Pipelines Will Get a Lift From Gas

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Following Sunday night’s 90-day agreement on tariffs between the US and China, the S&P500 sailed back above its pre-Liberation Day levels. All is right with the world. Sentiment seems weaker than data, so one will correct. After Liberation Day JPMorgan called for a 2H25 recession. Following the tariff news they dropped that forecast. Fed Funds futures are projecting only two rate cuts by year-end, versus four a couple of weeks ago.

Midstream has not yet recovered its tariff-trauma losses. Crude oil has been more consequential, with the May 3rd OPEC+ announcement adding downward pressure. Last year’s US oil production of 13.2 Million Barrels per Day (MMB/D) was expected to grow by 0.2-0.3 MMB/D this year, but forecasts are being modified. This will modestly impact Gathering and Processing (G&P) businesses that are sensitive to volumes from individual wells.

Some think output may even fall and at current prices at least one analyst thinks US shale has peaked. However, cheaper oil will stimulate demand. The prospect of continued delays at Newark airport through the summer will cause some to drive instead of fly.

Interestingly, Enterprise Products Partners CEO Jim Teague recently commented that even flat oil production out of the Permian basin would cause, “…rich natural gas to grow between 1.3 and 1.5 Bcf a day” and, “…a couple of hundred thousand barrels a day of natural gas liquids.” That’s because oil wells become more “gassy” as they age.

There’s much more to midstream than crude oil.

To us the pessimistic view overlooks the sector’s huge tailwind, which is gas demand from data centers. I listened to Liz Reid, head of Google Search, on a recent Economist podcast. AI is regarded by some as a direct threat to Google’s business model, since as Reid explains the Google AI search result taps into multiple websites, reducing the opportunity for advertising revenue. I’m not too worried about Google, but users are learning to ask more complicated questions.

For example, in response to “Which midstream companies mentioned data centers on their earnings calls”, I was presented with a list of names and summaries from their call transcripts. Previously I would have laboriously found each transcript online and done a word search (Ctr-F “data centers”) to find the relevant dialogue. But the AI-aided search is more efficient.

Results included:

Williams Companies (WMB) discussed their ability to bring around a gigawatt worth of power online for data center use by the end of 2027 on an earnings call.

Kinder Morgan (KMI) highlighted how AI-driven energy needs are boosting their business on recent earnings calls.

Energy Transfer (ET) during its earnings call on May 6, said it has roughly 200 data center opportunities in 14 states across its footprint.

Enbridge (ENB) noted the company is well-positioned to fuel escalating AI and data center needs.

Gas demand for data centers is the midstream story.

When asked on the podcast if Google search users were being “retrained” to use AI, Liz Reid cleverly responded that they were trying to “untrain” users from prior habits and encourage them to raise their expectations of search results by asking more complex questions. I’m doing that myself with narrower queries that generate AI-driven complex results drawing on numerous individual websites.

Your blogger’s narrow experience doesn’t settle whether AI will add sufficient value to justify all the investment in data centers and associated supporting infrastructure, including power. But it’s working for me.

Retail electricity prices vary widely across the US. Generally, more renewables penetration correlates with higher prices. This must mystify left-wing advocates of solar and wind.

New York State faces an interesting challenge. They’ve passed legislation requiring 70% of their power to come from renewables’ sources by 2030. It’s currently 29%, or 50% if you include nuclear.

Today New York state sensibly relies on natural gas for 46% of its electricity, slightly above the US average of 43%. It’s why New Yorkers enjoy relatively low prices. Unfortunately, public policy is to reduce gas in favor of renewables. To this end, new building construction in New York City can no longer include a gas connection.

The 800 MW Empire Wind Offshore wind farm being built by Norway’s Equinor is expected to power up to 500K homes in Brooklyn. But construction has stopped, because the US Interior Department thinks the Biden administration approved the project without an adequate environmental assessment. Equinor has said the delay is costing them $50million a week and unless it’s resolved within days they’ll pull the plug.

Electricity customers in the Empire state may soon find themselves squeezed between an aspirational policy on renewables unable to deliver and self-imposed constraints on using cheap natural gas. It is democratic, if poorly conceived.

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

Energy Mutual Fund Energy ETF

 

 

 

 

Tariff Trauma Is Receding

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Americans visiting Europe know that Republican presidents are generally less popular than Democrat ones, since Europe’s political center of gravity is left of ours. This is especially true of President Trump, which didn’t surprise us on a recent trip with friends to the UK and Belgium. Trade policy is largely how Europeans experience US presidential power, so Liberation Day was poorly received.

Observers on both sides of the Atlantic have been critical of how tariffs have been implemented, including this blog (see Tariffs And Mismanaging The Economy). While tariff dysfunction remains, the S&P500 has recovered its post-Liberation Day losses on hopes of trade deals. Britain was the first to reach agreement, albeit limited in scope. The UK still exerts some soft power in that an invitation to visit the King and accents that Americans find appealing hold some sway.

Midstream energy fell 13.5% over the two trading sessions following Liberation Day, more than the S&P 500’s 10.5% loss. There were concerns of reciprocal tariffs targeting our LNG exports although if anything countries seem more inclined to buy US energy exports than before.

Unlike the broader market, midstream has yet to recover its Liberation day losses. That’s probably due in part to weaker crude oil, which has investors worried about volumes. Oneok (OKE) and Plains (PAGP) are both down around 12% over the past three months. Gas-exposed names such as LNG exporter Cheniere (LNG) and pipeline company Williams (WMB) are +8% and 4% respectively over the same period.

Since the election gassier names have held their gains. The weakness in crude prices has dampened some of the election excitement. But gas volumes continue to grow steadily, underpinned by LNG exports and data centers.

Earnings have been providing generally good news. Cheniere easily beat expectations, increased buybacks and is on track with its expansion plans. Energy Transfer disclosed on their earnings call that they are discussing supplying gas to 150 data centers just in Texas! Not all of these will become reality, but it is representative of the positive fundamentals for gas.

The sector’s failure to recover its Liberation Day drop reflects investor unease over the drop in crude. In our opinion this represents an opportunity.

Natural gas producers have performed well, with EQT even recouping all of its early-April tariff trauma losses.

The strength in gas names aligns with the demand outlook. This is at odds with the natural gas futures curve which suggests that supply will be plentiful in the years ahead. The December 2025 futures contract trades at $5 per Million BTUs (MMBTUs), and December 2028 at only $4, projecting a modest decline.

The idea that US gas prices will be lower in the years ahead than today seems implausible given prices elsewhere. The TTF European benchmark and the JKM Asian benchmark both trade at around $12 per MMBTUs.

The result is that stock prices for gas producers have run ahead of the value of their proved reserves. A PV-10 is the net present value a company can realize from its proved reserves using current technology, and a 10% discount rate.  Using JPMorgan PV-10 estimates, Range Resources (RRC) trades at almost $38 versus a PV-10 of $27. Expand Energy (EXE) is at $113 ($82) and EQT at $55 ($35).

Undeveloped/Unproved reserves could, in the upside scenario, justify current valuations if what their geologists think is there can be extracted profitably. But using the more conservative estimate they look expensive. And EXE, even if all their unproved reserves came through, has a PV-10 of $120.

That doesn’t seem to leave much room for anything to go wrong.

An alternative explanation is that the futures curve is wrong. Hedging more than two years out is impractical. For example, the May 2027 futures contract has only 5K outstanding, versus 207K for the most liquid July 2025 contract. It’s also likely that producers are keener to hedge their exposure by selling than consumers are through buying, which at the margin would depress prices.

JPMorgan calculates PV-10 values using both the futures curve and their own estimates, with the latter resulting in somewhat higher values.

Higher domestic natural gas prices seem very likely to us. As long as the huge spread exists between the US and other regional markets, companies will be looking to add LNG export capacity. The lower prices in the futures market almost assure they won’t be correct, since they’ll induce more exports. The message from the E&P names is more accurate than commodities markets.

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

Energy Mutual Fund Energy ETF

 

Drama-Free Energy Stocks

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Supplies of crude oil were already set to increase by 2.6 Million Barrels per day (MMB/D) year-on-year before the OPEC+ announcement on Monday. Demand is growing in emerging economies across Asia, Africa and South America, but not fast enough. This has led to forecasts of stocks increasing by 2 MMB/D this year.

Last year we noted that the International Energy Agency (IEA) was consistently promoting a politically motivated outlook for global energy based on strong growth in renewables (see Serious Energy Forecasts Are Rare). They expect an 8 MMB/D imbalance between supply and demand in 2030.

Meanwhile the world’s producers of oil expect the opposite and have been increasing output. Spending by international majors on upstream capex in the Middle East this year is likely to be double the low hit during the pandemic, led by TotalEnergies and Exxon. The UAE will add 0.4 MMB/D of capacity over the next couple of years and Iraq 0.3 MMB/D.

North American output is also increasing, with US production forecast to rise around 0.3 MMB/D and Canada by 0.2 MMB/D. However, the enthusiasm with which energy executives received Trump’s win in November is moderating with lower prices, and forecasts of US output will likely be trimmed. In a sign E&P companies are becoming more cautious about capital allocation, Chevron cut 2Q25 stock buybacks by around a third versus the previous quarter. Shale operator Diamondback Energy just cut their output forecast.

Drill baby, drill isn’t resonating. Lower prices are needed to bring the market back into balance, and this will further stimulate demand.

The contrast between the oil and gas business is striking. Because crude oil is a global market, its price reflects energy sentiment around the world. Oil is relatively easy to transport and the cost of doing so is a small percentage of the value of the commodity.

Natural gas moves through pipelines or on an LNG tanker if going overseas. The combined cost of liquefaction and transport can exceed the cost of the gas, which is why it’s around $4 per Million BTUs (MMBTUs) in the US and $11 in Europe. That gas can be shipped to Europe for much less than the $7 difference is driving the sharp rise in US LNG export capacity.

Natural gas trades as regional markets because it’s so difficult to transport. Its price moves rarely reflect any change in sentiment by energy investors. At times crude oil and pipeline stocks have been correlated, although declining company leverage has weakened the relationship. Last year was a good example, with oil down and midstream up strongly. Gas prices rarely share any relationship with pipelines

Natural gas feedstock to LNG terminals is running at 15 Billion Cubic Feet per Day (BCF/D), up from 12.5 BCF/D last year. By 2030 exports will have doubled from 2024.

Australian LNG giant Woodside Energy bought Tellurian last year as it was teetering towards bankruptcy, or “circling the drain” as RBN Energy puts it. Tellurian’s fatal error was to favor contracts that retained price risk. This reflected then-CEO Charif Souki’s long term bullish view on gas prices but impeded financing because of their increased risk profile.

Woodside just announced Final Investment Decision (FID) on the LNG Louisiana terminal, formerly called Driftwood when it was Tellurian’s chief asset. Ironically, they’ve moved ahead with only 1 Million Tons Per Annum (MTPA) of capacity contracted out, from a total of 16.5 MTPA. This is rare because LNG terminals are only good for one thing, so most operators ensure they’ll have enough long-term customers before starting construction.

Woodside believes they’ll negotiate better terms by assuring buyers the LNG really will be delivered. It’s a choice that was never available to Tellurian, whose failure to raise capital and reach FID meant some contracts were later voided. Woodside is a much bigger company but nonetheless S&P changed their credit outlook from stable to negative on the news. They may also calculate that competing projects that have not yet reached FID may now face increased hurdles to line up financing.

The news does assure that gas flows to the Gulf will continue higher.

Tariff uncertainty has caused many companies to suspend earnings guidance for the year, most recently Ford who estimate a $2.5BN impact. Contrast this with Williams Companies, gliding through the market turmoil with equanimity. Much of the gas feeding Gulf coast LNG terminals will pass through their pipeline network. They raised full year guidance by $50MM to $7.7BN.

The energy sector is diverse. Gyrations in crude prices and fears of slower growth are impacting the big integrated oil companies. But the outlook for domestic gas infrastructure remains positive with no visible impact from the macro issues driving equity markets. It’s free of drama from oil prices or tariffs, the calm port in the storm.

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

Energy Mutual Fund Energy ETF

 

Tariffs Not Biting Yet

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On Friday the market achieved a welcome milestone in that the S&P500 rose above its pre-Liberation Day level. The unemployment report suggested that we’re not yet falling into a recession. Signs that trade negotiations with China may start was encouraging.

Midstream earnings have been coming in with little discernible impact from the tariff trauma. Worth noting is that TC Energy (TRP) is investing $0.9BN adding capacity to their ANR gas pipeline which connects Texas and Louisiana to the midwest. It’s to provide power for data centers and TRP estimates a 6X EBITDA multiple which is pretty accretive. AI-driven demand for natural gas still seems robust. They don’t see much near-term impact from tariffs.

Oneok reaffirmed 2025 full year guidance of $8-8.45BN and is close to a 10% EBITDA growth forecast for 2026. Targa Resources modestly beat expectations and reaffirmed full year EBITDA guidance of $4.7-4.9BN. 1Q adjusted EBITDA was +22% versus the prior year. They noted that they had accelerated purchases of steel to limit the exposure of capital projects already under way to tariffs.

On the Enterprise Products earnings call, co-CEO Jim Teague spoke to the uncertainty caused by tariffs. Many companies have suspended earnings guidance for the year, although no midstream companies have. Teague said, “I have the core belief that when the dust settles the aim of this administration’s policies, laws and regulations is intended to promote U.S. energy, not just for the next four years, but for decades.”

EPD is one of America’s biggest exporters of hydrocarbons. Along with Energy Transfer and Targa Resources they own 90% of the LPG export capacity along the US gulf coast. EPD is a significant exporter of ethane, and China is a significant buyer as feedstock for their petrochemical industry.

EPD said they have no contracts with any Chinese entities, which will come as good news to EPD investors. Volumes are typically routed through international trading companies. Moreover, the ethane tariffs that China initially said they’d impose look set to be lifted, since there are few near term alternatives to buying ethane from America.

What’s notable about all these companies’ earnings is that when asked about tariffs they focused very narrowly on the possible impact on their own purchases. Midstream executives are not overly concerned about declining volumes of hydrocarbons. As we’ve noted before, energy quantities are surprisingly stable (see Midstream Is About Volumes). In addition, if China imposes tariffs on US imports, flows will generally be rerouted to minimize the impact. And in the case of ethane, China’s dependence makes an import tax self-defeating.

The Tony Blair Institute for Global Change published The Climate Paradox: Why We Need to Reset Action on Climate Change last week. Tony Blair became a political pariah after leading the UK into the 2nd Iraq war in 2003 on a futile search for weapons of mass destruction. He’s been repairing his reputation ever since.

The Climate Paradox is a welcome addition. In the US neither political party has much useful to say on the topic. Democrats beholden to left-wing progressives maintain that solar and wind will solve everything. Republicans generally ignore the issue entirely. Blair has upset fellow left-wingers, which is usually time well spent, by asserting that rising CO2 levels prove the current approach is failing. His policy prescriptions include accepting that hydrocarbon use will continue to rise and we need to invest heavily in carbon capture.

Most significantly, he notes that regardless of the past history of CO2 emissions, the growth is coming from emerging economies led by China and India. Therefore, efforts to reduce emissions should start there.

Like the EU, the UK’s energy policies mean they’ll incur the cost of decarbonization without seeing the benefit, a sure way to lose popular support. California is following a similar path. Cutting emissions while China raises theirs was embraced by left-wing climate negotiators but never made sense to the rest of us.

Spain’s recent blackout was likely caused by over-reliance on solar power whose volatile output crashed the system. The all-renewables advocates keep losing credibility with voters worldwide.

Tony Blair has made a refreshing contribution to the climate change debate, one that aligns with our conviction that natural gas consumption will continue to grow for the foreseeable future.

Finally, most journalists and bloggers occasionally struggle for a topic but usually come up with something. I recently came across this BBC report that is a contender for least newsworthy story of the year. Rest assured that if your blogger ever plumbs such journalistic depths, readers will be sure to let me know.

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

Energy Mutual Fund Energy ETF

 

The Iberian Grid Warning

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It’s too early to say what caused the loss of power across Spain and parts of Portugal, but early signs are that it was linked to a disruption in solar supply. Some will soon blame it on global warming. But reducing greenhouse gas emissions (GHGs) requires increased electrification of energy systems. European governments are pushing heat pumps and EVs, all with the goal of increasing the use of electricity, more of which will come from solar and wind.

Spain gets 21% of its primary energy from renewables, significantly higher than Europe’s 15%. Red Eléctrica de España, which operates Spain’s grid, estimates that 56% of power generation was from renewables last year, significantly above the EU which was about a third.

Whether or not Spain’s heavy reliance on renewables is to blame, the bigger lesson is that increased electrification means the grid needs to work all the time. EV penetration is relatively low in Spain, but the country’s extensive public transport system runs largely on electricity. Travelers were stranded. Those pushing decarbonization will be increasingly marginalized unless they’re honest about the importance of grid reliability.

Across the US, independent system operators are warning that reserve margins are declining. This measures the amount of excess capacity that is available during peak demand, which typically occurs during hot summer days when AC units are cranked up.

The North American Electric Reliability Corporation’s (NERC) most recent Long-Term Reliability Assessment makes for grim reading. Throughout the continent, the margin for error is decreasing. The Midcontinent System Operator (MISO) is projected to have no reserve margin at all by 2034, which means that it will be unable to meet peak demand. On current trends, power outages on such days are virtually certain.

The PJM system, which includes New Jersey where your blogger resides when it’s warm enough for golf, will see its reserve margin drop from 35% to 10% by 2034. NERC warns that, “Resource additions are not keeping up with generator retirements and demand growth. Winter seasons replace summer as the higher-risk periods due to generator performance and fuel supply issues.”

We heat our home with natural gas, which is always available. A heat pump would increase our exposure to the grid, which looks increasingly ill-advised.

There’s no doubt that increased use of renewables is causing this. Natural gas power plants typically operate 95% of the time. Solar and wind are 20-35%. Moreover, if it’s cloudy solar output in a region can drop to zero, whereas it’s rare for gas power plants to all stop production at the same time.

In places where renewables are a significant source of electricity, consumers are increasingly facing compromises on reliability and cost.

Electrification is leading to a concentration of risk on a single energy system. During Superstorm Sandy in 2012, the basement of a house we owned flooded because the loss of power meant the sump pump didn’t work. We now have one that relies on water pressure.

The NERC is warning that we’re likely to endure more power outages in the future. Climate change has lost its political relevance in the US for a host of reasons, and energy reliability will displace CO2 levels as a concern if it’s not there 100% of the time.

Declining grid reliability is a good reason to stick to natural gas for heating rather than heat pumps. Otherwise, a power outage in the winter assures residents of northern states burst water pipes.

After Sandy, sales of gas-powered home generators soared. Some diversification of energy sources seems sensible.

Gas production in the US continues to grow. In their Annual Energy Outlook 2025, the US Energy Information Administration (EIA) forecasts 1.6% annual growth through 2030. They expect Residential, Commercial and Industrial demand to all grow, but see declining use for power generation.

Unlike the EIA, we think power generation will use more gas, not less. It’s reliable and not weather-dependent. It’s what data centers will favor. It’s cheap, and it’s here in the US. Unlike the EU, American voters are not going to sacrifice reliability or price to accommodate China’s relentlessly increasing GHGs.

Cheniere Energy trades at 12.6X Enterprise Value/EBITDA (EV/EBITDA), marginally above the sector median but with double-digit projected growth in Distributable Cash Flow (DCF). Williams Companies is a little more expensive at 13.2X EV/EBITDA but offers DCF growth in the mid-teens. With these rates of cash flow increase, over time their valuations will normalize.

Both companies are levered to increased consumption of natural gas both in the US and via exports.  This is a better bet than assuming increasing dependence on stretched power grids.

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

Energy Mutual Fund Energy ETF

 

 

Talking Midstream In the Volunteer State

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Midstream energy infrastructure is offering solid defense during a period when Presidential ruminations on tariffs or Jay Powell’s career prospects regularly cause 2% daily market moves. Operating a pipeline business is dull by comparison. These companies are largely immune to trade wars. They just keep generating cash and raising dividends.

Last week Energy Transfer (ET) announced a distribution hike of over 3%. Western Midstream came in with 4%. Earlier in the month Kinder Morgan announced a 2% dividend hike. Enbridge reaffirmed 3% annual increases that were originally forecast in December.

It’s not just that midstream is mostly a domestic business with limited exposure to foreign markets. China was only 5% of US LNG exports last year. If they dropped to zero, we’d just ship to other countries.

Kinder Morgan estimates that more expensive steel imports will add 1% to the cost of new projects. But capex isn’t a big driver of most midstream companies’ profits anymore, in part due to persistent lawsuits from climate extremists weaponizing the legal system and causing delays. Lower capex has boosted free cash flow, supporting dividend hikes, buybacks and reduced leverage.

If you meet a climate protester (and there seem to be fewer of them nowadays), hug them and offer transportation to their next event.

When you combine this limited exposure to tariff turmoil with the inherent stability of energy volumes, it’s hard to see why the fundamental values of these companies have changed at all over the past month. So far none has revised earnings guidance.

The American Energy Independence Index (AEITR) has sustained its positive return since the election, even though it was already widely believed that Trump would be good for the energy sector. Although still down since “Liberation Day”, it has retained its outperformance versus the S&P500.

Apart from China, across the rest of Asia countries are increasing their imports of US Liquefied Natural Gas (LNG). Japan, South Korea, India, Taiwan and Vietnam have all either set new records or indicated a desire to buy more. It’s a good way to reduce their trade deficits with the US.

Last week we were in Tennessee, dubbed “The Volunteer State” for its strong tradition of military service. In Memphis my wife fulfilled a lifelong dream to visit Elvis Presley’s Graceland while I enjoyed meeting clients over lunch. The next day another client lunch in Nashville afforded a brief opportunity afterwards to visit Andrew Jackson’s Hermitage. Jackson’s consequential life included leading the American army to victory at the Battle of New Orleans, concluding the War of 1812 and ejecting the British from US soil.

I’m glad it turned out that way.

I always enjoy fielding questions from potential investors, as they often reveal concerns others may have about the sector. The meetings in Tennessee provided plenty. The upside for natural gas consumption from data centers is well understood, but nuclear power still causes some to ask whether this will become the solution of choice. The Vogtle nuclear plant in nearby Georgia took fifteen years to complete and cost more than 2X initial estimates.

We should be adding nuclear, but critics argue that the Nuclear Regulatory Commission is excessively bureaucratic and demands multiple redundant safety systems. There are always opponents able to use the court system to slow construction, raising costs and scrambling IRR projections.

Absent changes, investing in nuclear energy remains unattractive. Small Modular Reactors (SMRs) continue to inspire hope, but so far haven’t moved beyond pilot projects designed for proof of concept. Three years ago NextEra CEO John Ketchum called SMRs, “an opportunity to lose money in smaller batches.”

The impact of the LNG permit pause often draws questions. When the Biden administration imposed this in January 2024, it didn’t impact projects that were already under construction. New projects needing a permit to begin construction had to wait. Three to five years is the typical timeframe to completion, although Venture Global’s modular approach has reduced this.

Trump canceled the pause as one of his first official acts upon taking office. But as the chart from Shell shows, there never was any discernible impact on our increasing LNG export capacity.

The case for midstream continues to be underpinned by demand growth, valuation and White House support. The sector isn’t as cheap as late 2023, but Enterprise Value/EBITDA (EV/EBITDA) recently dipped back below its ten year average following the ongoing tariff turmoil. Given the positive fundamentals which include dividend hikes, amply covered payouts and declining leverage, there doesn’t seem much to prevent valuations moving higher.

Since the industry roughly finances itself with equal amounts of debt and equity, a one turn improvement in EV/EBITDA from, say, 10.7X to 11.7X (i.e. +9.3%) would push equity values up around twice that. Alternatively, adding the sector’s dividend yield (5%), long-term dividend growth (3%) and buybacks (2-3% of market cap) implies a 10-11% total return without any change in valuation.

These solid fundamentals are what’s behind strong relative performance. They remain in place.

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

Energy Mutual Fund Energy ETF

 

Tariffs Soften Presidential Support

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Tariff turmoil and the market’s gyrations have elicited more than normal feedback on recent blog posts. Politically, our readers and investors tend to be Republican so many are inclined to look for positives in Liberation Day and the subsequent policy switches. Some echo Trump’s claim that foreign countries have been exploiting the US for years. Canada’s banking market and EU autos are two examples cited.

But the majority of responses express dismay if not alarm at the tariffs – mostly at their unexpected magnitude and unpredictable execution. History shows that Trump usually attempts to implement his campaign rhetoric, so 60%+ tariffs on China should not surprise anyone who followed his campaign last year.

Anecdotal evidence of the disruption is starting to emerge. An importer of cotton bathrobes from China is scouring the world for alternative suppliers since no US manufacturing capability exists. A small company that relies on textile imports and another that manufactures safety equipment with foreign sourced parts are both facing existential threats to their margins. A major manufacturer of paper cups faces tariffs on its exports to Canada, where insufficient domestic capacity exists to provide a replacement.

There persists this romantic notion that America would benefit from making more stuff here. Some critical supply chains should be domestic. We found we were overly reliant on personal protective equipment from China during the pandemic, ironically the source of the outbreak. Polls show that Americans overwhelmingly believe more of us should work in manufacturing as long as it’s someone else.

The public criticism of Fed chair Jay Powell and pressure to cut rates have not been well received by markets. One especially strong Trump supporter told me that, “The US is now universally viewed as an increased credit risk.”

The upside case for investors requires that Trump 2.0 will measure results by the stock market, like Trump 1.0. Our investors largely voted for him, and their happiness is being eroded with each decline of the S&P500. This theory suggests that eventually a combination of now-less-wealthy donors and fears of a mid-term voter reaction against chaos will ameliorate said policies before they do too much harm. I do sense among some readers growing fatigue over chaotic policy and falling markets.

It’s best not to rely too heavily on politics in committing capital. Clean energy bulls learned this lesson when Joe Biden won the presidency in 2020. Assuming that their political views and desired returns were in alignment, investors poured money into a sector that has become a serial disappointment.

Even limitless government subsidies couldn’t offset the intermittency of weather-dependent power and the range anxiety of EVs. Betting on profits from the energy transition has been a fool’s errand. A Democrat in the White House couldn’t alter the physics.

Voters care about combating climate change as long as it doesn’t cost them money. Democrats have failed to convince them that it’s worth paying more for low-carbon power. Climate change barely registered as a concern during the last election, far behind unchecked illegal immigration and inflation.

This blog has taken the pragmatic view that it’s worth reducing emissions and increasing cleaner-burning natural gas consumption as a coal substitute is the most impactful way forward. The science and investment returns vindicated this view.

Elections haven’t historically caused us to change our investment approach. More recently, neither has tariff turmoil. That the world is going to use more energy and that US natural gas will play an important role have always been enduring themes.

Trump’s robust advocacy of US oil and gas exports is a welcome change from Joe Biden. I listened to Larry Summers on an All-In podcast last week criticizing the Biden administration both for canceling the Keystone XL pipeline in 2021 and for the pause on new LNG permits in 2024. Summers was Treasury Secretary under Clinton from 1999-2001. His criticism of Biden shows how Democrat policies have shifted left in recent years.

The midstream sector’s prospects were good anyway, but the new Administration’s support for LNG exports has helped. Energy Transfer’s recent Heads of Agreement (HOA) with MidOcean Energy to jointly develop their Lake Charles LNG export terminal is an example of how the Trump Administration’s refreshing support for energy exports is attracting capital.

In another case, the Army Corp of Engineers granted national energy emergency status for Enbridge’s (ENB) Line 5 oil pipeline tunnel project. Environmentalists have opposed this even though owner ENB is seeking to replace the existing pipeline which they say may leak.

It’d be a shame for the tariff turmoil to detract from other more constructive policies.

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

Energy Mutual Fund Energy ETF

 

Stagflation

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On Wednesday during Q&A following Jay Powell’s speech to the Economic Club of Chicago, he warned that the near-term impact of tariffs is likely to be rising unemployment and rising inflation. The Fed’s twin mandate is one of maximum employment consistent with price stability. Powell said, “I believe that for the remainder of this year, we may deviate from these goals, or at least not make any progress, and then we will restore progress as much as we can.” 

Slower growth with higher inflation is stagflation, a word Powell managed to avoid but nonetheless described. The Fed can’t address both simultaneously and will generally prioritize whichever variable is farther from their long-term goal.   

The White House has made no secret of its desire for lower rates. Trump has mused openly about firing Jay Powell, but in any event his term as chair runs out in May of next year. The pool of replacements who can satisfy both the president and bond market vigilantes is a small one. Trump’s a real estate guy, and in that business inflation and low rates are a great combination.  

Given the choice, the White House would prefer low rates with debt issuance heavily weighted towards short maturities. Interest expense will exceed $1TN next year, 3.2% of GDP. The budget outlook and interest rate policy are becoming inextricably entwined. Political leaders will increasingly be able to blame the Fed for our budget deficit through pursuing needlessly tight monetary policy.  

The obvious casualty of pursuing the lowest possible short-term rates will be inflation. But we have a lot of debt and its trajectory is no secret. Financing it at negative real rates has been the time-honored solution of profligate governments for centuries. 

In 2013 I made the case that the US was going down this road in Bonds Are Not Forever: The Crisis Facing Fixed Income Investors.  

We still are.  

Part of that process involves debt monetization via the Fed expanding its balance sheet. Their holdings almost reached $9TN three years ago as part of the pandemic response, but since then have declined by over $2TN. Nonetheless at $6.7TN the Fed holds $5-6TN more than needed for the smooth operation of monetary policy.  

Oddly, long term yields have risen during the tariff turmoil. Theories why include liquidation of a huge basis trade by a Japanese hedge fund and concerns about unstable US policy, but there’s no consensus. A reduced trade balance will mean less foreign demand for our debt, since exporting countries will have fewer dollars to invest. This need not matter if we reduce our budget deficit commensurately, but absent that Americans will need to buy more bonds which will require higher yields.  

China’s holdings are declining and will probably continue to. I doubt they’ll sell aggressively because it would be highly disruptive. But if yields move too high the Fed will conclude it must restart quantitative easing. And if it ever looks as if China is dumping bonds, Trump is just the guy to note that when you owe someone $784BN (China’s holdings as of February) it’s really the lender’s problem.  

Another move from the real estate playbook. 

None of this is intended to criticize. Aggressive debt management might be our best strategy when we’ve issued so much. You take the world as you find it. But surely, nobody can seriously believe in 2% inflation.  

The University of Michigan consumer survey shows long term inflation expectations of 4.1%, similar to the levels reached during the pandemic. A quarter of respondents think it will exceed 10%. We have a president and budget outlook both acutely sensitive to interest rates.  

Pipeline tariffs – not to be confused with import taxes – are mostly regulated to prevent unscrupulous pipeline owners from exploiting their position. Wells Fargo estimates that around half the EBITDA of the industry benefits from annual price hikes linked to the PPI. Following the 2022 inflation spike, increases of 13% were not uncommon in 2023.  

This supported 5% distribution growth in 2022, a level which has continued up until today. It’s why the American Energy Independence Index (AEITR) was +21% while the S&P500 was –18% that year.  

 Import taxes are having a modest impact on new construction projects. Kinder Morgan recently estimated it at around 1% of major project costs on their earnings call. But the dominant inflation impact is on companies’ ability to raise prices.  

This is why we believe midstream infrastructure offers one of the most attractive ways to own inflation-protected assets. I’ve been invested in the sector for over two decades, partly because of my long term debt-fueled inflation outlook described in Bonds Are Not Forever. We’re probably facing an imminent bout of inflation. This is a sector that showed its resilience in such a scenario just three years ago. 

LNG Deals Aren’t Swayed By Tariffs

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LNG Deals Aren’t Swayed By Tariffs
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Last week President Trump said the EU should close its trade surplus with the US by buying $350BN of US energy. The Administration’s spontaneous policy switches on tariffs have been unpleasant for investors. But at least for those exposed to the energy sector, there’s a gratifying consistency in that oil and gas are invariably part of the solution.

It won’t be easy for the EU to satisfy this demand. Their total imports of oil, gas and coal last year were $420BN, and this is the place where decarbonization at any price drives energy policy. The EU’s green desire to cut hydrocarbon consumption conflicts with increased LNG imports and is unlikely to draw much sympathy from the White House.

Moreover, EU policy is often disjointed. Imports of Russian LNG reached a new record last year. They have a non-binding goal of eliminating Russian supplies by 2027 although some German politicians would like the opposite.

Meanwhile, German Chancellor Friedrich Merz said he would be willing to transfer German Taurus long-range missiles to the Ukrainian Defense Forces. Perhaps imports of Russian LNG generate the electricity that is used to manufacture the missiles?

Coherence is an accusation rarely hurled at EU policy.

Meanwhile, the buildout of US LNG export infrastructure continues to attract capital.

Energy Transfer announced an agreement under which MidOcean Energy will finance 30% of the development of its Lake Charles LNG export terminal.

NextDecade (NEXT) agreed a 1.2 Million Tonnes per Annum (MTPA) 20 year deal with Saudi Aramco, to be supplied from Train 4, part of Stage 2 of their Rio Grande LNG terminal in Brownsville, TX. On Monday TotalEnergies exercised an option to take 1.5 MTPA over 20 years. With these two deals in hand, NEXT expects to move ahead to a final investment decision on Train 4 and begin construction.

NEXT is a highly volatile stock that is risky by the standards of midstream energy with its reliable cashflows.

From a recent, pre-tariff intra-day high of $9.71 on March 25th NEXT slumped and briefly touched $5.16 on April 7 as markets absorbed the enormity of Liberation Day. A 47% two week decline is only tolerable for those holders willing to overlook the market’s occasional bipolar disorder – which is to say, unlevered long-term holders.

As regular readers know, we count ourselves in that group and believe the upside is commensurate with the risk.

I was in London and Belgium for the past two weeks. I had the opportunity to attend a presentation from a venture capital firm seeking financing for Ukraine’s growing armaments industry, most importantly drones.

I have no military background, but it’s inescapable that UAVs, UGVs and UMVs (respectively, Unmanned Aerial, Ground and Marine Vehicles) have changed the battlefield. The flagship of Russia’s Black Sea fleet was sunk by a UMV last year.

I learned that Ukraine produced 2.5 million drones last year compared with Germany’s 1,000.

The US has underwritten Germany’s defense for decades, enabling their ruinously expensive energiewende (energy transition). The need to boost defense spending and counter the Trump tariffs will force some overdue realism on Germany’s political leaders.

Wherever I travel I’m always looking for contrasts in how different regions use energy. Our hotel room in Belgium had a slot for your room key, without which the lights wouldn’t work. It stops guests going out and leaving the TV on. Dark corridors light up as you enter, triggered by motion sensors that ensure they’re only lit when needed.

This is because on average Belgians pay twice what the US does for electricity. The shale revolution has kept prices down here, and renewables have pushed them up in the EU, especially in Belgium.

London’s congestion charge on vehicles entering the city center has reduced traffic and emissions. It’s also ensured that most of the cars you see in the west end are either black taxis or expensive toys (Ferraris, Bentleys, Porsches etc), the latter often driven by Arabs presumably spending some of their oil wealth.

To be in Europe means being ready to defend US policies. My friends raised the issue of tariffs – gently, because our long friendships will outlive many more presidencies. But this is mostly how foreigners are experiencing the new Administration.

Republican presidents rarely play well in western Europe, because our political middle ground is to the right of theirs. Uncontrolled illegal immigration, fiscal profligacy that fueled the 2022 inflation spike and a centrist that, once elected, veered left set the stage for November’s result.

Few outside the US appreciate this, as my gentle reminders explained. But I also allowed that the tariffs have revealed no presidential advisors willing or able to explain basic trade economics in the Oval Office.

I like Trump’s energy policies. But tariffs as implemented are capricious and may lead us into a recession.

In the vein of aligning with government policy, investing in hydrocarbon infrastructure and especially LNG export terminals is, in our opinion, one of the best ways to achieve acceptable returns through the current uncertainty.

Help With Timing Regional Conflicts

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Dimitri Alperovitch co-founded CrowdStrike, the cybersecurity firm whose faulty software update on the Windows operating system last year led to worldwide IT failures. Alperovitch was no longer with the company, having left four years earlier to launch a nonprofit called the Silverado Policy Accelerator.

In April 2024 he published World on the Brink: How America Can Beat China in the Race for the Twenty-First Century, a thoughtful book on how the US should approach China.

World on the Brink opens with a hypothetical 2028 scenario in which China attacks Taiwan. This resonated with me more than anything else. The rest of the book chronicles the history of the west’s engagement with China, from Nixon’s visit in 1972 through the strategic ambiguity with which subsequent US presidents have spoken publicly about Taiwan.

Jimmy Carter said, “The Government of the United States of America acknowledges the Chinese position that there is one China and Taiwan is part of China.” Note that we didn’t agree with their position, simply acknowledged it. Joe Biden, when asked in 2022 if the US would defend Taiwan in one of his more lucid exchanges with a reporter, said, “Yes, if in fact there was an unprecedented attack.”

The book goes on to present thoughtful recommendations for US policymakers.

America’s long, ambiguous support for Taiwan has always struck me as not clearly in our national interest. We have a history of favoring democracies over dictatorships, but Taiwan has always complicated relations with China.

It’s like our decades-long military presence in Europe to protect them from Russia. This has passed its expiry date. US defense spending has enabled Europe’s generous government funded healthcare and a ruinously exorbitant pursuit of decarbonization, neither of which would have been possible without American troops stationed in Germany. That’s now changing.

It’s easy to see that this administration’s worldview will assess Taiwan as not worth fighting over.

In 2027 Chinese Premier Xi Jinping will probably be re-elected as leader of the Chinese Communist Party (CCP). At the age of 75, he’ll be in his third decade in power and the oldest leader since Deng Xiaoping. It’ll likely be his last term in office. While US presidents have issued carefully vague statements on defending Taiwan, Xi routinely asserts that reunification of the island with mainland China is inevitable. For the CCP, it’s only a matter of when.

To westerners, Taiwan looks like an island off the east coast of China. But tilt the map on its side as World on the Brink does and it blocks the gap between the Philippine and Japanese archipelagos. A hostile power could limit the access of China’s blue water navy to the deep waters of the Pacific.

Alperovitch argues that late 2028, with the US presidential election leading to a domestic focus and perhaps even a contentious transition, might be Xi’s best and last opportunity.

It’s a compelling scenario. One can imagine the “If not now, when?” argument as Xi considers whether to seal his legacy with a final crowning achievement.

Most of us have no influence over US geopolitical strategy, but as investors we need to think about the potential for a major conflict like this one. Alperovitch explains why it might be closer than we think.

US foreign policy has suddenly become transactional rather than strategic. Article V of the North Atlantic Treaty which governs NATO says “…will assist the Party or Parties so attacked by taking … such action as it deems necessary.”  The treaty itself leaves room for maneuver, and who doubts that any US military action will be preceded by a negotiation.

It’s not clear that Russian tanks invading Poland would be met with US boots on the ground. Taiwan has no more assurance. They look a lot like Ukraine – vulnerable to the regional superpower without their security being in the US national interest.

In the Middle East, Iran continues to develop its nuclear weapons capability. Deeply buried and dispersed, eliminating their growing missile launch capability represents a complex military challenge beyond Israel’s capability. Their only chance to take out this developing threat requires US support. Will they ever have a better opportunity than during the next four years, with a US administration that is unabashedly pro-Israel?

If not within the next three and half years, then when?

World on the Brink made me think differently about the odds of conflict over Taiwan. I now assess it as more likely than not. My partner Henry pointed out the Israel/Iran analysis and believes a US-aided attack on nuclear launch sites is virtually certain during the Trump presidency.

We don’t make a living from geopolitical prognostications. We’re not changing our investment posture. It does seem that global defense spending is on an upward path as the world adapts to America’s strategic shift.

We think domestic energy infrastructure is among the best investments you could choose at any time. Over the next four years, even more so.

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

Energy Mutual Fund Energy ETF

 

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