Latest / The PhilStockWorld Investing Podcast / Natural Gas: Is Today's Falling Knife Tomorrow's Infrastructure Goldmine?

Transcript

Natural Gas: Is Today's Falling Knife Tomorrow's Infrastructure Goldmine? · The PhilStockWorld Investing Podcast

• 0:00
  Roy: Have you ever looked at a market trend, maybe something specific, and wondered, is this thing that looks like a total falling knife actually maybe the energy opportunity of the year?
• 0:11
  Penny: Yeah. That's a classic investment dilemma, isn't it? That gut reaction versus what's really going on underneath.
• 0:16
  Roy: Exactly. And today we're diving deep into that very question, but we're focusing specifically on natural gas.
• 0:22
  Penny: Right. And natural gas, well, it certainly presents that challenge right now, big time.
• 0:27
  Roy: Absolutely. So our deep dive today, it's built on some pretty comprehensive analysis. We're pulling insights from, this AI driven market intelligence platform, we call it Bodie McBoatface internally and also from some, some really lively discussions happening in a specialized market community. Okay. And look, when you just glance at natural gas prices, they are near historical lows.
• 0:50
  I mean, hovering around $2.77. Yeah. It's not hard to see why a lot of people might be, you know, running the other way.
• 0:57
  Penny: Well, what's driving that immediate picture, it's really a perfect alignment of bearish factors, you could say.
• 1:02
  Roy: Like
• 1:02
  Penny: You've got these exceptionally high inventories sitting around, what, 3.5 TCF. That's trillion cubic feet.
• 1:09
  Roy: Wow. That's huge.
• 1:10
  Penny: It's a massive amount of stored gas and it's well above the five year average. Then, you add to that a period of, let's say, geopolitical calm, relatively speaking.
• 1:21
  Roy: Okay.
• 1:21
  Penny: And seasonally soft demand. Right? It all just combines to create this impression of a market in, well, free fall.
• 1:29
  Roy: So yeah, on the surface, totally understandable why someone sees this and thinks, Nope, time to head for the exits.
• 1:34
  Penny: Sure.
• 1:35
  Roy: But as we always ask here, is that the full picture? Our mission today is really to explore the fundamental forces, the real forces at play for natural gas. We want to understand why prices are where they are, but more importantly, figure out the best way to play this complex market.
• 1:52
  Penny: Right. Without getting totally caught up in the volatility of the commodity itself, because that can be brutal.
• 1:57
  Roy: Exactly. We're gonna try and uncover some surprising facts. Look at these big infrastructure shifts and see how, you know, expert analysis combines with advanced data to maybe tell a different story.
• 2:06
  Penny: Okay. So to really get a grip on the current price situation, you have to look at the supply demand balance.
• 2:11
  Roy: Right.
• 2:11
  Penny: US Henry Hub output is running around a 104.5 BCF day. That's billion cubic feet per day of production.
• 2:19
  Roy: Lot of gas.
• 2:20
  Penny: A lot of gas. And while, yeah, energy intensive sectors like AI data centers, crypto mining, they're definitely growing.
• 2:26
  Roy: We hear a lot about that.
• 2:28
  Penny: We do. But their current scale just isn't quite big enough yet to really counteract these huge inventory levels we talked about.
• 2:35
  Roy: Okay. That makes sense. And what about exports? How does that fit in?
• 2:37
  Penny: Well, the export capacity situation, it makes things even more nuanced. Think back to before 2017, The US had about maybe 13 BCF day of export capacity.
• 2:48
  Roy: Okay.
• 2:49
  Penny: Then there was this big push, especially, you remember, to accelerate LNG exports to Europe after everything happened there.
• 2:54
  Roy: Right.
• 2:54
  Penny: So we boosted that capacity up to around fifteen, sixteen BCF day. But that expansion has slowed down a bit recently. Some energy policy changes, a few projects even got paused.
• 3:05
  Roy: So what does that mean practically?
• 3:08
  Penny: Well, stepping back for a second, it basically means our export capacity is sort of flat lining near that 16 BCF day mark for the time being.
• 3:16
  Roy: Okay.
• 3:17
  Penny: And that raises a pretty important question about potential bottlenecks, you know, if exports were suddenly to surge for some reason.
• 3:24
  Roy: Right. If demand suddenly spikes somewhere.
• 3:26
  Penny: Exactly. And then you look globally, Qatar, Australia, Russia together, they've added about 10 BCF day of global LNG capacity over the last three years or so.
• 3:37
  Roy: Okay.
• 3:37
  Penny: European spot prices, interestingly, have actually come down quite a bit. That reflects, you know, increased flows from Russia and inventories over there too.
• 3:47
  Roy: Right.
• 3:47
  Penny: Asian prices though, they're still a bit higher, which, you know, still provide some incentive for US LNG exports to head that way.
• 3:54
  Roy: So, okay, let me see if I had this right. We've got high US inventories, almost flat export capacity for now, easing European LNG demand. Some reports even hinting maybe a pipeline revival with Russia down the line.
• 4:07
  Penny: Yeah. Those reports are out there.
• 4:08
  Roy: That definitely paints a pretty bearish picture for natural gas prices right now.
• 4:12
  Penny: It does for the immediate term. But this is exactly where the deeper analysis starts to really shift the narrative, especially when you look out just a few years.
• 4:20
  Roy: Okay. So what's the shift?
• 4:21
  Penny: That prevailing narrative, the oversupply narrative everyone talks about. It's, I think, dramatically overshadowing some massive fundamental shifts that are already underway.
• 4:30
  Roy: Already happening.
• 4:31
  Penny: Yes. We're talking about infrastructure driven demand. This isn't speculative hope. This is capacity that's already contracted. It's coming online.
• 4:39
  Roy: Okay, contracted capacity. That's different. So what does this fundamental shift really mean for the future then?
• 4:45
  Penny: Well, look at the U. S. Energy Information Administration, the EIA. Their projections show North America's LNG export capacity is on track to more than double by 2028.
• 4:55
  Roy: Double.
• 4:56
  Penny: Yeah. From about 11.6 BCF day to a staggering 24.4 BCF day. Wow. And even more immediately, just looking at 2025, 2026, key projects coming online in just those two years will add 10.3 BCF day. That's almost doubling current capacity in just two years.
• 5:14
  Roy: That is a truly enormous surge. Just around the corner, really.
• 5:18
  Penny: It is. And LNG isn't the only thing driving this. What's also fascinating here is the projected demand just from AI data centers.
• 5:25
  Roy: Ah, yes. The other big demand story.
• 5:27
  Penny: Goldman Sachs is projecting 3.3 BCF day of new gas demand just from these facilities. I mean, think about it. They need power twenty four seven reliably.
• 5:36
  Roy: Right. They can't go down.
• 5:38
  Penny: Exactly. And natural gas is rapidly becoming default choice even for companies that have zero emission goals on paper. This isn't some tiny trend way off in the distance. It's real. It's accelerating demand.
• 5:50
  Roy: Okay, huge new LNG export capacity coming online, accelerating AI demand. But if all this gas is coming, how does it get where it needs to go? Because pipelines matter, right? Capacity there is a big factor.
• 6:03
  Penny: Absolutely critical. Look, the Matterhorn Express Pipeline, that provided some temporary relief late last year in 2024. Okay. But it's projected to hit capacity by late twenty twenty five.
• 6:12
  Roy: Already.
• 6:12
  Penny: Yeah.
• 6:13
  Roy: Yeah.
• 6:13
  Penny: And the next major pipeline called Blackcomb, that doesn't come online until the 2026.
• 6:19
  Roy: So that leaves a gap.
• 6:20
  Penny: It potentially creates a bottleneck. Yeah. Maybe twelve months or more just while this LNG export demand is really ramping up.
• 6:28
  Roy: And we see this already, don't we? Like, regional price differences.
• 6:31
  Penny: Exactly. You already see places like the Northeast paying, what, $6.07 per MMB 2,000,000 British thermal units premiums?
• 6:38
  Roy: Just because of infrastructure constraints?
• 6:41
  Penny: Precisely. It highlights the importance of the pipes.
• 6:43
  Roy: This also brings up an interesting geopolitical point, doesn't it? What about the whole Russia situation? If peace talks in Ukraine say we're successful and Russian gas somehow comes back to Europe, what then?
• 6:59
  Penny: That's a fair question, but the timeline matters immensely. Even if that happened, Russian infrastructure has been damaged, political relationships are, well, fractured to say the least. Sure. It would take a minimum bare minimum of twelve to eighteen months just to restore meaningful Russian gas flows to Europe.
• 7:15
  Roy: Okay. A year to year and a
• 7:17
  Penny: half. Right. And during that crucial window, what's happening, US LNG export capacity will have grown massively, will have cemented its market share.
• 7:25
  Roy: Ah. So the timing works out for US exports regardless.
• 7:28
  Penny: It means that the so called Russia risk, at least in the near term, is probably largely overblown when you look at the infrastructure reality.
• 7:36
  Roy: Okay. That's a really interesting perspective. Yeah. So if this long term demand picture, the infrastructure build out, if it's also compelling, why is the price so low right now? Is it just market sentiment being slow?
• 7:47
  Penny: Mhmm.
• 7:48
  Roy: Or are there still fundamental factors keeping it down?
• 7:50
  Penny: Well, Many experts we follow believe that $2.75 could actually be a fundamental bottom for the price.
• 7:57
  Roy: The floor.
• 7:58
  Penny: Kind of. Historically, below $3 is where marginal production starts to get shut in. The economics just flip negative for those producers. Mhmm. And even at current prices, LNG export economics, still profitable.
• 8:09
  Break even is around $2.50.
• 8:11
  Roy: Okay.
• 8:12
  Penny: And that AI and data center demand we talked about, it's accelerating pretty much regardless of the wider economy. Plus, don't forget the storage injection season is ending. Winter demand is, you know, rapidly approaching.
• 8:23
  Roy: Right. Seasonality kicks in. So, okay, stepping back, looking at the bigger picture. The risk versus reward for maybe taking a cautious long position in natural gas itself, it's starting to look more favorable.
• 8:40
  Penny: It's becoming more favorable, yes, But, and this is the big but we keep coming back to. Right. The real opportunity, maybe the better odds, lie elsewhere. It's really about avoiding that immense volatility you get, betting directly on the commodity.
• 8:53
  Roy: Which can wipe you out pretty quickly if you're wrong.
• 8:55
  Penny: Exactly. This whole situation is almost like a master class in sidestepping commodity risk.
• 9:01
  Roy: How so?
• 9:01
  Penny: Instead of trying to fight a chart, you know, a price chart with a history of just brutal volatility Yeah. The smart focus shifts to these frankly boring but incredibly resilient infrastructure plays.
• 9:12
  Roy: The pipelines and terminals again.
• 9:14
  Penny: Exactly. The things that could potentially quietly double your investment while generating a steady dividend income.
• 9:20
  Roy: Okay. Let's unpack that because that sounds pretty appealing. If direct commodity exposure is too risky, what is this better way to play the natural gas theme?
• 9:29
  Penny: The experts we looked at are really clear on this. Focus on the infrastructure plays.
• 9:34
  Roy: Okay.
• 9:34
  Penny: Think pipelines, terminals, the businesses that profit from the volume of gas flowing through them, basically regardless of what the actual price of that gas is doing day to day.
• 9:45
  Roy: They're like toll roads for gas.
• 9:46
  Penny: That's a great analogy. They collect tolls on the volume. And the key criteria for picking these plays are pretty simple. Low debt is crucial.
• 9:54
  Roy: Okay. So strong balance sheet.
• 9:56
  Penny: Very important. And a price earnings ratio or PE ratio under 20.
• 10:00
  Roy: And just remind us, why under 20?
• 10:02
  Penny: That PE ratio basically tells you it's trading at a reasonable valuation relative to its earnings. It suggests you're not overpaying for the company, which is key for a stable long term play. You want value.
• 10:13
  Roy: Got it. Low debt, PE under 20. Any specific examples stand out?
• 10:17
  Penny: Well, top pick that came up frequently is Enterprise Products Partners, ticker EPD.
• 10:22
  Roy: EPD. Okay.
• 10:23
  Penny: It fits this profile almost perfectly. It has a PE of around 9.3, which is well under 20, and it offers a solid 6.7% yield paid as dividends.
• 10:33
  Roy: Nice yield.
• 10:34
  Penny: Yeah. And it's often called a financial fortress. That's because it has a really strong balance sheet, very reliable cash flow.
• 10:41
  Roy: Okay. Financial fortress, low PE, good yield. What about growth? Is it just a stable dividend payer or is it tied into this future demand story?
• 10:51
  Penny: Oh, it's definitely tied in. EPD isn't just about a strong balance sheet. They have a massive $7,600,000,000 project backlog.
• 10:59
  Roy: 7,600,000,000.0.
• 11:00
  Penny: Billion. And these projects are directly tied to, guess what, LNG exports and that growing AI data center demand.
• 11:08
  Roy: So right where the growth is expected.
• 11:09
  Penny: Exactly. And crucially, these aren't just speculative ideas. These are contracted fee based projects. They generate returns pretty much no matter what natural gas prices themselves are doing.
• 11:19
  Roy: Because they just make their money from the volume moving through their system.
• 11:22
  Penny: Precisely. They have this vast network, and they collect fees on the gas flowing through it.
• 11:26
  Roy: Were there other names that came up as strong candidates?
• 11:29
  Penny: Yeah. A couple of others were highlighted. Plains All American, ticker PA, that one was framed more as a deep value play. It has a PD around 11.7 and an even higher yield, about 8.8.
• 11:40
  Roy: Okay. PAA for value.
• 11:42
  Penny: And then there's Williams Companies, WMB. Now its PE is slightly outside our preferred range, around 21.5, so a little higher valuation.
• 11:51
  Roy: Okay.
• 11:51
  Penny: But it owns the Transco pipeline, and that is arguably the single most valuable natural gas pipeline system in America.
• 11:58
  Roy: Transco's.
• 11:59
  Penny: And they have seven expansion projects planned through 2029, specifically targeting that AI and LNG demand. So still very relevant.
• 12:07
  Roy: Interesting. So it sounds like the key is this midstream infrastructure. Are there areas within the broader energy space related to this theme that maybe we should avoid?
• 12:17
  Penny: Yes. Definitely things to be cautious about. The analysis pointed towards avoiding companies with high debt loads. Kinder Morgan was mentioned as an example there.
• 12:25
  Roy: Okay. Avoid high debt.
• 12:26
  Penny: Also, be wary of highly cyclical areas. LNG shipping, for instance. Those shipping rates can collapse almost overnight depending on market conditions. Very volatile.
• 12:35
  Roy: Right. Different kind of risk.
• 12:36
  Penny: And even pure LNG terminal like Cheniere or Venture Global were noted as maybe being a bit too richly valued right now. The PEs might be too high.
• 12:45
  Roy: So the sweet spot really seems to be that fee based, midstream infrastructure, the pipes, and related facilities designed simply to move the gas.
• 12:56
  Penny: That really is the fundamental takeaway here. A company like EPD, for example, seems perfectly positioned to benefit from this whole natural gas thesis, but without taking on that direct commodity price risk.
• 13:07
  Roy: Because it's fee based.
• 13:08
  Penny: It's fee based. It has direct LNG export exposure through its connections on the Gulf Coast. And it has those AI data center tailwinds because it serves that Southeast tech corridor where a lot of growth is happening.
• 13:21
  Roy: And it's a financial fortress, so it can fund its growth.
• 13:24
  Penny: Right, without having to issue more equity and dilute existing shareholders. If natural gas demand goes up, EPD captures the upside through higher volumes and building out these new contracted projects.
• 13:35
  Roy: And if prices stay stubbornly low,
• 13:37
  Penny: they still collect their tolls on the volumes flowing through the existing system. It's a much more resilient model.
• 13:41
  Roy: Okay, so as we sort of wrap up this deep dive, the central lesson seems really crystal clear. The big opportunity here might not be in trying to time the wild swings of natural gas prices themselves, but maybe in strategically investing in that, well, boring but highly profitable infrastructure that supports its inevitable growth.
• 14:03
  Penny: Yeah, this deep dive has really shown us I think the profound difference between you know directly betting on a volatile commodity like natural gas and strategically investing in those stable fee based businesses, the midstream infrastructure.
• 14:17
  Roy: They profit from the sheer volume regardless of price. And just to reiterate those key criteria.
• 14:23
  Penny: Low debt and a PE ideally under 20.
• 14:25
  Roy: And Enterprise Products Partners, EPD, seems to really embody that strategy. Yeah. You mentioned the PE of 9.3, that solid 6.7% yield, and that huge $7,600,000,000 project backlog.
• 14:38
  Penny: Directly tied to LNG exports and AI data center demand, it's a prime example of contracted capacity that's just poised for growth.
• 14:45
  Roy: Okay. So here's maybe a provocative thought for you, the listener, to consider as we finish up. The natural gas oversupply narrative that you hear so much about maybe it's truly overshadowing this massive funded and crucially contracted infrastructure build out that is already underway.
• 15:02
  Penny: It's happening now.
• 15:03
  Roy: It really makes you think sometimes the biggest opportunities are hiding in plain sight, doesn't it? Far away from the daily headlines and the direct commodity risks. Just waiting perhaps to quietly double while paying out steady dividends along the way.
• 15:17
  Penny: Exactly. It's a compelling idea.
• 15:19
  Roy: Which kind of makes us wonder what other areas out there might have a similar dynamic, you know, where a seemingly boring underlying infrastructure play actually offers a safer, maybe more profitable entry into a really high growth sector.
• 15:33
  Penny: That's a great question to ponder.
• 15:35
  Roy: This deep dive, I think, really underscores the value of looking beyond those immediate perceptions, beyond the noise, and really understanding the fundamental structural shifts that are happening underneath. Thanks for diving deep with us today.