Market Commentary: EQT Chief on Unleashing U.S. LNG
Updated: Jun 21, 2022
In the ongoing effort to reduce emissions, natural gas needs to be viewed as part of the solution—a complement to renewables. We recently met with Toby Rice, President and CEO of EQT Corporation (NYSE-EQT), the largest U.S. producer of natural gas. Toby is also a strong advocate for the role of natural gas and has championed, "Unleashing U.S. LNG," in which he writes: “Reducing international coal with American natural gas is the largest green initiative on the planet and the world’s best weapon to address climate change.” The plan is simple in concept – quadruple U.S. LNG capacity to 55 Bcf/d by 2030 to replace international coal.
Toby points out that the U.S. has led the world in emissions reduction from 2005 through 2019, primarily by displacing coal with natural gas, and to a lesser extent, renewables including wind and solar. According to the U.S. Energy Information Administration (EIA), the former has accounted for about 60% of the carbon emissions reduction. While wind and solar generation are the fastest growing sources of power in the U.S. and Europe, they are not the perfect solution. The power generated is intermittent and the energy is difficult to store for more than several hours. This necessitates the need for back-up power, such as natural gas.
Source: EQT Corporation, IEA data and statistics.
 Calculated as total global emissions by energy source minus emissions by energy source for U.S. for 2019.
Key Takeaways from “Unleashing U.S. LNG”:
1. U.S. policy needs to be global in scope to address climate change. International coal consumption outside the U.S. is growing (see our May 25th commentary) and accounts for ~48% of international energy emissions.
2. According to EQT’s calculations, unleashing U.S. LNG by 2030 to replace international coal is the equivalent to the combined effect of electrifying 100% of U.S. vehicles, installing rooftop solar on every U.S. home, and doubling U.S. wind capacity.
3. The conversion of a coal power plant to natural gas has the same CO2 emissions reduction effect as replacing a mid-size gasoline vehicle with an electric vehicle.
4. This plan does not need government subsidies, but rather the opposite. It will be funded by industry and generate tax revenues. In effect, this would save the public trillions of dollars required to finance green initiatives.
5. Unleashing U.S. LNG is the most expedient way to reduce CO2 emissions. EQT estimates that there is currently 175 Bcf/d of coal-to-gas switching demand in the world. However, renewables and new technology will still be required to achieve climate goals. For example, the adoption of carbon capture and hydrogen.
6. Natural gas will still be required as a back-up source of power to support renewables, due to the latter’s intermittency issues.
Toby believes that he is gaining political support for his plan from both sides of the aisle. However, there is still a lot of wood to chop. We anticipate that the biggest hurdle will be getting new infrastructure (pipelines and LNG facilities) constructed, including the need to:
Drill more wells EQT estimates that by adding 50 rigs in four basins, the current rate of natural gas production could ramp up from ~45 Bcf/d to 90 Bcf/d by 2030. (The U.S. currently produces ~95 Bcf/d). The largest natural gas field in the world resides in Appalachia, which would be the major source of supply under the plan.
Increase pipeline capacity from the northeast Production from Appalachia can’t increase without increased pipeline capacity from the northeast. This is the biggest obstacle! There have been at least six pipeline projects, 7 Bcf/d of capacity, that have been either cancelled or delayed because of political opposition and failure to receive permits. The largest,Mountain Valley Pipeline (MVP), a 2 Bcf/d project, is ~95% complete and awaiting final permits to proceed. This project is ~$3.1 billion over budget and about 5 years behind schedule. It’s hard to imagine that a new interstate pipeline will be proposed along the northeast corridor given the construction risks and the large capital outlay required, in our view, unless there is substantial government assurances and support.
Construct more LNG export facilities Currently, the U.S. is maxed out and exports ~12 Bcf/d from 7 LNG export facilities, the majority of which,(5)are located along the Gulf Coast. There are 2 more facilities approved by the FERC and currently under construction that will enter service over the 2023-24 timeframe, according to the EIA. It can take four to six years to permit and construct an export facility.
Note: Sabine Pass 6 and Calcasieu Pass were completed/commissioned in 2022. Due to a fire, Freeport LNG (2.1 Bcf/d of peak capacity) will be offline until September with only partial operation through year end.
IN OUR VIEW
On one hand, Europe and the U.S. clamor for more oil, natural gas, and even coal to address the current energy crisis. Ironically, they continue to simultaneously advocate for the end of fossil fuel. Policy makers need to abandon group think and be pragmatic in meeting the global objective of decarbonization. There needs to be recognition of the strides in reducing greenhouse gas (GHG) emissions, including methane, that traditional energy companies have made. EQT is among the leaders. The company has contributed to ~5% of all reductions in U.S. GHG emissions since 2005 and has committed to achieving net zero emissions by or before 2025.
THE BOTTOM LINE Clean energy and fossil fuels are both required to meet global climate ambitions as well as combat energy poverty in undeveloped nations. We believe investing in both will provide investors with attractive long-term returns. In the near-term, we expect traditional energy stocks to continue to outperform for the following reasons:
Commodity prices are likely to stay elevated for the foreseeable future due to years of underinvestment.
A surge in supply is unlikely, as energy companies have gotten the shareholders’ message demanding financial discipline
Consequently, free cash flow will continue to be allocated to debt reduction, dividend increases and share buybacks
The energy sector remains the cheapest S&P 500 sector with an estimated 2022 P/E multiple of ~9.7x versus ~18.5x for the S&P 500 (as of the end of May). It also provides investors with an attractive and growing yield (based on dividend increases) of 3.3% (S&P 500 Energy as of 5/31/22)
When the stock market ultimately bottoms—and it will—we expect a rotation back into growth stocks (i.e., companies with growing revenues but high valuation multiples) from value. Clean energy stocks will be beneficiaries. We do believe investors need to be selective in their stock picks, investing in companies with best-in-class technology underpinned by a healthy balance sheet and positive cash flow. As we’ve stated many times, the clean energy train has left the station!
SAM’S Infrastructure Income and ESG Infrastructure strategies invest in midstream companies with a targeted 65% and 35% weighting, respectively, and an approximate 20% and 50% allocation to clean energy stocks, respectively.
U.S. Energy Demand Likely to Wane in a Recession
Historically, recessions (and high prices) have led to declines in energy demand. We suspect that even in a recessionary scenario, commodity prices will soften but not collapse due to tight supplies and low inventory levels across commodities. Due to the COVID-19 pandemic, total U.S. energy consumption experienced its largest annual decrease since at least 1949, according to the EIA (i.e., falling ~8 quadrillion Btu to 93 quadrillion Btu or 7% in 2020). Specifically, the transportation sector, which accounted for 26% of total 2020 U.S. energy consumption, reported the largest decrease of approximately 15% year-over-year. Not surprising, the residential sector’s energy demand remained resilient (about -1%) during the pandemic-driven recession. Utilities have been outperforming recently (UTY was up 3.5% vs. 0.0% for the S&P 500 in May) given investors’ concerns of an impending recession and the defensive nature of the sector. Of note, SAM’s Infrastructure Income and ESG Infrastructure strategies target a portfolio allocation to utilities of 20% and 15%, respectively.
The financial crisis (December 2007-June 2009 as defined by the NBER) resulted in a decrease in total U.S. energy consumption of approximately 5% (i.e., ~94 quadrillion Btu in 2009, down from ~99 quadrillion Btu in 2008). The industrial and transportation sectors reported the largest annual decreases of approximately -9% and -3%, respectively. The dot.com bubble (recession during March-November 2001) led to a ~2% decrease in energy demand (2001 vs. 2000) with the industrial sector’s consumption most negatively impacted (about -6% year-over-year).
Biden Administration Takes Action to Support Clean Energy—A Positive for Solar
Earlier this month, the Biden Administration announced a 24-month tariff exemption for solar panel products from Cambodia, Malaysia, Thailand, and Vietnam. Conceptually, this two-year hiatus should allow enough time for companies to diversify their sources of supply and for manufacturing facilities in the U.S. to be constructed. Solar stocks reacted positively on the news, as some projects (mainly utility-scale) were at risk of being delayed because of equipment uncertainties (timing/availability/cost). As noted in the 6/6/22 White House statement, “Roughly half of the domestic deployment of solar modules that had been anticipated over the next year is currently in jeopardy because of insufficient supply. Across the country, solar projects are being postponed or canceled.” The Commerce Department had initiated an investigation on 3/25 into the circumvention of U.S. tariffs on Chinese solar products through Southeast Asian countries, which led to a massive disruption in the solar sector.
Aiming to provide access to clean and reliable electricity, the Biden Administration also announced the use of the Defense Production Act (DPA) to promote domestic production of clean energy technologies. Specifically, the President is authorizing the Department of Energy to use the DPA to rapidly expand American manufacturing of five critical clean energy technologies:
▪ Solar panel parts like photovoltaic modules and module components
▪ Building insulation
▪ Heat pumps, which heat and cool buildings super efficiently
▪ Equipment for making and using clean electricity-generated fuels, including electrolyzers fuel cells, and related platinum group metals
▪ Critical power grid infrastructure like transformers
Additionally, the Administration plans to use master supply agreements with “super preference” status for federal procurement of solar systems to promote growth of domestic solar manufacturing capacity.
Energy Posts Strong Gains in May
In May, SAM’s Infrastructure Portfolio produced a return (net) of 5.8% compared to 0.2% for the S&P 500 and performed in-line with its customized benchmark, which increased 5.7%. SAM’s ESG Infrastructure Portfolio generated a return (net) of 5.0% vs. 5.5% for its customized benchmark. The biggest portfolio laggards in May were utilities that generated a total return of 4.1%, as measured by the Philadelphia Stock Exchange Utility Index (UTY)
The S&P 500 Energy sector posted a one month return of 15.8% in May and is still the best performing of the 11 S&P 500 sectors year-to-date with a return of 58.5% as of May month end. This compares with the S&P 500’s negative year-to-date return of -12.8%. The Alerian Midstream Energy Index (AMNA) and S&P Clean Energy Index (SPGTCED) posted total returns of 6.4% and 5.3%, respectively, last month.
Sam Partners’ Infrastructure Income and ESG Infrastructure Strategies seek to provide sustainable income and growth with capital preservation. This is accomplished by investing in a concentrated portfolio of high-quality clean energy companies, midstream energy companies and utilities that are well positioned to participate in the energy transition to a net zero carbon future. A diversified approach to investments across these sectors should optimize risk-adjusted returns, in our view. Our Infrastructure Income Strategy offers investors a current yield of 4.8% and growth potential of ~7%; while the ESG Infrastructure Strategy that is more heavily weighted with clean energy stocks and adheres to strict ESG criteria, offers investors a current yield of 3.9%. In a world starved for yield, we believe these Strategies offer a compelling value proposition.
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