Forty years ago, when I was trading eurodollar interest rate futures, it was routine to respond to a sudden unexplained move in the market by calling the floor of the CME and talking to our broker. Caught up in the excitement of the loud heaving mass of brokers and locals in the pit*, he would breathlessly explain that, “Refco came in to sell 10,000 and Goldman followed with 15 after that. Cargill pulled their bid and it was all offered.”

This nugget of market intelligence was somehow intended to help guide me as I managed our interest rate risk. The broker was telling me what happened but had no idea why. This market color was almost completely useless, but somehow the broker and I felt that we were better off sharing the information.

Sometimes it feels like that when explaining moves in the energy sector. Prices fluctuate, and often out of all proportion to developments. There can be days with little news of importance, and yet pipeline stocks react as if there was.

Last week was one of those times. We recently highlighted the low correlation between energy and the overall market (see Midstream Dances To A Different Tune). There’s a great AI story for midstream since data centers will rely principally on natural gas to generate power. But it’s still a value sector, and the emotional turbulence of growth investors remains dominant.

The low correlation between energy and the market means their daily moves are less in sync. February showed this dramatically: midstream and the S&P500 moved in the same direction on fewer than half the days of the month. In other words, a bad AI day was more likely than not a good day for midstream.

Over the past decade, changes in the American Energy Infrastructure Index (AEITR) have matched the market’s daily direction over two thirds of the time. Last month it was only 37%, 7 out of 19 trading days. It’s as if when AI stocks are down traders rush for the security of midstream with its stable cash flows. When AI stocks are up they dump these slow moving cash machines. I doubt such manic behavior is very satisfying or profitable.

The driver of returns in energy lies outside the sector.

Midstream wasn’t completely the marionette to the AI puppeteer. Cheniere reported strong earnings, repurchasing $1BN in stock during 4Q25, more than expected, making it $2.7BN for the year. They also announced authorization for $10BN more in repurchases through 2030.

Cheniere expects Asian LNG demand to grow at 12-15% through 2030, which would take it from 270 Million Metric Tonnes (MMTs) to 400. Global LNG trade last year was around 430 MMTs.

Nonetheless, we think Cheniere’s buyback program suggests their capex plans may slow somewhat, a development welcomed by investors concerned about excess capacity among LNG exporters in the years ahead. Cheniere rose over 5% on Thursday following their earnings release and conference call.

Kinetik (KNTK) is an acquisition target of Western Gas (WES), and the interest has prompted KNTK to explore a sale process, inviting other companies to make proposals. The stock has rallied 14% since the news of WES’ interest first broke.

The American Energy Infrastructure Index (AEITR) is +20% YTD and the S&P500 is flat, approximately reversing last year’s relative performance (+2% and +18% respectively).

Regular readers know we often refer to the American Energy Independence Index. We started publishing it in 2017 because we recognized that the market was missing a truly representative index for midstream energy infrastructure, one that wasn’t dominated by Master Limited Partnerships (MLPs) but also didn’t omit them entirely.

The AI revolution is boosting the demand for natural gas to generate power, benefiting those midstream companies that focus on gas. America’s shale revolution is also creating more opportunities to export Liquefied Natural Gas (LNG). The large price difference between the US and overseas markets is driving a substantial increase in US liquefaction capacity to meet foreign demand.

These two trends are more beneficial to midstream gas companies than those focused on oil, and investors are recognizing the opportunity to benefit from these twin growth stories. Therefore, we have modified the AEITR to become the American Energy Infrastructure Index, with an overweight towards names that we believe will benefit from increased gas consumption for power and LNG exports. The ETF that seeks to track this index will similarly rebalance at the end of the first quarter.

We are long term bulls on US natural gas consumption. Our index and our investments are aligned with this outlook.

*for those too young to remember, the Chicago futures exchanges were once cavernous rooms with several “pits”, consisting of ledges arranged in an octagon that descended in steps towards the center. Brokers were arranged around the periphery where they could easily see and communicate with their colleagues on the phone with clients, and locals (independent market makers) were within although the best spots were near the brokers executing the biggest volume. In this tightly packed environment, physical heft offered a commercial advantage. It’s now all computerized and impersonal.

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

Energy Mutual Fund

Energy ETF

The performance of midstream last year didn’t align with the fundamentals. This is clear when you consider the periods either side (2024 and 2026YTD). Last year, the sector lagged and many investors became frustrated with the underperformance versus the S&P500, which really means versus the big AI hyperscalers.

In 2024 midstream investors grasped the need of data centers for more power, and how this would inevitably lead to increased natural gas demand since it’s cheap, reliable and abundant in the US.

Companies such as Williams (WMB) developed Behind The Meter (BTM) solutions under which a dedicated gas supply feeds a power plant that provides electricity to the data center. This avoids connecting through the grid and potentially driving up prices for all consumers, an issue that’s drawn much unwelcome attention recently.

Oddly, this positive sentiment didn’t persist into 2025 in spite of the AI story leading the overall market higher. Data centers still needed power and the role of gas-oriented midstream companies such as Energy Transfer (ET) and Kinder Morgan (KMI) in providing BTM solutions.

Not that many years ago, the big IT firms were sitting on enormous cash piles and faced pressure from investors to deploy or return it. The AI revolution has at least provided a use for some of that cash.

This year’s concerns about spending have caused sector rotation from growth to value. Midstream, along with energy stocks more broadly, has benefited. Over the past year or so, midstream performance has been driven by sentiment shifts leading to sector rotation more than changing fundamentals for the pipeline sector itself.

The result is that the correlation between the American Energy Infrastructure Index, representing the midstream sector, and the S&P500 has been falling over the past year, defined here using daily returns over the prior month. This year at times it’s been negative, and it’s fair to say that midstream and the stock market have no meaningful correlation.

Fundamentally, it shows that the concern about returns on AI-related capex doesn’t extend to the companies who will provide the natural gas infrastructure to power centers. Hyperscalers are expected to spend $450BN on AI capex this year. But BTM deals will typically require long term contracts that ensure an adequate return on the infrastructure, similar to the take-or-pay contracts commonly used for pipeline capacity.

It means midstream can act as a useful diversifier in a portfolio. The underlying fundamentals are strong, but in addition it’s not that exposed to the shifting sentiment among growth stock investors.

The low correlation with the market is less useful when overall returns are strong. But the tide is shifting as concerns grow about the scale of the hyperscalers’ capex plans.

Technology has been highly correlated with the S&P500, at above 0.8 for the past several months and often above 0.9. Energy along with the pipeline sector has generally not been correlated. This frustrated investors when tech stocks were hot, but it’s now turning out to be a more valuable feature.

For long term performance, the Targa Resources (TRGP) chart is quite a sight. My partner Henry and I have often debated the merits of this position. In late 2020 I flippantly called TRGP a “perennial misallocator of capital” (see Pipeline Buybacks and ESG Flexibility) as they initiated a buyback program with the stock price at $15 (Friday’s close was $231).

Former CEO Joe Bob Perkins frustrated many investors when he dismissed critics of their capex plans, saying their opportunities were really “capital blessings.”

Fortunately for our clients, Henry’s articulate defense of retaining our TRGP position was invariably convincing.

At the worst of the pandemic, TRGP lost 86% of its value from its previous high two years earlier. It subsequently rebounded to 38X that level. TRGP has developed a vertically integrated business in the Permian basin focused on natural gas and natural gas liquids (i.e. ethane and propane).

In early 2023 they acquired the remaining 25% of the Grand Prix NGL pipeline in Texas that they didn’t already own from Blackstone. Full ownership allowed them to improve their margins. Their stock is up 3.5X since then. Their quarterly dividend has grown from $0.35 to $1, although given the stock performance this still leaves it with paltry 1.8% yield.

But in recent years they’ve been buying back stock in similar amounts to their dividend payout. Last year they spent $755MM and the prior year $642MM. Distributable cash flow growth is solidly in the teens.

TRGP is quite a story.

Last week we had the opportunity to catch up with long-time friend and investor Dave Pasi and his charming wife Diane. At the risk of upsetting our friends up north, al fresco dining is thriving in Naples, FL. Dave was pushing his clients to add to their midstream positions last year, advice that looks especially good right now.

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

Energy Mutual Fund

Energy ETF

Williams Companies’ (WMB) youthful President and CEO Chad Zamarin gave an inspiring presentation to kick of their Investor Day last week. He described US energy infrastructure as a blessing, and natural gas as our competitive advantage. Zamarin traced the company’s origins back to World War II, when German U-boats were sinking US ships transporting fuel from the Gulf to New York, imperiling the war effort.

The construction of War Emergency Pipelines was contracted by the Federal government, and within a year fuel was moving by pipeline from Texas to New York. Zamarin thinks we need a similar sense of urgency today around infrastructure. For example, their Atlantic Sunrise project went into service in 2018, but 13 years of litigation surrounding the project only finished last year.

John Williams led Williams Brothers, founded in 1908 and one of the key construction companies on the war-time project. D-Day might not have been possible without it, and naturally Williams subsequently saw combat with the D-Day landings.

After the war, Williams Brothers moved from construction to pipeline operations and became Williams Companies. Cementing his legacy as a member of the Greatest Generation, the pipeline John Williams built is still in service today, showing the long-lived nature of midstream assets when properly maintained.

In 1947, the pipeline was sold by the Federal government to Texas Eastern Transmission, now a subsidiary of Enbridge. Chad Zamarin tells the 118-year story of Williams Companies like a political candidate, and at 48 has plenty of runway ahead of him if he ultimately runs for public office. He described their financial goals as not an aspiration but a destination.

This sector needs inspirational leaders, and Zamarin can marshall solid fundamentals into a compelling vision.

Having chronicled the company’s history, Zamarin walked through the strong fundamentals underpinning the natural gas business. Powering data centers and LNG exports are the two big drivers of natural gas demand, along with resurgent US manufacturing due to cheap domestic energy. Natural gas demand is expected to rise by 35% over the next decade.

The doubling of US gas production so far this century is the most important change in the global gas market. We surpassed Russia as the biggest producer fifteen years ago and now hold a 25% market share.

Gas is cheap and energy dense, which is why we often note that the true energy transition in the US is the one towards natural gas, whose output has grown 8X as much as renewables on an energy equivalent basis since 2000. It’s by far our most important source of power generation. Following Russia’s invasion of Ukraine, the US doubled LNG exports to the EU. No other country could do that.

WMB builds energy infrastructure, and Zamarin pressed the case for permitting reform which has widespread industry support but is still short of votes in Congress. He noted that winter gas prices are significantly higher in New England than the rest of the nation, a result of regional constraints on new infrastructure that raise prices for consumers.

In the Q&A in response to a question about the importance of permitting reform, Zamarin cited gas prices in New England that reached $200 per Million BTUs, more than 50X the price in gas-producing Pennsylvania. He argued that price spikes in gas are caused by inadequate infrastructure.

China produces more than 2X the electricity as the US, up almost 10X over the past quarter century. The global AI race will turn on who has the cheapest, most accessible electricity for data centers. This makes improved access to natural gas a national security imperative.

You’d expect the CEO of a gas pipeline company to make this argument. But it’s one that’s likely to find support in Washington, and as investors, we find the tailwind of regulatory support another reason to commit capital to the sector.

Over the years we’ve found that forecasts of natural gas demand have been consistently too low. Many have lazily bought into the narrative that electricity generation from renewables undercuts traditional power, in spite of abundant evidence from Germany, the UK and California among others that when climate change dominates energy policy, consumers pay more.

The result is that gas demand forecasts keep getting revised up. They’re probably still too low. Apart from the US, the world has barely begun to displace coal with gas for power generation. This has been our biggest source of emissions reduction, and while US policy currently dismisses greenhouse gases as a problem, many other countries disagree.

As countries buy more US LNG to reduce their coal consumption and fight climate change, this White House should retain enough intellectual agility to have no problem supporting that.

The US natural gas story remains compelling, and we think WMB represents a good way to gain exposure to it.

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

Energy Mutual Fund

Energy ETF

The other day I was chatting with a retired friend about the inflation rate he should assume when analyzing his investment portfolio and its ability to fund his retirement. The Fed’s stated inflation goal is 2%, so my friend felt that 3% was a conservative assumption.

There are several problems with using the CPI to estimate future living expenses, described in prior blog posts (see Why Keeping Up With Inflation Isn’t Enough, Why Inflation Isn’t What You Think and Economists Having Fun With Inflation).

These blog posts and others explain that inflation statistics are based on a basket of goods and services of constant utility. They strip out the quality improvements in the products and services we buy that steadily raise living standards. Simply keeping up with inflation means not participating in the improved quality of life.

Today’s median household income gives you a better standard of living than the one from a decade ago. Keeping pace with inflation isn’t enough, even though for many retirees that’s a challenging goal after taxes. Assuming your living expenses will grow in line with median household income is a better bet. Over the past quarter century, that’s 2.9%, slightly ahead of inflation at 2.7%.

Readers of this blog are not representative of the broader population. You are on average richer, smarter, older and more politically right-leaning than the rest of the country. And, in my personal experience, unfailingly good company too. You’re well above the median household income. Unfortunately, it turns out that for higher percentiles, income, and therefore you can assume consumption, is growing faster than the median.

My new toy ChatGPT suggests many adjectives for Naples, FL, where we live. I especially like sun-drenched, refined, affluent and idyllic. It is therefore a completely unrepresentative town, and retirees here face an even greater challenge in maintaining their lifestyle.

Income dispersion is increasing, and it is boosting the cost of what 95^th percentile households buy faster than the median, and well ahead of the CPI.  Dining out, first class airfares, country club memberships and tickets to live concerts are all reported to be noticeably higher than a year ago. Flying private is up 28% since 2020, although not your blogger’s problem. Call it the Naples Conundrum. The higher your income percentile, the higher the inflation rate in your own consumption basket of goods and services.

The Naples Conundrum is a lighthearted way to illustrate an important consideration for anyone in retirement. You should assume that your expenses will grow faster than CPI and at least as fast as household income. You should further consider that increasing income dispersion will make it harder to stay at the same percentile.

The problem has become more acute. Inflation over the ten years to 2024 (aligning with the most recent household income data) was 2.9% versus 2.7% over the past 25 years. Median household income grew at 4.1% (versus 2.9%). But for the 95th percentile it grew at 5.3% (versus 3.7%).

The income data is from ChatGPT, but because different AI models can provide different results, I also looked at Grok which found a 4.4% ten year income growth rate for the 95^th percentile of households.

On top of all this, the future retiree needs to consider what our relentless Federal fiscal profligacy means for long run inflation. As this blog regularly argues, the reliable solution to excessive debt has historically been currency debasement through higher inflation. Few would confuse President Trump with a hard money man. His views on Fed policy are well known.

With Federal interest expense over $1TN annually, lower rates could help (see Monetary Policy Is Increasing The Deficit). Higher inflation would better accommodate rates on our debt below inflation (i.e. negative real rates). It’s easy to criticize this as a misguided policy, but what’s important is to assess its likelihood and consequently the impact on inflation and investment returns.

I think 4% inflation is more likely than 2%. If the Fed began targeting stable inflation around 3%, they’d find many economists cautiously supportive.

As far as what a saver should assume for the increase in their living expenses to preserve their relative standard of living, 3% would seem to be the low end of the range. 4-5% is more appropriate.

Some might respond to this by thinking they need to generate higher returns from their portfolio, meaning take more risk. However, this would be flawed thinking. Assets don’t return more just because you need them to. A higher return requirement doesn’t alter the return set available. Adopting a riskier portfolio can also increase the probability of significant underperformance.

For some, delayed retirement and working longer may be the answer.

Alternatively, and as we’ve noted before (see Inflation Protection From Pipelines), midstream energy infrastructure with the prevalence of inflation-linked contracts is, we believe, better situated than most sectors to offer protection against higher inflation.

Think of it as the Naples Solution to the Conundrum.

Last week we had the opportunity to catch up in San Juan, Puerto Rico, with Jerry Szilagyi, owner of Catalyst Capital Advisors our mutual fund partner. We’ve been in business together for eleven years, and Jerry along with his team have been great partners. This summer they’ll be celebrating the company’s twentieth anniversary, and we’re looking forward to being there with them.

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

Energy Mutual Fund

Energy ETF

January was a good month for midstream energy infrastructure. The American Energy Infrastructure Index was +9%, the 10^th best month of the past decade and the best since November 2024. For those who like simple statistical patterns, over the past ten years the direction of January’s performance has correctly predicted the full year 70% of the time.

Put another way, annual performance and January’s are both usually up.

Energy is back in favor. The S&P500 Energy Sector (XLE) was +14% last month. Exxon Mobil (XOM) and Chevron (CVX) represent 42% of its holdings, and investors have been encouraged by rising oil production even with soft prices. Continued efficiency improvements are boosting sentiment, perhaps helped by signs that CVX can increase Venezuelan oil output without following the White House’s desire that they ramp up capex there.

XLE fund flows were consistently negative last year. Perhaps the strong start to the year will draw in buyers to upstream and midstream who like to see good price action before committing capital. Over the past twelve months it’s now beating the market.

The news for midstream was generally good in January, although to us the sparkling performance was a belated recognition of the already positive fundamentals. ChatGPT guided me to a wildly bullish article from an obscure website (see The Gilded Age of Infrastructure: Why 2026 is the Breakout Year for US Midstream and Energy).

Venture Global stood out at +43%, buoyed by a positive arbitration outcome (see Energy Leads The Market). Energy Transfer responded to the strong seasonal pattern that usually boosts MLPs. Even though Winter Storm Fern doesn’t seem to have created the type of energy market dislocations seen five years ago that netted them $2.4BN, ET held on to the gain registered in anticipation.

Last week Abu Dhabi’s state oil company ADNOC added 7.6% to its stake in Phase Two of NextDecade’s Rio Grande LNG export terminal. ADNOC acquired the stake from Global Infrastructure Partners by exercising an option they acquired back in May 2024 when they invested in Phase One.

ADNOC is presumably pleased with the progress to date.

Natural gas oriented capex plans from Kinder Morgan and Energy Transfer were both positively received. The underlying demand from LNG exports and power generation for data centers is no less compelling than for the past couple of years. But perhaps when hyperscaler Microsoft can shed in value half the midstream’s entire market cap, as the stock did following earnings on Thursday, it can reflect favorably on an un-hyped sector.

Although Winter Storm Fern didn’t result in the widespread loss of power that Uri caused five years ago, it did once again highlight vulnerabilities in the reliability of the country’s grid.

New England relied on fuel oil to generate as much as 40% of its electricity. Other than in the Middle East where crude is cheap and abundant, oil isn’t used for power generation. Progressive energy policies in Massachusetts and across the region have raised prices and the risk of disruption for little discernible benefit.

The North American Electric Reliability Corporation (NERC) released their 2025 Long Term Reliability Assessment in January. They found that 13 of the 23 assessment areas will face resource adequacy challenges over the next decade. Grid planning takes place over years, so while warnings such as this rarely appear urgent, much of the US faces a growing risk that power supply will become less reliable.

There can be no doubt that left wing energy policies are the cause. NERC blames the increased investment in solar and the requisite battery backup along with decreasing investment in reliable gas-fired power. This is reducing the overall capacity utilization of the nation’s power–generating assets, creating grid complexity because of the increased reliance on intermittent generation and raising costs.

The PJM Grid, the country’s biggest which extends from the md-Atlantic as far west as Illinois and includes New Jersey, our summer home, is rated as High Risk from 2029. Recently elected NJ governor Mikie Sherril looks set to continue Phil Murphy’s misguided policies based on recent executive orders she issued to favor renewables. A mandate that 100% of electricity be generated from carbon-free sources by 2035 has disincentivized any investment in gas-powered generation.

There are some encouraging signs. NERC found that retirements of peak seasonal capacity, while still high at 105 Gigawatts (GW), were down by 10 GW from a year earlier as some power plants had their useful lives extended. PJM and other grids such as MISO (midwest) and ERCOT (Texas) have started addressing the biggest vulnerabilities noted by NERC and implementing plans to curtail power to certain users.

Underlying these challenges is the growing demand from data centers, some of which are accepting that at times of high usage they’ll need to rely on alternatives, such as diesel.

Natural gas looks like a clear winner as grid operators and customers look for reliable power. It’s why we’re invested there.

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

Energy Mutual Fund

Energy ETF

There were several positive news stories last week that helped propel the American Energy Infrastructure Index (AEITR) to +7% YTD, well ahead of the S&P500 which is +1%. Kinder Morgan’s (KMI) earnings unusually beat expectations. Moreover, their increased backlog of projects didn’t scare investors as much as it should given their perennially low Return On Invested Capital (ROIC, see Not All Growth Projects Are Good ). Most of their capex is in natural gas infrastructure. Investors concluded that even KMI must be able to generate an attractive ROIC providing gas to power data centers.

Venture Global (VG) prevailed in an arbitration dispute with Spain’s Repsol. They’ve won two (the first was Shell), lost one (BP) and settled one (Sinopec). Four remain outstanding. The worst fears following September’s loss to BP are not being realized. Consequently, the stock has rebounded 45% YTD.

VG’s plausible worst case if all the arbitration cases went against them including successful appeals by Shell and Repsol is around $6BN. The standard for challenging arbitration rulings is higher than in US civil courts. Industry lawyers think they’re unlikely to be successful.

Even after VG’s recovery this year, its market cap is still about $7.5BN below where it was in early September, before the Shell ruling. We think it looks cheap.

European LNG prices have been strong, which has increased the differential with the US Henry Hub benchmark. This increases the profit opportunity for LNG export terminals able to use some of their uncontracted liquefaction capacity to sell on the spot market (see Quantifying The Gas Arb). NextDecade (NEXT) seems to respond to this even though their Rio Grande facility won’t begin operations until late this year at the earliest. NEXT dipped early in the month but is now flat YTD.

Energy Transfer (ET) has responded to the January effect that tends to boost MLPs (see What A Difference A Year Makes). Five years ago ET enjoyed a $2.4BN windfall gain from the disruption to the Texas gas market caused by Winter Storm Uri. As you read this on a Sunday morning, ET holders are wondering whether there will be a repeat. The Texas legislature responded to Uri with new laws on improved weather resilience and reliability.

We’ll soon see how effective that was.

Mitsubishi purchased the pipeline assets of Aethon in the Haynesville shale in Texas last week for $7.5BN, showing that foreign investors continue to find attractive valuations in this sector. They expect to profit from the world’s growing need for power.

US pipeline construction is set to reach an 18 year high this year, led by gas projects in Texas, Louisiana and Oklahoma. These will add around 18 Billion Cubic Feet per Day (BCF/D) of capacity and are intended to meet the twin demand drivers of data centers and LNG exports.

Capital is flowing into the sector, thanks to attractive valuations and unremarkable retail flows. Energy is the 2^nd best performing S&P sector this year, just behind Materials.

In November, the Energy Information Administration (EIA) boosted their forecast of US oil production to 13.6 Million Barrels per Day (MMB/D). US drillers continue to find efficiencies, allowing output to remain firmer than last year’s declining crude price would otherwise dictate. The EIA reaffirmed their 13.6MMB/D forecast in a recent Short Term Energy Outlook, roughly flat with last year.

Presidential ruminations and dropped threats related to Greenland showed that midstream energy is less exposed than the broader market.

New Jersey’s recently elected Democrat governor Mikie Sherrill showed that the progressive drift in the Garden State continues. Voters evidently don’t mind reduced quality of life and affordability caused by high taxes and widespread construction of apartment buildings that are turning suburban towns into urban areas.

Sherrill wasted no time in signing an executive order promoting solar power and storage, instead of tapping into the vast supplies of gas in neighboring Pennsylvania. Over time, electricity will become more expensive and less reliable for NJ.

Elon Musk was interviewed in Davos last week by Blackrock’s Larry Fink. Musk thinks the production of AI chips will far outpace our ability to generate enough power to use them. He thinks space-based data centers, positioned to receive solar power 24×7, are “a no-brainer.”

Musk also offered some advice for living life, which might also be applied to golf: it’s better to be optimistic and wrong than pessimistic and right.

Finally, I am generally not an early adopter of new technology, so my latest ChatGPT discovery may strike savvier readers as ho-hum. Thanks to John O’Sullivan, friend and regular blog reader, I recently learned that the subscription version will create a daily email with news updates on the stocks we care about. It’s infinitely customizable, so through iterative feedback can be refined as needed. It helps research the blog, but the human touch will remain ascendant.

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

Energy Mutual Fund

Energy ETF

In The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, author Greg Zuckerman explains how today’s traders spend most of their time doing research. At Renaissance, the hedge fund Zuckerman chronicles, and other quantitative funds, traders spend much of their time looking for market anomalies that are likely to repeat and aren’t just the accidental result of noise. The trading that takes place is done by algorithms executing trades for a given strategy. The trader monitors the activity and looks for new opportunities.

This is very different than the trading I did over thirty years ago. Fast reactions and rapid mental numeracy were what separated the great traders from the average. We often hired MBAs. Some years ago, I visited the trading floor for Jane Street, a big market maker in ETFs, and learned that their hires are typically computer science majors.

Over the past couple of months, we’ve noticed a relationship between the Europe/US natural gas spread and the prices of LNG stocks. I don’t know if quant hedge funds are trading this. We’re not, but their prices seem to be connected.

Specifically, we looked at the difference between the TTF Dutch benchmark for natural gas and the US Henry Hub, converted to US$ per Million BTUs (MMBTUs). It costs around $2-4 per MMBTUs to liquefy US gas and ship it to Europe, whereas the TTF/HH spread is usually more than that. The wider the spread, the bigger the profit opportunity.

Generally, LNG is liquefied under long term Sale Purchase Agreements (SPAs). Cheniere (NYSE: LNG) has locked in 90% of its estimated cashflows through 2035 with SPAs. Venture Global (VG) famously exploited a sharp widening of this spread following Russia’s invasion of Ukraine in 2022 (see Nothing Ventured, Nothing Gained) They netted $BNs and wound up being taken to arbitration by aggrieved counterparties claiming breach of contract. They won against Shell in August but then lost to BP in October (see Gassy Isn’t Happy), which led to a repricing of their stock to reflect worse than losing all the remaining cases.

LNG terminals retain some uncontracted liquefaction capacity to allow for maintenance or other downtime. A wider TTF/HH arb is directionally good for them, but these are facilities with a useful life measured in decades so changes in the arb shouldn’t have much effect on, say, thirty years of discounted cashflows.

Nonetheless, Cheniere, VG and NextDecade (NEXT) all dropped by 20% or more as the spread narrowed during 4Q25. The Henry Hub benchmark traded up from $3 to $5 per MMBTUs on colder US weather. Meanwhile the TTF benchmark slumped from €31 to €27 per Megawatt Hour ($11.25 to $9.25 per MMBTUs) on ample supplies and mild weather.

This slashed the TTF/HH arb in half, from over $8 to $4.

VG probably has more exposure than Cheniere and moved more. But it still seems excessive. And they need never lose money on the arb. If it drops to an unprofitable level they would simply stop doing any new spot transactions.

Even more bizarre was the reaction of NEXT, since they’re at least a year away from shipping any LNG at all. They’re not generating any cash, so the spot arb is irrelevant. But perhaps the computer scientists at quant funds are trading a basket of LNG stocks, and since there aren’t many to choose from, NEXT is added for diversification.

In any event, the arb has been widening in recent days, which seems to have acted as a catalyst on these stocks. On Friday morning it spiked to $10, which should benefit VG and to a lesser extent Cheniere via increased profit on spot market transactions. It’s also worth noting that Qatar, from which the US recently removed some air base personnel as a precaution in case we attack Iran, is the world’s second biggest exporter of LNG.

Elsewhere in energy, the oil glut is not a secret and Jeff Currie (formerly head of Commodities Research at Goldman Sachs but now at Carlyle) argues that the geopolitical risks have risen markedly following the capture of Venezuela’s Maduro. China may start seizing oil tankers in the South China Sea which are typically “dark fleet” vessels. We don’t make oil bets, but Currie’s views are worth considering.

Last week was the CFA Naples Annual Forecast Dinner. SL Advisors was a sponsor, and I was happy to bring Bradley Golden and Thomas Vulgaris, both from Pacer Advisors, along with long-time friends and investors David Pasi and Michael Shinnick. David Rubenstein, co-founder of Carlyle, was the speaker and his star power drew record attendance.

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

Energy Mutual Fund

Energy ETF

More than most times, the energy market is moving on macro developments. President Trump is for low oil prices. He wants energy dominance which means ample supply. Although the White House is a big fan of the US energy sector, volumes trump profits. Trump’s first term was not a good one for energy investors. Oil was generally weak and the pandemic in 2020 was a short-term disaster with oil briefly negative as nobody traveled.

The President’s apparent goal of $50 per barrel for oil will not be cheerful news for energy executives. Moreover, Exxon and Chevron are facing pressure from the White House to invest $BNs in Venezuela to help achieve this unappealing objective. They’ll need to find a middle ground that appeases the administration while still making responsible capex decisions. On Friday Exxon said they were ready to send a team to Venezuela, while Chevron, who never left, are prepared to boost output.

Midstream is largely insulated from this calculus, since the sector operates in North America. Pipelines and related infrastructure are more aligned with the goal of energy dominance because increased volumes are good for the toll-model they operate.

There is some logic to Venezuela’s oil production restoring its links to the US. Because sanctions have limited both their output and potential customers, shipments travel halfway around the world to China. The country’s three main refineries operate at only 19% of capacity because of years of chronic mismanagement, so most of their unprocessed viscous crude has to be mixed with Iranian diluent for transportation. The US will easily replace that.

Iran has also been helping improve the performance of Venezuela’s refineries, an effort that has had a limited effect and will likely now end.

Exxon Mobil (XOM) has claims of $20BN against Venezuela. CEO Darren Woods noted last week that the company has twice suffered seizure of its property. On Friday he described the country as “uninvestable”. Conoco Philips is owed $10BN. Chevron lost $3BN but has continued to operate there. Satisfying these financial claims is likely a point of agreement in negotiations with the White House, which expects $100BN to be invested over the next decade.

The prospect of increased heavy Venezuelan crude reaching SE Texas has boosted stocks like refiner Valero but has weighed on Canadian pipeline companies like Enbridge (ENB) and Pembina (PBA). Investors are concerned that Venezuelan crude will displace Canadian production. While this is possible, Canadian crude output from tar sands doesn’t vary as easily as shale, where decline rates are fast and drillers can modulate output by altering their plans to drill new wells.

By contrast, producing tar sands often relies on Steam-Assisted Gravity Drainage (SAGD) which involves piping steam underground to warm the bitumen before it’s extracted. Such facilities generally have to keep running. Even during the pandemic when oil went briefly negative, the risk of the equipment freezing and rupturing meant that production continued even if unprofitable.

Canadian oil producers have long struggled to get their output to market. Most likely they’ll just have to accept lower prices.

Venezuela and Mexico used to provide over half of US oil imports, which is why our refineries are set up to process the heavy crude they produce. Over the past couple of decades Canadian production gradually gained market share, as Venezuela’s Hugo Chavez and then Nicolas Maduro oversaw a steady degradation of their energy industry, exacerbated by nationalization of assets owned by US companies.

Venezuela has the world’s sixth largest reserves of natural gas, with around two thirds of the reserves in the US which is #4. However, their output is under 3 Billion Cubic Feet per Day (BCF/D) versus the US at around 108 BCF/D. Most Venezuelan gas is associated with oil production, so output of both could increase together. However, it’s unlikely any of this gas would be exported – the country has a chronically unreliable power grid so could use the help. Moreover, the White House is focused on oil, and any additional gas may even be flared if installing the infrastructure to capture it isn’t a priority. US LNG exporters are unlikely to be impacted.

The long-term impact of Maduro’s removal and America managing its oil exports remains unclear. The President will be impatient to see results, which suggests Exxon, Chevron and others will deploy their resources accordingly, mindful of the election cycle.

Midstream energy infrastructure is nicely insulated from the shifting geopolitical/energy landscape. We don’t expect pipeline companies to be involved in rebuilding Venezuela’s infrastructure. There will be questions about Canadian pipeline exports, but little else to concern investors. The President’s desire to grow production can’t be bad for volume-based businesses. Pipelines look cheap.

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

Energy Mutual Fund

Energy ETF

Energy was a laggard in 2025, and within that Liquefied Natural Gas (LNG) stocks were especially weak.

The S&P Energy Index was +9.1%, 8.8% behind the S&P500. The American Energy Independence Index (AEITR) was +1.7%. The five-year annual trailing return on the AEITR is well ahead of the broader market (23.6% vs 15.3%). Over the past ten years they’re still close (14.3% vs 14.8%) which is pretty good given the MAG7 impact on the S&P500 and the current attractive valuations for midstream.

Macro headwinds hurt LNG. Many analysts are forecasting a supply glut over the next few years as global liquefaction capacity grows, especially in the US. The spread between global import benchmarks TTF (Europe) JKM (Northeast Asia) and the US Henry Hub narrowed, reducing the arbitrage opportunity in the spot market. And White House efforts to force a cessation of hostilities in Ukraine has made increased Russian LNG exports more likely.

The EU imported over 142 Billion Cubic Meters (BCMs) of gas in 2025, with Russia their second biggest provider behind the US representing probably over 15% of that supply. That the EU continues to buy Russian gas while selling Ukraine weapons to kill Russians confirms that they’re a big market but geopolitically incoherent.

Softer global LNG prices weighed on America’s two largest LNG exporters, Cheniere and Venture Global (VG), by reducing the arbitrage opportunity from using uncontracted liquefaction capacity on the spot market. Many expect soft global prices to persist, although futures going out to 2030 for TTF and JKM don’t reflect this.

If the feared LNG glut does materialize over the next couple of years, the buyers who have signed multi-year Sale Purchase Agreements (SPAs) are more exposed. LNG exporters typically contract out most of their liquefaction capacity at fixed prices. VG has retained more spot exposure than Cheniere, which introduces more variability to their cash flow forecasts.

VG quickly sank from its $25 IPO price in January to less than half that level in the spring. It looked attractive, but losing the arbitration case to BP in October (see Gassy Isn’t Happy) caused the market to price in adverse outcomes in all the remaining cases plus an additional haircut. Because in August VG won the case Shell brought with similar facts and circumstances, it’s hard to be confident about how the rest will turn out.

VG had a good year operationally. They reached FID on Calcasieu Pass 2 and signed six SPAs all for twenty years. The expansion of their Plaquemines facility is on schedule and phase one ramped up volumes faster than many expected. VG’s liquefaction capacity will rival and at times exceed Cheniere’s over the next several years.

Nonetheless, the continued uncertainty leaves the stock priced for more than the worst case, down over 70% from its IPO price.

Weakness in NextDecade (NEXT) has been especially hard to explain. They have limited exposure to soft LNG prices for now because they’re not generating any cash and when Stage 1 is completed they’ll only own 21% of the economics. They reached Final Investment Decision on Trains 4-5 (Stage 2) where they have better economics.

NEXT acquired the needed equipment before prices rose, which derailed other less developed projects such as Energy Transfer’s (ET) Lake Charles facility. Although ET has signed multiple SPAs, rising demand for specialized equipment has depressed their anticipated liquefaction margins. This benefits projects that are further ahead by reducing any potential LNG glut.

NEXT continued to sign strong SPAs. Their contractor Bechtel is ahead of schedule and on budget for Phase 1. And they didn’t issue any more equity. For now, it’s a development stage company with no revenues and if it wasn’t already public wouldn’t seek a listing. But the long-term story remains intact and we think double digit multi-year returns are in store for current holders.

NEXT’s cashflow trajectory over the next five years is similar to OpenAI, albeit of smaller magnitude and with a little less hype.

New Fortress Energy (NFE), focused on LNG and power solutions in the Americas, faces an uncertain future following several execution failures. CEO Wes Edens, who became a billionaire by co-founding Fortress Investment Group, has disappointed investors with project delays and failures in Brazil, Mexico and Puerto Rico.

Five year 12% bonds issued in late 2024 soon lost value, and in May slumped to 40. One usually thinks of bond investors as taking a more jaundiced view of a company’s finances given their risk/return asymmetry, but in this case they weren’t skeptical enough.

In November, NFE missed an interest payment and is currently under a forbearance agreement, which was extended from December 15 to January 9. Bond holders could claim a default if it’s not extended further.

The deft touch that Wes Edens showed in finance hasn’t extended to NFE.

The outlook for global natural gas demand remains underpinned by electricity consumption. Data centers for the AI revolution as well as generally rising living standards are driving it higher. America derives a relatively high 43% of its electricity from natural gas, because at $3-4 per Million BTUs it’s cheap. China is around 3%, but if LNG prices fell sufficiently switching from coal could make commercial sense across Asia, providing a floor to LNG prices.

Domestically, demand from LNG export terminals continues to increase. Gas for power generation fell slightly last year, but the Energy Information Administration expects that to reverse this year with 1.6% growth.

The Permian in west Texas produces associated gas (i.e. as a byproduct of crude oil) and if oil prices fall enough to make some wells unprofitable, that could in turn lower gas production. There’s still insufficient takeaway capacity in the region, which caused gas prices at the Waha hub to be negative almost a quarter of the time last year. But steadily rising gas output overall seems highly likely.

Natural gas infrastructure assets are cheap. Cheniere trades at a 12% Distributable Cash Flow (DCF) yield and is best in class. If VG was to lose $5BN (a worst case scenario) in arbitration cases and penalties, they’d still have a DCF of 11%. ET was –9% last year and has a DCF yield of over 15%. Stock performance for many midstream names was disappointing, but valuations remain compelling.

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

Energy Mutual Fund

Energy ETF

Regular readers know that around this time of the year my thoughts briefly stray from midstream energy to Christmas. My love of Christmas pudding has been well documented here (see English Christmas Traditions, Merry Christmas and Happy Holidays! and watch The Joy of Christmas Pudding).

We all fondly remember the Christmas of our childhood. My boyhood Christmases in the UK always involved a Christmas dinner delayed from its scheduled mid-afternoon time while the men of the house struggled home from the pub far later than promised. With a 1960s segregation of duties, some marital discord usually followed concerning an over-cooked turkey.

I was too involved in whatever toys I’d been given to care, which I guess is how events can seem happier as time passes.

This is why the moment is about children, as we create memories in our offspring that rhyme with our own. Our grandchildren are numerous enough that they pretty much were the church Christmas pageant – naturally it was the best one we’ve ever seen.

My wife and I have passed through several phases of Christmas parenting. It started with putting out the cookies and sherry at bedtime (English Santa wants something stronger than milk). Hoping the little ones won’t wake up too early, and a few years later wondering if they’ll wake up before lunchtime. Nowadays vicariously, as our children report on just how early the grandchildren were up. Our Christmas morning was peaceful, as we prepared for another round of family togetherness.

The English Christmas meal involves some other traditions unfamiliar to Americans. Each place setting has a Christmas cracker which, when pulled with the person next to you explodes with a modest bang to present a silly paper hat, a cheap plastic toy and a lame joke such as, “How much did Santa’s sleigh cost? Nothing, it was on the house.”

Good enough for a grade school playground.

The BBC recently wrote that the jokes are tested before being used. This surprised me because after a lifetime of often truly awful Christmas cracker humor, I assumed there was no minimum standard.

You’ll find the participants at an English Christmas dinner table wearing silly paper hats demonstrating that sometimes we really shouldn’t be taken too seriously.

For years I have fended off competition for Christmas pudding, described lovingly in past blog posts noted above. My mother used to want a second helping, but she’s sadly no longer with us. I still have to share it with my wife, but since she cares enough to make sure we have some, it seems sensible not to complain.

I ensured my children didn’t like Christmas pudding. But last year in a sinister game they persuaded their own children to try it, expecting screwed up faces of disgust. Improbably, one granddaughter declared it very good, creating future unnecessary competition.

Boxing Day, December 26^th, traces its roots to when the staff celebrated their Christmas (see Downton Abbey). Nowadays it’s a reprise of leftovers from the day before, and this year in the UK, Canada and other members of the British Commonwealth part of a four-day holiday. Inexplicably, the traditional extravaganza of Premier League matches was limited to just mis-firing Manchester United.

An additional reason to love Christmas is because it provides a colorful time of joy before the depressing winter that follows. January in London is akin to living in a damp, dark pit with grey skies delivering cold rain. Boxing Day has less than eight hours of daylight. January commuting is typically in darkness.

New Jersey is a little brighter but colder. You’d think such unpleasant winters would come with a compensating tax structure. Instead, liberal politicians add insult to injury by spending freely on big government and subsidized renewable energy even though they can’t fix the weather.

This is why within days of the conclusion of festivities we head south to Naples, Florida, where the climate and lifestyle are worth far more than they cost. Christmas has become the start of a wonderful sunny season. This prospect is so agreeable that I’m even moved to share my Christmas pudding.

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

Energy Mutual Fund

Energy ETF