SL Advisors partner Henry Hoffman spent a couple of days last week at the Wells Fargo Midstream and Utilities Symposium. He had the opportunity to meet with many of our portfolio companies and drew some useful insights.

Below are Henry’s notes from the event.

Chatter at the Conference:

Throughout the one-on-one meetings, hallway conversations, and mealtime discussions, Equitrans (ETRN) was a hot topic. Everyone seemed intrigued by the article published last Friday, hinting at a possible sale of the company. Questions arose: had they received a tempting offer, prompting them to explore broader interest? And if so, who might the potential buyer be? Could a deal materialize before the Mountain Valley Pipeline project’s valves were even turned on? One CEO humorously referred to ETRN as “eye candy for anyone who looks at a map.” Speculation was rampant, with my personal favorite theory coming from an analyst at a hedge fund who suggested they might have received an offer from Energy Transfer, sparking the “leak” for Williams to swoop in as a white knight defensive bidder against ET’s potential encroachment into Williams’ territory. The conference buzzed with theories and excitement, and the possibility of a bidding war for ETRN could inject fresh energy into the midstream sector.

Editor’s Note: Wells Fargo thinks Kinder Morgan may also be an interested buyer.

Most Impressive Management of the Conference:

Cheniere’s CFO, Zach Davis, delivered a meticulously calculated approach to value creation at Cheniere. Their disciplined strategy has allowed them to offer LNG liquefaction rates at a substantial premium compared to competitors, with no trouble filling new capacity slots to the satisfaction of existing customers. Cheniere’s ability to generate surplus free cash flow provides them with significant flexibility for investments in additional trains, debt reduction, or share buybacks, all geared towards enhancing shareholder value.

Topic That Left Me Puzzled:

A surprising revelation at the conference was that Carbon Capture, Utilization, and Storage (CCUS) is progressing more slowly than anticipated. Despite the potential for substantial financial incentives from Congress, there appears to be a lack of urgency from the Biden administration in providing guidance and clarity. Consequently, there have been fewer Class 6 wells drilled than expected. This came as a surprise since one might have assumed that drilling vertical wells and injecting CO2 would be a straightforward geological matter, especially without the pushback from anti-fossil fuel groups, given that CCUS directly involves capturing CO2. The expected surge in CCUS activity after the Inflation Reduction Act has yet to materialize, and the industry seems to be off to a slow start.

#1 Misunderstood Story:

Ironically, the simplest narrative appears to be the most misunderstood investment opportunity in the industry. NextDecade’s (NEXT) CEO, Matt Schatzman, outlined the case for the first three trains (Phase 1) at the Rio Grande site in South Texas as laying the foundation for a massive LNG facility akin to Cheniere’s. Phase 1 brought in strategic partner Total Energies, a lending syndicate of 30 major banks, EPC partner Bechtel, and equity partners, including premier private equity infrastructure fund Global Infrastructure Partners (GIP), GIC (Singaporean sovereign wealth fund), and Mubadula (the sovereign wealth fund of the Emirate of Abu Dhabi). These partnerships enhance the certainty of additional trains, which promise significantly higher economics for NEXT.

Phase 1’s estimated cash inflow of ~$250 million for all three trains translates to roughly $83 million per train. By contrast, Trains 4 and 5 are projected to yield $700-$1 billion in cash flows or approximately $425 million per train, including the option for equity partners to participate. Furthermore, NEXT has the land available for three more trains (Trains 6-8), which are expected to offer even better economics, as they do not have the same obligations to current equity partners as options on Trains 4-5. There’s also the potential upside from their Carbon Solutions business, although this remains uncertain, as touched upon earlier.

Energized CEO Award:

Kinetik Holdings CEO Jamie Welch exuded enthusiasm for the investment case. In his distinctive Australian accent, he referred to 2024 as a “barn burner” year, anticipating a sharp drop in capital expenditure and a surge in free cash flow. He was highly optimistic about creating substantial shareholder value, to be realized when they find the right buyer for the company.

Additional Insight on M&A:

During the conference, Enterprise Products (EPD) Co-CEO & CFO, Randy Fowler, shared astute comments on M&A in the midstream sector. He believes that strategic buyers will dominate the landscape. However, Fowler emphasized the need for strategic buyers to exercise caution when considering private equity acquisitions, citing concerns about quality and downstream commitments. When you buy an asset, you really want the flexibility to control the molecule.  For a purchase to be viable for them, it must meet two key criteria: it must possess “industrial merits” and be accretive to cash flow per unit when adjusted for leverage.

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

Energy Mutual Fund

Energy ETF

Real Assets Fund

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.