Simon Lack, Portfolio Manager

The cold winter currently being endured in north-east Asia isn’t just a boon for those hoping the planet isn’t burning up. It is setting a fire under local prices for Liquified Natural Gas (LNG). Because of the relatively high cost of moving LNG by tanker, regional price differences can be far wider than for crude oil, where transportation costs are a much smaller portion of the overall shipment.

Although we generally write about investing in midstream energy infrastructure, we find macro subjects interest our readers too. In April, not long after the market low, The Stock Market’s Heartless Optimism was popular, as any guide to the market’s direction was eagerly sought. We regularly use the Equity Risk Premium (ERP) to illustrate the relative value of stocks versus bonds. Earnings forecasts never fell as far as the market, which is what propelled its rebound for the remainder of the year.

Writers care what their audience thinks, and we monitor pageviews and comments to learn what resonates. For pipeline investors, a few months into the year it was looking like the mother of all bear markets. The sector had been persistently lagging the S&P500 since peaking in 2014, and pre-Covid the fundamentals were improving strongly. Fortunately, the recovery since then has repaired much of the damage to portfolio values, if not the emotional scars from extreme volatility. The American Energy Independence Index is –13% for the year, compared with –51% at the end of 1Q.  

The biggest question for long term investors is why bond yields remain so low. The Equity Risk Premium (see Stocks Are Still A Better Bet Than Bonds) has favored equities…

The pipeline sector’s increasing Free Cash Flow (FCF) has quietly allowed several companies to initiate buyback programs. We calculate that over $8.5BN in buyback programs have been announced this year,…

The pipeline sector continued on its tear last week. The catalyst was Pfizer’s vaccine announcement a month ago, but cheap valuations have drawn increasing attention as prices have risen. The…

Jim Cramer has even offered some reasons to buy – describing President-elect Joe Biden as “the counterintuitive savior of the oil industry”. He’s echoing a point we’ve made – that Democrat policies favor higher energy prices (see Why Exxon Mobil Investors Might Like Biden). Combined with a more cautious attitude towards growth projects, an era of growing free cash flow is at hand for midstream energy infrastructure – a trend that’s remained in place all year and is returning cash to shareholders (see Pipeline Buybacks Are Coming).

Renewables receive a disproportionate share of media coverage given their still small size. In 2019, less than 9% of America’s power came from solar and wind. Fossil fuels (mainly coal and natural gas) are over 62%. Moreover, electric power is only 37% of our total energy use. Renewables receive outsized attention because of the hope they will lead to lower emissions. A look at recent daily data on U.S. power generation illustrates the challenges we’ll face in relying on intermittent, low-density sources of energy.  

Incoming President Biden is expected to take the U.S. back into the Paris Climate Agreement, which will mean policies to reduce emissions of GHGs (Green House Gases) will figure in Administration policy.

Pipeline companies have been reporting earnings. As has been the case recently, they’ve been generally coming in as expected, reflecting the stability in their underlying businesses.