Sometimes this blogger stumbles across a phrase that begs to be used as the title for a blog post. Who better to be the subject of this one than the far-left climate extremists whose policies have led to higher energy prices, deindustrialization and job losses.

Start with Germany. Ryanair’s CEO Michael O’Leary recently described Germany as being run by “a government of idiots” because they followed the “stupid solutions” pushed by the Green Party. No doubt O’Leary’s perspective is the narrow one of the airline executive. He criticizes airport fees of over €50 per passenger which he believes will relegate Berlin to “a regional airport at best.”

Germany imposes some of the highest aviation taxes in Europe, partly to curb CO2 emissions. Lufthansa CEO Carsten Spohr agrees with O’Leary, commenting that, “More and more airlines are avoiding German airports or canceling important connections.”

More broadly, Europe’s energy policies are driving de-industrialization. The auto sector represents 7% of EU GDP, far higher than in the US. They’re having to build EVs the market doesn’t want using energy that’s priced too high. No wonder Volkswagen is planning factory closures, lay-offs and pay cuts.

Angela Merkel, German chancellor 2005-21, bares as much responsibility as anyone for these failures. She led the country to depend heavily on Russian natural gas and endorsed Green policies including shutting all their nuclear plants and diving headlong into windpower.

Appeasement of Russia following its 2014 annexation of Crimea led to the 2022 invasion and Germany’s current scramble to reinvigorate its military following decades of dependence on the US for defense.

But such poor leadership isn’t only across the Atlantic. Angela Merkel has her fans among the Democrat establishment in the US.

Five years ago Harvard awarded her an honorary degree, citing, “shrewd resolve and pragmatism” and sensible policies including the nuclear phaseout. She’s on a book tour and was recently feted by Barack Obama at an event in Washington, DC.

Merkel endorsed Kamala Harris for president, which for voters aware of Germany’s penchant for economic self-harm likely cemented the Democrat as too liberal.

Last month’s election sent a clear message against progressives on a range of issues including energy policy. America’s big enough to accommodate varying approaches to energy, so we can see which states are managing climate change without widespread collateral damage.

Texas is the biggest user of windpower and second in solar. Sunny Florida is third in solar. Both states are adding jobs, people and investment because they provide cheap, reliable energy in a regulatory environment that promotes new business formation.

California is #1 in solar and has expensive electricity provided on a creaky grid. Diablo Canyon, a nuclear power plant, was almost shut down prematurely due to pressure from environmental extremists.

German voters have been led lemming-like over the cliff into energy purgatory and economic malaise. American energy policies have generally been enlightened with a few exceptions such as liberal Massachusetts which imports LNG because it won’t allow gas pipeline infrastructure linking it to the Marcellus shale in Pennsylvania, and New York which forbids new natural gas hook-ups.

The Sierra Club and its peers have been an irritant but largely inconsequential, which is why the US economy continues to do so well.

Fund flows into the MLP sector have been negative for years. From 2018-23 there were five years of outflows. For much of this year the pattern continued. Meanwhile equity funds have seen almost $140BN in inflows since the election as investors assessed the market’s prospects with generally less regulation.

My friends in Naples may not be fully representative of the overall electorate (ie wealthy, white, older and male). But they’re certainly cheered by the election and consequent market reaction.

Energy including midstream is a clearer election beneficiary than any other sector. In November MLP funds saw their strongest monthly inflows in almost eight years. 2024 is suddenly on track to be the best year since 2017. We do a lot of calls with clients and for that reason generally gain assets. But there’s still no FOMO, no irrational exuberance, at least among the new investors we talk to.

Wells Fargo noted that midstream’s correlation with crude oil prices has weakened significantly to 0.23 this year versus 0.53 over the past five years. During periods of market weakness this has been a common topic for clients wondering why their toll-model investments are moving lower with oil prices.

AI data center demand for natural gas has been an important driver of recent performance, but with leverage averaging around 3.3X Debt:EBITDA, pipeline businesses are just less risky than in the past. We think the low correlation with commodity prices will persist.

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

Energy Mutual Fund Energy ETF

 

Like millions of families across America, on Thanksgiving we gave thanks for being with friends and family, along with “…sunny days and that we’re all together.” I added a silent appreciation that left-wing climate extremists were resoundingly defeated on November 5th.

The market’s realization that the election had ushered in sensible, pro-American energy policies took the American Energy Independence Index +15% for the month, a return that in different circumstances would be satisfactory over a full year. The YTD performance is +52% the best of four consecutive up years.

President-elect Trump seems to be in the Oval Office already. His pronouncements from Mar-a-Lago on tariffs, illegal immigration and drugs carry more weight and press coverage than anything emanating from the White House.

In preparation for transactional foreign policy, Mexican President Claudia Sheinbaum asserted that migrant caravans are no longer reaching the US-Mexico border. Why is that only happening now?

European Central Bank chief Christine Lagarde has said the EU should embrace a “checkbook strategy” and increase imports of US LNG and defence equipment. They sorely need both. Seeing the fast response of foreign leaders to the election simply highlights how weakly the current Administration has promoted US interests.

It’s likely Europeans will be buyers of LNG next year anyway. Northwest Europe has endured colder than normal weather recently, and North Sea windspeeds have been inconveniently low. As a result, storage withdrawals have been higher than usual, although overall levels remain ample.

European natural gas futures markets reflect increased European demand. Buying more US LNG should be an easy way for the EU to deflect Trump’s promised tariffs.

UK power generation has relied on natural gas more than usual over the past month, given the calm, cold weather. The prospects for the cleanest hydrocarbon are diverging markedly from the outlook for crude oil, where its role in transportation is changing. The International Energy Agency (IEA) is little more than a renewables cheerleader and has long forecast an imminent peak in oil demand.

Greg Ebel, CEO of Enbridge, argues that we’re going through an energy transformation, not transition. On a podcast series called Energized: The Future of Energy he classifies the 19^th century as being about coal, the 20^th about crude oil and the 21^st about natural gas. North America’s biggest pipeline operator rejects climate orthodoxy that all hydrocarbons are going away, arguing instead that natural gas is a vital partner to increased reliance on intermittent solar and wind.

The UK is a case in point. Although windpower is on average their biggest source of electricity, roughly half the time natural gas provides the most.

Meanwhile China’s growing EV market is likely to dampen one source of demand growth for crude oil.  They recently reached a milestone in that half of new auto sales now run on batteries. This often fools people into thinking that China is making substantial progress in decarbonizing their economy, ignoring that their EVs, like China itself, run principally on coal. They’re regressing towards a 19^th century fuel because energy security is what drives policy in Beijing.

China’s energy deficit needs to close before they can take a more confrontational approach over Taiwan. It’s still some years away. Friends of mine with a military background, and therefore better placed to have an opinion, say their military isn’t yet ready.

But China’s heading in that direction, building up their military capability while reducing their dependence on imported energy. Increased power generation from coal and renewables helps because they’re both sourced domestically. This is why the Chinese government has pushed EV adoption.

Nonetheless, moderating crude imports from the biggest driver of demand growth is likely to weigh on prices and global consumption.

Although “drill baby, drill” is widely expected to have a limited impact on E&P behavior, some increased production is likely at the margin as the new administration opens up more public land for drilling. 90% of oil and gas production is on private land and so not much impacted by the White House. However, an improved regulatory environment will encourage some increase.

Barron’s recently wrote about the impact of AI on oil drilling in the Permian, where it’s lowering break evens and driving energy sector productivity higher than any other industry, delivering 60% more oil a day with 40% fewer workers over the past decade. This is bearish for oil prices although not for industry profits.

If we do see lower crude prices it will stimulate demand, delaying any potential peak in oil consumption.

Whichever way crude moves, midstream investors are unlikely to care. The sector has shown little connection with oil prices this year and there’s every reason to think that will continue to be the case.

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

Energy Mutual Fund Energy ETF

 

Market strategists often point out that valuations aren’t a good timing tool, but it’s still worth staying on top of whether the market is cheap or not. Stocks were having a good year leading into the election, and the Republican sweep took the market another leg higher. Residents of Naples, FL, our winter home, are politically right of center with a demeanor that is unfailingly cheerful, for good reason because it’s a beautiful place.

So, my friends at the golf club are nowadays exhibiting even more good cheer than normal, with happiness from the election and with their portfolios easily offsetting the clean-up cost of two recent hurricanes. My hope is that their sunny disposition continues indefinitely because they’re so much fun to be around. But I’m also watching the Equity Risk Premium (ERP).

With both the S&P500 and bond yields rising at the same time, valuation was never going to be compelling. What’s striking is that the ERP (defined here as the yield spread between  S&P500 earnings and the ten-year treasury) is the least attractive in at least twenty years. This blog has noted that stocks aren’t that cheap to bonds for at least the past year, which is why we don’t employ a market-timing overlay across any of our portfolios.

The Cyclically Adjusted Price Earnings (CAPE) model popularized by Robert Shiller also shows stocks to be expensive. This has been true for several years, demonstrating the weakness in valuation as a timing tool. Nonetheless, CAPE has a good record in predicting future ten year returns from stocks, as shown in this article from 2020. Since then the market’s continued strong returns have discredited the analysis somewhat, but a tool with a robust history going back 80 years or so is still worth considering.

Markets can remain expensive for a long time. Factset is forecasting earnings growth of 15% next year which would be the best since 2021 when profits rebounded from the pandemic. The current optimism is well founded. But it’s hard to make a case for declining bond yields given the outlook for the deficit, tariffs and deported illegal immigrants.

By contrast, midstream energy infrastructure remains cheap, and to this blogger offers a good chance of continuing to outperform the broader market as it has done for the past five years. A recent Bloomberg article noted that labor productivity in oil and gas extraction has improved faster than any other sector over the past decade. Continued innovation in shale has led to increasing output per well and fewer rigs employed while production continues to reach new highs.

Finally, some notes from my partner Henry Hoffman who attended the TD Energy Conference in New York last week:

The conference featured an insightful discussion between John Miller of Washington Research Group and Dustin Meyer, who oversees Policy and Regulatory Affairs at the American Petroleum Institute.

A key point of discussion was the impact of energy policy on recent elections. Meyer noted that while the primary concerns were immigration and inflation, he attributed part of the inflation issues to the Biden Administration’s climate initiatives. He criticized the increased regulatory burdens and climate mandates, highlighting their contribution to rising costs and inefficiencies.

Meyer expressed concern that industry professionals are unclear about compliance expectations under the current EPA, describing the administration’s approach as disjointed with extensive, yet unclear, directives. He also touched on the Inflation Reduction Act, labeling it as a partisan effort that indiscriminately funnels funds into various clean energy projects without a clear strategy. Meyer mentioned a division within the Republican Party over whether to repeal the act or retain elements that are gaining GOP support, such as the tax credit for carbon capture, known as 45Q.

On the topic of U.S. LNG, a representative from Cheniere’s Investor Relations conveyed optimism about the growth prospects for U.S. LNG. He underscored Cheniere’s significant role, accounting for half of the U.S.’s LNG 15bcf/d of exports, equivalent to two LNG tankers daily from their facilities alone. He highlighted Cheniere’s consumption of 7-8% of all U.S. natural gas and affirmed the company’s capability to continue expansion at their target of 7x EBITDA build multiple. He anticipated that the halts on issuing non-FTA licenses by the DOE would be quickly reversed under a new Trump administration.

In a separate session, NextDecade’s CFO, Brent Wahl, shared optimism about U.S. LNG export growth.  Specific to RGLNG, he expects no hurdles from FERC for a SEIS by next year and hopeful for a reversal of the DCCCA’s 3-judge panel’s vacatur sooner. Wahl also noted strong support from stakeholders for continuing with Train 4 once permitting challenges are addressed.

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

Energy Mutual Fund Energy ETF

 

When investors ask what return they should expect from an investment in midstream, we typically suggest dividends plus growth plus buybacks. Dividend yields are around 5%. Wells Fargo is forecasting 4% dividend growth next year, and buybacks of around 2% of market cap. 5% + 4% + 2% suggests an 11% total return, assuming no change in valuation.

Valuations are attractive, with Distributable Cash Flow (DCF) yields above 9% and expected to grow 5-10% over the next few years. Leverage of around 3X Debt:EBITDA is becoming the norm for investment grade midstream companies. An 11%pa return over the intermediate term looks reasonable.

But what about over the long run? For years the energy sector has labored under the fear of stranded assets as the world moves away from hydrocarbons. Experience shows that this was unfounded. Developing countries are driving consumption higher as they seek western living standards. India for example is seeing SUVs increase their share of a rapidly growing domestic auto market.

Status is one reason, but the poor state of Indian roads is another. The clearance between the bottom of a car and the road is critical when potholes and poorly designed speed bumps proliferate. Bigger cars need more gasoline. India is a long way from peak emissions.

Solar and wind are failing to meet the promises of climate extremists. Sloppy reporting routinely claims that these two are the cheapest forms of electricity. This is still not the case as a recent post by the Energy Information Administration showed. And it omits the cost of either battery storage or dispatchable power (usually natural gas) for when it’s not sunny or windy.

Renewables require vast amounts of space. Unlike hydrocarbons, they are not energy- dense. Vaclav Smil, probably the most intelligent writer on energy, shows that an acre of land dedicated to solar power serves 1.21 homes. In the case of wind, it’s 0.17.

You know where this is going.

There are approximately 145 million US homes. Powering all of them with solar power would require 120 million acres of land dedicated to solar, about 5% of all the land in America. We could put solar panels on every rooftop and we’d still need a lot of space.

If we relied fully on wind it would take almost 38% of our landmass.

We’re going to use more solar and wind, but climate extremists need to embrace nuclear and coal to gas switching to be taken seriously.

The election showed that Democrat climate policies resonate less than illegal immigration and inflation.

Pipelines that move hydrocarbons, especially natural gas, will be here for the foreseeable future. These infrastructure assets have long lives and deliver predictable cashflows that are linked to inflation. Wells Fargo has calculated that roughly half the industry’s EBITDA relies on contracts that incorporate tariff hikes linked to PPI.

Ten year real yields, as defined by Treasury Inflation Protected Securities (TIPS) are 2.1%. With ten year notes at 4.45%, implied inflation is 2.35%. It’s been edging up, and while Republican policies are good for the energy sector there’s little reason to think inflation will be 2%.

Trump ran on an expansionary fiscal platform. Ejecting illegal immigrants, good policy though it is, will tighten the labor market for low-skilled workers. And tariffs could push up prices depending upon how they’re implemented.

Recognizing the risks, Fed chair Jay Powell has paused further rate cuts.

Investors need to protect themselves against inflation that’s 3% not 2%.

The approximate 5% yields on midstream energy infrastructure translate to a real yield of 2.65%, 0.55% better than TIPS. But while TIPS will keep up with inflation, midstream will likely do better. JPMorgan expects dividend growth rates of 8% for large-cap c-corps over the next couple of years and 4% for large MLPs, both of which are above plausible inflation forecasts.

Given the reliable cashflows that characterize the sector, with dividends likely to consistently grow well in excess of inflation they should have real yields comparable to if not below TIPS. Dividend yields of 4.5% wouldn’t seem unreasonable, similar to treasuries.

The dividend yield on the S&P500 is a paltry 1.2%. Stocks offer a negative real yield of –1.15%, 3.8% less than pipelines, even though the latter comes with widespread inflation-linked tariffs.

Although pipelines have outperformed the market for the past five years, there remains a compelling case for investors seeking inflation protection to own them. That should apply to every one of today’s savers.

The point of investing is to preserve purchasing power. In our opinion midstream offers the best chance to do so.

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

Energy Mutual Fund Energy ETF

 

Donald Trump’s political comeback looks a lot like the recovery in the energy sector. In March 2020 during the pandemic pipeline stocks slumped as crude oil prices briefly turned negative. Within a year Trump was out of office, faced numerous civil and criminal charges and was widely believed to be a one-term president. By then midstream had rebounded but fears that the energy transition would lead to stranded assets caused many to remain skeptics.

But inexorably, substance overcame style. Between friends at golf clubs and energy investors my interactions are overwhelmingly with Republicans. My perspective is that Trump campaigned on policies while Harris argued that he was unfit for office. Voters pragmatically chose the substance of Republican policies, overcoming any misgivings about Trump the candidate.

In the energy business, over-hyped renewables have been an investment bust while hydrocarbons have maintained their >80% share of the world’s expanding consumption of primary energy. The substance of reliability has trumped the style of virtue-signaling.

The discrediting of excessive PC, DEI, ESG and the rest of the woke acronyms helped both Trump and energy. A couple of years ago a friend at JPMorgan told me that employees were being encouraged to add their pronouns to their profiles on Bloomberg. I don’t think they/them realized how irritating that is for the rest of us not struggling with our gender.

The moment of maximum absurdity had been reached. Woke is broke.

BP until recently apologized for producing what the world wants. Browbeaten by left wing climate extremists they promised to kick their hydrocarbon habit. But investing in renewables leaves a big fortune smaller, and with their stock price slumping BP has belatedly acknowledged the market’s rejection of this strategy (see BP Decides To Follow The Money).

Midstream outperformed on Wednesday as markets digested the news. NextDecade rallied sharply because of the improved regulatory environment for LNG.

Liberty Energy (LBRT) provides fracking services to oil and gas E&P companies. In an inspiring and informative report called Bettering Human Lives, they claim the moral high ground from the climate extremists. Employees at Liberty “relentlessly dedicate our lives to energizing the world” They know that hydrocarbons have, “transformed the human condition over the last two centuries.” They reject the dystopian vision of that wretched little girl Greta, AOC and her squad, and the Sierra Club who all promote policies that will make life shorter and more miserable for billions of people.

The Liberty Energy report doesn’t deny climate change but places it behind malnutrition, access to clean water, air pollution, endemic diseases and human rights as problems more deserving of the world’s attention. It acknowledges that temperatures and sea levels are rising because of human generated CO2, accelerating a trend that started in the mid-19^th century at the end of the “little ice age”.

Every hurricane, flood and heatwave is blamed on global warming. But the data shows that global losses from extreme weather events as a % of GDP are falling, as are US flood losses. Global deaths are down 90% since 1900 even as the world’s population has increased five-fold. We are better prepared, through greatly improved weather forecasts and stricter building codes.

What’s most striking is the modest projected losses in GDP from increased temperatures of as much as 4 degrees C by 2100. Various independence forecasts are remarkably similar, at around a 3-4% loss of GDP in plausible extreme scenarios. It may sound a lot, but a 4% smaller GDP by 2100 means annual GDP growth of 0.06% less in the meantime. Even a 2100 GDP that’s 15% smaller than it would otherwise be, which is at the extreme end of forecasts, would reduce annual GDP growth by 0.22%.  

Estimates of the annual investment needed to combat climate change are in the $TNs, out of a global GDP of $110TN. The International Energy Agency says annual clean energy investments of $4TN are needed, 3.6% of global GDP. The policy recommendations of climate extremists are devoid of any cost-benefit analysis, since they’d throw 25X or more at the problem every year than its annual cost.

Germany’s embrace of wind, rejection of nuclear and consequent reliance on coal to compensate for lost Russian natural gas is a form of economic self-flagellation that is leading to ruinously high energy prices, de-industrialization and no GDP growth (see Germany’s Costly Climate Leadership). Volkswagen is planning to close three factories, lay off tens of thousands of workers and impose 10% pay cuts because their commitment to EVs exceeds the enthusiasm of buyers.

The US has for the most part avoided such missteps apart from a few blue states. While American voters rejected extreme climate policies, as if on cue Germany endured a period of “dunkelflaute”, a wonderfully Teutonic word for endless calm, cloudy days that render wind and solar impotent.

Finally, an illuminating chart showing median real household income. 4.1% unemployment shows everyone who wants a job can have one, and this blog often celebrates the strong US economy with its per capita GDP moving ever farther from former peers in the EU. But while the average looks good, the median household has lost purchasing power over the past four years.

The $1.9TN American Rescue Plan in 2021, the first major piece of legislation under incoming President Biden, was an excessive fiscal response to Covid at a time when a vaccine was available, and treatments were improving. It led to the 2022 inflation that so many voters maintain has left them worse off, driving them to vote Republican. Similar episodes of falling real incomes in 2008 (Great Financial Crisis) and 1990 (First Iraq War, Bush sr. tax hikes) also led to a change in the White House.

As Jim Carville said, “It’s the economy, stupid.”

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

Energy Mutual Fund Energy ETF