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.

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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.

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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.

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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.

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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.

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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.

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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

The word of the week is re-rating. Both Wells Fargo and Morgan Stanley have suggested that, notwithstanding this year’s 50%+ return in midstream energy infrastructure, further upside is possible. They posit that a re-rating of the sector would not be unreasonable given the strong fundamentals.

Enterprise Value/EBITDA (EV/EBITDA) is a widely used valuation metric, although my partner Henry correctly points out that this is less useful when leverage varies throughout a sector. By this measure though, MLPs remain below their ten-year average while c-corps, representing roughly two thirds of the investible universe, are at their ten-year average.

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Reasons why fair value might exceed the average include the sharp increase in gas demand for data centers and the secular drop in leverage, which is 3.0-3.5X (Debt:EBITDA) versus 4.0X and higher a decade ago.

The increase in natural gas demand is real. 148 new power plants are under construction or have been announced as of September, up from 133 in April.

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Entergy is building two new gas-fired power plants in Richland Parish, LA for a $5BN Meta data center in nearby Holly Ridge, LA. According to Morgan Stanley, Meta has, “expressed a need for the project to be completed quickly.”

America’s tech giants need more electricity. Nuclear can meet some of this but restarting old reactors takes years. Solar and wind, the choice of climate extremists, are weather-dependent. Natural gas, which already provides 40% of our power, is the best solution. You can still read poorly informed commentators stating that renewables are now cheaper than hydrocarbons. They’re not. The choices data centers are making clearly show that natural gas is the preferred option.

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Midstream companies have also been de-risking their balance sheets. After peaking at 4.1X during the pandemic, leverage has been steadily falling. Reduced capex has helped. Few want to embark on a new greenfield pipeline project anymore. Leverage recently reached 3.2X.

Climate extremists have learned how to weaponize the court system so that interminable delays make completion uncertain and IRR less attractive. Investors like us have come to appreciate the consequent boost to free cashflows even if it’s an unintended result of efforts by the Sierra Club and their motley crew.

Hug a climate extremist and drive them to their next protest.

Some have expressed concern that the incoming administration’s energy mantra “drill baby, drill” will lead to a repeat of the poor investment performance under Trump’s first term. But there’s little evidence that another bout of over-production will depress oil prices, and sanctions on Iran will likely remove at least one million barrels per day from global markets. US natural gas prices are held down by associated gas production from Permian basin oil wells in west Texas and New Mexico. It’s unlikely any E&P company will “drill baby, drill” with reckless abandon for more gas.

Several people have asked us whether the construction of the Keystone XL pipeline will be restarted. A story on Politico said Trump was planning to reissue the permit as part of a raft of energy-related executive orders on his first day in office.

Keystone XL was an expansion of the existing Keystone pipeline intended to solve Canada’s perennial challenge of getting crude oil from Alberta to overseas markets. Because it crosses the border, the US State Department was required to issue a permit.

Back in 2010 a limited permit was granted under Obama with numerous conditions attached. By 2012 with increased sensitivity to climate opposition, Obama canceled it. Trump reinstated the permit upon taking office in 2017, and Biden duly rescinded it four years later. Canada’s TC Energy sued the Federal government for $15BN in damages once they finally threw in the towel.

Given this history, one might think there would be little appetite to start again, especially since construction takes longer than a single presidential term. TC Energy is now principally a natural gas pipeline company, having spun off its liquids business in the form of South Bow. And the Canadian federal government completed TransMountain Express at considerable taxpayer expense after buying it from Kinder Morgan (KMI). An ongoing dispute between Alberta and British Columbia led KMI to conclude that they had no place in the middle of an inter-provincial squabble.

Completed substantially over budget, TMX now moves crude oil to the pacific coast for shipment to export markets. So Canada’s need to find egress for its crude oil is not as acute as several years ago. Our betting is that the reissued Keystone XL permit will provide a welcome change of regulatory intent but won’t lead to any construction.

We just might be in a Goldilocks period for midstream, with the desire to build, baby build due to positive fundamentals tempered by continued financial discipline. Under such circumstances, re-rating doesn’t seem unreasonable.

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.

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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

Sitting next to me at Newark airport on Monday while I waited to board an airplane was an FT reporter. I know this because he made a phone call to discuss the Trump appointments “on background” with a source who, based on one side of the conversation, had recently been in Mar-a-Lago. Chris Wright, Trump’s soon-to-be Department of Energy (DoE) head, was the topic. Yes, the source confirmed, the pause on LNG permits would be lifted as a first order of business. A lighter regulatory touch should be expected.

None of this is news by now, but a DoE head drawn from the energy sector is a remarkably rare event. Jennifer Granholm, the current head, and ignominious architect of the LNG pause, is a former governor of Michigan and Harvard law graduate with no industry expertise or nuclear background.

The DoE website informs that the National Nuclear Security Administration (NNSA) “is a semi-autonomous Department of Energy agency responsible for enhancing national security through the military application of nuclear science.” Oversight of our nuclear deterrence is a not widely appreciated but vital DoE responsibility.

Ernest Moniz, who led the DoE 2013-17 and his predecessor Steven Chu (2009-13) both under Obama, at least shared a background in science. But the DoE hasn’t had an executive from the energy sector since at least 1998.

Incoming DoE head Chris Wright is CEO of Liberty Energy. Their website includes a lengthy presentation called Bettering Human Lives which was worth reading even before Wright’s appointment. It provides a robust and unapologetic justification for being in the hydrocarbon business, some of which we recently highlighted (see Trump Energizes The Pipeline Sector).

Lifting people out of energy poverty so they can cook with propane or natural gas rather than animal dung is closer to doing God’s work than carpeting open spaces with solar panels and windmills. Chris Wright is no climate denier but will approach global warming as one of several huge challenges along with malnutrition, access to clean water, air pollution, endemic diseases and human rights.

Northern India and parts of Pakistan have endured severe smog in recent days, caused by pollution from burning coal. Schools have closed and residents of affected areas have been advised to stay indoors. They are potential beneficiaries of increased US exports of LNG, since natural gas generates around half the CO2 emissions of coal per unit of energy output. The Sierra Club and other far left progressives have nothing useful to say to these people.

Bettering Human Lives is found under the ESG section of Liberty’s website, unashamedly claiming the moniker with better justification than most. Energy investors have correctly responded with enthusiasm to the likely path US energy policy is about to follow.

Increased power demand from data centers has provided support for pipeline stocks this year, since natural gas will be the main source of additional electricity. The number of gas-fired power plants either announced or in development duly rose to 148 in September, up from 133 in April according to S&P Global Platts.

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The map shows most of them in a wide swathe across Texas and into the northeast, in the general area of natural gas production. Although labeled “fossil fuel-fired power plants” they are all natural gas. Coal-burning power plants are being phased out in the US, with the last large one built back in 2013.

Valuations remain attractive, with midstream offering yields of 5% well covered by cashflow. Payouts are rising, companies are buying back stock, leverage is down and valuations still attractive. In our opinion it’s hard to find anything negative to say about the sector’s prospects.

NextDecade (NEXT) had some good news recently, albeit somewhat legally obscure. The U.S. Court of Appeals for the D.C. Circuit ruled that the Council on Environmental Quality (CEQ) wasn’t empowered to issue regulations related to the National Environmental Policy Act. If the CEQ wasn’t top of mind for you, well you’re not alone.

In the summer a panel of the DC Circuit vacated the FERC permit for the construction of NEXT’s Rio Grande’s LNG terminal (see Sierra Club Shoots Itself In The Foot). As a result of the CEQ ruling, NEXT has filed a petition arguing that their permit was wrongly vacated. The entire process is obviously generating healthy legal fees, but more importantly shows signs of heading towards a positive resolution.

Perhaps our incoming DoE head will conclude that the Sierra Club is creating more problems and few solutions with their frivolous lawsuits. It’s time someone took them on.

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.

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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.

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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.

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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%.

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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

As the market absorbed last week’s election results, energy was the clear winner. On the week, midstream infrastructure returned +8.4% while the S&P500 was +4.7%. The main driver of outperformance is the expectation of a regulatory regime not beholden to climate extremists. The pause on LNG export permits will be lifted. Although many expected this to be the case even with a Harris victory, the ascendancy of Trump and the Republicans means that the government will genuinely seek to facilitate more exports.

The outlook for increased oil and gas production is less clear, 90% of which takes place on private land. Opening up more Federal land to drilling might help at the margin, but E&P companies are widely expected to stick with the capex discipline that has prevailed in recent years.

Midstream economics is about volumes, and we just might be headed towards a Goldilocks period of modestly higher domestic production that retains a focus on per share returns rather than volume growth.

3Q24 earnings have come in mostly at expectations with a few positive surprises. Targa Resources (TRGP) raised their dividend by 33% on the back of strong results. Their stock has returned +136% YTD, a figure that looks more like an AI stock than a stable midstream company.

Natural gas demand looks certain to benefit from AI data centers, with unprecedented capacity additions to power generation widely expected. Energy Transfer reported 16 Billion Cubic Feet per Day (BCF/D) of new natural gas demand, although not all these requests will translate into actual volumes. Total US production is expected to come in at around 103 BCF/D this year. Wells Fargo expects Musk to be an influential White House advocate on AI.

Cheniere once again beat expectations with 3Q EBITDA of $1.48BN, ahead of the $1.41BN consensus number. They raised their FY2024 guidance again and increased their dividend by 15%. The Corpus Christie LNG export terminal loaded its 1,000th cargo in September, bound for Italy. Along with their Sabine Pass facility, they’ve loaded 3,720 cargoes over the past eight years.

It’s also worth noting that while the Democrat climate change agenda didn’t resonate with voters as much as other issues such as immigration or the economy, European buyers of US LNG exports are very climate conscious. Consequently, Cheniere announced steps to achieve the highest standards of methane emissions, recognizing its importance to some of their buyers.

Williams Companies met expectations. Their 3.4% dividend is 2.2X covered by adjusted funds from operations.

The sector remains cheap, as measured by Enterprise Value/EBITDA. 2025 distributable cash flow yields are generally >9% with 10% growth expected 2025-26.

The Trump impact on crude oil prices is hard to gauge. Some additional US production may simply offset less exports from Iran as the incoming administration tightens sanctions. US intelligence found that Iran was trying to assassinate Trump during the election. It’s usually best to be successful in such attempts. “When you strike at a king, you must kill him” is attributed to Ralph Waldo Emerson.

In his first term Trump squeezed Iran with sanctions, and this time around will be similar.

Russian oil has generally been getting to buyers, albeit at discounted prices. Crude notably weakened in the days following the election. Oil prices have decoupled from the pipeline sector, reflecting different economics and reduced midstream leverage.

US natural gas prices should move higher. LNG exports are already set to double over the next five years as new terminals are completed. Going from 12-24 BCF/D will mean almost a quarter of US output is going overseas. And Trump has promised an improved regulatory environment, which will help although the legal system remains a tool for climate extremists to impose delays and uncertainty.

NextDecade rallied strongly following the election. Phase 2 of their development will now be freed of the LNG export permit pause that the Biden administration imposed early in the year. The more immediate challenge is for FERC to issue a revised Environmental Impact Statement after a DC circuit court rejected the one in hand (see Sierra Club Shoots Itself In The Foot).

The US badly needs to reform its permitting process to prevent climate extremists from finding a liberal judge to overturn issued permits on an environmental technicality. This will require Congressional action, and while both parties should be able to find areas of agreement, the outlook is unclear following the election.

The COP29 climate conference begins this week in Baku, the capital of Azerbaijan, a major exporter of hydrocarbons. The US is expected to withdraw from the Paris Agreement, the third time the US has left a global climate accord.

Two thirds of Azerbaijan’s GDP depends on hydrocarbons, so it takes an especially gullible liberal to believe that country has a sincere interest in reduced global emissions. China continues to persuade apologists to overlook their enormous coal consumption (>55% of the world’s total) and instead praise their huge commitment to solar and wind. China is more correctly viewed as increasing their reliance on domestic energy sources, both renewables and hydrocarbon.

Increased US LNG exports will continue to help the planet by displacing coal consumption.

In our opinion, US natural gas infrastructure remains in the sweet spot of investment opportunities following the election.
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.

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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.

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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.

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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”.

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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.

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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.

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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.

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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.

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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.

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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

Performance in the pipeline sector remains strong – closing in on its fourth straight year beating the S&P500 and ahead overall for the past five. But for the past six months the Alerian MLP Infrastructure ETF (AMLP) has increasingly lagged the sector, as defined by the American Energy Independence Index.

AMLP is more or less tracking its index, the Alerian MLP Infrastructure Index (AMZIX), although taxes are opening up a gap here too. It’s 2.4% behind over the past year through September. Over 4% of its NAV is set aside for future taxes.

Between December 2022 and June 2023 AMLP took two NAV adjustments as their accountants revised their tax calculations (see AMLP Trips Up On Tax Complexity and AMLP Has Yet More Tax Problems).

Being a tax-paying ETF is complicated. Those two adjustments added up to over 6% of NAV.

Last year AMLP cut its distribution (see AMLP Fails Its Investors Again) even though MLPs were raising payouts.

But the problem is that the AMZIX index which AMLP tries to track represents a shrinking subset of midstream infrastructure, since it’s limited to MLPs. AMLP labors under the same burden.

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The boom in data centers to support AI is driving electricity demand up. Nuclear power is enjoying a renaissance with several of the Fabulous Five announcing plans to rely on dedicated nuclear plants to provide electricity to their new data centers.

These are positive steps for everyone outside of the Sierra Club with its dystopian vision for humanity. But these new sources of nuclear power won’t be available until well into the next decade.

In many regions of the US grids are revising their ten-year demand outlook from 0-1% pa to 5% pa or more. Natural gas is the only plausible solution, since data centers need to run 24/7 not simply when it’s sunny or windy.

This realization has boosted midstream infrastructure. Williams Companies (WMB) CEO Alan Armstrong recently told investors, “… we frankly are kind of overwhelmed with the number of requests.”

WMB is up over 50% YTD as they recalibrate demand across their extensive natural gas pipeline network.

MLPs generally haven’t enjoyed the same uplift, because they tend to be more focused on liquids than gas. In recent years many MLPs converted to c-corps, the conventional corporate form for US businesses, so as to eliminate K1s in favor of 1099s. They concluded that making their stock available to all buyers of US equities and not just those willing and able to invest in partnerships was worth foregoing the tax efficiency of the MLP structure.

Natural gas MLPs have had an additional incentive to convert to corporations since 2018 when the Federal Energy Regulatory Commission (FERC) issued a ruling that impeded their ability to incorporate tax expense in their calculation of tariffs for cost of service pipelines.

Prior to 2018 natgas MLPs could include in their cost of service calculations an estimate of the taxes paid by their MLP unitholders. Of course they didn’t actually know what those taxes were, so they made a good faith estimate. Then FERC reversed the rule. Faced with a less generous rate-setting regime, most converted to c-corps.

As a result, there aren’t any pureplay natural gas pipeline MLPs although some like Energy Transfer do operate gas pipelines within their mix of businesses.

As MLPs have become less representative of the midstream sector, so has AMLP. Its relative underweight to natural gas pipelines means it has missed out on the AI-driven rally such stocks have enjoyed. Global sales of gas turbines are forecast to be up 5% this year, driven by the need to power data centers, EV sales and to compensate for intermittent solar and wind. Midstream energy is seeing the benefits of this.

In other news, FERC rejected a plan by Talen Energy’s Susquehanna Nuclear facility to provide power to Amazon data centers. The regulator felt there was some risk that rates could rise for other customers on the PJM grid. This setback is unique to the Talen plant and doesn’t affect plans announced by Microsoft and Google to rely on nuclear power for their planned data centers.

In a note on Monday Wells Fargo predicted this could shift gas demand to Texas, where unlike PJM their ERCOT grid operates outside of FERC regulatory oversight. The net result is that the demand outlook for natural gas continues to be robust.

The impact from AI is rippling unevenly across midstream, benefiting natural gas c-corps but not liquids-oriented MLPs.

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

Energy Mutual Fund

Energy ETF

An axiom of capitalism is that a business must earn a Return On Invested Capital (ROIC) in excess of its Weighted Average Cost of Capital (WACC). It’s just as true for a lemonade stand as for a conglomerate.

I should note here that fifteen years ago our younger daughter (then about nine years old) set up a lemonade stand at the end of our backyard on the 12^th tee at our golf club. Due to the generosity of the golfers passing by she earned an excessively high ROIC. This should have invited competition, but she sensibly took early retirement, concluding that capitalism wasn’t that complicated.

Wells Fargo recently updated their estimates of ROIC for midstream energy infrastructure companies. Results varied widely. They define this as capital invested versus change in EBITDA over rolling five-year periods. It’s not a perfect measure – for example, it excludes the management of existing assets. And a project that was funded at the end of the five years will generate future EBITDA not captured in the calculation.

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Nonetheless, over time it offers a decent measure of how effectively management teams are making capital allocation decisions.

The first chart compares returns with cost of capital, or ROIC against WACC. Less risky businesses in theory enjoy a lower WACC, allowing them to profitably invest in lower return projects. The bigger the gap between ROIC and WACC, the happier the investors are. Cheniere (LNG) stands out as earning their owners a substantial return. Williams Companies (WMB) and Targa Resources (TRGP) are also very good.

At the other end, Kinder Morgan’s (KMI) capital allocation earned an inadequate return.  The calculation for Plains All American (PAA) shows that their projects generated negative EBITDA, although this was more accurately the result of lower fees on Permian oil pipeline tariffs when they negotiated new rates.

Five years may be too short a time to judge. But Wells Fargo shows that skill in capital allocation seems to be persistent, in that for KMI and PAA, the results don’t look much better over the past decade either. When these companies talk excitedly about the growth projects they’re planning to finance, the non-fawning analyst might enquire whether their track record justifies such enthusiasm.

Of course, a business can perform well because of great returns from assets it already owns. The weak capital allocators in recent years are being supported by better decisions made long ago by their predecessors on the management team.

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One would expect that proficiency in capital allocation drives longer term returns, and the second chart shows that’s generally true.

Targa Resources (TRGP) is the standout here. Five years ago TRGP was often criticized for its capex plans at a time when most companies were cutting spending after several years of poor returns. We were among the critics (see When Will MLPs Recover?).

In November 2019 we wrote, “Former CEO Joe Bob Perkins flippantly talked about new projects as ‘capital blessings’. Investors won’t miss his self-serving arrogance.”

It turns out that those decisions were on balance good ones. However, the same math showed that over the prior decade 2009-19, TRGP’s ROIC on capex ranged between 3% and 6%, so our skepticism was well founded. They showed that results can improve, although it’s uncommon.

One of TRGP’s best decisions was in 2018 when they took a majority stake in the Grand Prix NGL pipeline. By bringing NGLs from the Permian in West Texas to their Mont Belvieu processing facility and Galena Park export terminal in Texas they became more vertically integrated. In January 2023 they took complete control of Grand Prix by acquiring Blackstone’s remaining 25% interest.

Cheniere has both the best spread of ROIC vs its WACC as well as the highest overall ROIC. Completing projects on time and under budget helped. Cheniere also profited from the jump in global natural gas prices following Russia’s 2022 invasion of Ukraine.

Cheniere is benefiting from substantial capex in prior years. Their export terminals require comparatively little spending on upkeep. Their maintenance capex as a % of EBITDA is consistently at the low end of their peer group, which feeds through into a higher ROIC.

TC Energy was hurt by cost overruns on their Coastal Gas Link pipeline in Canada and spending on the proposed Keystone XL crude pipeline, which President Biden canceled in January 2021 shortly after taking office.

Looking ahead, Wells Fargo generally expects history to repeat, Differentiating among companies based on their capital allocation is one of the most important variables to consider in constructing a portfolio.  We expect the industry to continue delivering good results on this metric.

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

Energy Mutual Fund

Energy ETF

The pause in issuing new Liquefied Natural Gas (LNG) permits is among the least defensible energy policies of this Administration. It has been widely criticized. Jamie Dimon called it naive, and the International Energy Agency worries that it will impede the supply of natural gas on global markets.

The US Department of Energy (DOE), which grants LNG export permits, has published studies (2014 and 2019) which concluded that when buyers of LNG use it to switch away from coal for power generation, it reduces global Green House Gas emissions (GHGs). Coal use is widespread in developing countries and is increasing along with overall electricity demand.

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Non-OECD countries represented 85% of global coal consumption last year, up from 82% in 2022. China is 56% of the global total, where it is by far their biggest source of primary energy.

In the hunt for votes, the White House dropped careful analysis in favor of pandering to climate extremists and granting the permit pause they’d long sought. LNG exports allow us to support our friends and allies with cheap, reliable energy, so are in our national interest. But even if you’re a far left progressive with little care for such things, they also reduce global emissions.

Climate extremists focus on the wrong things, like banning new natural gas connections in New York. Their opposition to LNG exports harms the climate. The following math shows why:

The US Energy Information Administration (EIA) estimates that a coal-burning  power plant generates 2.3 lbs of CO2 per Kilowatt Hour (KwH) of electricity, compared with 0.97 lbs for a natural gas power plant. Converting to metric, since GHGs are measured in Metric Tonnes (MTs), this is 1,044 grams for coal and 440 grams for natural gas.

Incidentally, in researching this I was interested to learn that virtually all the carbon atoms in natural gas (methane, CH4) attach themselves to oxygen when burned, creating CO2 in approximately the same volume as the methane that was used. CO2 is around 30% heavier than methane, both of which are denser than air*.

Returning to electricity – per KwH of power generation natural gas produces 604g less CO2. According to the EIA, it takes 7.42 cubic feet of gas to generate 1 KwH of power. So each cubic foot of gas reduces CO2 emissions by 81g (604/7.42) assuming it displaces coal in power generation.

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The US currently exports around 12 Billion Cubic Feet per Day (BCF/D) of LNG. Maintaining the assumption that this gas is being used instead of coal, 81g  X 12 billion X 365 days means that our exports are reducing CO2 emissions by 356 million MTs annually.

Among non-OECD countries this is closest to the annual CO2 emissions of Vietnam (328 million MTs). Over the next five years our LNG exports will double, in spite of the LNG permit pause, because of LNG export terminals already approved and under construction. At that level the CO2 benefit will be almost equal to Indonesia’s emissions of 692 million MTs.

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Most of the drop in US CO2 emissions over the past 15 years is because of coal-to-gas switching. US LNG exports offer the potential to spread that success to other countries. Climate extremists may argue that there’s no guarantee buyers of LNG will use it to reduce coal consumption. But it wouldn’t be hard to make this a condition of export approval.

Moreover, coal emits other local pollutants including nitrous oxides and sulfur dioxides which cause lung damage and lead to millions of premature deaths. So the benefits of natural gas are more than just the 58% reduction in CO2 emissions.

Some may point to methane leaks from gas production as weakening the case. But US standards are higher than elsewhere. We are the leader in having the lowest leaks per unit of production. The world benefits when countries buy from America rather than from another country with lower standards.

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Climate extremists such as the Sierra Club and that wretched little girl Greta regularly push for policies that are impractical and will reduce living standards, most especially for people in developing countries. They have an outsized influence over the Democrats, which allows their poorly conceived ideas to sometimes escape into the light of day.

The US has already achieved substantial success in reducing emissions while renewables have remained an inconsequential part of our primary energy.

Texas is the country’s biggest user of windpower and Florida is 3^rd in solar. Massachusetts imports LNG because it won’t allow new gas pipelines and California combines the highest electricity prices bar Hawaii with the least reliable grid.

Red states have more coherent energy policies than blue ones.

Betting on a shift to pragmatic energy policies has been the key to superior returns. We think that will continue to be the case. Long natural gas infrastructure and short renewables has worked for years.

If Kamala Harris loses next week, the influence of climate extremists will not be missed.

*A blog reader offered this detailed chemical analysis which is shown in full:

The mole balance equation for burning nat gas is pretty simple as there is only one carbon atom on both sides of the equation, which means (assuming complete combustion), each mol of CH4 generates 1 mol of CO2.

At standard temperature (0 degrees C) and pressure (sea level), all gases have 22.4 L of volume per mole, so the volumes of CH4 and CO2 should indeed be the same (assuming complete combustion). 

I am pretty sure that H is 1 g/mol, C is 12 g/mol, O is 16 g/mol, and N is 28 g/mol, so:

Methane (CH4) is 16 g/mol

Carbon Dioxide (CO2) is 44 g/mol

Each g of Carbon will emit 44/12 = 3.67 g of Carbon Dioxide if fully combusted. 

Air, which is roughly 80% N and 20% O is 29 g/mol

CO2 is roughly 50% heavier (denser) than air and natural gas is roughly 50% lighter than air, when all are at standard temperature and pressure. 

I believe the CO2 is considerably less dense upon emission because of the heat produced by combustion, but CO2 is still technically denser than air and almost 3x the density of CH4.

I think the EIA publishes that the average US gas-fired power plant consumes 7,730 Btu of energy per kWh and US nat gas contains on average 1,040 Btu / ft^3.

That means it takes 7.4 ft^3 of nat gas to generate 1 kWh. There are 3.28 ft / m, so 7.4 ft^3 = 211 L of nat gas to generate 1 kWh of electricity.

I think that the EIA uses 60 degrees F or roughly 15 degrees C (288 degrees K) for its reporting, so you adjust the volume of one mole of gas by 288/273 x 22.4 = 23.6 L, so I think that the density of nat gas is reported by EIA is 16/23.6 = 0.68 g / L, which means it takes 8.9 moles of of CH4 with 143 g of mass to generate 1 kWh of electricity.

The 8.9 moles of nat gas should produce 8.9 moles of CO2 with density of 44 g/mol = 392 g CO2. 

Pretty close to your number of 440 g. 

The math is a bit trickier for coal, because coal typically has a mix of long chain carbon molecules and various impurities, but I think thermal coal, which is now mostly Chinese coal, has on average energy density of roughly 19 MJ / kg and contains about 52% carbon by mass. 

The EIA reports that the average US coal-fired power plant consumes 10,500 Btu per kWh of electricity. At 948 Btu / MJ, that is 11 MJ or 11/19 = 0.58 kg of coal consumed per kWh. 

At 52% carbon content, that would be 0.30 kg of carbon generating 0.30 x 44 / 12 = 1.10 kg of CO2. 

Pretty close to your 1,044 g.

Note that natural gas energy density of 1,040 Btu per ft^3 translates into 57 MJ/ kg, which is 3x coal’s energy density of 19 MJ/kg. 

1,040 Btu/ft^3 / 948 Btu/MJ = 1.1MJ/ft^3

1.1 MJ/ft^3 x (3.28 ft/m)^3 = 38.7 MJ/m^3

38.7 MJ/m^3 / 0.68 kg/m^3 = 57 MJ/kg

The two simple reasons why natural gas produces 65% less CO2 that coal:

1) Natural gas has 3x the energy density of coal (57 vs. 19 MJ/kg).

2) Natural gas burns 36% more efficiently than coal: 7,730 vs 10,500 Btu input energy per kWh (3,412 Btu) of electricity produced.

As an aside, some people are concerned that fugitive methane emissions might change this answer, but the data from the EIA and the Energy Institute shows that coal production and processing actually generates more fugitive methane emissions per unit of useful energy than natural gas production and processing.

According to the IEA, in 2023 natural gas production and processing generated 29 Mtpa of fugitive methane for 144 EJ of primary energy, which is 0.20 g CH4 per MJ of primary energy.

Coal production and processing generated 40 Mtpa of fugitive methane emissions for 164 EJ of primary energy , which is 0.24 g CH4 per MJ of primary energy, 20% more than natural gas. 

Because coal requires 36% more primary energy that natural gas to generate a kWh of electricity, coal produces 0.74 g of fugitive methane emissions per kWh of coal-fired electricity. 

That is 64% more than the 0.45 g of fugitive methane emissions from natural-gas fired electricity.

Using the IPCC’s recommended 100 year Global Warming Potential values of 29 for CH4 and 1 for CO2, the 0.74 g of CH4 from coal-fired electricity translates into 21.5 g CO2 equivalent and the 0.45 g of CH4 from gas-fired electricity translates into 13 g CO2 equivalent.

After factoring in fugitive methane emissions, coal-fired power emits 1.13 kg CO2e / kWh, which us 2.8x the 405 g of CO2e per kWh of gas-fired electricity.

After factoring in fugitive methane, gas-fired electricity has 64% less CO2 equivalent emissions then coal-fired electricity. 

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

Energy Mutual Fund

Energy ETF