Episode 11: Iran Teaches Dems Geopolitics

Episode 11: Iran Teaches Dems Geopolitics
SL Advisors Talks Energy

00:00 / 00:05:50

Iran Promotes Fracking


In this week’s podcast, Simon Lack is going to talk about the lesson we should take from the attack on Saudi Arabia’s oil infrastructure


Show Notes:

The other day I awoke from a terrible nightmare

Newly elected President Elizabeth Warren had just signed an executive order to ban fracking

Carrying out a promise from the campaign trail

By eliminating 60% of U.S. output, she’d forced us to turn to Saudi Arabia for more imports, because America’s economy still runs on fossil fuels

Renewables remained fringe, slowly gaining market share but still providing less than 10% of America’s energy

And Iran saw its chance to bring the Great Satan to its knees by disrupting its energy supply

Just like Jimmy Carter, another U.S. president was facing American consumers sitting in gas lines

It’s fortunate for voters that Saudi facilities were shown to be so vulnerable this early in the election cycle

Banning fracking is one of those campaign promises that panders to an extremist minority

But it doesn’t consider the practical difficulties of implementation

And it gives up the security around our energy supplies that the Shale Revolution has created

Most Democrat candidates are promising to jeopardize our energy security by disrupting America’s Energy Renaissance

For decades, presidents called for energy independence, all the way back to Nixon

We’ve fought wars in the Middle East partly over security of energy supplies

Much of the world’s crude comes from unstable regions

Finally, when America has freed itself of reliance on OPEC, most of whom don’t much like us

Democrat presidential candidates want to give up that progress

They want to take us backwards, to greater dependency

The disruption in energy supplies from the Middle East makes America a more secure provider

Our infrastructure is dispersed and safe

Even if there is a terrorist attack, it couldn’t take out half of our oil supply

And no foreign country has any plausible way to threaten our domestic energy industry

To an Indian or Japanese buyer, American oil and gas now looks a little more attractive

More security of supply

The Democrats need to drop their opposition to fracking, or American voters will conclude that they don’t understand the world we live in

Episode 10: Political Promises on Climate Change

Episode 10: Political Promises on Climate Change
SL Advisors Talks Energy

00:00 / 00:09:07

Political Promises on Climate Change


In this week’s podcast, Simon Lack talks about the impractical promises from Democrat presidential candidates on climate change, and adds an update on the Blackstone-Tallgrass deal (6 minute mark). 


Show Notes:

Shale Revolution has transformed America’s energy production

Hydraulic fracturing, “fracking”

Responsible for 60% of our crude oil

75% of our natural gas

3 MB/D of 5 MMB/D of NGLs (propane, butane)

Leading America to Energy Independence

Net exporter of natgas, net imports of crude falling

Cheap energy driving economic growth

Lowering CO2 emissions as natgas replaces coal

Democrats have had some bad ideas like Green New Deal

All against fossil fuels although 81% of America’s energy

Elizabeth Warren will ban fracking if she’s president

If 60% of our petroleum based liquids were removed, that’s 10% of global market

10% we need to import, 10% jump in new demand

2014-16 and 2008 crude dropped around 75% with around 2% excess supply

What would happen if 10% excess demand?

Prices would sky rocket.

$100s to fill your car

Power prices would leap because of lost natural gas

Coal use would jump, creating more CO2

US$ would weaken, trade deficit grow

Big wealth transfer from U.S. to OPEC+

Probably not possible, require Congressional legislation

But can’t be sure

Such a dumb idea

What’s needed are thoughtful solutions:

Phase out coal for natgas

Create Federal standards for building nuclear power plants. Clean, great safety record

Carbon tax

More Federal R&D in cleaner use of what works, which is fossil fuels

A word on Tallgrass

Last week we wrote blog and podcast on TGE

Self-dealing by management, $26.25 vs $19.5 for investors

No asset manager could do this

Why do SEC-registered asset managers follow a higher set of ethical standards?

Few others have spoken out

Not the other asset managers who own TGE

Generally not the sell side analysts who cover them

By failing to speak out they’re failing to protect their clients interests

Just because we like a sector and invest in it, doesn’t stop us from calling out bad behavior

Signs the market expects a sweetened offer from Blackstone

We’ve been one of the most vocal critics

We’re fighting for our clients. Others should too.


Episode 9: Blackstone and Tallgrass

Episode 9: Blackstone and Tallgrass
SL Advisors Talks Energy

00:00 / 00:08:15


In this week’s podcast, Simon Lack is going to talk about the ethical gulf revealed by Blackstone’s offer to take Tallgrass private.


Show Notes:

In our business we invest alongside clients

Highly attractive feature

SEC rules designed to protect clients

CFA charterholder also has ethical rules

Designed to protect clients

Client assets take priority over ours

Selling a position higher than clients unthinkable

But that’s what TGE have done with Blackstone

January Blackstone bought 44% of TGE at $22.47

Sideletter later revealed TGE management could sell at $26.25 within year

Qs on earnings call. Dehaemers reaffirmed his personal stake.

“…there is no intention of Blackstone doing anything here untoward.”

Investors concluded Dehaemers still invested alongside

Last week offer to take private at $19.25. Mgt still get $26.25

Worse than selling at higher price

Mgt no exposure to sale price

No incentive to support stock

TGE very weak in August, due to questions on investment spending and recontracting rates on pipelines

Mgt provided little transparency

If they had same downside they would have

In fact, lower TGE made BX more likely to buy, triggering sideletter price

Mgt benefitted from lower price

We’re invested in TGE

Unconscionable for us to sell at higher price than clients

Especially so to have sideletter like TGE

Why are ethical standards followed by asset managers so much higher than public companies?

Had several discussions with David Dehaemers. Liked him.

Should never have had such a sideletter

Huge disappointment.

Shows huge ethical gulf between rules for asset managers and for public companies

Hopeful management will reconsider and ensure equal treatment

Restore alignment of interests



Private Equity Sees Value in Unloved Pipelines


Blackstone and Tallgrass Further Discredit the MLP Model




Episode 8: Private Equity Buyers

Episode 8: Private Equity Buyers
SL Advisors Talks Energy

00:00 / 00:07:17


In this week’s podcast, Simon Lack talks about the difference in value seen by private and public market investors.


Show Notes:

Energy remains out of favor (:46)

Recently dropped to 4.5% of S&P500 (:48)

FT wrote about Why US energy investors are experiencing a crisis of faith (1:01)

Being an energy investor requires religious conviction (1:12)

Attractive dividend yields (1:22)

Growing cashflows (1:23)

Malaise caused by reinvesting too much cash (1:36)

Poor expense control (1:46)

Fears of global warming (1:49)

Blackstone bought 56% of Tallgrass they didn’t already own (2:00)

GS estimates $250BN in private capital for infrastructure and natural resources (2:20)

Ultra low bond yields + tremendous demands for stable, long term flows (3:11)

Pension funds are part of the demand. US pensions 28% in fixed income, up 3% (3:19)

Blackstone paying 36% premium (4:06)

All good news, lifted the sector (4:20)

Except seems a bit of bait and switch (4:30)

Blackstone bought 44% earlier this year (4:40)

But buying 56% costs less than buying 44% earlier this year (4:52)

Questions asked about why they hadn’t bought whole company (4:55)

Meanwhile stock has slid over uncertainty about capex, recontracting on pipelines (5:04)

Blackstone took opportunity to bid for 56% they didn’t own at $19.50, 35% premium (5:15)

Management team gets to sell their shares at $26.25, 35% above deal price (5:33)

Good to see private equity buying another pipeline company (6:27)

Finding value in sector (6:32)

Disappointing to see another management team structuring transaction with superior rights for themselves compared with other investors (6:37)



Why US energy investors are experiencing a crisis of faith


Episode 7: Pension Funds

Episode 7: Pension Funds
SL Advisors Talks Energy

00:00 / 00:08:19


In this week’s podcast, Simon talks about the distortions showing up in bond markets.


Show Notes:

Interest rates are low (:40)

$17TN publicly traded debt has negative yields (:45)

Incredible reflection of price-insensitive buying (:50)

Reflects degree of risk aversion. Prefer the certainly of a loss in bonds rather than own stocks (:57)

But bond investors generally do good analysis (1:20)

Look at energy (1:27)

Perennially out of favor (1:28)

Valuations cheap, yields high (1:40)

American Energy Independence Index yields nearly 7% (1:42)

Investor sentiment poor, long term outlook uncertain (1:48)

But a look at bond yields on biggest companies shows bond investors more relaxed (2:00)

EPD, $63BN market cap, yields 6% while its 2054 bonds yield 3.9% (2:08)

KMI, $46BN mkt cap, has 2098 bonds yielding 5.1% (2:27)

In many cases the bond yields are 1.5% below the dividend yield (3:05)

Must be so much better to own the stock where dividends can grow (3:15)

Interesting piece blog called The Pension Fund Apocalypse by Colin Lloyd (3:27)

He highlights the problems for pension funds by low rates (3:33)

Estimates that $26TN in pension assets earning negative real return on fixed income allocation (3:44)

Problem is that bond demand remains strong (4:13)

US pension funds incredibly raised their fixed income from <25% to 28% last year (4:17)

They should be investing less bonds given returns

But regulations make it hard (4:50)

More broadly, bond yields reflect some risk aversion and inflexible investing regulations (5:28)

Investors in energy company bonds are pretty calm, shown by low yields (6:29)

It’s a factor keeping interest rates low (6:58)

All suggests that stocks are cheap, not over the next week or two but over the next 2-5 years (7:16)


Suggested Links:

Bond Buyers Should Buy Pipeline Stocks


The Pension Fund Apocalypse





Episode 6: Trade Wars

Episode 6: Trade Wars
SL Advisors Talks Energy

00:00 / 00:09:21


In this week’s podcast, Simon Lack talks about the growing concerns on trade and how we think events will unfold.


Show Notes:

S&P500 finally had big release on trade fears (:41)

German economy contracted in 2Q (1:05)

Trump’s modest relaxation of tariffs to miss Christmas season too little (1:12)

Flat yield curve indicating fear of recession (1:24)

Investors are worried (1:33)

Outlines of final act are coming into view (1:33)

China deficit likely lower this year (2:00)

Tariffs having an impact

Setting stage for Trump to grab deal and declare victory (2:50)

Able to enter election year bragging about first president to take on China and win

More focused on Dow than any previous president (3:30)

More unilateralist approach reflects popular opinion (3:43)

America has protected shipping lanes for years (3:57)

Why are US troops in Germany? (4:17)

Nordstream 2 (4:27)

Bilateral trade negotiations suit US as biggest economy (5:06)

TPP didn’t fit this (5:15)

Replacing NAFTA with separate negotiations with Canada and Mexico (5:36)

It’s why EU exists (5:50)

Wait until UK tries for US deal after Brexit (6:17)

A less selfless US, more inclined to consider self-interest (7:40)

More transactional (7:50)

Not conventional wisdom among governing class, but popular among voters (8:00)

Episode 5: Don’t Let Energy Volatility Scare You

Episode 5: Don’t Let Energy Volatility Scare You
SL Advisors Talks Energy

00:00 / 00:10:50


In Episode 5 of SL Advisors Talks Energy, Simon Lack talks about market volatility, valuations in midstream energy, and Canada’s new way to export its crude oil.


Show Notes:

Volatile week with more tariffs on China roiling markets (:51)

Still assuming Trump will take China deal in time for election (:52)

Falling bond yields reflect widespread risk aversion (1:28)

Equity risk premium is favoring equities (2:15)

Investors asking why energy stocks are down again (2:48)

Sector remains out of favor, falls farthest when stocks are weak (2:53)

But valuations are compelling (3:03)

Energy Transfer yields >9%, 2X covered by DCF (3:10)

Williams 6% yield, also 2X covered (3:24)

ENLC fired its CEO and lowered guidance but still expects to raise distribution, yielding 15% (3:36)

Midstream energy infrastructure earnings generally good, but sentiment poor (3:51)

Misallocated cash, although signs of improvement (4:00)

Weak natural gas prices, although not hurting pipeline earnings (4:30)

Fears over climate change, although oil and gas consumption continue to grow (5:00)

Turn to Canada – big challenge to get crude out of Alberta (6:55)

Keystone XL much delayed although TC Energy (FKA TransCanada) expects to finally build it (7:32)

ENB told us they wouldn’t build a Canadian crude pipeline except in Alberta (7:47)

Plans to build railway from Edmonton and Ft McMurray to Alaska (8:10)

Amazing considering 2013 crude disaster in Quebec, 47 deaths (8:34)

But pipeline opponents have done this (8:41)

Railway will travel up through Yukon Territory, allowing Canadian crude exports from Alaska (9:19)

Also unlocking mineral reserves in Yukon by providing transport (9:22)

Project still in planning stage, but reflects ongoing global demand for crude in spite of fears over climate change (9:38)


Alaska – Alberta Railway Development Corporation


Stocks Offer Bond Investors an Opening              


Episode 4: Pipeline Earnings Are Good

Episode 4: Pipeline Earnings Are Good
SL Advisors Talks Energy

00:00 / 00:12:22


In Episode 4 of SL Advisors Talks Energy, Simon reports on 2Q19 pipeline earnings and provides his insights on the weeks’s major stories in energy politics.


Show Notes:

In this week’s podcast, I’m going to talk about pipeline company earnings and why valuations are attractive, followed by some comments on climate change politics

Pipeline Earnings Are Good 1:08

Energy out of favor 1:10

Too much investing in new projects, not enough cash back to investors 1:22

Democratic primary debates show political risk given extreme positions 1:27

But cash flows are growing 1:40

Some big companies reported 2:10

EPD increased EBITDA 18%. $66BN company 2:14

WMB been weak because of natgas but had good earnings and popped 2:22

OKE, CEQP, TC Pipelines all good quarters 2:38

Still expect FCF to reach $7-8BN for AEITR this year, up from $1BN 2:47

Balance sheets are stronger, 4.1X Debt:EBITDA 3:40

Dividend yields >2X bond yields 4:00

…credit analysts, banks fine with risk 4:05

Industry has growing FCF, better credit profile, lots of PE interest 4:40

Energy politics

2 Items caught my eye

  • Annual Google Camp 5:10

Attendees of rich and famous, secretive affair 5:20

Barry Diller, Dave Geffen, Katy Perry, Tom Cruise, Leonardo DiCaprio 5:25

Many arriving by private jet – one estimate of 111 separate flights 5:30

Let’s hope there’s no sermonizing on climate change from this crowd 5:40

  • Democratic Debate 6:05

Most candidates endorse GND 6:12

We wrote Bovine Green Dream 6:16

Completely impractical 6:25

Climate change solutions include 6:50

Government support for nuclear 7:05

Increased natgas and phasing out of coal 8:30

R&D on cleaner use of fossil fuels, share results 9:23

Greater honesty, that dealing with climate change will be expensive 10:11

Americans won’t spend >$10 per months fighting climate change 10:18

US 15% of emissions 11:15

Andrew Yang: Find high ground 11:32


Links to Additional Information:

The Coming Pipeline Cash Gusher

The Bovine Green Dream

Natural Gas: The Big Energy Story

Episode 3: Natural Gas | The Big Energy Story

Episode 3: Natural Gas | The Big Energy Story
SL Advisors Talks Energy

00:00 / 00:06:32


Although much of the press coverage focuses on solar and wind, the big story in energy is the growth in natural gas. In this podcast, Simon Lack reviews how natural gas growth is far more important than renewables.


Show Notes:

New natgas hookups in Westchester County are prohibited (1:00)

Will constrained natgas hookups hurt demand (1:07)

Energy is undergoing a transformation (1:12)

Renewables receive all the press (1:15)

Solar and wind prices are falling (1:17)

Nextera Energy analyst day (1:20)

Berkeley, CA won’t allow new buildings to use natgas (1:44)

In 2018 natgas was 43% of growth in world energy use, vs 18% renewables (1:57)

U.S. natgas share rose almost 2% to 31%; renewables rose from 3.9% to 4.2% (2:08)

China burns half the world’s coal (2:41)

Political issue. Killing citizens, causing respiratory problems (2:44)

China wants to reach 15% natgas share by 2030, vs 7.5% today (3:01)

With China’s growth of 4.3% they needs to more than triple natgas consumption (3:15)

They need almost ¾ of today’s U.S. consumption (3:30)

They need a U.S. Shale Revolution (3:37)

But Chinese forecasts of shale output keep being revised down (3:51)

Russian exports from eastern Siberia will help (4:00)

Two seasonal peaks, China has too little storage (4:06)

But volumes not able to vary (4:31)

Chinese LNG imports will increase, likely to grow 2-4X, maybe more based on 5 year plan (4:57)

Liberal media focus on renewables (5:44)

Natgas is the real transformation in energy (5:58)


Links to Additional Information:

SL Advisors Blog Post https://sl-advisors.com/natural-gas-the-big-energy-story 

Next Era Energy Investor Day  https://sl-advisors.com/is-nextera-running-in-place

BP Statistical Review of World Energy https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

Columbia|SIPA A Natural Gas Giant Awakens: China’s Quest for Blue Skies Shapes Global Markets