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

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

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

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

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

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

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

ADNOC is presumably pleased with the progress to date.

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

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

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

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

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

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

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

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

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

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

Energy Mutual Fund

Energy ETF

There were several positive news stories last week that helped propel the American Energy Infrastructure Index (AEITR) to +7% YTD, well ahead of the S&P500 which is +1%. Kinder Morgan’s (KMI) earnings unusually beat expectations. Moreover, their increased backlog of projects didn’t scare investors as much as it should given their perennially low Return On Invested Capital (ROIC, see Not All Growth Projects Are Good ). Most of their capex is in natural gas infrastructure. Investors concluded that even KMI must be able to generate an attractive ROIC providing gas to power data centers.

Venture Global (VG) prevailed in an arbitration dispute with Spain’s Repsol. They’ve won two (the first was Shell), lost one (BP) and settled one (Sinopec). Four remain outstanding. The worst fears following September’s loss to BP are not being realized. Consequently, the stock has rebounded 45% YTD.

VG’s plausible worst case if all the arbitration cases went against them including successful appeals by Shell and Repsol is around $6BN. The standard for challenging arbitration rulings is higher than in US civil courts. Industry lawyers think they’re unlikely to be successful.

Even after VG’s recovery this year, its market cap is still about $7.5BN below where it was in early September, before the Shell ruling. We think it looks cheap.

European LNG prices have been strong, which has increased the differential with the US Henry Hub benchmark. This increases the profit opportunity for LNG export terminals able to use some of their uncontracted liquefaction capacity to sell on the spot market (see Quantifying The Gas Arb). NextDecade (NEXT) seems to respond to this even though their Rio Grande facility won’t begin operations until late this year at the earliest. NEXT dipped early in the month but is now flat YTD.

Energy Transfer (ET) has responded to the January effect that tends to boost MLPs (see What A Difference A Year Makes). Five years ago ET enjoyed a $2.4BN windfall gain from the disruption to the Texas gas market caused by Winter Storm Uri. As you read this on a Sunday morning, ET holders are wondering whether there will be a repeat. The Texas legislature responded to Uri with new laws on improved weather resilience and reliability.

We’ll soon see how effective that was.

Mitsubishi purchased the pipeline assets of Aethon in the Haynesville shale in Texas last week for $7.5BN, showing that foreign investors continue to find attractive valuations in this sector. They expect to profit from the world’s growing need for power.

US pipeline construction is set to reach an 18 year high this year, led by gas projects in Texas, Louisiana and Oklahoma. These will add around 18 Billion Cubic Feet per Day (BCF/D) of capacity and are intended to meet the twin demand drivers of data centers and LNG exports.

Capital is flowing into the sector, thanks to attractive valuations and unremarkable retail flows. Energy is the 2^nd best performing S&P sector this year, just behind Materials.

In November, the Energy Information Administration (EIA) boosted their forecast of US oil production to 13.6 Million Barrels per Day (MMB/D). US drillers continue to find efficiencies, allowing output to remain firmer than last year’s declining crude price would otherwise dictate. The EIA reaffirmed their 13.6MMB/D forecast in a recent Short Term Energy Outlook, roughly flat with last year.

Presidential ruminations and dropped threats related to Greenland showed that midstream energy is less exposed than the broader market.

New Jersey’s recently elected Democrat governor Mikie Sherrill showed that the progressive drift in the Garden State continues. Voters evidently don’t mind reduced quality of life and affordability caused by high taxes and widespread construction of apartment buildings that are turning suburban towns into urban areas.

Sherrill wasted no time in signing an executive order promoting solar power and storage, instead of tapping into the vast supplies of gas in neighboring Pennsylvania. Over time, electricity will become more expensive and less reliable for NJ.

Elon Musk was interviewed in Davos last week by Blackrock’s Larry Fink. Musk thinks the production of AI chips will far outpace our ability to generate enough power to use them. He thinks space-based data centers, positioned to receive solar power 24×7, are “a no-brainer.”

Musk also offered some advice for living life, which might also be applied to golf: it’s better to be optimistic and wrong than pessimistic and right.

Finally, I am generally not an early adopter of new technology, so my latest ChatGPT discovery may strike savvier readers as ho-hum. Thanks to John O’Sullivan, friend and regular blog reader, I recently learned that the subscription version will create a daily email with news updates on the stocks we care about. It’s infinitely customizable, so through iterative feedback can be refined as needed. It helps research the blog, but the human touch will remain ascendant.

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

Energy Mutual Fund

Energy ETF

In The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, author Greg Zuckerman explains how today’s traders spend most of their time doing research. At Renaissance, the hedge fund Zuckerman chronicles, and other quantitative funds, traders spend much of their time looking for market anomalies that are likely to repeat and aren’t just the accidental result of noise. The trading that takes place is done by algorithms executing trades for a given strategy. The trader monitors the activity and looks for new opportunities.

This is very different than the trading I did over thirty years ago. Fast reactions and rapid mental numeracy were what separated the great traders from the average. We often hired MBAs. Some years ago, I visited the trading floor for Jane Street, a big market maker in ETFs, and learned that their hires are typically computer science majors.

Over the past couple of months, we’ve noticed a relationship between the Europe/US natural gas spread and the prices of LNG stocks. I don’t know if quant hedge funds are trading this. We’re not, but their prices seem to be connected.

Specifically, we looked at the difference between the TTF Dutch benchmark for natural gas and the US Henry Hub, converted to US$ per Million BTUs (MMBTUs). It costs around $2-4 per MMBTUs to liquefy US gas and ship it to Europe, whereas the TTF/HH spread is usually more than that. The wider the spread, the bigger the profit opportunity.

Generally, LNG is liquefied under long term Sale Purchase Agreements (SPAs). Cheniere (NYSE: LNG) has locked in 90% of its estimated cashflows through 2035 with SPAs. Venture Global (VG) famously exploited a sharp widening of this spread following Russia’s invasion of Ukraine in 2022 (see Nothing Ventured, Nothing Gained) They netted $BNs and wound up being taken to arbitration by aggrieved counterparties claiming breach of contract. They won against Shell in August but then lost to BP in October (see Gassy Isn’t Happy), which led to a repricing of their stock to reflect worse than losing all the remaining cases.

LNG terminals retain some uncontracted liquefaction capacity to allow for maintenance or other downtime. A wider TTF/HH arb is directionally good for them, but these are facilities with a useful life measured in decades so changes in the arb shouldn’t have much effect on, say, thirty years of discounted cashflows.

Nonetheless, Cheniere, VG and NextDecade (NEXT) all dropped by 20% or more as the spread narrowed during 4Q25. The Henry Hub benchmark traded up from $3 to $5 per MMBTUs on colder US weather. Meanwhile the TTF benchmark slumped from €31 to €27 per Megawatt Hour ($11.25 to $9.25 per MMBTUs) on ample supplies and mild weather.

This slashed the TTF/HH arb in half, from over $8 to $4.

VG probably has more exposure than Cheniere and moved more. But it still seems excessive. And they need never lose money on the arb. If it drops to an unprofitable level they would simply stop doing any new spot transactions.

Even more bizarre was the reaction of NEXT, since they’re at least a year away from shipping any LNG at all. They’re not generating any cash, so the spot arb is irrelevant. But perhaps the computer scientists at quant funds are trading a basket of LNG stocks, and since there aren’t many to choose from, NEXT is added for diversification.

In any event, the arb has been widening in recent days, which seems to have acted as a catalyst on these stocks. On Friday morning it spiked to $10, which should benefit VG and to a lesser extent Cheniere via increased profit on spot market transactions. It’s also worth noting that Qatar, from which the US recently removed some air base personnel as a precaution in case we attack Iran, is the world’s second biggest exporter of LNG.

Elsewhere in energy, the oil glut is not a secret and Jeff Currie (formerly head of Commodities Research at Goldman Sachs but now at Carlyle) argues that the geopolitical risks have risen markedly following the capture of Venezuela’s Maduro. China may start seizing oil tankers in the South China Sea which are typically “dark fleet” vessels. We don’t make oil bets, but Currie’s views are worth considering.

Last week was the CFA Naples Annual Forecast Dinner. SL Advisors was a sponsor, and I was happy to bring Bradley Golden and Thomas Vulgaris, both from Pacer Advisors, along with long-time friends and investors David Pasi and Michael Shinnick. David Rubenstein, co-founder of Carlyle, was the speaker and his star power drew record attendance.

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

Energy Mutual Fund

Energy ETF

More than most times, the energy market is moving on macro developments. President Trump is for low oil prices. He wants energy dominance which means ample supply. Although the White House is a big fan of the US energy sector, volumes trump profits. Trump’s first term was not a good one for energy investors. Oil was generally weak and the pandemic in 2020 was a short-term disaster with oil briefly negative as nobody traveled.

The President’s apparent goal of $50 per barrel for oil will not be cheerful news for energy executives. Moreover, Exxon and Chevron are facing pressure from the White House to invest $BNs in Venezuela to help achieve this unappealing objective. They’ll need to find a middle ground that appeases the administration while still making responsible capex decisions. On Friday Exxon said they were ready to send a team to Venezuela, while Chevron, who never left, are prepared to boost output.

Midstream is largely insulated from this calculus, since the sector operates in North America. Pipelines and related infrastructure are more aligned with the goal of energy dominance because increased volumes are good for the toll-model they operate.

There is some logic to Venezuela’s oil production restoring its links to the US. Because sanctions have limited both their output and potential customers, shipments travel halfway around the world to China. The country’s three main refineries operate at only 19% of capacity because of years of chronic mismanagement, so most of their unprocessed viscous crude has to be mixed with Iranian diluent for transportation. The US will easily replace that.

Iran has also been helping improve the performance of Venezuela’s refineries, an effort that has had a limited effect and will likely now end.

Exxon Mobil (XOM) has claims of $20BN against Venezuela. CEO Darren Woods noted last week that the company has twice suffered seizure of its property. On Friday he described the country as “uninvestable”. Conoco Philips is owed $10BN. Chevron lost $3BN but has continued to operate there. Satisfying these financial claims is likely a point of agreement in negotiations with the White House, which expects $100BN to be invested over the next decade.

The prospect of increased heavy Venezuelan crude reaching SE Texas has boosted stocks like refiner Valero but has weighed on Canadian pipeline companies like Enbridge (ENB) and Pembina (PBA). Investors are concerned that Venezuelan crude will displace Canadian production. While this is possible, Canadian crude output from tar sands doesn’t vary as easily as shale, where decline rates are fast and drillers can modulate output by altering their plans to drill new wells.

By contrast, producing tar sands often relies on Steam-Assisted Gravity Drainage (SAGD) which involves piping steam underground to warm the bitumen before it’s extracted. Such facilities generally have to keep running. Even during the pandemic when oil went briefly negative, the risk of the equipment freezing and rupturing meant that production continued even if unprofitable.

Canadian oil producers have long struggled to get their output to market. Most likely they’ll just have to accept lower prices.

Venezuela and Mexico used to provide over half of US oil imports, which is why our refineries are set up to process the heavy crude they produce. Over the past couple of decades Canadian production gradually gained market share, as Venezuela’s Hugo Chavez and then Nicolas Maduro oversaw a steady degradation of their energy industry, exacerbated by nationalization of assets owned by US companies.

Venezuela has the world’s sixth largest reserves of natural gas, with around two thirds of the reserves in the US which is #4. However, their output is under 3 Billion Cubic Feet per Day (BCF/D) versus the US at around 108 BCF/D. Most Venezuelan gas is associated with oil production, so output of both could increase together. However, it’s unlikely any of this gas would be exported – the country has a chronically unreliable power grid so could use the help. Moreover, the White House is focused on oil, and any additional gas may even be flared if installing the infrastructure to capture it isn’t a priority. US LNG exporters are unlikely to be impacted.

The long-term impact of Maduro’s removal and America managing its oil exports remains unclear. The President will be impatient to see results, which suggests Exxon, Chevron and others will deploy their resources accordingly, mindful of the election cycle.

Midstream energy infrastructure is nicely insulated from the shifting geopolitical/energy landscape. We don’t expect pipeline companies to be involved in rebuilding Venezuela’s infrastructure. There will be questions about Canadian pipeline exports, but little else to concern investors. The President’s desire to grow production can’t be bad for volume-based businesses. Pipelines look cheap.

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

Energy Mutual Fund

Energy ETF

Energy was a laggard in 2025, and within that Liquefied Natural Gas (LNG) stocks were especially weak.

The S&P Energy Index was +9.1%, 8.8% behind the S&P500. The American Energy Independence Index (AEITR) was +1.7%. The five-year annual trailing return on the AEITR is well ahead of the broader market (23.6% vs 15.3%). Over the past ten years they’re still close (14.3% vs 14.8%) which is pretty good given the MAG7 impact on the S&P500 and the current attractive valuations for midstream.

Macro headwinds hurt LNG. Many analysts are forecasting a supply glut over the next few years as global liquefaction capacity grows, especially in the US. The spread between global import benchmarks TTF (Europe) JKM (Northeast Asia) and the US Henry Hub narrowed, reducing the arbitrage opportunity in the spot market. And White House efforts to force a cessation of hostilities in Ukraine has made increased Russian LNG exports more likely.

The EU imported over 142 Billion Cubic Meters (BCMs) of gas in 2025, with Russia their second biggest provider behind the US representing probably over 15% of that supply. That the EU continues to buy Russian gas while selling Ukraine weapons to kill Russians confirms that they’re a big market but geopolitically incoherent.

Softer global LNG prices weighed on America’s two largest LNG exporters, Cheniere and Venture Global (VG), by reducing the arbitrage opportunity from using uncontracted liquefaction capacity on the spot market. Many expect soft global prices to persist, although futures going out to 2030 for TTF and JKM don’t reflect this.

If the feared LNG glut does materialize over the next couple of years, the buyers who have signed multi-year Sale Purchase Agreements (SPAs) are more exposed. LNG exporters typically contract out most of their liquefaction capacity at fixed prices. VG has retained more spot exposure than Cheniere, which introduces more variability to their cash flow forecasts.

VG quickly sank from its $25 IPO price in January to less than half that level in the spring. It looked attractive, but losing the arbitration case to BP in October (see Gassy Isn’t Happy) caused the market to price in adverse outcomes in all the remaining cases plus an additional haircut. Because in August VG won the case Shell brought with similar facts and circumstances, it’s hard to be confident about how the rest will turn out.

VG had a good year operationally. They reached FID on Calcasieu Pass 2 and signed six SPAs all for twenty years. The expansion of their Plaquemines facility is on schedule and phase one ramped up volumes faster than many expected. VG’s liquefaction capacity will rival and at times exceed Cheniere’s over the next several years.

Nonetheless, the continued uncertainty leaves the stock priced for more than the worst case, down over 70% from its IPO price.

Weakness in NextDecade (NEXT) has been especially hard to explain. They have limited exposure to soft LNG prices for now because they’re not generating any cash and when Stage 1 is completed they’ll only own 21% of the economics. They reached Final Investment Decision on Trains 4-5 (Stage 2) where they have better economics.

NEXT acquired the needed equipment before prices rose, which derailed other less developed projects such as Energy Transfer’s (ET) Lake Charles facility. Although ET has signed multiple SPAs, rising demand for specialized equipment has depressed their anticipated liquefaction margins. This benefits projects that are further ahead by reducing any potential LNG glut.

NEXT continued to sign strong SPAs. Their contractor Bechtel is ahead of schedule and on budget for Phase 1. And they didn’t issue any more equity. For now, it’s a development stage company with no revenues and if it wasn’t already public wouldn’t seek a listing. But the long-term story remains intact and we think double digit multi-year returns are in store for current holders.

NEXT’s cashflow trajectory over the next five years is similar to OpenAI, albeit of smaller magnitude and with a little less hype.

New Fortress Energy (NFE), focused on LNG and power solutions in the Americas, faces an uncertain future following several execution failures. CEO Wes Edens, who became a billionaire by co-founding Fortress Investment Group, has disappointed investors with project delays and failures in Brazil, Mexico and Puerto Rico.

Five year 12% bonds issued in late 2024 soon lost value, and in May slumped to 40. One usually thinks of bond investors as taking a more jaundiced view of a company’s finances given their risk/return asymmetry, but in this case they weren’t skeptical enough.

In November, NFE missed an interest payment and is currently under a forbearance agreement, which was extended from December 15 to January 9. Bond holders could claim a default if it’s not extended further.

The deft touch that Wes Edens showed in finance hasn’t extended to NFE.

The outlook for global natural gas demand remains underpinned by electricity consumption. Data centers for the AI revolution as well as generally rising living standards are driving it higher. America derives a relatively high 43% of its electricity from natural gas, because at $3-4 per Million BTUs it’s cheap. China is around 3%, but if LNG prices fell sufficiently switching from coal could make commercial sense across Asia, providing a floor to LNG prices.

Domestically, demand from LNG export terminals continues to increase. Gas for power generation fell slightly last year, but the Energy Information Administration expects that to reverse this year with 1.6% growth.

The Permian in west Texas produces associated gas (i.e. as a byproduct of crude oil) and if oil prices fall enough to make some wells unprofitable, that could in turn lower gas production. There’s still insufficient takeaway capacity in the region, which caused gas prices at the Waha hub to be negative almost a quarter of the time last year. But steadily rising gas output overall seems highly likely.

Natural gas infrastructure assets are cheap. Cheniere trades at a 12% Distributable Cash Flow (DCF) yield and is best in class. If VG was to lose $5BN (a worst case scenario) in arbitration cases and penalties, they’d still have a DCF of 11%. ET was –9% last year and has a DCF yield of over 15%. Stock performance for many midstream names was disappointing, but valuations remain compelling.

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

Energy Mutual Fund

Energy ETF

Regular readers know that around this time of the year my thoughts briefly stray from midstream energy to Christmas. My love of Christmas pudding has been well documented here (see English Christmas Traditions, Merry Christmas and Happy Holidays! and watch The Joy of Christmas Pudding).

We all fondly remember the Christmas of our childhood. My boyhood Christmases in the UK always involved a Christmas dinner delayed from its scheduled mid-afternoon time while the men of the house struggled home from the pub far later than promised. With a 1960s segregation of duties, some marital discord usually followed concerning an over-cooked turkey.

I was too involved in whatever toys I’d been given to care, which I guess is how events can seem happier as time passes.

This is why the moment is about children, as we create memories in our offspring that rhyme with our own. Our grandchildren are numerous enough that they pretty much were the church Christmas pageant – naturally it was the best one we’ve ever seen.

My wife and I have passed through several phases of Christmas parenting. It started with putting out the cookies and sherry at bedtime (English Santa wants something stronger than milk). Hoping the little ones won’t wake up too early, and a few years later wondering if they’ll wake up before lunchtime. Nowadays vicariously, as our children report on just how early the grandchildren were up. Our Christmas morning was peaceful, as we prepared for another round of family togetherness.

The English Christmas meal involves some other traditions unfamiliar to Americans. Each place setting has a Christmas cracker which, when pulled with the person next to you explodes with a modest bang to present a silly paper hat, a cheap plastic toy and a lame joke such as, “How much did Santa’s sleigh cost? Nothing, it was on the house.”

Good enough for a grade school playground.

The BBC recently wrote that the jokes are tested before being used. This surprised me because after a lifetime of often truly awful Christmas cracker humor, I assumed there was no minimum standard.

You’ll find the participants at an English Christmas dinner table wearing silly paper hats demonstrating that sometimes we really shouldn’t be taken too seriously.

For years I have fended off competition for Christmas pudding, described lovingly in past blog posts noted above. My mother used to want a second helping, but she’s sadly no longer with us. I still have to share it with my wife, but since she cares enough to make sure we have some, it seems sensible not to complain.

I ensured my children didn’t like Christmas pudding. But last year in a sinister game they persuaded their own children to try it, expecting screwed up faces of disgust. Improbably, one granddaughter declared it very good, creating future unnecessary competition.

Boxing Day, December 26^th, traces its roots to when the staff celebrated their Christmas (see Downton Abbey). Nowadays it’s a reprise of leftovers from the day before, and this year in the UK, Canada and other members of the British Commonwealth part of a four-day holiday. Inexplicably, the traditional extravaganza of Premier League matches was limited to just mis-firing Manchester United.

An additional reason to love Christmas is because it provides a colorful time of joy before the depressing winter that follows. January in London is akin to living in a damp, dark pit with grey skies delivering cold rain. Boxing Day has less than eight hours of daylight. January commuting is typically in darkness.

New Jersey is a little brighter but colder. You’d think such unpleasant winters would come with a compensating tax structure. Instead, liberal politicians add insult to injury by spending freely on big government and subsidized renewable energy even though they can’t fix the weather.

This is why within days of the conclusion of festivities we head south to Naples, Florida, where the climate and lifestyle are worth far more than they cost. Christmas has become the start of a wonderful sunny season. This prospect is so agreeable that I’m even moved to share my Christmas pudding.

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

Energy Mutual Fund

Energy ETF

2025 has been frustrating for those who must explain short term performance in midstream energy stocks – which is to say your blogger, along with many financial advisors whose clients are invested in the sector.

It hasn’t been an especially newsworthy year. In 2024, the realization that natural gas would benefit from the growth of data centers was an important driver of stock performance. The other source of demand, LNG exports, continued to benefit from growing liquefaction capacity.

2025 hasn’t offered much in the way of dramatic new developments, simply a steady stream of confirmations that the bullish thesis from 2024 remains intact. US oil production reached a record 13.8 Million Barrels per Day (MMB/D) in September, up 5% year-on-year.

Dry gas production (natural gas) exceeded 108 Billion Cubic Feet per Day (BCF/D) in September, up 6% yoy. LNG exports were over 15 BCF/D in September, +24%. Propane production, used in backyard barbecues, by farmers for drying crops and for exports, reached 2.4 MMB/D in September, +7%.

US power generation reached 368 Terrawatt hours in September, +2.4%. Natural gas remains by far the dominant source of electricity generation. Grid operator, PJM Interconnection held a capacity auction last week that set a new record high.

In other words, natural gas and natural gas liquids such as propane are a growth story.

A year ago, many analysts expected continued growth in hydrocarbon production, although there were concerns that soft oil prices might depress output of crude. Electricity consumption has probably run modestly ahead of expectations. The big grid operators have been warning of a jump from the 0.2% pa annual growth that prevailed for the past decade. Data center demand is starting to impact, which is partly why electricity prices are up around 7%.

This has been a good year for businesses that handle natural gas and related hydrocarbons. Cash flows are growing. Dividend hikes are the norm. Leverage has been falling. And co-location of data centers with the power plants that support them (also known as Behind The Meter or BTM) is creating growth opportunities for the biggest natural gas pipeline companies.

What midstream doesn’t have is an exciting AI story. It’s true that sending natural gas to data centers is a modern-day equivalent of selling pickaxes to gold miners. But it’s not a new story.

A looming oil glut has added to the negative sentiment towards energy, with forecasts that crude may drop below $50 per barrel next year. US E&P companies continue to defy expectations by continuing to innovate and lower their production costs. The $7 drop in prices over the past year hasn’t curbed output.

Nonetheless, for many investors the oil price is probably their first thought when they consider the outlook for the energy sector. It continues to persuade many generalists to look elsewhere for opportunities.

The absence of an exciting new story has weighed on midstream stocks this year, even though operating performance has been generally good.

Investors are afraid of still-weaker oil prices with 2026 supply forecast to be 2-3 MMB/D in excess of demand. They’re afraid of a surplus of LNG exports as more liquefaction capacity comes online. They’re afraid that tariffs will be imposed on US exports of propane and other Natural Gas Liquids (NGLs).

These are all manageable and probably inconsequential risks for the midstream companies that handle, move and store hydrocarbons.

Cheniere (LNG) continues to add liquefaction capacity. Fears of an LNG glut are unlikely to be realized in our view. Regassification capacity is growing to keep up with the increased availability of LNG shipments.

Similarly, over the past year NextDecade has begun construction of their Rio Grande facility, has signed numerous long term shipping agreements and is on track to expand at its existing site.

Venture Global has fallen far below its IPO price because of an adverse arbitration ruling (see Gassy Isn’t Happy). We think the current valuation more than discounts the worst plausible outcome on the remaining cases.

Foreign buyers of US propane or ethane have generally not imposed tariffs, in part because they have few other sources. This concern has hurt Energy Transfer (ET), Oneok (OKE) and Targa Resources (TRGP). Propane trade with China has been disrupted but flows have been redirected elsewhere in Asia and to Europe. China quickly dropped tariffs on ethane because their petrochemical industry relies heavily on it.

ET is also among those well positioned to benefit from data center gas demand and has paused their LNG export terminal in Lake Charles, LA. Its 15.5% Distributable Cash Flow (DCF) yield almost defies belief.

Even allowing for the discounted valuation common for MLPs, ET looks like a cheap stock. It could also benefit from the January seasonal effect that typically impacts partnerships more than c–corps, reflecting their bigger retail ownership.

Several big midstream companies have seen poor stock performance while the fundamentals of their business have remained strong, and their valuations have improved. Some investors are already starting to take advantage of that.

Recently we had the good fortune to enjoy lunch with long-time investor Eric Schulze and his delightful wife Jessica, who were visiting Naples from Colorado. Whatever the weather in America, it’s usually sunny and warm in south Florida, as was the company that day.

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

Energy Mutual Fund

Energy ETF

Hydrogen has long been thought to be a viable form of carbon-free energy. When burned, it produces water vapor. But hydrogen isn’t very energy-dense (about two thirds less than gasoline), is expensive to produce and hard to handle. An interesting fact is that H2 molecules are so tiny they can gradually leak through a steel tank container and make it brittle.

The 2022 Inflation Reduction Act (IRA) included subsidies to create seven hydrogen hubs, to jump start US production.

To be a hydrocarbon substitute, hydrogen has to be produced without carbon emissions. This typically means solar-powered electrolysis.  Using one form of carbon-free energy to produce another isn’t cheap, even if the intermittency of solar is more manageable in a production process than if it’s supporting the grid.

The most optimistic cost forecasts for green hydrogen are $2-3 per kg. It takes about 7kg of hydrogen to generate the same energy as a million BTUs (MMBTUs) of natural gas. At the equivalent of $14-21 per MMBTU, this makes hydrogen uncompetitive in the US and above the current European LNG benchmark of $10 per MMBTU.

The EU has great hopes for hydrogen, pledging that it will produce 10 million tonnes by 2030 and that it will provide 10% of Europe’s energy by 2050. As with most progressive policies to move away from conventional energy, this is wildly unrealistic.

The FT reported last week that 60 low-carbon hydrogen projects have been canceled or put on hold this year, equal to 4.9 million tonnes of capacity which is more than 4X what currently exists. Spiraling costs and the absence of ready buyers are the most commonly cited reasons.

None of the energy majors derive significant profits from low carbon business units. Shell and BP drank the Kool-Aid more readily than their American peers which has weighed on their stock prices. BP has slashed its spending on clean energy by 80 per cent compared with last year, to just $332MM.

The 2022 Inflation Reduction Act in reality was a fiscal injection into renewables. The White House recently slashed funding for two of the contemplated hydrogen hubs, and further cuts are expected. The policy uncertainty has halted construction.

Hydrogen faces substantial hurdles to wider use, including high cost and challenging transportation/storage. It’s often converted to ammonia which is easier to transport and then converted back for use.

Hydrogen is likely to remain a niche market for the foreseeable future.

The dimming interest in hydrogen is symptomatic of a broad acknowledgment that reducing consumption of hydrocarbons as pushed by progressives is impractical. The International Energy Agency (IEA) restored serious forecasts in their 2025 World Energy Outlook and now sees no peak in global oil or gas consumption.

Nature magazine withdrew a flawed paper whose prediction of economic catastrophe relied on wrong data from Uzbekistan. It’s why Democrats are concluding that climate change fearmongering doesn’t resonate with voters.

Last week Exxon Mobil (XOM) boosted their forecast earnings growth through 2030 with higher oil and gas output. Renewables were a footnote, with the Carbon Solutions unit focused on carbon capture. Last year, XOM announced the construction of a large hydrogen plant in Baytown, TX, but they recently canceled it.

US natural gas prices recently traded above $5 per MMBTU before pulling back to around $4.50. Gas provides 43% of America’s electricity, so the price run-up adds fuel to the affordability debate. Climate extremists have long opposed adding natural gas infrastructure which would improve access to this resource.

New York policy has recently become more amenable as the political cost of such opposition becomes apparent (watch Are Democrats The Problem?). Renewables have consistently failed to meet promised generation targets or low costs.

Increasing LNG exports have been blamed by some for high domestic gas prices. As long as the gap between foreign LNG benchmarks and the US exceeds the cost of liquefaction and transportation, exports will continue to flow. The price gap will narrow, in part by US prices moving higher. It’s an issue that bears watching. Popular opinion in Australia led to curbs on LNG exports a few years ago when many felt it was boosting domestic prices.

The problem is most easily solved by adding takeaway capacity to get more gas out of the ground to where it’s needed. As in so many cases, left wing energy policies have stalled the use of conventional energy, raising prices for US consumers.

In his press conference last week, Fed chair Jay Powell made the surprising admission that the Bureau of Labor Statistics (BLS) is probably overstating employment by around 60K workers per month. It’s due to problems estimating the impact of new and failing businesses (the “birth-death” model), an issue that’s challenged BLS statisticians for years.

The cut in rates was partly due to the labor market weakness this implies.

Midstream yields of 5% and higher look ever more attractive.

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

Energy Mutual Fund

Energy ETF

Renewables’ advocates are fond of linking solar and wind with the power needs of data centers. Superficially, the marriage of new technology and new energy seems inevitable. Bloomberg New Energy Finance (BNEF) is just one example of media outlets that are telling this story (see Power Hungry Data Centers Are Driving Green Energy Demand).

Inconveniently, this narrative is at odds with the facts. Intermittent power that runs 20-40% of the time is not an obvious choice for customers whose acceptable annual downtime is measured in seconds. Solar and wind can be cheap if you’re willing to be opportunistic in your use of electricity, but few of us are so accommodating.

This is why four of the five biggest data centers in the US are being built to run primarily on natural gas. The renewables + batteries combination, the only way to harness sun and wind reliably, is nowhere in sight.

Elong Musk, an original thinker who executes his big, bold ideas, has suggested that data centers operating in orbit where they can constantly re-position for 24X7 sunlight will become cost-competitive within 4-5 years.

Natural gas currently provides 43% of US electricity. This is higher than almost any other OECD country (Italy is 44%). Gas has been increasing its share of power supply for decades, a trend that we believe will continue. This is because the growth in electricity demand is largely from data centers, and they are going to rely on gas for much more than 43% of their power needs.

For those who worry that an AI bubble will derail this source of growth, many projects are already under construction. Returns to the financiers of the AI boom may be unsatisfactory, but losses to the investors in fiber optic cable built during the dot com bubble didn’t prevent it from being used by subsequent owners.

Once capital is invested in fixed infrastructure, covering the variable costs can be sufficient to assure its operation even if the returns on that initial capital are poor.

The US is better positioned than the EU to develop AI capabilities. Years of progressive energy policies have reduced greenhouse gas emissions across Europe but at a significant cost. (see Europe’s Green Energy Rush Slashed Emissions—and Crippled the Economy). Voters were fooled by renewables advocates into believing an era of cheap, abundant energy was at hand.

“Very clearly the cost of the transition has never been admitted or recognized,” said Gordon Hughes, a professor at the University of Edinburgh and a former adviser on energy to the World Bank. “There is a massive dishonesty involved.”

The region is slowly de-industrializing because of high energy prices, slow GDP growth and falling birth rates. Most countries will want data centers that they rely on to be located within their national borders. The commercial case for building anything in Europe is weakening every year.

The growth in gas demand caused by feedstock for Liquefied Natural Gas (LNG) export terminals continues to draw skeptical analysis from those warning of a supply glut in the years ahead.

This cautious outlook also doesn’t square with the facts. LNG exporters sign long-term Sale Purchase Agreements (SPAs) with shippers that go out 10-20 years. These are generally investment grade counterparties who have committed to pay for liquefaction whether or not they use it. Cheniere has sold 90% of their capacity through 2035.

It seems implausible that these buyers have made long term commitments without having the other side of the trade locked in. There’s little reason for them to speculate on global natural gas prices many years in the future. If there is a supply glut, it shouldn’t hurt the LNG export terminals.

If for example Kogas of South Korea declined to use some of their already purchased liquefaction capacity, the LNG operator could use it themselves in effect for free since it’s already been paid for. Or Kogas could use it at a loss, as long as they covered their variable cost since the liquefaction fee is in effect a capital commitment.

As noted above in the cases of fiber optic cables and data centers, a cash profit that covers variable costs and contributes to fixed costs can support the operation of an asset even if it results in a poor return on capital for the owner.

This year’s news developments for midstream have largely confirmed the positive outlook that took hold last year. The absence of anything further has caused many investors to turn to more exciting areas, such as AI and growth stocks, for example. Meanwhile, the fundamental bullish case for midstream is only getting stronger.

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

Energy Mutual Fund

Energy ETF

Midstream is mercifully removed from all the angst and excitement of AI stocks and crypto – although in a modern version of selling pickaxes to goldminers, natural gas and its infrastructure enable much of this activity. You have to admire the response of MicroStrategy CEO Michael Saylor to the bitcoin collapse which has crushed his stock price.

“Volatility is Satoshi’s gift to the faithful” said Saylor recently, invoking Satoshi Nakamoto, the pseudonym attributed to bitcoin’s founder. Such uber-confidence would badly shake mine if I was invested with Saylor.

But it’s safe to say that our risk appetites have little in common. I have no bitcoin and only wish the best for my friends who do. Tangible assets with well covered dividends that are growing are our thing.

To invoke Ben Graham, crypto is for those who rely on the stock market as a voting machine, while midstream is for those who use it as a weighing machine. For the latter, including your blogger, the spread between a company’s Return On Invested Capital (ROIC) and its Weighted Average Cost of Capital (WACC) provides enduring excitement.

Recent figures from the Wells Fargo Show Me The Money report, when compared with stock price performance,  illustrate a solid relationship. Targa Resources (TRGP), Cheniere (LNG) and Williams Companies (WMB) all show a healthy spread between what they pay for capital and what they earn on it.

Kinder Morgan continues to prove that when management discusses “growth capex opportunities,” investors should prepare for more capital misallocation.

Commensurate stock price performance followed.

Energy Transfer has combined a relatively low spread with decent stock performance, which is probably due to its very low price five years ago as we came out of the pandemic, flattering returns. Nonetheless, even today the 8% distribution yield 2X covered by Distributable Cash Flow looks like a glaring market oversight, as improbable as that sounds for a company with a $56BN market cap.

The one year total return forecast for ET is 38%, 35% and 45% at JPMorgan, Morgan Stanley and Wells Fargo respectively.

The difference in ROIC over the past five years across companies is surprisingly large given the predictability of cashflows in the industry. Wells Fargo now forecasts ROIC for the next five years and unsurprisingly expects persistence in the skill that capital allocators exhibit.

As a group, midstream companies are improving at deciding which projects to finance. The shale revolution represents the nadir, with the five year periods ending in 2016 and 2017 especially poor. The most recent lustrum* equaled the 11.8% record set in 2022.

Encouragingly, Wells Fargo expects the period ending in 2031 to produce a median ROIC of 13.5%. Oil and gas volumes are growing. Data centers are sprouting up everywhere to support the AI revolution. Behind The Meter (BTM) deals that provide natural gas directly to a dedicated power plant, bypassing the grid, are proliferating. Wells Fargo counts 4GW of BTM deals that have reached Final Investment Decision, up from 2GW in July. This will continue to ramp up.

Exports of liquefied natural gas will double by 2030. So far in 4Q25 they’re running at 16.2 Billion Cubic Feet per Day (BCF/D), up from 13.3BCF/D in 4Q24.

The projected ROIC could be wrong. Perhaps some capital will be committed too exuberantly, in a re-run of a decade ago. But it’s also possible that today’s valuations are wrong. Companies have discovered the virtue of capital discipline with its concordant impact on stock prices.

Therefore, it’s a paradox that Enterprise Value/EBITDA (EV/EBITDA) has weakened to 9.6X, well below the ten year average of 11.0X. Market prices are implying an ROIC substantially below the Wells Fargo forecast and probably below the median of recent years. A move up in EV/EBITDA from 9.6X to 10.6X would increase enterprise values by around 10% and equity values by twice that given the roughly 50/50 equity/debt split that prevails.

Fund flows are barely positive for the year, with recent months offsetting inflows in 1Q25. This year might yet break a streak of seven consecutive years of outflows.

The combination of growing volumes, improving capital allocation and twin demand drivers for gas might ordinarily induce value-driven investors to buy. This is a sector of tangible assets full of concrete metrics well suited to the weighing machine type of investor.

To paraphrase Michael Saylor, today’s attractive valuations are a gift to the discerning investor. The breathless excitement of crypto and AI commands the attention of many. When they start voting their money differently, we suspect that stable dividends will become fashionable once again.

Pipeline investors are used to being paid to wait. It’s only boring over the short run.

Recently, long-time investor Emerson Fersch interviewed me to discuss the history of midstream and its outlook. You can watch it here.

*A lustrum is half a decade.

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

Energy Mutual Fund

Energy ETF