Simon Lack, Portfolio Manager

In recent weeks, 2021 natural gas have been quietly moving higher. November ’21 futures have rallied over 40 cents, to just under $3 per Thousand Cubic Feet (MCF).

The energy sector has long been criticized for reinvesting too much capital back into its business, without ensuring that such investments exceed their cost of capital. No business can survive unless its return on investments is more than the cost of financing them.

Targa Resources, a perennial mis-allocator of capital, is not an obvious candidate to initiate a buyback program. Nonetheless they did on Monday, and the stock rose almost 11% on the news. In February last year, when Joe Bob Perkins was CEO, he responded to questions about their capex plans by arrogantly calling them “capital blessings.” This reflected an attitude that building new infrastructure and buying assets was part of their mission, regardless of whether such projects made financial sense.

With pipeline stocks having their worst month since the depths of Covid-panic selling in March, investors are wondering when the smart money will finally respond to today’s extreme undervaluation and commit capital. Recent price action makes little sense, something that becomes very apparent in discussions with clients. 2Q20 earnings were as expected, and dividends unchanged. The yield on the American Energy Independence Index, the most representative index of North American midstream energy infrastructure, is now over 10%.

More risk more return is a truism of finance, and much else besides. It makes intuitive sense (why bungee jump unless the rush of near-death exceeds the actual risk?) and…

Growth isn’t always good. The Shale Revolution led to enormous growth in U.S. oil and gas output, but abundance pressured prices and, for investors in U.S. exploration and production, it’s…

Last week the Centers for Disease Control (CDC) told state health officials to prepare for vaccine distribution as soon as November 1. “My fellow Americans, our long national nightmare is over.” was first spoken by President Gerald Ford following Nixon’s resignation under threat of impeachment in 1974. But it could equally apply to Covid in 2020.

Last week’s ejection of Exxon Mobil (XOM) from the Dow Jones Industrial Average looks like another indication of the declining relevance of energy stocks. XOM had been in the Dow…

In late April, a month after the low, we noted how stocks were cheap (see The Stock Market’s Heartless Optimism). The Equity Risk Premium (ERP, the difference between the earnings…

Oil production in the U.S. has fallen sharply as a result of Covid. Gasoline demand has recovered from its low point in April, but remains about 9% below normal.