Discussing Energy In The Caribbean
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I spent a few days last week at the Catalyst Funds National Sales Conference in Puerto Rico. Catalyst is our mutual fund partner. It is about ten degrees warmer than Naples, FL where we’ve spent most of the winter, and the conference was once again thoughtfully located at the Royal Sonesta Hotel on the beach in San Juan.
In spite of the idyllic surroundings and poolside bar your blogger did work, running a grueling series of roundtable presentations with wholesalers explaining why midstream remains very attractive and answering their questions.
Feedback from clients and investors helps us better explain the opportunity. The investment case is not quite brief enough to qualify as an elevator pitch, but we believe is compelling. Investors who have done the homework to understand how it fits in their client portfolios have been handily rewarded in recent years. It’s summarized in The Energy Story’s Trifecta.
Some potential investors remain wary because of the steep drop the sector endured in March 2000, at the height of market concern over the pandemic. We all hope we’ll never again endure the lockdowns that many states (though not Florida) imposed on their citizens.
But the reason that type of market reaction is highly unlikely in the future is that much of the mismanaged capital that caused it was largely lost (see MLP Closed End Funds – Masters Of Value Destruction). Running a concentrated portfolio of stocks in a single sector with leverage is the pastime of the temporary portfolio manager.
Disaster is certain albeit with uncertain timing, as with a strategy of relentlessly selling put options for example. The PMs who oversaw such lunacy need alternative employment with which their skills are better aligned – perhaps as counselor providing emotional support to formerly wealthy closed end fund investors.
The Darwinian resolution visited on such strategies has rendered them of inconsequential size. It’s hard to be a serial offender at capital destruction. It won’t happen again.
The demand growth in natural gas for power generation drew many questions. Natural gas provides 43% of US electricity, a share that is likely to rise since data centers need reliable energy rather than the intermittent, weather-dependent offering of solar and wind.
Many learned for the first time that the Natural Gas Energy Transition is the big energy story in America. The impact of solar and wind has been less than left-wing media outlets often imply. Natural gas production has grown 8X as much as renewables on an energy equivalent basis throughout the past twenty five years.
In Energy Secretary Chris Wright we have someone who is pro-reliable energy and believes the world should use more natural gas which can displace coal, reducing emissions (see New Energy Policies Are Here).
Was the DeepSeek news of January likely to trim the outlook (No – see Pipelines And The Jevons Paradox). Could small modular reactors compete with natural gas for power generation (not for at least several years – see Why The Navy Can’t Help With Nuclear and watch Why Not Nuclear?). Will Russian gas exports to Europe displace US LNG following peace in Ukraine (unlikely – see Will Europe Feed The Crocodile?).
Some questions came from New Englanders who thankfully don’t share their region’s self-destructive climate views. With natural gas pipelines from Pennsylvania to Massachusetts blocked by progressive energy policies, some wondered why Boston’s imports of LNG don’t come from Texas or Louisiana.
The answer is the Jones Act, which requires trade between US ports to be conducted on ships that are American built, owned and crewed. No such vessels exist, which is why Boston buys LNG from places such as Trinidad and Tobago.
The power needs of data centers were acknowledged by many. One participant from Atlanta, GA commented on the planned 615 acre QTS development in nearby Fayetteville which Google AI estimates will need 25 MW of power, enough to supply a million homes.
Tariffs are on everyone’s mind. Midstream is less exposed than most sectors to capricious and unpredictable policy revisions, because energy consumption is very stable (see Midstream Is About Volumes). Consequently, pipeline stocks are generally trading above their pre-election levels while the S&P500 is not. We think 4.5% yields, 2-3% growth and 2-3% of market cap in buybacks (i.e. 4.5+2.5+2.5) support 9-10% return expectations.
Finally, it was a pleasure to celebrate our ten year partnership with Catalyst Funds CEO Jerry Szilagyi. He’s built a great business with many talented people, and we are looking forward to continuing to grow together.
We have two have funds that seek to profit from this environment:
1. Energy Mutual Fund: Catalyst Energy Infrastructure Fund (Tickers: MLXAX | MLXCX | MLXIX)
2. Energy ETF: Pacer American Energy Independence ETF (Ticker: USAI).
More By This Author:
What Energy Transition?The Receding Energy Crisis
Will Europe Feed The Crocodile?
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