SL Advisors Talks Markets Archives

Next Leg Up

July 16, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Next Leg Up

00:00 / 00:05:08

Morgan Stanley’s bullish report on US LNG stocks last week gave the sector a lift. The biggest impact was felt by NextDecade (NEXT), which was up 17%, bringing its market cap to $2.8BN.

NEXT is still a small cap stock with no dividend, unusual for the midstream sector which is dominated by large-cap, investment grade companies that pay attractive dividends. But NEXT generates no cashflow. They’re building their Rio Grande LNG export terminal in Brownsville, TX.

Phase1, consisting of three trains or liquefaction units, is scheduled to become operational in 2H27. NEXT made their Final Investment Decision (FID) to proceed with Phase 1 in July 2023. Like many investors, we were disappointed that they conceded so much in the final round of negotiations with their partners. The 20.8% share of the economics NEXT wound up with seemed inadequate compensation for operating the project (see Environmentalists Opposed To Windpower last three paragraphs). Phase 1 is expected to generate $200-300MM in Distributable Cash Flow (DCF).

Perhaps as a result, the market hasn’t assigned much credit until recently to Phase 2. NEXT has been negotiating supply agreements with buyers to de-risk the project. They haven’t started construction, although Phase 2 will benefit from some of the infrastructure being built for Phase 1. Management has expressed confidence that they can achieve a bigger share of the expansion, but many have been skeptical.

Although Phase 2 hasn’t yet received FID, based on the 60% share the company has said it expects, Morgan Stanley estimates it will generate $700-$1BN in DCF. This would be a substantial improvement on Phase 1, although the company may yet wind up with a reduced share than they think. Since we invested in them in 2022 it has been anything but a smooth ride.

Our first mention of the company concerned the loss of a contract with France’s Engie because of concerns about the emissions associated with sourcing natural gas (methane) through NEXT (see Making LNG Cleaner). This raised worries that European buyers of LNG would insist on low or zero emissions in its production. NEXT sought to address the issue by planning to add carbon capture to their liquefaction facilities.

Engie returned a year later and signed an off-take agreement.

An adverse court ruling came last August, when the Sierra Club persuaded a judge to vacate a previously issued permit. It’s an example of why permitting reform is needed. A legal challenge should only disrupt a construction project that has the needed government permits in hand under exceptional circumstances. Otherwise, nothing will get done. In this case the Federal Energy Regulatory Commission (FERC) had produced a supportive environmental study that the company relied upon to start construction.

Climate extremists including the Sierra Club are a destructive force pursuing nihilistic aims.

It has not been a smooth ride. There have been legal and regulatory setbacks, disappointing agreements with partners, and secondary offerings of equity at bargain basement prices. The stock has been 40% or more below its prior all-time high almost a third of the time.

The high it reached in August 2022 wasn’t even eclipsed in the aftermath of Trump’s election victory last November. When it did finally make a new high on March 25^th, Liberation Day duly followed, bringing fears of reciprocal tariffs on US LNG exports. Within days it had lost 40% of its value.

In short, if volatility worries you this is not your investment.

NEXT needs around $1.2BN to finance their share of Phase 2. Fortunately, as Phase 1 progresses their financing options improve. They might issue some debt secured by the cashflows from Phase 1, or preferred securities. But even If the company makes the most dilutive choice of 100% equity and issues 120 million shares at $10 to raise $1.2BN, their share count would rise to just under 361 million.

Taking the midpoint of Phase 1 ($250MM) and Phase 2 ($850MM) sums to $1.1BN in DCF, around $3 per share.

If they FID Phase 2 in September and complete in four years, 2029 is approximately when they should approach that $3 per share in DCF.

NEXT is also developing plans for Phase 3 (Trains 6-10), which would further add to cashflow but is too far out to be reflected in today’s stock price.

Cheniere recently guided to $25 per share in DCF by 2030 and trades at a 9X multiple. They are best in class. NEXT rose over 20% during the two trading sessions following Morgan Stanley’s report. Nonetheless, at a 3-4X DCF multiple we think it still trades at a substantial discount.

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

Energy Mutual Fund Energy ETF

Power Auctions Are Getting Interesting

July 13, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Power Auctions Are Getting Interesting

00:00 / 00:05:34

Last Wednesday PJM Interconnection began their Capacity Auction. PJM runs the largest electricity grid in the US, extending from the east coast as far west as Illinois. The auction sources commitments for surge capacity, to ensure that even during times of high demand the system can meet the need for power.

Capacity auctions haven’t historically drawn much attention. But last year the auction cleared at $269.92 per Megawatt-Day, more than 9X the prior year’s figure of $28.92. That drew news coverage, along with warnings that this would increase electricity rates for millions of households (see The Coming Fight Over Powering AI).

PJM has 65 million customers.

The jump in price is generally regarded as being due to increased demand, especially from data centers, and declining supply as coal plants are retired, but new renewables capacity is added too slowly.

Power supply across PJM’s region has a complex structure. PJM operates the grid, but customers deal with a local utility. In our part of New Jersey it’s PSE&G. The point of a regional grid is that electricity can be transmitted across state lines where it is needed to balance supply and demand. This makes it hard to hold politicians accountable if things go wrong.

Electricity prices are about to become a political issue, especially in New Jersey which will elect a new governor later this year. Partly because of last year’s auction, prices are apparently going up by 17%. I examined my own electricity bill, which is worth doing from time to time.

The hike in rates must vary. We’re now paying 30 cents per KwH, up from 22 cents. This is among the highest in the country, almost as high as California at 32 cents. Our most recent bill is up 15% year-on-year, and we used 15% less, a 35% hike.

Outgoing Democrat governor Phil Murphy has mandated that 100% of electricity must be renewable by 2035. New Jersey currently has a splendid mix of power generation, which is almost all nuclear and natural gas. Renewables with their weather dependency are, for now, not interfering. But there’s not much point in building a new natural gas power plant, given current policy.

Because solar and wind are opportunistic, each new addition requires an engineering study to make sure grid operators fully understand the impact. Solar and wind typically work 20-40% of the time.

Left wing policies that push for 100% solar and wind are part of the problem, exacerbated by incorrect claims that natural gas is unreliable.

As they’re added to a grid, renewables increase the need for dispatchable power that can be turned on when it’s not sunny or windy. That usually comes from natural gas power plants, since their output can most easily be varied on short notice as needed.

Williams Companies, a large natural gas pipeline operator, has reported that renewables create additional natural gas demand to compensate for their inadequacy.

Josh Shapiro, the governor of Pennsylvania (the “P” in PJM) is so upset he’s threatened to withdraw his state from the PJM network. The Keystone state is the biggest exporter of electricity to the rest of the PJM system. It’s unclear how they would withdraw, but if they did, it would presumably not help the supply shortage.

What’s clear is that Democrat politicians within the PJM region are starting to realize that poorly conceived energy policies aimed at their primary voters are about to collide with Main Street.

Increased demand from data centers is part of the problem. By 2030 PJM expects 32 gigawatts of additional demand, with 30 from data centers. But they also blame insufficient new supply, including state policies that closed fossil fuel plants prematurely.

This is where assigning blame gets messy. Three years ago PJM stopped processing new applications for power plant connections after it was overloaded with more than 2,000 requests from renewable power projects.

The US Department of Energy believes Grid Growth Must Match Pace of AI Innovation in a report on grid stability published recently. They use terms like the “AI arms race” and warn that inadequate power supplies to data centers risk jeopardizing our economic and national security.

That suggests that even though data centers don’t create many jobs, they’ll have a powerful backer in the Federal government. The acceptable downtime of new data centers is around 3 seconds per year. This makes intermittent power a non-starter. Powering them will overwhelmingly rely on natural gas, and public policy will be behind them.

The results of the latest PJM Capacity Auction will be released on July 22^nd. They’ll be more keenly awaited than in the past.

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

Energy Mutual Fund Energy ETF

Reliable Energy Is Mainstream Again

July 9, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Reliable Energy Is Mainstream Again

00:00 / 00:05:26

The ending of many renewables subsidies in the One Big Beautiful Bill (OBBB) is being hailed as a win for the oil and gas industry. The WSJ wrote, The Moment the Clean-Energy Boom Ran Into ‘Drill, Baby, Drill’, suggesting that oil production will benefit.

But in reality it’s about electricity generation, and oil produced just 0.4% last year. It’s an expensive way to generate power – globally it was just 2.2%. Oil is used as a back-up in places like Boston where new natural gas pipelines have been opposed, although this may be changing (see Gas Kept Us Cool Last Week).

Saudi Arabia gets over a third of their electricity from oil, since they have it in abundance. They use natural gas for the rest.

Since renewables are all about power generation and OBBB shifted public policy support away from them, natural gas is the obvious winner. With EV sales faltering, crude oil demand may also benefit but not as much as gas.

The change in priorities reflects evolving public opinion. A majority still favors expanding solar and wind output, but according to one survey that has fallen to 60% from 79% five years ago. Unsurprisingly, red and blue respondents hold widely differing views.

The shift back towards reliable hydrocarbons isn’t limited to America. Canada’s PM Mark Carney recently said it’s, “highly likely that we will have an oil pipeline…” when asked about improving access of Alberta’s crude oil to foreign markets by adding a pipeline to Canada’s Pacific coast.

Alberta may be the only Canadian province where Trump’s disappointing references to the 51^st state don’t provoke widespread anger. Carney likely believes that supporting Alberta’s energy sector will snuff out any nascent calls for secession, and the country badly needs alternative export routes for its hydrocarbons. Canadians know they’re too reliant on their southern neighbor.

Canada shipped its first tanker full of LNG last week, from Kitimat, BC. The export terminal, owned by LNG Canada, cost about C$48BN ($35BN). PM Carney said, “Canada has what the world needs.” He wants to lead “the world’s leading energy superpower.”

Until recently Canada thought of itself as a leader in reducing greenhouse gas emissions, even though their per capita emissions are among the world’s highest at 20.4 tonnes per year (the US is 17.2). They attribute this to their energy intensive industries, ironically including oil and gas extraction, and their cold climate.

The Department of Energy (DoE) just released a report evaluating grid reliability. Demand is rising at a faster rate than in the past, mainly because of data centers. The supply mix is becoming less reliable as dispatchable power from coal plants is replaced with intermittent solar and wind.

Some may find the report’s tone political, such as this sentence: The current administration has made great strides—such as deregulation, permitting reform, and other measures—to enable addition of more energy infrastructure…

But then NJ residents just saw electricity bills rise 17% which their grid operator PJM blamed on the same factors mentioned in the DoE report: data centers and insufficient new dispatchable power, which really means reliable power that’s there when needed.

The whole situation needs more natural gas power plants.

So far this year, midstream energy infrastructure is +3.5%, lagging the S&P500 by around 3%. Operating performance has remained strong, resulting in cheaper valuations for those still inadequately allocated to the sector.

Consequently, EV/EBITDA has slipped from the ten year average of 11.0X at the end of last year to 10.5X now. Dividend yields of around 4.5%, added to dividend growth of 3-4% and buybacks of 2-3% imply a prospective total return of around 10% pa (ie 4.5% + 3.5% + 2.5%). A return to 11.0 EV/EBITDA would mean a 4.76% increase in enterprise value (i.e. 0.5/10.5 = 0.0476) which given the prevailing 50/50 split between debt and equity liabilities would result in a 9-10% price increase (4.76% X 2).

In other words, pipelines are cheaper than they were following the election. White House policies have been at least as supportive towards traditional energy as was hoped eight months ago. The fundamentals support appreciation from current levels.

Retail investors remain cautious after a spurt of buying earlier in the year. Open-ended MLP funds, which confusingly includes c-corps which are now the dominant corporate form, have seen minor net inflows this year after seven straight years of outflows. This should soothe the fears of any potential buyer that it’s a hot sector. Sentiment is at odds with valuations, as is often the case.

We’re happy to report that net inflows to products managed by your blogger and partner Henry here at SL Advisors are well in excess of the $31million net adds to the sector.

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

Energy Mutual Fund Energy ETF

Anniversary Celebrations

July 6, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Anniversary Celebrations

00:00 / 00:05:07

Around this time of year, I’m often asked if we celebrate July 4^th. Since it is the anniversary of America’s Declaration of Independence, in Britain it receives scant attention. But I often note that had the war turned out differently I might not have emigrated to America in 1982.

We have much to celebrate in this country. As an immigrant I’ve always found America welcoming. Memorial Day weekend fell within a couple of weeks of my arrival 43 years ago, and the “new English guy” was invited to a home in Brooklyn where a friendship began that continues to this day.

I’ve never felt like a foreigner or an outsider.

The US is very good at assimilating newcomers. Beginning with reciting the Pledge of Allegiance every day, I watched proudly as our three children born of English parents grew up to be Americans like so many millions before them. Nonetheless they did receive a healthy dose of English culture. Just the other day we watched an episode of the brilliantly funny 1970s Britcom Fawlty Towers, for at least the hundredth time, so a close family friend might better appreciate our sense of humor.

Britain is a great country, but America is the greatest country. I love trips back to the UK, timed as much as possible to enable me to watch an Arsenal game. I’ll keep returning and I’m proud to have grown up in England, but America will always be my home.

We have our political differences to be sure. I once remarked to my business partner Henry, who’s from North Carolina, that the country had probably never been so divided as it is now. Henry retorted that the 1860s were worse, and of course he’s right, as he usually is. The south was more impacted by the Civil War, which is perhaps why Southerners more readily refer to it.

I have friends on both sides of the political divide, although since I predominantly interact with energy investors and golf club members my world is overweight Republicans. I think the Red tribe is fundamentally more optimistic about the future, and since I know America’s best days are still ahead, I feel comfortable there. But my Blue tribe friends correctly note our shortcomings, sometimes bitterly.

Maybe the key difference is in our assessment of whether what’s bad will be made good. Ronald Reagan was my first president. His sunny optimism was mine and remains so today. It’s always Morning Again In America.

That political ad from 1984 still gives me goosebumps.

To say we’re more united by shared values than we are divided by politics sounds uncomfortably like a campaign speech. But ahead of anything else, Americans are good, generous people. Most casual interactions with a stranger confirm that. Families across the country are raising children, instilling their values and hoping a bright future awaits them while enjoying the highest living standards in human history.

In recent weeks my wife and I attended a series of year-end school concerts and recitals. With eight grandchildren aged nine months to nine years old, the events come thick and fast.

As I watched those youngsters perform alongside their classmates, I thought how that next generation is growing up with the shared experiences and values of being first and foremost Americans. I looked at all those bright, smiling faces accepting the applause and thought about how this was happening at thousands of school halls across the country. They’ve completed another year of growing up in this great country.

Can you think of anything more powerfully filled with hope and optimism?

Every year in early July, the Queen Mary 2 operates a seven day cruise from New York up to New England and Nova Scotia and back. My wife Karen and I boarded the ship on July 1 to celebrate our fortieth anniversary.

Like America on July 4^th, we also had much to celebrate on our anniversary, July 6^th.

I’m sure there have been moments when it seemed to Karen we long ago passed that forty-year milestone. At such times I indulge my romantic side and note there are many oil and gas pipelines that have lasted even longer, including the original elements of the Transco network operated by Williams Companies. That such news leaves her non-plussed I attribute to poor delivery on my part, not irrelevant content.

Sometimes I think I have confirmed Warren Buffett’s advice that the secret to a happy marriage is to find a woman with low expectations. But in truth we both had high hopes when we married in 1985, and here we are still together.

Optimism isn’t always rewarded. But positivity is better for you, and life is more enjoyable if you can find it in others.

I hope your July 4^th left you still feeling Ronald Reagan’s sunny optimism.

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

Energy Mutual Fund Energy ETF

Gas Kept Us Cool Last Week

July 2, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Gas Kept Us Cool Last Week

00:00 / 00:05:01

Our power infrastructure survived last week’s heatwave, which saw the PJM Interconnect system peak at an almost twenty year high of 160,560 Megawatts on June 23. Natural gas provided 44% of generation, with solar at 6%. The ISO-NE system that covers New England saw peak demand a day later. This was met 47% by natural gas and 4% from renewables (wind, solar and batteries).

There is a revival of interest in new pipeline projects to serve the northeast. In recent years politically motivated regulatory hurdles led to several cancellations. In 2016 Kinder Morgan (KMI) shelved Northeast Energy Direct (NED) which was to transport natural gas from Pennsylvania through New York and into New England. They were unable to obtain enough firm commitments from power companies who feared future limits from state governments on their ability to use gas.

In 2020 Williams Companies (WMB) canceled Constitution Pipeline which was to link Pennsylvania and New York because of difficulties obtaining water permits. Last year they canceled the Northeast Supply Enhancement Pipeline (NESE) that was to run from Pennsylvania through New Jersey to New York City, also because of problems with water permits.

Constitution has now been restarted, with an in-service date of 3Q27.

NESE has also been restarted, with an in-service date of 4Q27. Residents of New York and New Jersey are fortunate that WMB still has an appetite to try and complete these projects given the hostility to reliable energy from their state governments.

So far KMI hasn’t indicated they’ll restart NED. But the shift is palpable, driven by the failure of renewables to meet expectations and the Administration’s reversal of energy policies followed under Joe Biden.

JPMorgan’s Energy, Power, Renewables, and Mining Conference provided positive news for domestic natural gas demand with Exxon Mobil (XOM) confirming that Golden Pass LNG will start operations by the end of the year. The project is situated on the Texas side of the Sabine-Neches Waterway, opposite Cheniere’s Sabine Pass LNG terminal which is on the Louisiana side. XOM owns 30% of the project and Qatar Energy 70%.

Energy Secretary Chris Wright wrote an op-ed last week justifying the shift against renewables in the One Big Beautiful Bill (OBBB) currently making its way through Congress. He compared the intermittency of solar and wind with the value of an Uber ride that couldn’t commit to a pickup time or drop-off point.

Other than his support for coal, we think Wright’s energy policies are good.

The OBBB has caused some big swings in renewables stocks as traders react to changes to the draft language. The damage to renewables businesses in the US is likely to last well beyond the current Administration even if the Democrats reclaim the White House in 2028, because investment timelines are longer than the presidential election cycle.

The Texas state legislature passed a new law allowing data centers to be cut off from the grid during times of high demand. This reflects the growing electricity needs of data centers and their limited political influence. Once constructed, they create few jobs since all that’s required is a handful of IT specialists to monitor the thousands of computers supporting the AI revolution.

This will boost Behind The Meter (BTM) solutions which deliver natural gas to a dedicated power plant, bypassing the grid. WMB is developing a reputation for offering market leading solutions as they’re able to combine access to large quantities of gas through their existing pipeline system with marketing knowledge and control of relevant plots of land.

Data centers often like to connect with the grid even if their main supply is BTM because it provides back-up when their gas power plant is down, most likely for maintenance. Data centers are increasingly seeking very consistent power supply with virtually no downtime. The current standard for maximum acceptable loss of power is reported to be as little as three seconds per year.

Lastly, the President had a good foreign policy week, but the implementation of tariffs continues to create uncertainty. The US sells ethane to China, and neither side has an easy replacement. Shortly after Liberation Day analysts worried that China might impose reciprocal tariffs on US ethane but demurred since they have a petrochemical industry designed to receive it.

Then the US announced a license requirement for ethane exports and even though Enterprise Products Partners and Energy Transfer both made “emergency applications” they were not forthcoming. The latest twist in the ethane trade is that ethane tankers can be loaded and travel to China but not unload.

It’s unclear if any ethane tankers will be dispatched under such circumstances. US trade policy remains capricious.

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

Energy Mutual Fund Energy ETF

Energy By The Numbers

June 29, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Energy By The Numbers

00:00 / 00:05:19

The Energy Institute’s (EI) Statistical Review of World Energy provides a wonderfully detailed view of what’s actually happening, mostly untainted by any political bias. The world is using more of all kinds of energy, raising living standards across the developing world. Hydrocarbons still dominate and will for the foreseeable future.

There’s still a tendency even at the EI to focus on percentage increases rather than absolute values when it comes to renewables. For example, while “…wind and solar grew nearly nine times faster than total energy demand” is a true statement, it compares the percentage growth rates and so isn’t that meaningful. The pressure to express optimism around intermittent energy sources extends broadly.

More accurate is to note that renewables production increased by 2.8 Exajoules (EJs) last year. One can cheer the 9.2% increase, or note that global energy production increased by 11.9 EJs last year and renewables were just under a quarter of this. Natural gas production grew at only 2.8%, but provided 4.1 EJs of additional energy, almost half as much again as renewables.

Natural gas met over a third of the world’s growth in energy demand last year and provided a quarter of the total. Overall, hydrocarbons fell from 87% to 86.6% of the total. It’s a true statement to say that renewables are gaining market share, reaching 5.5% last year from 5.2% in 2023. This also means that an investor in hydrocarbon energy infrastructure with a bias towards natural gas doesn’t need to be too concerned about solar and wind becoming dominant.

In 2006 Al Gore’s documentary An Inconvenient Truth raised public awareness about the risks from climate change. It also predicted that Arctic sea ice would disappear by 2013 and that Florida would disappear within decades. These were wrong in timing, but directionally had some merit.

Four years before Gore’s documentary, developed country emissions (defined as OECD) were bigger than emerging countries’ (non-OECD). If your goal was reducing them, the rich world needed to play a role. In 2003 non-OECD emissions became the larger of the two. In 2007, the year after the documentary, rich world emissions peaked.

Last year, Greenhouse Gas emissions (GHGs) increased by 1.3% to 40.8 Gigatonnes (GTs, billions of metric tonnes) on a CO2 equivalent basis (CO2e). OECD countries were 12.0 GTs, non-OECD 28.8 GTs. Whatever the moral argument that per capita emissions are bigger in rich countries and should shoulder more of the burden, non-OECD populations and emissions overwhelm. Liberal efforts to block natural gas hookups and build offshore wind raise costs, reduce reliability and are irrelevant until poorer countries can change their trend.

Coal is the problem, both because of local pollution as well as emissions. It’s cheap, easy to use and needs to be cut. Emerging countries increased their coal use by almost three times the reduction among rich countries. China burns 56% of the world’s output. India is 14%. Both are growing. There’s little point in having the world’s biggest EV market if they run on coal, which provides 58% of China’s electricity and 75% of India’s.

Coal displacement with natural gas in emerging Asia and elsewhere is our biggest opportunity to lower GHGs.

America’s LNG exports will keep growing, solidifying our role as the world’s biggest exporter. Some criticize the sector for methane leaks and the GHGs emitted in liquefaction. But the industry is addressing the issue, recognizing that many of their buyers want the full benefit of a fuel that generates roughly half the emissions of coal.

Last week Energy Transfer announced that Chevron has increased the LNG it will buy from their planned Lake Charles export facility. The twenty year offtake agreement now covers 3 Million Tons per Annum (MTPA), up from 2 MTPA.

Global electricity production grew by 4% last year, well ahead of the ten year 2.6% CAGR (compound annual growth rate). Much has been written about the impact of data centers, which are causing a sharp jump in demand in the US. OECD power consumption grew at a 0.4% CAGR over the past decade, and 4.2% in emerging countries.

AC is a big driver in countries such as India, which makes increased LNG exports critical to curbing their voracious appetite for coal.

Naples, FL is one of the most politically conservative places in America. It’s very red, and its population includes quite a few who would assert climate change isn’t real. Nonetheless, one local church that has endured repeated flooding from storm surges, including last October, has concluded that such events are more likely and has decided its best defense is to raise the entire building. For some, pragmatism trumps conviction.

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

Energy Mutual Fund Energy ETF

Coping With Heat

June 25, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Coping With Heat

00:00 / 00:05:33

This is the time of year when liberal news outlets warn of irreversible climate change. We spent a couple of days in Naples, FL which was, unusually, cooler than New Jersey. The daily afternoon thunderstorms that accompany hurricane season moderate the heat. When I first moved to New York from London in 1982 I remember being amazed at how on very hot days the tarmac on the streets felt soft underfoot.

PJM Interconnect, which operates the grid for mid-Atlantic states and as far west as Illinois, issued an order for Maximum Generation. New Jersey electricity prices are rising by 17%, which PJM blames in part on declining supply. Only self-flagellating Democrat energy policies could engineer such an outcome. State policy is to move to 100% renewable power by 2035.

Coal plants are being closed but solar and wind are inadequate – especially since offshore wind projects have been canceled. The policy is a virtue-signaling goal that is expensive, irrelevant and risks leaving the state short of power at peak times like these. Let’s hope there’s enough available to avoid power losses during the summer.

This blog shares with Energy Secretary Chris Wright a belief that climate change is real. Left wing policy prescriptions have failed to make much impact, because they favor intermittent energy instead of pushing for worldwide displacement of coal with gas.

Emissions growth in the developing world is far too much to be offset by even the most draconian energy policies promoted by rich world liberals. In the UK, industry has complained about the prohibitive cost of electricity as the country has shifted to windpower.

Britain has been reducing its emissions at the cost of jobs. The government recently announced plans to cut prices for industrial users, which means they’ll be subsidized by taxpayers. Once again, renewables are not cheap.

Data centers are the main source of demand growth in the US, and they are also being blamed for the jump in New Jersey electricity prices. But at a global level, increased air conditioning is more impactful than AI.

India’s Centre for Science and the Environment claims that, “A single heatwave – even one lasting just a few days – causes tens of thousands of excess deaths in India,” Global warming and rising living standards are driving energy demand up. Coal provides 75% of India’s electricity. For all non-OECD countries, it’s 45%. The US is 16% and the EU is 13%. The number of air-conditioning units in India is expected to grow from 110 million today to almost half a billion* within the next decade. That’s where emissions are going up.

India imported 26.1 Million Tons (MTs) of LNG last year, equal to around 3.5 Billion Cubic Feet per Day (BCF/D). This was up from 21.9 MTs in 2023. The US provided almost a fifth of this. We were their second biggest supplier, behind Qatar which is a much shorter trip.

India plans to double its imports of LNG by 2030. They’ve signed contracts with ADNOC and TotalEnergies, two companies that have in turn contracted to buy LNG from NextDecade’s Rio Grande terminal in Texas once it’s completed.

Since gas generates around half the emissions of coal when used to produce electricity, investments in growing our LNG export capability are helping keep Indians cool in the summer and reducing their emissions.

The last few days illustrate how hard it is to trade any market, including energy, based on developments in the Middle East. But on balance, even when oil prices drop sharply and erase prior gains, the net effect is to highlight the security in America’s supply of oil and gas both for our domestic market and overseas buyers. Qatar easily fended off Iran’s missiles, whose delivery was in any case well telegraphed.

But America’s LNG shipments do not leave ports at risk of attack. We don’t have to ask arriving tankers to wait miles away to avoid creating a concentrated target at the shipping terminal. They don’t have to pass through a narrow strait of water that might be closed during a war.

Because LNG contracts are often ten years or more, buyers need to consider a range of possibilities.

Venture Global (VG) was a brief beneficiary of the fears around shipping access through the Strait of Hormuz. This is because they have the most uncommitted capacity of any LNG exporter, so would have been able to profit from a short term spike in global LNG prices.

This is what they did in 2022 when Russia invaded Ukraine, earning an estimated $3.5BN along with the ire of customers who believed those deliveries should have gone to them under existing contracts. VG’s slide on Monday mirrored oil, as markets priced in reduced tensions in the region.

Other positive LNG news came from Cheniere. They announced Final Investment Decision on Trains 8 and 9 at Corpus Christi, and plan to spend $25BN on accretive growth projects, buybacks and debt repurchases through 2032, by which time they expect to reach $25 per share of Distributable Cash Flow. They also raised their dividend by 11%, although at 0.94% it won’t draw income-seeking investors.

We were also happy to see that TD Cowen raised NextDecade to a Buy, which boosted the stock yesterday. We continue to think it’s attractively priced.

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

Energy Mutual Fund Energy ETF

*An earlier version of this blog post incorrectly stated India had 110,000 a/c units rising to 500.000 by 2035. Sorry.

LNG Keeps Growing

June 22, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Jaclyn Rodriguez

SL Advisors Talks Markets

LNG Keeps Growing

00:00 / 00:05:13

Conflict in the Middle East invariably leads to concern about disruption to crude supplies that pass through the Strait of Hormuz. Oil prices duly rose once Israel launched its surprise attack on Iran. Around 20% of total oil consumption comes through this narrow waterway. It’s unlikely Iran could close it for long if at all.

Sell side firms have estimated that the market’s assessed probability of a closure is around 15-20%, based on comparing the recent move up in crude versus where it would go if a fifth of global supplies were stopped. Crude is up about 20% this month.

Around 20% of the world’s Liquefied Natural Gas (LNG) also passes through the same bottleneck. Nonetheless, the reaction of regional LNG benchmarks in Asia and Europe, where most imports go, has been muted, with prices rising around 3% this month.

Maritime insurance rates have gone up, and ships are being asked to arrive at export terminals in the Arabian Gulf only when called to minimize the number of vessels concentrated together.

Although 20% of oil and LNG pass through the Strait, LNG is only 14% of global gas consumption. This explains the difference in market response to the Israel-Iran war, since only 3% of the world’s gas is at risk.

Oil is easier to move than gas, so around 40% of the world’s oil is traded before being refined. Because natural gas isn’t very energy-dense, its volume has to be significantly condensed to make movement by ship commercially attractive.

Twenty five years ago the trade in gas via inter-regional pipelines was more than 2.5X as big as LNG. Pipeline volumes peaked just prior to the pandemic when they fell 10%. A brief rebound in 2021 ended with Russia’s 2022 invasion of Ukraine. By 2023 pipeline gas volumes were 24% lower than in 2019. The loss of Russian gas exports to the EU was the proximate cause.

By contrast, LNG volumes have climbed steadily, and didn’t even drop in 2020. Energy security became more important following the Russian invasion. A pipeline connecting two countries doesn’t allow any flexibility if relations between the supplier and buyer break down. This was the case with Nordstream before it was mysteriously blown up. China and Russia have been negotiating for years over additional Russian gas supply via the Power of Siberia 2 pipeline, with China showing less urgency than Russia to reach an agreement.

Both countries must consider how they’d cope if a dispute caused flows to stop. A Russian adviser suggested that Middle East tensions would spur an agreement so that China could reduce its exposure to the Strait of Hormuz, although this looks like wishful thinking.

LNG trade is around 40% bigger than inter-regional pipeline volumes, and that gap is likely to grow. Moving natural gas by ship allows trade between countries too far apart to be connected via a pipeline. LNG also enhances energy security for both parties, since once the necessary infrastructure is in place, both buyer and seller can negotiate agreements with multiple counterparties.

We often note the projected growth in US LNG export capacity, driven by abundant domestic supply. The Asian JKM benchmark is $13.80 per Million BTUs (MMBTUs), and the European TTF is $13.25 per MMBTU. With US natural gas at around $4, the price differences are easily big enough to make US exports attractive.

Our current LNG exports of around 15 Billion Cubic Feet per Day (BCF/D) are limited by liquefaction capacity. We expect this to roughly double by 2030 based on projects already under construction.

There are many other projects that have not yet reached Final Investment Decision (FID), so export capacity is likely to continue growing into the next decade.

The US is the world’s biggest LNG exporter with 21% of the market but is not alone in growing. Around half of the “aspirational” capacity as estimated in the International Gas Union’s 2025 World LNG Report is outside North America.

China is 19% of LNG imports, followed by Japan at 16%. Global LNG trade has grown at 6% pa since 2000.

Because there will be more LNG available, some analysts predict this will lead to a global surplus that will depress prices and profitability for exporters. However, receiving capacity is also growing. The facilities that regassify LNG for injection into their distribution networks are more numerous than the liquefaction export terminals. They generally operate at around 40% capacity,

By contrast, global liquefaction facilities operated at 87% of capacity last year. There’s more than 2X as much import capability as export. The world is preparing to use more natural gas, as the unmet promises of renewables mount up. For example, Malaysia just announced a 50% increase in gas-fired electricity to meet rising demand from data centers.

LNG exports will be part of the solution.

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

Energy Mutual Fund Energy ETF

US Midstream Is Far From Conflict

June 18, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

US Midstream Is Far From Conflict

00:00 / 00:04:57

To trade the daily moves in the market is to be an armchair strategist. JPMorgan estimates the crude oil market reflects a 17% probability of a worst-case supply disruption out of the Middle East. Presumably an oil spike would hasten the war’s conclusion via US pressure on Israel.

So Israel’s attacks on energy infrastructure are focused on disrupting Iran’s domestic supplies. Therefore, Iran must have an incentive to impede flows. Perhaps their military capabilities have already been too degraded to provide this option. Or maybe this country with few friends in the region doesn’t wish to further alienate its neighbors.

Will there be a ceasefire? Or will the US use bunker-busting GBU-37 bombs each weighing 30,000 pounds to wipe out Iran’s nuclear capability? To us it seems that the opportunity to destroy the Fordo nuclear site will never be as good as it is now. Few of Iran’s neighbors would be sorry to see the theocracy finally denied the capability to make a nuclear weapon. Trump has promised the world something better than a ceasefire. This would seem to check the box.

But it’s hard to make a confident forecast. The worst case for energy supplies is not the most likely outcome but would cause sharply higher prices. In that regard, midstream companies provide some optionality.

Consequently, the news affecting midstream has been in North America, and therefore drawing less attention than Israel’s pummeling of its long-time adversary.

Last week the Ohio Power Siting Board approved the 200MW Socrates South Power Generation Project. Will-Power, a subsidiary of Williams Companies (WMB), will develop two power plants that will run on natural gas provided by WMB. This is an example of the behind-the-meter (BTM) solution to providing electricity to data centers without impacting residential customers.

WMB as well as other large natural gas companies such as Energy Transfer have been promising BTM solutions to meet the needs of data centers for rapid increases in electricity. Meta will be the main customer of the Socrates project. It is expected to be operational by 2H26, fast by the standards of new power generation. Ohio’s electricity customers won’t be adversely affected.

In an example of what happens when data centers boost demand, residents of New Jersey and other neighboring states that are part of the PJM Interconnection grid system are now paying higher prices for electricity. It’s complicated to assign blame. PJM says 70% of the recent increase in demand is attributable to data centers.

But supply is down too. In 2023 New Jersey’s Democrat governor Phil Murphy mandated that the state cease all hydrocarbon-based power generation by 2035. The state’s last two coal-fired power plants were shuttered in 2022. Windpower has come up short, with Danish firm Orsted abandoning two offshore projects because they became too costly.

Liberals say not enough renewable supply is being added, but they’ve lost credibility on energy policy.

This is exactly the problem that BTM is supposed to avoid. Across the region covered by PJM, data centers are driving up power prices for everyone.

Worried about Democrats being blamed by voters for a big jump in electricity prices when they vote for governor in November, Murphy has announced subsidies for household utility bills.

Democrat energy policies are to blame.

Clean energy stocks dropped sharply yesterday as it became clear that the Senate tax package would immediately end most tax breaks for wind, solar and EVs. Given the lead- times involved and reliance on tax credits, it’s likely that swathes of the renewable energy business in the US will be permanently impaired. The electoral cycle is shorter than their investment cycle, leaving any proposed project at risk.

Renewables have been a lousy investment. The S&P Global Clean Energy Index has returned just 3% pa over the past five years. The American Energy Independence Index has returned 27% pa over the same period.

EVs are losing attraction in western countries. A recent survey carried out by Shell found that only 31% of US owners of conventional cars were interested in switching to an EV, down from 34% last year. The slow rollout of charging infrastructure under the last administration didn’t help, and it’s unlikely to change now. In Europe, interest in switching to an EV fell to 41% from 48%.

EVs continue to gain adherents in China, which is supporting their coal consumption since this provides 80% of electricity generation in China. Progressives who cite China’s EV leadership as evidence of their commitment to reducing greenhouse gas emissions need reminding of this regularly.

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

Energy Mutual Fund Energy ETF

Strengthening Your Portfolio With Pipelines

June 15, 2025/0 Comments/in Midstream Energy Infrastructure SL Advisors Talks Markets/by Simon Lack

SL Advisors Talks Markets

Strengthening Your Portfolio With Pipelines

00:00 / 00:04:47

When conflict occurs that might disrupt global oil supplies, portfolios that include an allocation to midstream energy infrastructure usually enjoy some modest protection. Crude traded up 14% on Thursday night as the Israeli attack unfolded. Some opportunistic hedging by producers trimmed those gains during the day. Energy stocks as usual responded positively.

The effect on midstream is more subtle. The sector is less responsive to commodity prices than in the past. It may enjoy a brief lift as positive energy sentiment spills over, but management teams don’t generally obsess too much about oil. This time may be different, because weak crude prices have constrained US oil production with some even forecasting it may drop next year. Friday’s higher prices benefitted Oneok and Plains All American, which might see more robust volumes through their systems if higher prices persist.

Crude weakness this year has also curbed inflation expectations. The partial reversal explains Friday’s weakness in bonds. According to Wells Fargo, around half the midstream sector’s EBITDA is tied to contracts that allow price hikes linked to the PPI. In 2022 this was a significant benefit since midstream companies were able to raise prices in line with inflation. This supported the sector’s 22% return that year, a sharp contrast with the S&P500’s -18% return as the Fed tightened rates.

On Friday, midstream outperformed the S&P500 by 1.5%. But the diversification benefits of midstream last for more than a couple of days. Most investors have significant technology exposure, since it’s now almost a third of the S&P500. Several articles have been written about the evolution of the market’s leading index towards a basket of growth stocks.

Midstream energy infrastructure, defined here as the The American Energy Independence Index (AEITR), is less correlated with most S&P500 sectors than is the Technology sector. The two sectors where this is significantly not the case are the energy sector itself and financials. It has only half the correlation to the S&P500 as Technology, unsurprisingly given the shifting composition of the index. But for Communication Services, Consumer Discretionary and Healthcare the AEITR is also less correlated to these sectors than is the Technology sector.

It also doesn’t hurt that when markets are considering whether Israel will strike Iran’s energy infrastructure, the AEITR is all in North America well out of harm’s way. The Strait of Hormuz is widely recognized as a chokepoint for Middle East oil exports. Less attention is paid to the vulnerability of trade in Liquefied Natural Gas (LNG), 20% of which passes through the same stretch of water from Qatar and the UAE.

Last year Qatar exported 80 million metric tons of LNG, making them the third biggest exporter behind the US and Australia, with 19% of global trade. 70% of Qatar’s exports go to Europe and 20% to Asia. We were surprised that so far neither of the regional LNG benchmarks have responded much to the same concerns that have boosted oil prices, even though buyers have limited alternatives.

US LNG exports don’t face the risk of a Middle East war disrupting supplies. We think that the reliability of the US as a supplier could become more highly valued as buyers contemplate worst case scenarios for the product.

We still see attractive opportunities among LNG stocks.

Venture Global received a boost last week when they withdrew their application to build the Delta LNG terminal, because they believe they can achieve an equivalent capacity increase by expanding their Plaquemines facility. VG has earned the respect of many for their relatively fast project execution.

NextDecade announced that they have reached agreement with Bechtel Energy to build Trains 4 and 5 of their Rio Grande LNG terminal. We think it’s possible that NEXT will make a Final Investment Decision (FID) to go ahead with this second stage before the end of the year.

Israel halted production at its Leviathan natural gas field, operated by Chevron, due to security concerns. Within hours Egypt, which depends on gas imports, began shutting factories.

Russia’s invasion of Ukraine made energy security a higher priority. The war in the Middle East will likely add to that. We continue to think that US LNG exports will be highly valued by America’s friends and allies around the world.

For many investors, midstream appeals because of the stable dividends well covered by cashflow and declining leverage. Few consider the diversification benefits of an allocation or the sector’s resilience to disrupted energy supplies. The events of recent days have highlighted these additional positive features.

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

Energy Mutual Fund Energy ETF