Below is a chart of both KYN and KMF from April 1, 2020 through July 2, 2021. The 149% and 142% returns of KYN and KMF do not include the dividends which accrued to their shareholders.
The chart below of KYN and KMF show their extreme selloff from COVID-19, the OPEC+ dispute and the MLP Closed-End Fund forced liquidation black swan.
While the appeal of MLP closed-end funds remain, their broader fossil fuel exposure and leverage make them less appealing than some pure-play natural gas investments like Antero Midstream (AM), Antero Resources (AR), and Tellurian (TELL) which offer unique growth and value propositions.
The chart below shows AM, AR, and TELL since March 31, 2021.
The Case for Natural Gas:
While activists promote renewables like hydroelectric dams, wind turbines and solar panels, these alternatives provide a fraction of the energy generation needed to heat our homes and keep the electricity on. By substituting natural gas with coal plants, the United States has lowered its carbon footprint more effectively than many other economic powers. During the coming decades-long transition to broader use of renewables, we expect natural gas will continue to grow as “the clean fossil fuel”, while sllowly displacing coal and oil.
“Coal plants supply less than 20 percent of the country’s electricity, down from about half a decade ago. Over that same time, the share from natural gas has doubled to about 40 percent. Renewable energy has also more than doubled to about 20 percent, and nuclear plants have been relatively steady at around 20 percent.”
IGA has been very fortunate with natural gas stocks over the last 15 months, specifically Antero Resources (AR), Antero Midstream (AM), and Tellurian (TELL). AR and AM were highly leveraged, but their continued stock and bond purchases, premiere basin exposure, and sharp investment banker management team kept us buying. Tellurian will provide a long-term global “LNG” business directed by CEO Sharif Souki who revolutionized LNG shipping as Co-founder and former CEO of Cheniere Energy. With the secular bull market in natural gas, these three natural gas stocks still have compelling potential.
Last year’s collapse in oil prices – oil prices turned negative last May in the futures market – led to a collapse in oil drilling. When oil wells shut down, they not only stop producing oil but also the associated natural gas that comes from the same well. Consequently, when the market crashed last year, supply fell off for natural gas, but the demand for it did not. Consequently, demand continued rising with less supply resulting in the 11-year bear market in natural gas prices ending.
The economy will continue to grow and with the Delta Variant fading, interest rates should resume their march higher. The degree to which interest rates rise will depend on how meaningfully inflation rises. With the current combination of excessive monetary and fiscal stimulus, combined with supply shortages, and millions to re-enter the workforce, interest rates could rise another 2-3% or more.
Among the skills I have acquired throughout my investment career, understanding market cycles and major market cycles has proven critical. Those who had invested outside of technology following the 2000 tech bubble, made attractive returns while those who didn’t pay dearly. Those who did not recognize the ESG movement and fade fossil fuels and own big-cap tech over the last eight years significantly underperformed. We now believe that the markets again are at an important turning point.
To hedge against higher interest rates we are buying commodities and cyclical stocks for our clients. Natural gas, MLPs, precious metal stocks, commodity stocks with copper, steel and lithium exposure should outperform while large-cap technology stocks like Microsoft and the FAANG stocks should underperform. Other asset classes including European equities and emerging market equities will provide outperformance relative to the S&P 500 over the coming decade.
Happy Fourth of July!