An update on Energy Infrastructure, Ep #76

Upthinking Finance™ is now trademarkedIs the energy transition really leaving oil and gas behind, or is the story more complicated? In this episode, Emerson sits down with Simon Lack, CFA, Managing Partner at SL Advisors and veteran of more than four decades in investment management, to unpack what is actually happening inside the midstream energy space.Simon draws on his experience as an investor, author, and board member of the CFA Society in Naples, Florida to walk through the history of MLPs, the painful reset after 2014, and why he believes natural gas and energy infrastructure are positioned to be long term winners in a world hungry for power, data, and reliability. You will want to hear this episode if you are interested in...Why energy infrastructure still matters for retirement income (00:00)The shale revolution, overbuilding, stranded assets, and the downturn into 2015 (05:00)Three major headwinds, energy transition fears, overbuild, and the pandemic washout (11:30)Why Simon prefers natural gas over oil and why coal to gas was the real emissions win (15:00)LNG exports, global gas price gaps, and America’s edge in cheap energy (19:00)AI, data centers, and why 24/7 power demand points straight back to natural gas (23:00)Pipelines as toll roads, inflation linkage through regulated tariffs, and protecting purchasing power (34:00)The limits of solar and wind, the case for nuclear, and the reality of global energy demand (39:00)EVs, range anxiety, and why the United States is a tough market for full electrification (43:00)Simon’s philosophy for owning midstream as a long term income and value play (46:00)How an FX and hedge fund background led Simon into the midstream energy niche (47:30)From Rollercoaster To Reset: What Really Happened In MidstreamSimon walks through the origin story of MLPs in the late 1980s, explaining how tax advantaged structures attracted high net worth investors who were comfortable with K-1s in exchange for deferred income. That calm income story changed with the shale revolution. Rapid investment, overbuilding, and the emergence of stranded or underutilized assets pushed the sector into an extended downturn starting around 2014.Kinder Morgan’s decision to cut distributions and then restructure its GP and MLP entities became a turning point. Many long time income investors faced both reduced cash flow and unexpected tax bills, leaving them frustrated and reluctant to come back. Over time, many MLPs converted to corporations, widened their investor base, and rethought how growth should be funded.Simon also highlights one underappreciated culprit in the 2020 crash, heavily leveraged closed end MLP funds that were forced to liquidate in March 2020, pushing prices far below what underlying cash flows justified. The upside, in his view, is that the weakest hands and structures have already been washed out of the system.Why Natural Gas, LNG, And AI Make Midstream So InterestingLooking forward, Simon makes a clear distinction between oil and natural gas. Oil, he notes, is mainly a transportation fuel and subject to policy swings. Gas is different. It is difficult and expensive to move, which means infrastructure assets that move it are often backed by long term, take-or-pay style contracts and relatively visible cash flows.He points out that the biggest real “energy transition” in the United States has already happened quietly. Shifting from coal to natural gas has reduced emissions meaningfully while keeping power reliable and affordable. At the same time, America’s gas is far cheaper than in Europe or Asia, which sets the stage for robust LNG exports for years to come.Layered on top of LNG is the AI and data center build out. Data centers need power nearly 100 percent of the time, not 20 to 35 percent of the time like wind and solar. In Simon’s view, that reliability requirement makes gas fired generation a natural partner for AI growth. For midstream companies that move and process gas, that means decades of potential volume growth tied to two powerful drivers, export demand and compute demand.He also reminds listeners that much of midstream EBITDA is explicitly linked to the Producer Price Index through FERC regulated tariffs. That gives many pipelines built in inflation protection and can help long term investors protect purchasing power when inflation runs structurally above the old 2 percent target.A Cleaner Balance Sheet And A Simpler Investment CaseOne of Simon’s key messages is that the sector today is not the same as it was a decade ago. Leverage has come down from four to five times debt to EBITDA to closer to three to three and a half times. Growth projects are more disciplined and are often funded internally rather than through constant equity issuance. Many companies now combine attractive distributions with share buybacks and a self financing capital model.He also emphasizes that midstream has finally broken its unhealthy day to day correlation with crude oil prices. Pipelines are paid on volumes and contracts, not commodity prices, and recent years have shown that performance can be strong even when oil prices are weak.For investors, Simon frames midstream as a way to get paid to wait. You own real assets that help keep the modern economy running, you collect a meaningful income stream, and you participate in long term growth driven by LNG and data centers. His own approach is deliberately straightforward, no leverage, no trading, no derivatives, simply owning what he believes are durable businesses for a long time.Connect With Simon LackSimon LackConnect with Emerson FerschCapital Investment AdvisersOn LinkedInSubscribe to Upthinking FinanceAudio Production and Show Notes by - PODCAST FAST TRACK