Energy Policies Are Moving Right

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Data center demand for natural gas was the big energy story last year.  Wells Fargo referred to “a momentous year for midstream” with this as the biggest driver. It’s been consistently cited by JPMorgan and Morgan Stanley.

Wells Fargo calculated that C-corps outperformed MLPs by 23%. This was a substantial difference and means that the Alerian MLP ETF (AMLP) underperformed the S&P500 in a year when midstream generally beat the market by 20%. This is partly because MLPs are perennially “cheap” since their investor base is limited to wealthy Americans willing to tolerate a K1. US tax-exempt and foreign institutions face onerous tax liability and reporting requirements, so generally avoid MLPs. Retail investors don’t want K1s.

The other reason MLPs lagged is that pure-play natural gas names began converting to c-corps following a ruling from FERC in 2018 that prevented them from including their equity holders’ tax liability in calculating their required return on pipeline tariffs. So today MLPs have limited direct exposure to the biggest story in midstream – data center power demand to be satisfied mainly with natural gas.

Valuation as defined by Enterprise Value:EBITDA (EV:EBITDA) has risen to 11X, close to the 12X ten year average. However, a move to 12X would be more appreciative than it might appear. Since midstream companies typically finance their assets with around 50% debt, an EV:EBIDTA move from 11X to 12X, roughly a 9% increase in EV, would be double that on the company’s equity since their debt obligations would clearly be unaffected.

2024 was an exceptional year. Nonetheless, the math suggests that a reversion to the mean for valuation, plus a 5% dividend yield, could generate a total return of around 23%. We’re not predicting such. But energy is incoming President Trump’s favorite sector.

Dividend yields are close to the ten year treasury, historically very tight. However, this relationship has lost relevance. Dividend coverage has moved higher in recent years as c-corps have become more prevalent. The old MLP model of paying out 90% of distributable cash flow no longer prevails, with payout ratios of 50-60% common today.

JPMorgan’s Eye on the Market Outlook 2025: The Alchemists was published on January 1. I occasionally interacted with Mike Cembalest, the author and Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, 20 years ago when I worked there. I enjoy his writing as much as anything I read. It is deeply researched and full of insights.

In discussing AI, data centers and the growing demand for power from “hyperscalers” (ie Google, Meta, Microsoft, Amazon etc) the report noted: The hyperscalers will probably have to hyperscale back their commitments for green power consumption and rely heavily on natural gas, as they have been.

US natural gas prices have risen 44% so far this year (as of January 6). Winter storm Blair is the reason, not AI. Even so, $3.70 per Million BTUs (MMBTUs) remains far below global prices. Futures on the European TTF benchmark and Asian JKM are both trading in the $14.50-15 range.

US energy remains cheap. Whenever I walk past a store on a hot day with its doors open, using its air conditioning to draw in shoppers, I’m reminded how rare such a sight is elsewhere in the world. Increased US LNG exports over the next few years will benefit our trade partners, reduce coal consumption and modestly lift US prices. It’s a small price to pay.

The pendulum is swinging back from progressive ideas such as uncontrolled immigration and switching to renewables with no cost-benefit analysis. Canada is the latest country to chart a new direction as PM Justin Trudeau concluded when he resigned on Monday. Conservative leader Pierre Poilievre has promised to cancel the country’s much hated carbon tax, which is set to rise to C$170 per metric tonne (US$119) of CO2 equivalent by 2030.

The chart on illegal immigration included in Mike Cembalest’s annual outlook caught my eye more than most, along with this explanation: Biden immigration policies directly led to the largest unchecked, uncontrolled and unmanaged migrant surge on record which will negatively impact major urban fiscal positions for many years.

Cembalest’s writing is apolitical since they have a diverse client base. He’s no ideologue. The sentence above shows how such a view has become solidly mainstream. The general retreat from left wing policies is overdue and represents a positive environment for hydrocarbons. It doesn’t mean we’ll stop working on lowering greenhouse gas emissions, but we are moving into a period of more careful cost-benefit analysis.

This is good for the cleanest hydrocarbon, natural gas.

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

Energy Mutual Fund Energy ETF

 

 

Last Year’s Favorite Blog Posts

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We enjoy the feedback from our blog readers, which along with the pageviews inform future topics. Looking back over last year’s posts, natural gas growth, the challenges facing renewables and obstructionist climate extremists were among the themes that resonated most.

The most popular post was The Inflationary Energy Transition, which reviewed how US electricity prices have been rising. This ought to shock renewables proponents, because we’re constantly told that solar and wind are cheaper than conventional energy. The overwhelming absence of supporting evidence has done little to silence this crowd. Indeed, the International Energy Agency (IEA), which has adopted the mantle of renewables cheerleader, reiterated this belief last year. Hopefully under Trump the US will cut its funding.

An op-ed in the WSJ last week by Bjorn Lomberg included a chart showing that electricity prices rise with solar and wind penetration all over the world.

If the IEA and others would simply say that renewables cost more and are a better choice because of rising CO2 levels, at least they’d have credibility on the issue. But by misrepresenting the economics they’ve lost any right to be taken seriously.

A Concentrated Bet On Renewables Stumbles showed how Costa Rica’s grid has moved almost fully to renewables, led by hydropower at 73%. A drought blamed on El Nino forced daily power cuts on consumers. Renewables Are An Energy Footnote showed how modest the impact of solar and wind has been in the US in spite of enormous subsidies and glowing media coverage. Natural gas production has increased 8X renewables over the past decade, and even if you eliminate exports and just count the gas that’s consumed domestically, it’s still 4X as big.

What became clear to us last year is that we are experiencing The Natural Gas Energy Transition, One day we’ll run out. One day perhaps everything will run on electricity from nuclear plants. But over any meaningful forecast period natural gas demand will continue to grow. Investment returns last year reflected this. The S&P Global Clean Energy Index was –25% last year. Midstream energy infrastructure was +45%. On Thursday there were new reports of closures among German solar firms.

The Energy Transition Towards Natural Gas showed how the US is benefitting from this, at least in those regions where energy policy hasn’t been hijacked by progressives (ie New England and the Pacific northwest). For more, see Blue State Energy Policies.

Sierra Club Shoots Itself In The Foot showed how environmental extremists’ use of the courts to slow projects was likely to prolong use of coal across developing countries where energy demand continues to grow. NextDecade’s (NEXT) construction of an LNG export terminal in Brownsville, TX was cast under some uncertainty due to the ruling. The stock lost almost half its value in the days following.

However, by the election it had recouped some of that and Trump’s victory propelled it higher. In recent days it’s back to its levels prior to the August court ruling, as investors have concluded that the project will continue to completion with minimal if any delay.

In this video (watch Let’s End The Sierra Club) we noted how they’re even against nuclear power with a set of dystopian policies that would impoverish billions of people and cause widespread starvation.

We’ve long believed that natural gas would remain a crucial source of energy for the foreseeable future. It seemed to us that greater renewables penetration would require natural gas to provide reliable energy for when it’s not sunny and windy. Slow renewables growth simply means greater use of reliable gas. Both themes are at work. Natural Gas Demand Keeps Growing and A Gassier World explained why.

And in 2024 the demands of data centers for reliable power added to the strong fundamentals.

Consequently, Drilling Down On AI was one of our most read blog posts. The Coming Fight Over Powering AI reminds that power demand growth is on a trajectory that will challenge the ability of utilities to add necessary infrastructure.

Last year not a single client commented on the relationship between crude oil and midstream – unsurprisingly, since oil finished down on the year. We reviewed this in Oil And Pipelines Look Less Like Fred And Ginger. Persistently strong operating performance and reduced leverage have finally broken whatever connection existed – and that only arose at times of strong energy sector sentiment (usually negative).

Someone once said that if you want to understand a topic, write a book about it, the point being that the research required will make you an expert. Writing a blog is similar, and astute readers can be relied upon to catch any sloppy analysis. It’s also an enjoyable part of my job.

Thank you for the regular feedback.

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

Energy Mutual Fund Energy ETF

 

 

 

 

 

 

 

 

Economists Having Fun With Inflation

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The other day I read a tweet complaining that since 1971 household family income had increased 5.5X (from $10K to $55K) while the median cost of a new car has gone up by 12X ($4K to $48K). It’s not quite correct. Median family income has risen to $101K, so has almost kept up. But it did remind me that car price inflation as calculated by the Bureau of Labor Statistics (BLS) has substantially lagged car prices. Car CPI has averaged 2.2% since 1970, resulting in a mere tripling and far less than actual prices.

The reason is what the BLS calls hedonic quality adjustments – not to be confused with hedonistic, although indulging in the latter might help consumers accept the result of the former.

The CPI is calculated on the basis of a basket of goods and services of constant utility. This last phrase is critical, because it means that any improvement in a product or service that provides increased utility gives you more for your money – in other words, a price cut. CPI seeks to keep this constant.

It’s a concept only familiar to economists, and we have written about it before (see Why Inflation Isn’t What You Think). Non-BLS economists – which is to say, most of us – think about how much more a new car costs than it did last year. Or an iphone, flight or house. We don’t think of improved quality as a theoretical price cut.

Economists around the world love hedonic quality adjustments. In their tribe this is not a controversial topic. However, I am increasingly convinced that their application is uneven, unintuitive to users of inflation statistics and not helpful to anyone interested in maintaining their standard of living.

In 2013 I wrote about airfares (Why Flying is Getting More Expensive) and noted that the only quality adjustment the BLS had made was to factor in easier cancellation terms as an implicit price reduction. Since then, few would dispute that flying coach has become a degrading experience with less legroom, no meals and a general feeling of being cargo rather than people. The BLS never makes adjustments for a decrease in quality, even though it’s certainly the case with flying. And I’d suggest that regular travelers to New York City on NJ Transit could identify another form of transportation where quality has dropped.

What’s the hedonic quality adjustment for regular delays?

The other problem with these adjustments is that they’re applied to indivisible objects. For example, if an improved car provides you with greater utility, what exactly can you do with the excess? Today’s new car provides more utility whether you like it or not. You can’t take the extra and apply it somewhere else. You’re unlikely to conclude that increased utility in one purchase allows you to accept reduced utility in another, such as an airplane ticket. Only BLS economists think like that.

From 2019-21 during the pandemic, household incomes rose 3%, lagging new car prices (+14%) along with most other things. Voters remembered in November.

But the real mistake lies in thinking that keeping up with inflation means keeping up with the neighbors. Social security payments are linked to CPI, but that just means slipping to a lower percentile of income over time. It’s even more important for anyone planning retirement in a decade or two. Assuming that today’s household expenses will increase at inflation so their savings only need to keep up will turn out to be inadequate.

A more realistic goal is to target median family income. That has increased by 4.4% pa over the past decade, versus CPI at 2.8%. $100K in household expenses in 2013 required $154K in 2023 to maintain its purchasing power relative to the median. If it grew at the CPI the family would have $131K and would have fallen behind their peers of a decade earlier.

The median family income has roughly kept track with car prices over the past fifty years, which has enabled car prices to increase well ahead of car price inflation. It simply shows that car price inflation as calculated by the BLS isn’t a very useful figure. For savers this applies to inflation statistics more generally.

So make your new year’s resolution to grow your savings at a more appropriate rate. We will naturally suggest that midstream energy infrastructure has a better chance than most investments of delivering.

And if this New Year’s Day discussion of hedonic BLS weaknesses is challenging your foggy brain, I hope you can blame it on excessive hedonism the night before.

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

Energy Mutual Fund Energy ETF

 

 

 

 

The 8X Energy Transition

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Over the years I’ve developed a few soundbites to help investors remember why they should invest in midstream energy infrastructure. Once it became clear that climate extremists’ efforts to impede new pipeline construction were boosting free cash flow, I proclaimed that we should all hug our local climate protester and drive them to their next event.

As the absence of profits in renewables led inevitably to poor returns, I noted that the way to make a small fortune in solar and wind was to invest a big one and wait.

More recently, I’ve enjoyed using data to highlight that the Natural Gas Energy Transition is the only transition of any consequence in America. One of the least appreciated statistics is how growth in US gas production has swamped the increase in renewables.

Solar and wind output have almost tripled since 2000, from 1.2 Exajoules (EJs) to 3.5 EJs last year. Left-leaning and superficial journalists routinely hail this as clear evidence that hydrocarbons are on the way out.

What they willfully ignore is that natural gas production has grown from 18.7 EJs to 37.3 EJs over the same period. This is a mere doubling, a compound annual growth rate of only 2% versus renewables 2.7%. This is the type of arithmetic sleight of hand on which so much energy reporting rests.

But in energy equivalent terms, natural gas production is up by 18.6 EJs vs 2.3 EJs for renewables. We’ve added 8X as much new energy from gas as from solar and wind combined so far this century.

The Natural Gas Energy Transition is 8X as big as the renewables version.

8X

This is the statistic that every apologist for intermittent, weather-dependent power should explain before they mistakenly talk about the wrong transition.

Some might argue that this is too long a period, that solar and wind have really taken off more recently. Over the past decade, natural gas production has increased by 13.7 EJs versus 1.6 EJs for renewables. That’s a ratio of over 8X. It’s a similar story over five years, and from 2022 renewables growth has stalled.

It could be argued that since some of this production has gone to exports, the comparison overstates the penetration of natural gas in our economy. But domestic consumption has still grown by 9.3 EJs over the past decade, 4X the growth in renewables.

The sudden jump in power demand for AI data centers will provide further impetus to domestic natural gas consumption. There are no reports of frantic purchases of new solar and wind output, because data centers need power 24X7. In time nuclear power will hopefully meet some of this need, but given the time required even to restart an existing nuclear plant, natural gas is the only viable solution. So consumption will grow at a higher multiple of renewables in the future.

By any objective measure we are pursuing a natural gas energy transition. If left wing journalists were focused on this objective instead of their dystopian one of limited, intermittent and expensive energy, they could claim the right side of history. If they’d also embraced nuclear and used their platform to promote the low risk of this carbon-free energy, they might have helped sway public opinion behind a virtuous gas/nuclear combination that would displace coal and render solar and wind obsolete.

But they didn’t.

The Natural Gas Energy Transition is a huge success in that millions of words have been spilled on climate change, providing consumers with all the information they could need to make choices. That burning hydrocarbons raises CO2 levels has been understood for at least fifty years.

Many people have changed their behavior. They’ve installed solar panels, bought EVs that hopefully don’t run on coal like China’s, and switched from heating oil to gas to heat their homes (like your blogger).

But generally, with the exception of a handful of left-wing states, choices have been driven by incentives, not imposed by taxes. We’ve lowered greenhouse gas emissions from their 2007 peak of just under 6.2 Gigatonnes (Billion Metric Tonnes, GTs) of CO2 equivalent to 5.1GTs. We’ve dropped from 18.2% of the world’s total to 12.7%.

We’ve done it without impoverishing people or crushing our economy. Germans now watch for Dunkelflaute, periods of cloudy calm weather that renders those solar panels and windfarms little more than expensive, useless hardware. For an energy strategy to avoid, look no farther than Germany.

Incoming President Trump can tell the rest of the world they could do worse than emulate our energy mix. And our natural gas exports are here to help them do it.

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

Energy Mutual Fund Energy ETF

 

 

 

 

 

English Christmas Traditions

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Around this time of year, I’ve often indulged myself in writing about Christmas pudding (for more, watch this video). This English dessert is a rich, dark fruit cake best enjoyed heated with heavy cream. It is an acquired taste, and our children were each offered one brief opportunity to develop a taste for it.

While the mouthful was pondered I quickly swept the plate away – because a new Christmas pudding devotee means sharing the meagre supply. It is a decidedly unhealthy dish, including suet (animal fat) which adds to the glorious flavor. But the desired result has been achieved, and our children have advised our grandchildren to avoid it too.

Job done.

My wife and I brought other Christmas traditions from England. Christmas crackers are pulled by two people, and when ruptured out pop a colored paper crown, a cheap plastic toy and a lame joke. First time Christmas visitors often look relieved when the cracker pulling leaves the silly hat on their neighbor’s plate. However, there is one cracker per person, so nobody is free of the obligation to wear one. It’s the Monty Python spirit.

Britain once ruled an empire because we don’t take ourselves too seriously – or perhaps it was in spite of that.

Turkey is the traditional meat served at the English Christmas table – after all, there’s no Thanksgiving in the UK. Goose was often served at wealthy tables during the time of Charles Dickens, but not in my experience.

As a young boy I remember Christmas dinner was always planned as a late lunch but wound up being dinner. This is because the men of the house stopped by the local pub while the women were cooking and shockingly returned home later than promised. I’m happy to report that our family life is decidedly less chauvinistic. We left that tradition behind.

Fans of Downton Abbey will know that Boxing Day is when the staff enjoy their Christmas, the day after working all day to serve the family. Since my family never had any household staff, we simply treated Boxing Day as a low-key follow-up. It means eating leftovers, because there’s always ample turkey left and the people who cooked the day before are exhausted.

The Christmas period nowadays includes a packed Premier League schedule. For two weeks there are games on TV almost every day. Boxing Day is an extravaganza. This year is typical – the first game kicks off at 730 NY time and the last one finishes at 5pm. They’re planned to limit the traveling that visiting fans must endure, so often local teams play one another.

I remember pleading unsuccessfully with my mother to let me go to Arsenal v Chelsea (two London clubs) back in the 1970s when I was around twelve. Violence was a regular feature and more likely between fans of two nearby clubs, probably on a pub crawl before the game.

Dramatically more expensive tickets and CCT that identifies troublemakers both inside and outside stadiums have fueled a customer upgrade.

Few games were televised live back then either. A Boxing Day packed with Premier League action was not yet a tradition.

Some traditions come under threat. I continue to put up outside Christmas lights and a wreath above the front door with the help of my younger daughter (see Of Christmas Lights And Ladders). It is our tradition but looks increasingly amateurish compared with our neighbors who hire professionals.  They can turn a center hall Colonial into a suburban version of Saks Fifth Avenue, looking like an oversized gift box adorned with a ribbon and countless wreaths, all identical and hung symmetrically.

Given the expense involved, it’s little surprise that many ignore another English tradition, that decorations be removed on the 12th night of Christmas, its official conclusion. I smile to myself at their lack of sophistication while packing away our jerry-rigged lighting until it’s needed next year.

Christmas memories are formed during childhood, and while we’re making new ones every year with our own children and grandchildren, I fondly remember the excitement of my own early Christmases. It’s many years since I last spent Christmas in the UK, but we’ve simply brought our traditions to the US.

To all our regular readers I wish you a wonderful Christmas or holiday time with your families. If you’re reading this the day after Christmas, there’s a good chance I’ll be watching Premier League English football, yelling at Arsenal to put one in the net and enjoying a last slice of Christmas pudding. I hope your Christmas is just as convivial.

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

Energy Mutual Fund Energy ETF

 

The Transatlantic Energy Trade

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For years the center of gravity for global LNG trade was in Asia. China, India, Japan and South Korea were routinely over 60% of global LNG imports. Asia-Pacific was often over 70%, reaching a high of 75% in 2018. Australia and Qatar were geographically better suited than the US to meet this demand, and our exports were in any case inconsequential until 2017.

Two events of great geopolitical importance followed. The US rapidly grew its LNG exports and is now the world’s #1. Meanwhile Germany’s energy strategy, built on fantasy rather than realpolitik, collapsed. Today Europe is 31% of global LNG trade, a share that has doubled over the past seven years.

Western Europe has adopted policies more oriented to reducing Greenhouse Gas (GHGs) emissions than any other region. Over the past decade, CO2 emissions from fossil fuels declined at a 2.2% annual rate, almost twice the 1.2% rate of the US. Recently they’ve been rather too successful: 2023 was –6.2% versus 2022, but it’s mostly because the high energy prices caused by climate policies have caused GDP growth to slump. The German economy is headed for a second straight year of no expansion in 2025.

Six years ago President Trump famously criticized German leaders for relying on Russian gas imports via the Nordstream pipeline while US troops were stationed in Germany protecting them from Russia. Trump often causes conventional political leaders to squirm with his outspoken attacks, but it’s a pity past presidents hadn’t been so forthright. Germany’s reliance on Russia collapsed spectacularly following the invasion of Ukraine.

Europe relies on renewables for 15% of its primary energy, more than double the rest of the world which is at 7%. It’s an unappealing example to follow given their moribund economies.

In negotiating long term LNG import agreements, European policymakers have clung to the notion that their energy systems will be free of hydrocarbons. So they’ve often balked at the 20+ year deals LNG exporters need to justify their fixed investments in liquefaction terminals.

Meanwhile, incoming President Trump who is our de facto president already, just said,”I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!”

This followed the US Department of Energy’s (DoE) report on the advisability of increased US LNG exports, which it warned would raise domestic prices by 30% over 25 years. It’s a ridiculous forecast, because with natural gas at $3 per Million BTUs versus $12 in Europe and Asia, a $1 increase is inconsequential and a 25 year price forecast is useless. We waited 11 months since the permit pause in January for a weak political document that is the parting gift of Energy Secretary Jennifer Granholm.

There are reports that she sought to ban LNG exports entirely. The only plausible explanation is that she’s taking a stand that will cheer left wing progressives when she runs for public office* again one day. It’s similar to NJ governor Phil Murphy and his pursuit of offshore wind that is widely opposed by the NJ residents who live on the Atlantic coast where the turbines will be situated.

For America, Jennifer Granholm’s retirement can’t come quickly enough.

Some have speculated that opponents of increased US LNG exports could rely on the DoE to persuade the courts to block increased exports.  It’s more likely that incoming DoE head Chris Wright will correctly consign the report to the dustbin and focus on what’s in our national interest.

It’s hard to think of a set of circumstances more likely to favor the energy sector at the expense of others. The US is threatening most of our trade partners with tariffs unless they (1) impede illegal immigrants entering from their country, which applies to Canada and Mexico, or (2) buy more American goods, which for the incoming administration means US oil and gas.

According to the US Bureau of Economic Analysis, shipments of crude oil, natural gas liquids, natural gas, fuel oil and other petroleum products were $262BN for the year through October, 15% of all our exports. Pharmaceutical preparations ($90BN) is the next biggest category, followed by civilian aircraft and engines ($80BN).

Europe wants to avoid tariffs and is pursuing green policies that are impeding their economy. At the same time they are reliant on US natural gas, and we have a president who wants them to buy more, which will provide them with reliable, secure energy and maybe even arrest Germany’s industrial decline.

It looks like a good time to be invested in US energy.

*An earlier version of this blog post suggested Jennifer Granholm might decide to run for US president one day. Thank you to a regular and diligent reader who noted that as a Canadian citizen she is ineligible.

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

Energy Mutual Fund Energy ETF

 

Natural Gas Is The Solution

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With forecasts for power demand growth seemingly increasing every month, it’s clear that part of the solution will be “behind the meter”, meaning new natural gas power plants directly connected to their data center customers without the need to connect to the grid.

This also sidesteps potential complaints that existing electricity customers are subsidizing the new ones because the cost of added infrastructure is broadly shared across a network. Although adding data centers is a vital step in developing AI capabilities, they don’t add many jobs.

Once constructed, oversight of a warehouse of servers is not labor-intensive. Like bitcoin miners, they don’t have much political clout, so operating independently of the grid is likely to become more widespread.

Texas has its own grid that operates without any meaningful connections to other states. Their forecast growth in peak summer illustrates the problem. Having increased at 2% pa for the past couple of decades, they now expect a tripling of that growth rate over the next nine years. Nobody knows if the power infrastructure to support this can be built on such a schedule. We’re adding 148 new gas power plants across the country, up from 133 in April, according to S&P.

Renewables are too unreliable to receive serious consideration because data centers need to run all the time, not just when it’s sunny or windy. Several nuclear projects are being pursued but none are likely to be operational before the 2030s. So natural gas is the only remaining solution. Williams Companies has discussed offering co-located gas generation as a complete solution for data centers.

Because the technology companies building these new facilities care about their carbon footprint, Carbon Capture and Sequestration (CCS) is often part of the package. Exxon Mobil thinks data centers could be 20% of the total CCS market by 2050.

Too few people in America appreciate how significantly the energy sector has boosted our economy. The casual observer contemplating equity markets sees technology stocks and anything linked to AI driving returns. While true, this view doesn’t give sufficient credit to the energy sector and how our access to cheap, reliable hydrocarbons has let the US leap ahead of other developed countries.

Construction of manufacturing plants has tripled from pre-pandemic levels. Part of this is the result of all the fiscal stimulus the Biden administration pumped into the economy, from spending to offset the drag caused by covid lockdowns to the Inflation Reduction Act. But there can be little doubt that access to cheap, reliable energy has played an important role. Manufacturing employment has stopped its multi-decade decline.

Natural gas is in demand for data centers and to power new manufacturing. But it’s also the biggest source of reduced CO2 emissions by displacing coal. Roughly two thirds of the million metric tonnes we’ve cut is down to natural gas. This has happened with little fanfare and scant support from environmental extremists. Yet it’s been more important than all the solar and wind we’ve built.

America has come to Europe’s aid with exports of LNG, with over half of our volumes sent there to replace lost Russian imports. The widely criticized LNG permit pause, an ineffective sop to progressives, injected uncertainty into our willingness to continue with long term supplies. Fortunately, that will be lifted next month.

The US Department of Energy (DoE) is expected to release the environmental study whose preparation the pause was intended to allow – apparently it wasn’t possible to keep approving permits while doing research.

In a letter obtained by the NYTimes, outgoing DoE head Jennifer Granholm said increased exports would drive domestic gas prices higher, by as much as 30%. Even if true, US natural gas is around $3.25 per Million BTUs versus over $12 in Europe and Asia. It would still be very cheap compared to global prices.

We often use a chart showing growing LNG export capacity as new terminals are completed. Surprisingly, this year volumes are down. It’s not the permit pause, which had no impact on existing projects, but is the result of slower than expected completion at a couple of expansion projects and downtime for maintenance elsewhere.

In some cases, FERC has been slow to issue approvals – whether this was politically motivated or simply the result of diligent regulators depends on your perspective. But the net result has been that feedgas demand from all our LNG terminals averaged 12.53 Billion Cubic Feet per Day (BCF/D) this year, down slightly from 2023 and the first drop since we began exporting LNG in 2016.

There’s every reason to expect higher volumes next year. For many energy challenges, natural gas is the solution.

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

Energy Mutual Fund Energy ETF

 

Measuring The Midstream Mood

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Last week my partner Henry Hoffman attended the 23rd Annual Midstream, Energy, and Utilities Symposium, held by Wells Fargo. The mood was understandably upbeat, underpinned by strong fundamentals and the more coherent regulatory framework expected following the election.

Given our focus on natural gas, we were naturally interested in this element of the energy story. Data centers in support of AI are driving power demand sharply higher. Randy Fowler, CEO of Enterprise Products Partners, noted that ERCOT which runs the Texas electricity grid is forecasting 150GW of power demand by 2030, up from 85GW currently. We heard other reports that demand may even double by then.

Grid expansions of this magnitude typically take several years. Therefore, it seems unlikely existing infrastructure will be able to meet the increased demand from data centers, which will lead to “behind the meter” solutions whereby a data center builds its own power source or buys it directly from a provider without going through the grid. The several announcements involving nuclear power contemplate this. However, the widely reported Microsoft deal to restart a reactor at Three Mile Island has run into problems with FERC as this power supply wouldn’t be totally separate from the grid.

Cheniere is planning to take advantage of the more co-operative regulatory environment to “permit it all”, which in their case could bring their total permitted LNG capacity to 90 Million Tons per Annum (MTPA), around 12 Billion Cubic Feet per Day (BCF/D). This would give Cheniere alone more export capacity than any other country. Cheniere’s CFO Zach Davis expects the global LNG market to grow from 400 MTPA to 600 MTPA by the early 2030s. He also noted 1,200 MTPA of global regassification capacity, indicative of robust demand.

Anticipation of an improved regulatory environment has pushed midstream stocks higher since the election. Some of this can be achieved by the new administration through executive actions, but building any type of US infrastructure nowadays is too often tied up in legal challenges. Climate extremists have learned how to use the courts to slow hydrocarbon projects but just about anything can suffer interminable delays. Williams Companies’ (WMB) general counsel highlighted four areas that require attention:

  • Limiting challenges to approved permits.
  • Reducing state-level authority to block projects based on technicalities.
  • Streamlining water-crossing permits under FERC jurisdiction.
  • Imposing stricter time limits on federal reviews.

A bipartisan effort to pass legislation reforming permitting was moving forward until the election. Some attendees felt the political winds were shifting. WMB reported more frequent discussions with members of Congress. A handful of Democratic governors have suggested that shifting more oversight of infrastructure to the Federal level could ease political pressure they sometimes face.

NextDecade, a company we’ve followed closely as they’ve moved forward with their plans to build the Rio Grande LNG export terminal in Brownsville, TX, expressed confidence that robust demand would support adding further capacity beyond their Stage One project. They also expect any outstanding permit issues to be resolved by November next year.

There’s very little evidence that the animal spirits of 2016 will offer a reprise of “drill baby, drill” with its subsequent poor investment returns. Most management teams were singing the same tune, which is to maintain strong balance sheets, prioritize accretive investment opportunities and focus on growing free cash flow per share.

Kinetik’s CEO Jamie Welch was more bullish, saying, “On January 21st, don’t be surprised if animal spirits take over.”

In other news, we recently made a small investment in New Fortress Energy (NFE) across our portfolios. NFE provides natural gas using floating terminals called “Fast Liquefied Natural Gas’ or FLNG. Accessing offshore reserves speeds delivery to customers, a significant advantage given the 3-5 years it typically takes to build an onshore LNG export terminal. The company has endured some cost over-runs and recently raised additional equity which enabled them to refinance their debt. It’s currently a small position but we think it’s attractively priced at current levels.

My wife recently retired as a pre-school teacher at our local church. She didn’t do it for the money, which is fortunate because their compensation structure might kindly be described as parsimonious. But she did receive a form of payment which is priceless, in the form of hand-drawn cards from five year old students saying I love you, a reward rare in investment management as I often noted.

However, several years of strong performance in midstream has stimulated warm feelings among countless clients, and I have felt the love this year as I’ve met with and corresponded with many of you. The 2020 pandemic was a miserable period in so many ways. But there were sparkling rewards for those who retained their conviction.

One investor cited a tripling of the value of his investment (excluding dividends) which yields over 14% from his original cost. He called it, “a good result for sticking with things when your hands are bloody from the pain.”

Another long-time investor called me and read off similarly rewarding figures from client accounts.

We appreciate the continued support of so many investors, who are overwhelmingly long term and not just in for a quick trade. Some have been with us since the firm’s founding in 2009. We never forget that you’re the reason we are in this business.

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

Energy Mutual Fund Energy ETF

 

US Leads Natural Gas Demand And Supply

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US Leads Natural Gas Demand And Supply
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It’s clear that natural gas demand is heading higher over the next few years. It’s less certain that this will push prices higher. New LNG export terminals are going to double our volumes sent overseas over the next five years. The widely criticized pause on LNG permits that President Biden imposed last January only applied to new projects.

Previously issued permits were unaffected and those construction projects largely continued. The pause did inject uncertainty into contract negotiations for projects that were seeking enough commitments to reach a Final Investment Decision (FID). Japan is one foreign buyer that expressed concern at the time over the uncertainty this created about the US as a supplier.

Incoming President Trump is widely expected to lift the permit pause soon after he’s in office. This will lead to more visibility about export volumes from 2030 and on, given that it’s not uncommon for a new project to require five years to build following FID.

The second source of new demand is from new natural gas power plants to power all the new AI-related data centers that are planned. JPMorgan reported that global gas turbine orders are +33% YoY, driven by demand in Saudi Arabia which is replacing many older turbines with more efficient models, and the US because of data centers. Excluding China orders are +61% measured by GW of output capacity.

Demand for heavy-duty turbines able to provide baseload supply (defined as 100MW of output), is similarly strong.

Continued coal-to-gas switching, our biggest source of reduced CO2 emissions in the US, is a third source of natgas demand.

A google search of, “Is solar power cheaper than gas?” delivers numerous affirmative responses, including Google’s AI result. There are at least that many journalists toiling away in willful defiance of overwhelming evidence to the contrary. Saudi Arabia is a reliably sunny place and they’re driving the growth in gas turbine demand.

In the US, renewables’ advocates routinely overlook the cost of intermittency. In the marketplace for reliable power, solar and wind have no place. The persistent championing of renewables by the International Energy Agency and other progressive commentators denies empirical evidence to the contrary. They’ve helped countless investors create small fortunes from big ones by investing in clean energy. The real money has been made from independent thinking.

It’s clear that demand for US natural gas is headed higher. But even though US gas volumes are set to rise prices, which are perennially among the cheapest in the world, may remain low as supply increases commensurately.

US oil output is likely to rise somewhat. Trump’s new Treasury Secretary Scott Bessent’s “3-3-3 plan” targets 3% GDP growth, 3% deficit to GDP and 3 million barrels a day of new oil production. His ability to influence oil output is limited. For example, Chevron expects this year to be their peak capex spend in the Permian as they prioritize growing free cash flow over production.

Markets still expect some higher production in response to more pro-energy regulation and greater access to Federal land. Increased oil from the Permian in west Texas could add to the supply of associated gas, an unsought companion to the crude that’s produced there.

In their investor day recently, Enbridge raised 2025 EBITDA guidance modestly on the back of organic growth in their natural gas pipeline business which is their major area of focus.

Nuclear power can be part of the solution for new data centers, albeit not until the 2030s given how long new plants require for construction. Small Modular Reactors (SMR) have seemingly been on the horizon for years. However, earlier this year the Department of Energy released a guide to help companies use the sites of retired coal plants for nuclear facilities. This takes advantage of already existing connections to the grid.

TerraPower, led by founder and chairman Bill Gates, recently broke ground on its Natrium SMR project in Kemmerer, WY which would be the first nuclear plant to be situated on a former coal plant. It’ll use molten salt (natrium is the Latin word for sodium) rather than water as coolant, since it has a much higher boiling point.

As Terrapower points out, it is the only “coal-to-nuclear project under development in the world.” Why isn’t the Sierra Club behind efforts like this?

Between increased natural gas and ongoing innovation in nuclear, one day we’ll find we’ve transitioned away from intermittent renewables. Among the many positives will be that wretched little girl Greta being consigned to the dustheap of history.

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

Energy Mutual Fund Energy ETF

 

 

Lemming Leadership

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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

 

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