Let me introduce you to the worst take on the economy of 2022. BlackRock President Rob Kapito appeared at a conference in Houston this week. He made more than $20 million last year. His company is considered “Too Big to Fail” by the Federal Reserve. While discussing the ongoing “scarcity inflation” that is weighing on natural gas and oil prices, worker shortages, and worsening food supplies… he said this…
“For the first time, this generation will go into a store and not be able to get what they want,” he said. “And we have a very entitled generation that has never had to sacrifice.” I’ll remind you that Kapito makes $20 million a year.
Also, let me remind you that one of the biggest drivers of ESG policies in boardrooms and balance sheets – the very trend that is keeping capital out of the hands of oil and gas producers and driving up energy costs (and everything else) — is BlackRock. This may be the worst level of self-awareness I’ve witnessed in years.
Speaking of ESG… Let’s Talk About Europe
Before Russia invaded Ukraine, European nations were experiencing energy challenges from their transition to renewable sources. And the EU has been starving capital for new local oil and natural gas projects for years. However, the Russian invasion has exacerbated an energy crisis.
To be very candid: Europe was lucky to have a mild winter. I have friends in the energy sector in Switzerland, Germany, and France, and all of them were concerned about rolling blackouts back in October if winter was colder than anticipated. European natural gas storage levels are almost at their lowest levels over the last five years.
As relations between Russia and Europe hit recent new lows, the question is who will provide liquefied natural gas (LNG) to the region. The answer is here in the United States. However, the U.S. alone won’t be able to replace Russian supplies completely.
The global LNG market has been VERY tight – and there is very little new capacity coming online in the next five years. LNG prices are likely to remain elevated, especially as Asian nations come back online and purchase fuel in the wake of their reopening from COVID-19. In addition to buying pressure, there isn’t a lot of substitution in this market.
Wind and solar are intermittent sources, and they are VERY expensive to integrate to ensure the replacement of baseload capacity. We’ll likely need to see a dramatic downturn in battery storage prices for long-term success in converting electrical generation to these sources. And coal prices are now likely to be very expensive as well.
Which Natural Gas Companies Will Benefit
So, the entire LNG supply chain will benefit from five years of tight supply and increasing demand. Who benefits?
First, LNG operators. You have likely heard of Cheniere Energy (LNG), which operates the Sabine Pass terminal. But, as I’ve noted, they have already sold out of their LNG from this facility into the 2040s. In addition, you have larger operators in this space, but they are multinational oil-and-gas companies like BP (BP), Shell (SHEL), and Exxon Mobil (XOM). These are more stable companies with diversified portfolios.
Second, look to the companies building projects in the United States and around the world. I like Tellurian (TELL), which has announced plans to create a new facility for LNG in Louisiana. It will take time to bring its project online, but it will start to generate long-term projects in the space. Others include Energy Transfer (ET) and Kosmos Energy (KOS).
Tomorrow, I’ll talk about another way to play this trend. Yes, many of these stocks have rallied in 2022. Don’t let that deter you from trading them. We’re in the early innings of a massive trend for the second list of stocks.