Gas market fundamentals are giving us exactly what we need to see for a firm fall.

Chart🧵

2024 demand is power led. 2025 Demand will be LNG led. 26-30 will be both. Weakening production has slipped to YoY decline

Power Thought
GS dropped 3 AI / Power reports this morning (my cup overfloweth!) and over the past 3 weeks we've seen over a dozen estimates from research houses and industry participants alike.

If you want to take a law of large numbers approach the median expectation is for ~5 Bcfpd of additional natural gas power burn by 2030, which squares to effectively just the market share capture of the anticipated load growth.

If gas can continue to increase market share (as it has in both coal switching regions but also greening regions as a key source of grid hardening) then we can cast our eyes upward towards the 10 Bcfpd+ trajectories.

One thing that these reports never seem to overtly capture is (a) the global picture (GS did a bit today and sees 34-48% power growth [all sources and fuels] in Europe by 2032) and (b) where price will play a role.

On the gas side if price floats from $2 to $4 over the next 1-2 years as is expected (CAL26 strip trades $4 for the first time since November today) there will be some elasticity in demand, some coal/oil will come back. $4 is still low enough for a lot of capacity build out to make sense, but it is interesting to see in this whole theme which analysts seem to be the most nervous - the Utilities analysts.

They see a sector that sized debt obligations in a 1% interest rate world, about to see 3-5% interest rates for longer than they were expecting, higher feedstock costs (nat gas prices), and an increasingly cost conscious customer base in which to try and place growth capital into a rate-base increase. Tricky!

It might be that the real infrastructure demand play is all independent power producers (IPPs) who step up to install behind-fence power solutions for the industrial (data center) players who need it. Much like crypto, this will stumble upon the market without the regular fanfare of publicized capacity timelines and que filings.

The decentralization of power could be a pretty big disruptor for the utility sector, regulatory capture, and climate goals. It also could be a really large accelerator for the power sources that can step up for the 24hr load demands facing the market. Perhaps 10 Bcfpd by 2030 is not just possible but probable. The simple load growth and market share assumptions that each scenario imply

Most common thematic natural gas question today is what will data center energy consumption mean for domestic natural gas power burn consumption.

Some thoughts 🧵👇 First. What could this look like. Estimates vary. Also data centers aren't the only thing going on in power. Heat pumps, air conditioning, industrial revamp are all vending into power demand forecasts. Lets broaden the net to total US power demand and acknowledge data centers will play a large role.

A generalist investment memo in Energy. My take. 🧵

Opener - which energy source holds the best forward return outlook?

Selecting from renewable (wind / solar / hydro), oil, gas, nuclear & coal

Which subset has the best S&D set up to provide for outsized investment returns?⬇️ - Renewables? Subsidy gamed infrastructure in a high interest rate enviro with scaling cost pressures into a constrained raw material market... No thank you.

- Oil? bullish S&D but long term demand grind... Not great. Not terrible. Can we do better?

"Levelized cost" math gets in the way of good public policy.

A quick example.

Exhibit A) these make renewable costs look very compelling; and I think they are factually accurate. Just incomplete.

Based on this slide you wouldn't invest in gas or gas gen. But "hold up"

🧵 ~1/2 as cheap? How can gas / Nuke / Coal / Hydro compete?

Cost looks compelling. Profit must follow the same ranking? Not quite.

Pricing is wildly different through the day.

Solar generates during the day (duh), peaking gen comes in at night.

TC had some great slides in the i-day. Stock was off on CGL $$ and pot'l disappointment they didn't have an asset sale in the bag to talk about?

However the gas infrastructure opportunity is clear.

My take on their best macro slides.🧵⬇️ Gas growth to 2050 is a Permian Montney supply story and a LNG + domestic story. The global call on gas resource is immense.

Most investors hit the balance sheet for working capital and debt and then move on, missing the little score board at the bottom of the statement.

The score, of course, is retained earnings. 🧵⬇️ So what's retained earnings? Simplistically its the sum of all profits and losses since the business began. If a company is growing with debt or growing by issuing equity, RE is not directly effected. It is the track record of profitability.

I think we are entering an era in Energy where the greatest performance will be had in owning the largest company's. Some qualitative thoughts and some quantitative thoughts.

🧵⬇️ First context and qualitative.

We are out of the wildcatter era. No longer can an oilman and his 3 best amigo's take $10mm and start an oil company, prove up some acreage, and sell it.

Start up's are now $0.5 - $1.0bn PE funded businesses.

The junior universe is mostly gone

Interesting TC comment on interest costs 🧵

"When we look at the pass-through for our interest costs, the overall interest, we have about CAD2.9 billion of financial charges, roughly 20% of that would flow through in our rates"

I assume this is similar for all pipeline co's (?) So near term 1/5th of this structurally higher rate will flow into tolling structures. And then longer term infra co cost of capital is going to have more and more of this interest spiked embedded in return hurdles.

If you've been watching closely this q we are ~ consistently trimming gas growth; and / or hearing degrading capital efficiency in the Montney small / mid cap space. As this gets digested the forward WCSB storage balances should look better now that TC has finished expanding. Haynesville is bottlenecked till Q3-23

https://twitter.com/JamieHeard5/status/1554933797434507265?s=20&t=KvQnsM4Jw3ztDtPtz4j-iw

What does the last decade of E&P returns tell us about which E&P's should be owned at which part of the cycle.

Since 2011 E&P's have returned an average of 14% total return, but the spread is huge (-90% to +180%). Stock picking matters. What does a look back tell us. 🧵⬇️ Below is a matrix of 6 month total return slices, sorted vertically from best to worst WTI slices and left to right on best total return 2011 to 2022.

Takeaways
- Best TR stocks mitigated tough years vs nailed good years
- It's a barbell, lots of under and out performers

Top free energy information websites🧵⬇️
@RBNEnergy . Current newsletter is always readable, they go behind the paywall after a while. Get on this newsletter.

rbnenergy.com/daily-energy-p… @ArcEnergyCharts are a free version of what most banks put out as their weekly chart pack. A good way to get perspective if you are sans @TheTerminal
arcenergyinstitute.com/section/arc-en…

Nations seeing a business case in LNG:

USA, going from 12 Bcfpd to 30 Bcfpd

rbnenergy.com/blurred-lines-… Mexico, going from 0 Bcfpd to 6.5 Bcfpd. That's right our southern NAFTA partner might lap us in LNG exports **to the pacific**, although we had a 20 year head start.

bloomberg.com/news/articles/…

Trudeau doesn't see a business case for exporting LNG to Europe. I volunteer to frame one out. 🧵⬇️

ctvnews.ca/politics/touti… First, big picture this is the price you can sell gas at in Europe (TTF) / JKM (Asia) vs selling gas at in Canada (AECO). TTF is $80 US today. Gas in Canada is free ($0) today (yea maintenance!) and only $5 in September

The opportunity is huge, but lets focus on the long term

For decades LNG prices were crude linked and LNG deals would be price as a % of Brent

As a result price didn't really correlate with supply growth like a normal market. Prices rallied through the 09/11 build out and then fell (with crude) following '14

What's the outlook? 🧵⬇️ The US is going to put up some incredible supply growth this decade.

rbnenergy.com/blurred-lines-…

Puck drops on the third period of 2022 market returns Sept 1st.

In E&P energy, getting the gas vs oil call right last December would have been 'helpful'. But, that aside, how would have a "value screen" worked this year?

🧵⬇️ "I want to buy cheap stocks" in December last year wouldn't have really worked year to date. December 31st multiples haven't correlated at all with total returns 2022 YTD.

We could be entering a period where nat gas businesses and oil businesses have divergent outlooks for a period. We've been here before; associated supply was a "oil good, gas bad" cycle. Recession could be "gas good, oil bad". And then we have pre LNG dynamics + LT dynamics. 🧵⬇️ First, how did this work before. Oversupply crushed both oil and gas stocks. Then associated gas crushed gas stocks while crude stocks went sideways. and over the last two years the undersupply has lifted all stocks.

Lesson being oil and gas stocks don't always trade together.

When is a cheap multiple, high yield free cash flow stock, actually quite expensive? An illustrative example.
🧵⬇️ Consider company A. Trades at a 3.5x forward multiple, a 19% FCF yield on a maintenance budget. It's big, and margins look fine. Looks pretty good right?

Lot's of AECO basis Q's floating around.

A short thread on my interpretation of the last 60 days and what it can tell us about the dynamics at play.

🧵⬇️ Gross🤢, $4 front month basis, we must be over supplied right? mmm not so fast.

It's the season of weekend pilgrimages to the lake & family so consuming a lot more podcasts.

Was interesting to hear Harley Bassman talk about how long term rates holding at relatively low levels (10yr @ 3%) was supportive of market valuations.

podbean.com/ew/pb-878ek-12… I've tracked this implied equity risk premium for the last couple of years and Bassman is right, you're getting 'paid' another 1.3% in the US to hold stocks and 2.7% more in Canada with the implied risk spread to the 10 year, than you were a year ago.

Thoughts on four ways to pick stocks, and a survey on which is you:

(1) Value Today
Method - screen on multiple, yield (div or FCF) to sniff out the cheapest CO’s in your list and weight appropriately

Philosophy - the sector is making widgets and in general all cos (cont’d) Should trade at the same value (and if they don’t the cheap companies will get acquired) so hunting cheap stocks is an efficient way to earn alpha.

(2) Value risked

Method - still screen for value but do sensitivity work and only select stocks that maintain their (cont’d)