(This is CNBC’s Power Insider newsletter, giving you an inside look at the investments, people and companies that power the global energy industry. Click here to subscribe.)
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What we heard from energy stakeholders
Oil prices have hit new highs this week, with media outlets quoting President Trump as saying Iran negotiations are in the “final stages”. But that’s not the real reason. The real trigger was that ships began passing through the Strait of Hormuz. As soon as hedge funds started seeing an increase in traffic, oil prices started falling, even before the Trump headlines hit.
Sure enough, oil prices rose on Thursday morning following more negative “headlines.” Continue to observe the traffic in the strait as your guide.
Thankfully, that’s not my focus today.
There’s a lot going on in the energy industry beyond Iran, and investors can’t afford to be fooled by the rapid-fire headlines about the conflict and miss out on other big money-making themes that are unfolding.
Last week on Power Insider, I talked about the huge power demands of AI. (In today’s issue, we will introduce another interesting trading idea about it.)
Well…a few days later, I was on a plane visiting two huge liquefied natural gas (LNG) facilities in Louisiana and Texas, states close to the power front. About 48 hours later, NextEra Energy (NEE) completed a blockbuster deal to acquire Virginia’s Dominion Energy (D), creating America’s largest power company.
Let’s start with Dominion trading.
NextEra shocked the energy industry by announcing a megamerger with Dominion. The all-stock deal is valued at about $67 billion, but if the deal is approved, the combined enterprise value of the new company will be about $420 billion. This is a pretty good sized “if” as some on Wall Street aren’t confident the deal will be approved by regulators. Jefferies’ team notes that it believes the deal is “likely to be rejected” because NextEra “does not have a strong track record of approvals.” But Jeffries also noted that Dominion is “unloved in its home state of Virginia,” and is probably happy that NextEra has a potential buyer.
Another energy official I spoke to called the sale “amazing,” adding that it would be a complicated process to get it through with multiple state approvals. He understands NextEra’s point of view. The Florida company likely wants to expand its regulated utility base and could use recent strong stock prices to help cover costs. But on the Dominion side, my insider calls it “embarrassing” and points out that the issue could come from a board unhappy with Virginia’s policies, perhaps seduced by promises of big paychecks for executives.
Evercore ISI says don’t underestimate the scale of regulatory approval. Analyst Nick Amicucci emphasized that the potential merger would require approval from the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC), some combination of the FTC and the Department of Justice, and all three of Dominion’s state commissions.
What is clear is that NextEra and Dominion would not have entered into the deal if they and their expensive lawyers had already considered these hurdles. The final outcome of the proposed agreement is less clear.
In the spotlight → If you want to trade on this, Jeffries says people are likely to bid on both Duke Energy (DUK) and Southern Company (SO) as potentially “safer havens” in the short term.
Predominant view #2 → Lawyers on all sides of this transaction will be paid, whether or not there is an agreement. Consider law school, folks!
Now, let’s look inward and see the already huge, yet still growing world of liquefied natural gas.
There were two big conversations when it came to LNG. To be honest, it’s actually three (and we always are). The first two were with U.S. Energy Secretary Chris Wright, and the third was with the Governor of Louisiana.
We set out the day before the sun rose and spoke with Secretary Wright in Port Arthur, Texas. The interview also provided the first look inside ExxonMobil’s massive new Golden Pass export facility.
Note → Qatar Energy is the main owner of Golden Pass and security is very important as its assets in the Middle East have been attacked by Iran. Thank you Exxon Mobil for letting us in the gate.
In a morning interview, Wright was bullish on China becoming a bigger buyer of U.S. oil. He also believes the U.S. will soon see more oil coming from Alaska. My friend and colleague Morgan Brennan spoke about this the same day in Alaska with ConocoPhillips CEO Ryan Lance. Folks, please don’t ever tell me CNBC isn’t working for you.
We then got into our rented VW Touareg and drove about 90 miles east to Cameron, Louisiana and the energy-famous Calcasieu Pass. The Pass (or CP to insiders) is the future home of Commonwealth LNG’s huge new export facility. We were at the site of a groundbreaking ceremony that took about 10 years to build (see internal lines below for more details).
I also had the opportunity to speak with the enthusiastic Governor of Louisiana, Jeff Landry. Landry is enthusiastic about the possibilities around natural gas, LNG, and AI. The governor proudly emphasized that the state is leading America in LNG exports. But our main question was a direct one. Does Louisiana have enough natural gas to fuel an LNG export boom and fuel dreams of AI-powered electricity? Landry said the answer is yes.
Wall Street’s view → What happens if oil and bond yields remain high for an extended period of time?
Power Insider is all about energy, and these days the stock market is no different. Energy stocks have risen an average of 35% since the beginning of the year, more than double the 16% rise of the next best-performing group, information tech. Although energy remains a small part of the overall stock market, investors in ETFs such as XLE, XOP, and OIH have performed very well.
As oil prices continue to rise, government borrowing costs also rise. This week, the 30-year Treasury note hit 5.17%, its highest level since just before the 2007 subprime crisis. Because oil is a big part of inflation, it’s also a major part of bond market movements. When oil prices rise, bond yields often follow suit.
As Bespoke Investment Research points out, the energy component of the CPI has soared to an annualized rate of 130% in just two months. This is the second-worst two-month surge in recent history, behind Hurricane Katrina in 2005.
So what now?
The upcoming “battle” will be between rising inflation risk and the AI hyperspending cycle. If the hundreds of billions of dollars in capital spending every few months related to AI infrastructure can be sustained, and there is no indication that it won’t, it could defeat rising energy and inflation risks in the market.
Goldman Sachs says profits are key to stock prices at this point. The company notes that the recent rise is “consistent with a sharp increase in short-term profit expectations” and is up 8% year-to-date. But don’t be complacent. Goldman also warned that stocks could be depressed over the medium term. Since 1980, there have been only 11 similar stock increases, according to the company’s data. Historically in these markets, the market has risen for a short period of time, but then faces “weak returns in subsequent months.” In other words, we could have a flat or even cooler summer.
Evercore ISI’s Julien Emanuel seems more optimistic. The strategist has set a year-end target for the S&P 500 index at 7,750, but has also announced a super “bull case to 9,000.” Emmanuel emphasizes that the pandemic has changed everything, including the way markets move. He writes that the likelihood of what he calls “extreme outcomes” is high on either side. Emanuel advises investors to keep an eye on the options market, advising them to buy the SPY 775C/725P collar if there is “unimaginable upside” in both the bond market and oil prices in the short term.
My view → This is an AI trading with energy that doubles your money
Speaking of the stock market. This would be a great RBI (random but interesting!) if we don’t get one more RBI this week.
If you’ve invested in a basket of “AI giants,” companies that are spending hundreds of billions of dollars building data centers, you’re good to go. The equal-weighted basket is up only about 7% this year, but a hefty 43% over the past 12 months. But if you instead put that same money into a basket of companies that are building AI infrastructure and energy sources, you’d do much better.
In fact, your money has literally doubled in the last year.
In fact, Meta and Microsoft’s stock prices have fallen over the past year. Nvidia appears to be in limbo after last night’s results.
But look at the list of infrastructure. And yes, on the other hand Terrawolf (WULF) Also contributing to the bulk of the gains were data center construction company Equinix (EQIX), engineering and power management company Eaton (ETN), and cool-it-cool company Trane (TT). At least for now, investor money is changing.
Take a look → These days, the only thing flowing through the Strait of Hormuz is water. However, there are early signs that tanker shipping may finally start to recover. This video explains it in detail.
inside line
This week’s Inside Line is Ben Dell, managing partner at leading energy investment firm Kimmeridge and executive chairman of Commonwealth LNG. Ben didn’t choose the normal route to get natural gas. He is a graduate of St Peter’s College, Oxford. We asked him a few questions about the $10 billion-plus new LNG export facility.
random but interesting
This week’s RBI clearly illustrates that. While the Strait of Hormuz gets all the attention, the Strait of Malacca, which is less talked about in Asia, is actually a major transit point for oil and liquids. A commodity analyst at JPMorgan explains it well.
