theory should, over the long run, equate to the cost of owning a home.

Therefore, the CPI omits homeowners’ insurance, because that’s part of the cost of owning an asset and they’re not measuring assets.

The Personal Consumption Expenditure (PCE) index includes home insurance but with a very low weight. They take insurance premiums less underwriting losses and expenses (referred to as the insurers’ combined ratio) to set the weight. In effect they’re looking at the margin insurance companies charge over claims as the service. So if premiums go up 10% to match claims, the PCE index will capture that but if insurers have a 95% combined ratio (ie a 5% profit margin) then the weight will be 1/20^th of what it is to the consumer.

Presumably if households self-insured their homes and endured repair and replacement costs that rose 10%, this would flow through fully into the PCE although not the CPI since it’s not concerned with the cost of holding assets.

Insurance expenditures last year were $469BN out of total PCE of $19TN, around 2.5% of disposable income.

It’s an arcane topic and scarcely one that any politician can address in a soundbite. Insurance premiums have been outpacing inflation. It’s another reason why the published inflation statistics aren’t that useful for the typical consumer. There’s no conspiracy –  simply a bunch of economists producing numbers that fit their theoretical models but not the actual experience of Americans. It shows why inflation as perceived by voters is higher than the reported numbers.

The AI boom continues to improve the fundamentals for natural gas. Wells Fargo recently upgraded Kinder Morgan and Williams Companies to Overweight. A few years ago fears of “stranded assets” caused some to worry that pipelines would lose their customers within a decade or so, greatly reducing the npv of their anticipated cashflows. Since then, renewables stocks have collapsed as energy realism has started to return.

If Enterprise Value/EBITDA (EV/EBITDA) moves from 9X-10X, assuming a 50/50 split between equity and debt the typical company could appreciate by around 20%. Wells Fargo analyst Michael Blum thinks EV/EBITDA multiples for natural gas pipeline companies could eventually increase by around 2.5X.

New York governor Kathy Hochul abandoned the planned congestion charge for New York city, worried about the impact on businesses still recovering from the pandemic. Forcing more travelers onto public transit reduces emissions and should find support among Democrat voters in NY and neighboring New Jersey. But Democrats have mostly failed to convince people that the energy transition is worth paying for.

I endured a two hour, delayed journey on NJ Transit one day last week which made me late for dinner in NY. Public transit from the suburbs isn’t reliable enough.

.avia-image-container.av-1asomtw-8e097ee9cc6ac1e2d47c4e275262ad38 img.avia_image{ box-shadow:none; } .avia-image-container.av-1asomtw-8e097ee9cc6ac1e2d47c4e275262ad38 .av-image-caption-overlay-center{ color:#ffffff; }

A couple of weeks ago I had the opportunity to meet Vlad Zherenovsky from NJ –based Kraner, LLC along with his colleagues Robert Castella and Joe Pandolfo. We chatted about midstream energy, a sector we all agreed offers attractive upside.

Vlad and his family fled Latvia following the collapse of the Soviet Union with their savings wiped out. He finished his education here and went into finance, starting Kraner in 2010. Vlad’s is another immigrant success story.

.avia-image-container.av-u94qes-1d8f169fae29ea401e9e3e92bab23dc4 img.avia_image{ box-shadow:none; } .avia-image-container.av-u94qes-1d8f169fae29ea401e9e3e92bab23dc4 .av-image-caption-overlay-center{ color:#ffffff; }

Bill Shepherd recently turned 98. He is our oldest client, although not by much. Lunch with Bill is always a pleasure as we delve into the intricacies of the energy sector together. His father and mother were both born in England, in 1897 and 1900 respectively. They emigrated to the US and married in Brooklyn, NY in 1924. Like me, Bill is proud of his English heritage.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Oregon is typical of many liberal states in that it is reviewing the infrastructure plans of the utilities it regulates. The concern is that too much capital will be invested in new natural gas infrastructure that will subsequently result in “stranded assets” as renewables reduce natural gas demand. The fear is that poor capex decisions will saddle future ratepayers with the cost of un-needed infrastructure as cheap solar and wind gain share.

Renewables aren’t cheaper – that theory has been debunked by the rising price of electricity over the past couple of years (see The Inflationary Energy Transition). There’s a case that reducing CO2 emissions is a desirable public policy goal and pursuing it is worth more expensive electricity. Liberals rarely make this case, preferring instead to claim that weather-dependent power costs less in defiance of evidence to the contrary.

So the Oregon Public Utilities Commission is challenging assumptions about future natural gas demand, which they deem “unreasonably optimistic.”

.avia-image-container.av-mmhh1s-b39dd6cfb7b91436099385658c4f680f img.avia_image{ box-shadow:none; } .avia-image-container.av-mmhh1s-b39dd6cfb7b91436099385658c4f680f .av-image-caption-overlay-center{ color:#ffffff; }

Additions to US natural gas pipeline capacity were a record low in 2022, down 97% from the high five years earlier. It’s helping boost cashflow at pipeline operators because their capex is down but may not always be in the public interest.

By contrast, India’s PM Narendra Modi is pushing to turn India into a “gas-based economy.” The country’s largest steel mill is planning to invest $1BN to help it switch to natural gas, which will reduce its coal consumption and therefore India’s CO2 emissions.

The Indian Oil Corporation recently signed a long-term LNG deal with TotalEnergies, a key investor in NextDecade.

The White House pause on new LNG export permits impedes India’s energy objectives even though they’re in everyone’s interests. India’s JSW Steel is not going to use solar and wind to make steel.

This is why it’s correct to bet on continued growth in demand for US natural gas. The world is shifting to a more realistic energy transition which acknowledges it’ll take generations and that reducing coal consumption anywhere and everywhere is good. As policymakers and businesses adopt practical solutions, the US is well positioned to lead.

Several major European power companies are scaling back their renewables’ targets.  Italian, Spanish and Portuguese electricity prices may be among the highest in the world, but they aren’t high enough to make such investments profitable.

“There has been a big reality check around renewables growth,” said Norman Valentine, head of renewables research at consultancy Wood Mackenzie.

It is against this backdrop that your blogger is replacing an old oil furnace with a new gas one. This requires the local gas company to upgrade our existing gas line to higher capacity, work that is mercifully still permissible in blue New Jersey. In New York, Con Edison requires anyone with a gas service request to accept the “Acknowledgement of the Climate Leadership and Protection Act” which sounds as if they’d rather you didn’t make such a request in the first place.

Heat pumps have outsold natural gas furnaces for the past two years. This doesn’t mean that more homes are installing heat pumps, because some homes may be using more than one unit. For example, we already have one natural gas furnace so will be adding a second.

Heat pumps, which run on electricity, use less energy and are cheaper to operate. This should mean they’ll eventually displace natural gas furnaces. However, their installation is complex and expensive. They also don’t work well with the cast iron radiators in our almost century-old home, which require large volumes of very hot water to operate effectively.

Heat pumps reportedly run less efficiently as it gets cold, when they rely on a backup heating element which is much less efficient. I’d be concerned that they wouldn’t keep the house as warm as I’d like – I have little tolerance for being cold, which is why I spend much of the winter in south Florida.

Unlike our gas furnace, a heat pump would be placed outside where it would be vulnerable to ice formation. Defrosting it would reduce the heat available for the house, probably just when it is most needed. They’re apparently also noisy. They use a longer operating cycle than gas furnaces which means they’re running more of the time.

The added gas infrastructure that will enable our additional gas furnace will not be stranded for at least as long as we’re living here. My criteria for a heating system begins with whether it will keep us warm enough. There’s no efficiency or cost benefit that would compensate for being cold. And any reduced emissions would be offset by one of China’s new coal-burning power plants within a few moments, so that doesn’t factor in at all.

I don’t want to be forced to rely on a heat pump in the future if I don’t think it’ll meet my needs.

Ray Dalio sees political polarization in America causing people to, “…move to different states that are more aligned with what they want.”

Energy policy in liberal states is one reason why.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

I was perusing energy podcasts the other day. Disappointingly they all seemed to be about renewables – nothing about where over 80% of the world’s energy comes from today. Hopefully I started listening to one by Shell, but quickly realized it’s part of their PR campaign to convince people they’re fully committed to the energy transition while they struggle to make any money outside of their fossil fuels business.

Then I stumbled on an interview with Dawn Farrell, President and CEO of Trans Mountain Corporation (TMC). Originally called TMX, this was a project begun by Kinder Morgan to expand crude capacity on the existing pipeline connecting Edmonton, Alberta with Burnaby, British Columbia.

As we chronicled several times over the years (see Canada’s Failing Energy Strategy), Kinder Morgan eventually tired of navigating the politics between oil-rich Alberta and liberal British Columbia. Canada has long struggled to get its crude oil to market. The Keystone XL expansion was finally killed off by Joe Biden as soon as he became president in a slap to our ally. The Western Canada Sedimentary Basin crude benchmark trades below WTI – sometimes as much as $30. The Canadian Federal government decided completing TMX was in the national interest and bought it from KMI in 2018.

It is now finished. Dawn Farrell explains what it was like to oversee a project backed with theoretically unlimited government funds.

The cost grew from an estimated C$7BN to C$29BN (C$34BN including interest expense), although Farrell notes that the scope increased somewhat. The complexity of building infrastructure isn’t always apparent to those not directly involved.

The route included 47KM of steep slopes with a 15% grade. If not correctly built the pipeline will over time come apart in such terrain. Oil is moved through pipelines in batches of varying grades. Nitrogen has to be inserted between each batch to ensure no gaps open up in between them.

Farrell said they encountered 360 archeological sites, making them probably the largest dig in Canadian history. Every time a new one was encountered work stopped while archeologists were brought in.

Representatives of First Nations, Canada’s indigenous people, were involved at every step. They have stronger rights that native Americans and their consent was needed at numerous points for the project to proceed. TMC employed an ambassador who spent countless days courting First Nations leaders. They were awarded 10% of the jobs and may eventually own a stake in TMC.

.avia-image-container.av-2k6dxn-4ff1b7db66b01cbb11b15c781c95adc4 img.avia_image{ box-shadow:none; } .avia-image-container.av-2k6dxn-4ff1b7db66b01cbb11b15c781c95adc4 .av-image-caption-overlay-center{ color:#ffffff; }

Archeologists uncovered 250K artifacts that were mostly First Nations ancestors dating back as much as 1,500 years.

TMC moved 27,000 birds’ nests. They relocated 1.5 million amphibians. Biologists were ever present supervising the process. They passed through nine golf courses, all of which Farrell reports were restored to their previous condition. They met the needs of 69 regulatory agencies.

TMC expanded the oil loading facilities at Vancouver. An estimated 100 whales live in nearby waters, so all ships operate at lower-than-normal speed and employ specialized sonar which is audible to whales, reducing the odds of contact.

TMC increased TransMountain’s capacity from 300 Thousand Barrels per Day (KB/D) to 890KB/D. Filling the pipeline took 24 days and 4.2 million barrels of oil, but it’s now operational.

Canadian politics is more liberal than the US, but there are still plenty of realists up north who recognize that the world will need gasoline, jet fuel, diesel, lubricants and asphalt for the rest of our lives.

The cancelation of Keystone XL was intended to appease climate extremists, but it didn’t stop Canadian oil getting to market. It’s simply going west instead of south, with no US benefit. Similarly, the LNG permit pause won’t stop countries buying natural gas, but it will increase coal consumption by emerging countries in Asia. Democrat energy policies are often more about optics than results.

TMC was a huge infrastructure project with numerous stakeholders including landowners, regulators, oil shippers, indigenous tribes and environmentalists. Past struggles include: Energy Transfer’s Dakota Access pipeline which was fiercely opposed by indigenous tribes; Equitrans’ Mountain Valley Pipeline which suffered numerous judicial delays; and the Cardinal-Hickory Creek transmission line which environmentalists opposed even though it will bring solar and wind power to population centers in Iowa and Wisconsin.

TMX in China would have been different. Building energy infrastructure in rich, western countries is excruciatingly complex. Federal permit reform has support from both political parties but remains unaddressed. Until the process is improved it will impede the energy transition. There’s much more of this ahead for western nations as we electrify more of our energy consumption.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Which is the best pipeline company? It depends on what you’re measuring. Income-seeking investors might focus on Distributable Cash Flow (DCF) yield or distribution (dividend) yield. Dividend coverage is usually important. Lowest leverage would provide comfort to those concerned about downside. Momentum investors will look at dividend growth – and few will ignore price performance. So how do they rate?

We’ll focus on the biggest companies and MLPs, all part of the American Energy Independence index (AEITR). If DCF yield is what you’re after, Energy Transfer (ET) is top at 17.2%. For years this stock labored under the “Kelcy discount” as potential buyers were wary of past management actions that weren’t fiduciary best practice (see A Look Back At Energy Transfer).

.avia-image-container.av-qqdjpg-274a63f856fb23f17d93f388e0f266bf img.avia_image{ box-shadow:none; } .avia-image-container.av-qqdjpg-274a63f856fb23f17d93f388e0f266bf .av-image-caption-overlay-center{ color:#ffffff; }

However, this company knows how to execute. Last year’s acquisition of Crestwood has been absorbed with more synergy benefits than forecast. Many advisors we talk to own ET, and their reputation has evolved away from most likely to self-deal to great operator with an “in-your-face” posture to competitors and regulators.

One investor said he’d heard that some analysts are downgrading ET, but JPMorgan and Wells Fargo both reaffirmed Overweight ratings following earnings earlier in the month.

The highest dividend yield is Western Midstream Partners (WES) at 9.4%. Their DCF yield is only 10%, giving them a scant 1.1X coverage. It’s many years ago now but low distribution coverage ratios used to be typical when MLPs were the dominant corporate form in midstream energy infrastructure. They were routinely doing secondary offerings to buy “drop-down” assets from their controlling general partner.

The shrinking pool of MLP-oriented money forced a more conventional single entity c-corp structure on most of the industry. Giving up the partnership structure meant accepting the double taxation common to most equity securities (ie first on corporate profits then on dividends paid to owners).

Depreciation charges help lower taxable income in many cases.

The best payout coverage is a whopping 10.2X at Cheniere. Their DCF yield of 11.2% is close to the median. They paid their first dividend in November 2021. It’s grown by a third since then but still only represents a derisory 1.1%. One of the features we like about Cheniere is that once an LNG terminal is built its ongoing maintenance capex is low. As a % of EBITDA Cheniere has the lowest ratio in the industry.

Pipelines have been reducing leverage in what’s become a virtuous cycle. Falling capex, caused in part by opposition from climate extremists, has boosted free cash flow. This has allowed some debt paydown as well as driving EBITDA higher. MPLX currently has the lowest Debt/EBITDA of 2.7X.

The two big Canadians, Enbridge (ENB) and TC Energy (TRP), have both been bucking this trend (5.1X and 5.4X respectively) with big capex programs and (in ENB’s case) acquisitions. This has caused their stocks to lag the market, although both are continuing to raise dividends and reduce leverage.

Growth, as measured by three-year CAGR in payout, is distorted by companies that have significantly increased their payout ratio. Hence Targa Resources (TRGP) is top with a 22% CAGR having raised their annual payout from $2 per share in 2023 to an estimated $3.63 (re JPMorgan). More representative growth rates from companies that were always paying a reasonable dividend are Williams Companies (5%), ET (6%) and MPLX (7.1%).

When it comes to trailing one year performance, Equitrans is the clear winner with a +155% return. Resolution of Mountain Valley Pipeline (MVP) thanks to its inclusion in a debt ceiling bill makes Senator Joe Manchin (WVa) their MVP.

In 2022 NextEra, a JV partner in MVP, was so pessimistic about the prospects of completion that they wrote down their interest to zero (see Why Pipeline Construction Is Hard). The repeated delays and cost overruns show why making the permit process more predictable is so important to all kinds of energy infrastructure, especially renewables. If courts can rescind authorizations years after the fact, building big projects will carry an additional layer of risk.

Other strong performers over the past year include TRGP (+66%), WES (+58%) and Oneok (+46%). I received a hefty tax bill due to their acquisition of Magellan Midstream (MMP) last year, which we and others opposed (see Still Uncovinced By Oneok Magellan Combo).

Since New Jersey doesn’t recognize tax loss carryforwards, the gain on MMP which I’d held for close to two decades was fully taxed on my state return while my federal return allowed some older losses to offset.

The NJ tax code is the most effective tool for encouraging those with means to flee the state. Fortunately, the OKE-MMP combination has performed better than expected.

Whichever metric you prefer in selecting stocks, midstream energy infrastructure has names that measure up well. It’s why the sector continues to outperform.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Natural gas prices have been recovering in the US following several months below $2 per Million BTUs (MMBTU). The techniques of horizontal drilling and hydraulic fracturing (“fracking”) have enjoyed steady improvement, allowing break-evens to fall. An additional factor has been associated gas from the Permian in west Texas. E&P companies want oil but they get gas anyway, and in many cases the production is becoming more “gassy”.  

Natural gas rigs employed are 27% lower than a year ago. This reflects improved efficiency but also production cutbacks in plays that are all or mostly gas (“dry gas”). Late last year natural gas production surged, averaging 104.6 Billion Cubic feet per Day (BCF/D) in November. Full year 2023 production averaged 102.4 BCF/D, up from 97.5 BCF/D in 2022. This year it’s likely to fall slightly to 101.6 BCF/D, demonstrating the old saw that the cure for low prices is low prices. But it should rebound in 2025. 

.avia-image-container.av-1jevgz7-32d02dff73dbc8d48a32f623e46a7c90 img.avia_image{ box-shadow:none; } .avia-image-container.av-1jevgz7-32d02dff73dbc8d48a32f623e46a7c90 .av-image-caption-overlay-center{ color:#ffffff; }

That’s because demand growth is coming. Public utility companies quickly turned the conversation to AI power demand on earnings calls. Forecasts of 5% annual revenue growth are not uncommon in this sector. It’s caused a surprising turnaround in utility stocks. Following –7.2% performance last year, the S&P Utilities ETF (XLU) is +12.7 YTD. The recovery coincided inconveniently with our warning that many of these companies face substantial future capex (see To Lose On The Energy Transition Buy Utilities).  

.avia-image-container.av-14pgtv7-6ab8e3fcee4f627d50f711ea450608b2 img.avia_image{ box-shadow:none; } .avia-image-container.av-14pgtv7-6ab8e3fcee4f627d50f711ea450608b2 .av-image-caption-overlay-center{ color:#ffffff; }

It’s hard to overstate the level of new investment in data centers. JPMorgan estimates $300BN globally this year, up from $200BN in 2020. They see $500BN by 2027. The big spenders are Microsoft, Google, Amazon, Meta, Apple, IBM, and Oracle. Nvidia’s recent results provided real-time confirmation of the spending on AI chips.  

AI power demand is on track to double from 2022-26. 

JPMorgan estimates that the increase in power demand should require an additional 1.4 BCF/D of natural gas by 2027 and 6.2 BCF/D by 2030.  

.avia-image-container.av-kzpzmb-59aed02a70c3a97e7203d8e2428058f7 img.avia_image{ box-shadow:none; } .avia-image-container.av-kzpzmb-59aed02a70c3a97e7203d8e2428058f7 .av-image-caption-overlay-center{ color:#ffffff; }

The Energy Information Administration (EIA) has consistently forecast declining natural gas consumption in the US power sector. Unlike many forecasters, the EIA is non-partisan so they don’t regard their publications as providing cheerleading support for renewables. The International Energy Agency does just that, devaluing their output.  

The EIA’s outlook has been predicated on renewables gaining market share. Since 2010 solar and wind have gone from 2% to 15% of US power generation. Casual reporting often presents this as evidence that weather-dependent electricity is taking over. But natural gas has gone from 23% to 42% over the same period.  

By the numbers, America’s biggest electricity story is the growth of natural gas which has displaced coal. Intermittent power is growing, but thankfully is not yet to the point at which we fear dunkelflaute, the German word for cloudy or windless days.  

In January Texas, which relies substantially on windpower, set a winter record for natural gas provided electricity.  

Feedstock for LNG export terminals is set to increase by 9.4 BCF/D through 2030 based on facilities already under construction. This will take total US LNG export capacity to 26 BCF/D, including NextDecade’s Rio Grande Stage 1 with 2.2 BCF/D (see What’s Next For NextDecade?). 

However, JPMorgan assumes 86% utilization given the possibility of excess global LNG supply by then, resulting in 22.4 BCF/D of exports. roughly a quarter of current production.  

The combination of AI power demand and LNG exports will require an additional 15 BCF/D of production by 2030, bringing us to around 120 BCF/D. Achieving that increased level of output will require activating wells with higher break evens. However, natural gas bulls will need to temper their enthusiasm because JPMorgan believes a price of around $3.50 per MMBTUs will be sufficient for the market to clear.  

The EIA has sharply reduced their forecast natural gas price since early last year. They previously had it oscillating either side of $5 per MMBTUs but have adjusted that roughly $1 lower.  

The arbitrage between global LNG prices and US looks likely to remain for the foreseeable future. The European TTF benchmark trades at $11 per MMBTUs and the Asian JKM at $12. Both these offer enough margin to cover the transportation cost from the US. We’re just capacity constrained.  

The Golden Pass LNG project, co-owned by Exxon Mobil Corp. and QatarEnergy LNG, faces possible delays as the general contractor filed for bankruptcy. 3,000 workers were laid off. It’s scheduled to be operational in less than a year, and that timeline must presumably be in doubt.  

US natural gas has a bright outlook. It’s a blue flame future.  

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

NextDecade (NEXT) has drawn plenty of investor questions over the past ten days. It began with their most recent 10Q, filed with the SEC on May 13^th. The phrase, “... there is substantial doubt about the Company’s ability to continue as a going concern.” wasn’t pleasant reading for many. How can a company that reached Final Investment Decision (FID) on trains 1-3 for its Rio Grande LNG export facility last year have any doubts about its survival?

Investors initially looked past the company’s reiteration that it has secured funding for Stage 1 (Trains 1-3). The “going concern” language referred to Stage 2 (Trains 4-5) which is not financed and hasn’t yet reached FID.

.avia-image-container.av-rkx30o-d62c7114be5dcf840269de4c64a9b468 img.avia_image{ box-shadow:none; } .avia-image-container.av-rkx30o-d62c7114be5dcf840269de4c64a9b468 .av-image-caption-overlay-center{ color:#ffffff; }

The stock swung wildly over the two trading days (May 10-13), covering a range from $7.41 to $6.37. On Tuesday 14^th it recovered strongly, perhaps as investors reassessed.

Our opinion remains that the market is giving little if any credit for the economics of Stage 2. The costs of completing Trains 4-5 should be lower than 1-3 because the site will have already undergone its initial preparation. So we think it’s undervalued. However, the company disappointed investors when they reached Stage 1 FID last July because they wound up with only 21% of the economics.

My partner Henry and I often debate how to assess this. I think they negotiated poorly. Global Infrastructure Partners (GIP) and TotalEnergy outsmarted them. No doubt capital and offtake agreements are vital to the project. But if you’re acquiring the land, capital, infrastructure partner and customers it seems that should be worth more than a fifth of the resulting business. NEXT had led investors to expect a 30%+ share, so on this they disappointed.

The counter, as Henry points out, is that they’re in a much stronger position to negotiate over stage 2 where we expect them to achieve a higher share than Stage 1. Even though Stage 2 is two trains versus three in Stage 1, it’s plausible that Stage 2 could be more valuable.

The LNG permit pause, ill-advised though it is, has helped NEXT. This is because, crucially, they have permits for Stage 2 already. Energy Transfer, whose planned Lake Charles LNG project is currently hostage to the pause, has seen negotiations slow because of the uncertainty. Japan’s Minister of Economy, Trade and Industry Ken Saito has sought clarification since Japanese companies are among the potential customers.

NEXT is not impacted by this. As if to demonstrate, on Monday they announced a 20-year 1.9 million tons per annum offtake agreement for Train 4 (ie Stage 2) with ADNOC of the United Arab Emirates. ADNOC additionally acquired an 11.7% stake in Stage 1 through GIP.

NEXT’s 10Q reminded that they plan to resolve the going concern issue by, “obtaining sufficient funding through additional equity, equity-based or debt instruments.”

This deal didn’t raise any equity for NEXT, so the possibility of a secondary is still there. But it did provide welcome confirmation of Stage 1 economics for the current investors.

NEXT hopes to reach FID on Train 4 later this year.

Deals can get done before FID has been reached on a facility, as NEXT has shown repeatedly in recent years. Permit uncertainty is a more difficult hurdle to overcome.

The contrast with Tellurian (TELL) is stark. Former CEO Charif Souki pursued deals that let TELL retain natural gas price exposure, a risky approach that made it impossible to obtain financing. Agreements expired as TELL failed to make progress. Souki left a job that had already awarded him success bonuses even though he hadn’t been. He was better at negotiating payment for performance in advance than in making TELL successful (see What’s Next For Tellurian?).

In other news, JPMorgan reiterated their bullish outlook on Cheniere (CEI) with its 11% Distributable Cash Flow (DCF) yield and highly visible cashflows. One of my favorite charts is from Wells Fargo where they rank companies in the sector based on what percentage of EBITDA they need to reinvest as maintenance capex.

CEI is top on this metric. LNG terminals don’t require much spending to preserve their functionality.

Earnings for the sector generated few surprises other than CEI’s predictable beat of expectations. Midstream energy infrastructure businesses are generating steadily increasing cashflow. Yields betray that a substantial percentage of investors remain skeptical. Fund flows are modestly positive but there is no irrational exuberance evident. Energy is the best performing S&P sector for the past three years, but to us it still looks like we’re in the early innings.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Ominously for President Biden, opinion polls consistently show voters are unhappy with his economic stewardship. The surge in inflation in 2022 didn’t help, but after believing it to be transitory the Fed responded and it’s now back down. Wednesday’s 3.4% CPI figure isn’t yet at the Fed’s 2% target but is close enough that the difference shouldn’t be discernible for the typical consumer.

And yet 22% of voters identify inflation/prices as their most important issue, according to a recent Brookings poll. Inflation feels higher than 3.4% to many people.

Part of the reason is that inflation calculations assume a basket of goods and services of constant utility. This anodyne term means the Bureau of Labor Statistics (BLS) adjusts for quality improvements. A better iphone gives you more utility. More iphone for the same money is a price reduction under this construct.

.avia-image-container.av-1tade9n-c0614a06af87d9d1bf6a638b714b5230 img.avia_image{ box-shadow:none; } .avia-image-container.av-1tade9n-c0614a06af87d9d1bf6a638b714b5230 .av-image-caption-overlay-center{ color:#ffffff; }

The chart shows the difference. Average smartphone prices are up 72% over the past five years. But adjusted for their enormous quality improvements, the BLS find that they’re down 54%. They’re called hedonic price adjustments.

This is an extreme example, but it illustrates the point. Household income isn’t up 72% over the past five years, and since it’s impossible to live without a smartphone they are commanding an increasing share of disposable income. We’re all benefitting from increased utility since today’s smartphones are better, but few of us recognize that increased utility or can figure out what to do with it.

It just means that what the BLS is measuring doesn’t correspond with how we experience the purchase of goods and services. We have written on this subject before (see  Why You Shouldn’t Expect A Return To 2% Inflation, Why It’s No Longer Enough To Beat Inflation and Why You Can’t Trust Reported Inflation Numbers).

The energy transition is inflationary. It’s taken a long time for this to become clear because Democrats have long clung to the shibboleth that moving towards renewables would create well paid union jobs while exploiting the fact that solar and wind are cheaper than natural gas.

It’s now clear this was never true.

.avia-image-container.av-4gxy9n-cae9d245cd02a49bf0cc6c3a30d4299f img.avia_image{ box-shadow:none; } .avia-image-container.av-4gxy9n-cae9d245cd02a49bf0cc6c3a30d4299f .av-image-caption-overlay-center{ color:#ffffff; }

US electricity prices have moved sharply higher over the past two years, from 15.1 cents per Kilowatt Hour to 17.3 cents.

The trend over the past couple of decades has been for natural gas to displace coal, because it’s cheaper. Renewables have been gaining market share as a policy choice, often driving additional demand for natural gas to compensate for their intermittency.

Incidentally, the relative stability in annual electricity consumption of around four terawatt hours since 2000 is about to change as data centers for AI come online (see AI Boosts US Energy). This will also push natural gas demand higher over the next few years.

.avia-image-container.av-bg09n-7fdba4fb705c7af1e1945a693eb1723d img.avia_image{ box-shadow:none; } .avia-image-container.av-bg09n-7fdba4fb705c7af1e1945a693eb1723d .av-image-caption-overlay-center{ color:#ffffff; }

More weather-dependent electricity requires increased spare capacity for when it’s not sunny or windy. This reduces the capacity utilization of the grid (see Renewables: More Capacity, Less Utilization and Management Stumbles; Getting Less From Our Power Sources).

The energy transition causes inflation directly through higher electricity prices. The Inflation Reduction Act, which does the opposite of its title, is a huge source of energy subsidies. It’s intended to reduce CO2 emissions and is likely to cost over $1TN in fiscal stimulus.

Paying more for energy in order to reduce emissions isn’t necessarily a bad thing. Democrats have opted not to argue that green costs more because it’s good for you. But achieving lower CO2 underpins public policy in OECD countries to varying degrees. An economist might say that this brings greater utility. Carbon-free electricity that costs more might even cost less following a hedonic quality adjustment from the BLS.

It’s tempting to predict that the BLS will apply their statistical magic to energy prices, ameliorating price increases to reflect greater utility (ie lower emissions). A Democrat White House would surely love this, although it’s too late to make an impact before the election. But it’s unlikely, because the value of reduced emissions is unknown, and it would too easily appear politically motivated.

But it could provide a reason for the Fed to relax their 2% inflation target. There’s not much point in spending $TNs to reduce emissions if monetary policy responds by increasing the cost of capital for the long-lived assets the energy transition requires. Several years ago the Fed acknowledged an asymmetric inflation target, in that they’ll now tolerate it above 2% for a while. There’s no chance the Fed would then seek <2% inflation to bring the average lower. So we should already anticipate inflation above 2% over the long run.

This will also ease the burden of our looming fiscal catastrophe. The baby-boomer driven climb up the CBO’s steep wall of indebtedness has already begun. Tight monetary policy is making it worse via higher interest expense on outstanding debt (Our Darkening Fiscal Outlook).

Prudence dictates that investors plan for the Fed to accept inflation generally above their 2% target. All we’re waiting for is to see how they justify it.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Costa Rica, a central American country of five million, has a proud history of strong environmental policies. Their electricity comes almost entirely from renewable sources. Hydro is 73%, with geothermal providing most of the rest. Solar and wind are minor. Over the past decade they have reduced oil from 12% to virtually zero.

Costa Rica’s success in moving to a power grid free of fossil fuels is hailed as an example to emulate by those who would have the rest of us forego reliable energy. A year ago Spain’s University of Navarra praised them for, “driving the global commitment to overcome hydrocarbons.”

The thinking goes that if relatively poor Costa Rica (per capita GDP $18K) can do this, rich countries like the US ($85K) or groups like the EU ($42K) should be able to with their greater resources.

.avia-image-container.av-5v4sjy-dcfdc77ebca1e1f06694f61d852be68c img.avia_image{ box-shadow:none; } .avia-image-container.av-5v4sjy-dcfdc77ebca1e1f06694f61d852be68c .av-image-caption-overlay-center{ color:#ffffff; }

Except that Costa Rica introduced power cuts this week. The country is enduring a drought, which some blame on El Nino. Reservoir levels are low, and so is power from hydro. Customers have been told to expect daily outages of two to three hours.

Neighboring countries like Nicaragua or Panama that might normally provide electricity are struggling with the same problem, so don’t have any excess. Ecuador is also rationing electricity, and Bogota, Colombia’s capital, is rationing water.

If it rains normal service may resume within a week. It is their rainy season. Weather-dependent power can fail to deliver. The last time they had outages was in 2007.

There are virtually no oil or gas power plants able to pick up the slack. Their rejection of dispatchable energy is absolute. However, Costa Rica’s President Rodrigo Chaves is less enamored of past policies and has suggested they may wish to develop domestic natural gas reserves. Many of their political leaders believe they need to diversify their sources of energy.

Costa Rica generates 16 million tonnes of CO2 equivalent annually, around 0.04% of the world’s total. So it’s safe to say that any energy policy the country followed would have an inconsequential effect on global emissions. ClimateActionTracker rates countries based on their efforts and is a tough grader. They rate Costa Rica “Almost Sufficient”.

As to whether their example is inspiring similar selfless efforts by others, such an evaluation is inherently subjective. However, we’ll go out on a limb and postulate that China, where new coal plants are being added roughly every three weeks, is not inclined to follow Costa Rica’s lead.

Their citizens will suffer the consequences of undiversified energy sources without changing global emissions through deed or example. Nonetheless, it is by all accounts a wonderful place to visit, and if Costa Ricans find power outages an acceptable price to pay for a little virtue-signaling, their tourists will probably agree.

.avia-image-container.av-z14v0u-112d335fc00d69c9a9174d67ef90a199 img.avia_image{ box-shadow:none; } .avia-image-container.av-z14v0u-112d335fc00d69c9a9174d67ef90a199 .av-image-caption-overlay-center{ color:#ffffff; }

Coal consumption for electricity generation continues to fall in the US, setting an example for developing countries to follow. It’s how we’re reducing emissions. Natural gas continues to replace coal in providing baseload power. Meanwhile net exports of coal were the highest in five years, providing further evidence that the Administration maintains an ambivalent posture on climate change.

.avia-image-container.av-owckoe-79216d345cc20256fed20b9691ec276c img.avia_image{ box-shadow:none; } .avia-image-container.av-owckoe-79216d345cc20256fed20b9691ec276c .av-image-caption-overlay-center{ color:#ffffff; }

Earlier this week I had the great pleasure to catch up with long-time investors Ian Dietz and Paul Morse from Alliance Global Partners in New York, along with Justin Morcom, our Catalyst regional sales partner. There’s a steady drumbeat of unfortunate stories that contribute to some New Yorkers feeling less safe than before the pandemic. I found midtown Manhattan to be unthreateningly normal on a weekday lunchtime.

Clients are drawn to midstream energy infrastructure by the 6% yields, augmented by dividend growth (2-3%) and buybacks (1-2%) that in our opinion offer a reasonable prospect of a 9-11% pa total return. It’s safe to say that clients of Dietz and Morse have done well out of their advisors’ early insight into the sector’s potential.

We had much in common during our lunch, including a bullish outlook for the sector.

EV’s are seeing tepid US growth. Inadequate charging infrastructure and poor battery life are dissuading buyers who just want to reliably get from A to B.  Many would be surprised to learn that crude oil demand is on track to set another record this year of around 103 million barrels per day. Gasoline demand from developing countries and global aviation are two important drivers. Slowing EV demand is another.

As recently as last year the International Energy Agency was predicting that global gasoline demand had peaked in 2019, pre-pandemic. Like many of their forecasts, this one has been revised.

Natural gas demand growth adds to the positive outlook – over the next six years LNG exports will require an additional 12 Billion Cubic Feet per Day (BCF/D) as new terminals come online. Data centers could take another 6 BCF/D for increased electricity.

Midstream energy infrastructure is well positioned to keep providing more of what the world wants — reliable energy.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund