Simon Lack, Portfolio Manager

This past winter included some tumultuous weather events with implications for global energy markets. Winter storm Uri exposed vulnerabilities in the Texas power grid, and left millions without heat during an unusually cold snap (see Why Texas Lost Power).

Last week the Alerian MLP and Infrastructure Total Return Index (AMZIX) finally recouped its Covid losses. MLPs have returned to where they were at the end of 2019, when few knew what a coronavirus or N95 mask was. MLP investors have had a miserable decade.

Last week was hailed as a big victory for climate activists. In a 1-2-3 punch on Wednesday, a Dutch court ordered Royal Dutch Shell (RDS) to further reduce emissions from its products; Exxon Mobil (XOM) shareholders elected two new directors proposed by an activist hedge fund against management’s recommendation; Chevron (CVX) shareholders approved a proposal to reduce emissions caused by its customers. 

An enduring dichotomy in the valuation of midstream energy infrastructure companies has been the sharply different outlooks implied by debt versus equity pricing. Dividend yields of 6-7% suggest equity investors don’t regard their payouts as being sustainable indefinitely.

The S&P500 is up 11% so far this year. 2021 EPS estimates from Factset are up by close to the same amount. The rise in ten-year treasury yields means the Equity Risk Premium (ERP) doesn’t show the market to be quite as cheap as it was, but not by much.

Inflation is probably the biggest known risk facing equity markets today. Last week’s CPI report was expected to be high and still exceeded expectations. The 4.2% year-on-year increase in the All Urban Consumers index (CPI-U) was boosted by comparisons with a year ago.

The hacking into Colonial Pipeline’s network demonstrated the high-tech vulnerability of some infrastructure as well as society’s reliance on it. Colonial is the largest privately owned pipeline in the U.S., carrying up to 45% of the east coast’s gasoline supply from refineries in Texas to New Jersey.

The media is not short of simple solutions for climate change. Solar panels and windmills have been cheaper than natural gas for so long in the popular narrative that you’d think utilities are willfully pursuing lower profits by not blanketing the country with them. The industry that provides over 80% of our energy is often demonized by extremists who drive to protest pipelines.