In this week’s podcast, Simon talks about the distortions showing up in bond markets.

Show Notes:

Interest rates are low (:40)

$17TN publicly traded debt has negative yields (:45)

Incredible reflection of price-insensitive buying (:50)

Reflects degree of risk aversion. Prefer the certainly of a loss in bonds rather than own stocks (:57)

But bond investors generally do good analysis (1:20)

Look at energy (1:27)

Perennially out of favor (1:28)

Valuations cheap, yields high (1:40)

American Energy Independence Index yields nearly 7% (1:42)

Investor sentiment poor, long term outlook uncertain (1:48)

But a look at bond yields on biggest companies shows bond investors more relaxed (2:00)

EPD, $63BN market cap, yields 6% while its 2054 bonds yield 3.9% (2:08)

KMI, $46BN mkt cap, has 2098 bonds yielding 5.1% (2:27)

In many cases the bond yields are 1.5% below the dividend yield (3:05)

Must be so much better to own the stock where dividends can grow (3:15)

Interesting piece blog called The Pension Fund Apocalypse by Colin Lloyd (3:27)

He highlights the problems for pension funds by low rates (3:33)

Estimates that $26TN in pension assets earning negative real return on fixed income allocation (3:44)

Problem is that bond demand remains strong (4:13)

US pension funds incredibly raised their fixed income from <25% to 28% last year (4:17)

They should be investing less bonds given returns

But regulations make it hard (4:50)

More broadly, bond yields reflect some risk aversion and inflexible investing regulations (5:28)

Investors in energy company bonds are pretty calm, shown by low yields (6:29)

It’s a factor keeping interest rates low (6:58)

All suggests that stocks are cheap, not over the next week or two but over the next 2-5 years (7:16)

Suggested Links:

Bond Buyers Should Buy Pipeline Stocks

https://sl-advisors.com/bond-buyers-should-buy-pipeline-stocks

The Pension Fund Apocalypse

https://www.aier.org/article/pension-fund-apocalypse

In this week’s podcast, Simon Lack talks about the growing concerns on trade and how we think events will unfold.

Show Notes:

S&P500 finally had big release on trade fears (:41)

German economy contracted in 2Q (1:05)

Trump’s modest relaxation of tariffs to miss Christmas season too little (1:12)

Flat yield curve indicating fear of recession (1:24)

Investors are worried (1:33)

Outlines of final act are coming into view (1:33)

China deficit likely lower this year (2:00)

Tariffs having an impact

Setting stage for Trump to grab deal and declare victory (2:50)

Able to enter election year bragging about first president to take on China and win

More focused on Dow than any previous president (3:30)

More unilateralist approach reflects popular opinion (3:43)

America has protected shipping lanes for years (3:57)

Why are US troops in Germany? (4:17)

Nordstream 2 (4:27)

Bilateral trade negotiations suit US as biggest economy (5:06)

TPP didn’t fit this (5:15)

Replacing NAFTA with separate negotiations with Canada and Mexico (5:36)

It’s why EU exists (5:50)

Wait until UK tries for US deal after Brexit (6:17)

A less selfless US, more inclined to consider self-interest (7:40)

More transactional (7:50)

Not conventional wisdom among governing class, but popular among voters (8:00)

In Episode 5 of SL Advisors Talks Energy, Simon Lack talks about market volatility, valuations in midstream energy, and Canada’s new way to export its crude oil.

Show Notes:

Volatile week with more tariffs on China roiling markets (:51)

Still assuming Trump will take China deal in time for election (:52)

Falling bond yields reflect widespread risk aversion (1:28)

Equity risk premium is favoring equities (2:15)

Investors asking why energy stocks are down again (2:48)

Sector remains out of favor, falls farthest when stocks are weak (2:53)

But valuations are compelling (3:03)

Energy Transfer yields >9%, 2X covered by DCF (3:10)

Williams 6% yield, also 2X covered (3:24)

ENLC fired its CEO and lowered guidance but still expects to raise distribution, yielding 15% (3:36)

Midstream energy infrastructure earnings generally good, but sentiment poor (3:51)

Misallocated cash, although signs of improvement (4:00)

Weak natural gas prices, although not hurting pipeline earnings (4:30)

Fears over climate change, although oil and gas consumption continue to grow (5:00)

Turn to Canada – big challenge to get crude out of Alberta (6:55)

Keystone XL much delayed although TC Energy (FKA TransCanada) expects to finally build it (7:32)

ENB told us they wouldn’t build a Canadian crude pipeline except in Alberta (7:47)

Plans to build railway from Edmonton and Ft McMurray to Alaska (8:10)

Amazing considering 2013 crude disaster in Quebec, 47 deaths (8:34)

But pipeline opponents have done this (8:41)

Railway will travel up through Yukon Territory, allowing Canadian crude exports from Alaska (9:19)

Also unlocking mineral reserves in Yukon by providing transport (9:22)

Project still in planning stage, but reflects ongoing global demand for crude in spite of fears over climate change (9:38)

Links:

Alaska – Alberta Railway Development Corporation

http://www.a2arail.com/about-a2a.html

Stocks Offer Bond Investors an Opening              

https://sl-advisors.com/stocks-offers-bond-investors-an-opening

In Episode 4 of SL Advisors Talks Energy, Simon reports on 2Q19 pipeline earnings and provides his insights on the weeks’s major stories in energy politics.

Show Notes:

In this week’s podcast, I’m going to talk about pipeline company earnings and why valuations are attractive, followed by some comments on climate change politics

Pipeline Earnings Are Good 1:08

Energy out of favor 1:10

Too much investing in new projects, not enough cash back to investors 1:22

Democratic primary debates show political risk given extreme positions 1:27

But cash flows are growing 1:40

Some big companies reported 2:10

EPD increased EBITDA 18%. $66BN company 2:14

WMB been weak because of natgas but had good earnings and popped 2:22

OKE, CEQP, TC Pipelines all good quarters 2:38

Still expect FCF to reach $7-8BN for AEITR this year, up from $1BN 2:47

Balance sheets are stronger, 4.1X Debt:EBITDA 3:40

Dividend yields >2X bond yields 4:00

…credit analysts, banks fine with risk 4:05

Industry has growing FCF, better credit profile, lots of PE interest 4:40

Energy politics

2 Items caught my eye

• Annual Google Camp 5:10

Attendees of rich and famous, secretive affair 5:20

Barry Diller, Dave Geffen, Katy Perry, Tom Cruise, Leonardo DiCaprio 5:25

Many arriving by private jet – one estimate of 111 separate flights 5:30

Let’s hope there’s no sermonizing on climate change from this crowd 5:40

• Democratic Debate 6:05

Most candidates endorse GND 6:12

We wrote Bovine Green Dream 6:16

Completely impractical 6:25

Climate change solutions include 6:50

Government support for nuclear 7:05

Increased natgas and phasing out of coal 8:30

R&D on cleaner use of fossil fuels, share results 9:23

Greater honesty, that dealing with climate change will be expensive 10:11

Americans won’t spend >$10 per months fighting climate change 10:18

US 15% of emissions 11:15

Andrew Yang: Find high ground 11:32

Links to Additional Information:

The Coming Pipeline Cash Gusher

The Bovine Green Dream

Natural Gas: The Big Energy Story

Although much of the press coverage focuses on solar and wind, the big story in energy is the growth in natural gas. In this podcast, Simon Lack reviews how natural gas growth is far more important than renewables.

Show Notes:

New natgas hookups in Westchester County are prohibited (1:00)

Will constrained natgas hookups hurt demand (1:07)

Energy is undergoing a transformation (1:12)

Renewables receive all the press (1:15)

Solar and wind prices are falling (1:17)

Nextera Energy analyst day (1:20)

Berkeley, CA won’t allow new buildings to use natgas (1:44)

In 2018 natgas was 43% of growth in world energy use, vs 18% renewables (1:57)

U.S. natgas share rose almost 2% to 31%; renewables rose from 3.9% to 4.2% (2:08)

China burns half the world’s coal (2:41)

Political issue. Killing citizens, causing respiratory problems (2:44)

China wants to reach 15% natgas share by 2030, vs 7.5% today (3:01)

With China’s growth of 4.3% they needs to more than triple natgas consumption (3:15)

They need almost ¾ of today’s U.S. consumption (3:30)

They need a U.S. Shale Revolution (3:37)

But Chinese forecasts of shale output keep being revised down (3:51)

Russian exports from eastern Siberia will help (4:00)

Two seasonal peaks, China has too little storage (4:06)

But volumes not able to vary (4:31)

Chinese LNG imports will increase, likely to grow 2-4X, maybe more based on 5 year plan (4:57)

Liberal media focus on renewables (5:44)

Natgas is the real transformation in energy (5:58)

Links to Additional Information:

SL Advisors Blog Post https://sl-advisors.com/natural-gas-the-big-energy-story 

Next Era Energy Investor Day  https://sl-advisors.com/is-nextera-running-in-place

BP Statistical Review of World Energy https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

Columbia|SIPA A Natural Gas Giant Awakens: China’s Quest for Blue Skies Shapes Global Markets

https://energypolicy.columbia.edu/research/commentary/natural-gas-giant-awakens-china-s-quest-blue-skies-shapes-global-markets