Strong economic activity should drive commodity stocks well into 2019

Warmer than normal summer has led to robust natural gas prices: … we believe that natural gas prices will be… the forward curve would suggest.

· We look for 2018 exit prices in the … and average 2019 price in the range of about …: Assuming …, we’d expect natural gas prices to … by November then move towards the … level by December 2018. We would expect natural gas prices to drift towards the … range by mid-year and break back towards … levels by yearend 2019, averaging about … for the entire year.

· We expect economic growth to … 2H2018: …; we expect … to … at least 2019, if not into YE2020.

· Therefore, we expect 2H2018 and 1H2010 power gross profit … than expectations: … .

· Similarly, we’d expect natural gas infrastructure businesses to … for 2H2018 through 1H2019: … .

· Utility performance is also likely to … economy: … .

· Threat or danger to our thesis is pending …: … .

· We believe LNG is likely … economy and weather: … .

· However, with … economic activity, we’d expect interest rates to …: … .

· Therefore, we believe … underperform …:

Conclusion is reserved for our paid subscribers only.

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Capitalism — i.e., “trickle-down” economics — works, and works very, very well!

Note: Please note that while this post is lengthy, take into consideration that I’m trying to condense a whole college…

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Only short-sighted, ignorant, uneducated or unthinking people would assume that share buybacks and dividends won’t help the economy!

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be …:
Similarly, we’d expect natural gas infrastructure businesses to perform … :
We expect economic growth to surpass …:
Strong economic performance should lead to …:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to … and, given normal weather, we’d expect natural gas prices to … for 2018 with an exit price of some …:

Conclusion is reserved for our paid subscribers only.

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be … industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some XX%
Interest expense deductibility capped at XX% of EBITDA for 2018-2021 and to XX% of EBIT after
100% investment deduction, except for utilities that would … interest
Preservation of existing … and …
Repatriation of profits tax at XX% for … and XX% for …
Base-erosion & Anti-abuse Tax (BEAT) …: If payments to foreign affiliates are … then BEAT is imposed. We … to companies that we cover, given … would be allowed to …
AES Corp. faces … , we …; AES has …:
NRG Energy …:
Exelon Corp. …:
Cheniere Energy, oddly enough, …:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should … but may be able to use …:

Analysis is reserved for our paid subscribers.

Conclusion is reserved for our paid subscribers.

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Share buybacks do not create value and the notion that a company can invest in its own stock is nonsense

Ever since I graduated business school – which was a long time ago – I’ve been having discussions and arguments as to whether or not share buybacks (SBB) create value. Despite the fact that many impartial studies have demonstrated and many mathematical proofs have been proffered that SBB don’t create value, astonishingly people continue to emphatically argue that SBB create value. This is not to say that SBB cannot be used to return truly unused capital back to shareholders, but we believe that SBB should be an action of last resort. Regardless, the conclusion: SBB cannot and, therefore, do not create shareholder value.
Even CEOs and CFOs of many companies can’t seem to bring themselves to stop SBB despite all of the evidence that companies cannot create value by buying back their own shares. And, even when it is demonstrated to these managements that there are far better ways to utilize the cash, managements still have reservations about ending their SBB program.
Therefore, I’m hoping that I can end this resistance to ending SBB through this editorial tutorial. The following lists arguments that we’ve encountered for why SBB create value for shareholders:
1) The P/E argument: SBB reduce share count, which increases EPS, and given the same multiple, the stock price must go up;
2) Investing in the company’s own stock creates value for shareholders: Companies can buy their stock at a low price and sell it at a higher price, which creates value;
3) Higher ROE means higher valuation: By reducing the amount of equity on the balance sheet, this raises the ROE on the returns from company projects, for which investors give the stock a higher valuation; and
4) Excess cash returned: This point is about returning excess cash to investors not about shareholder value.

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Letter to FERC outlining our thoughts on how to redesign wholesale power market pricing mechanism

For years, I have been advocating for a wholesale change in how power is priced in the wholesale electricity markets. And, I wish to be heard on this matter, because I believe that my views are not only intelligent and cogent, but also on-point to a future grid that is both reliable and resilient.

From my perspective, there are five main issues that must be resolved to maintain a grid that is both reliable and resilient for the long-term:
Renewable power disruption of wholesale power pricing
Proper compensation of reliability and resiliency characteristics of generation
No regression to “cost-of-service” rates
No “freebies” to businesses
Redesign must be based on market principals

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Summary and analysis of the 187 page DOE report titled “Staff Report to the Secretary on Electricity Markets and Reliability” dated August 2017 and summary and analysis of the 6 page PJM report titled “Energy Price Formation and Valuing Flexibility” dated June 15, 2017

DOE report titled “Staff Report to the Secretary on Electricity Markets and Reliability” dated August 2017, and
Summary of the 6 page PJM report titled “Energy Price Formation and Valuing Flexibility” dated June 15, 2017

Following are some of the highlights:

Changing circumstances are challenging current reliability:
Energy efficiency is done:
Retired plants were mostly baseload-type plants:
Grid operators must place and are placing increasing premium on flexible resources
More focus on resiliency is needed:
Current wholesale pricing inadequate for modern grid:
Cooperation between power and pipeline sectors is becoming crucial to reliability and resiliency, especially in winter,
Four issues that threaten grid reliability due to forced early retirements:

Conclusion is reserved for our paid subscribers only.

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As expected, the EPA repealed the Clean Power Plan (CPP); asks industry to help write a new regulation

CPP repealed: As expected, the Administrator of the US Environmental Protection Agency (EPA), Mr. Scott Pruitt, repealed the Obama-era CPP regulation aimed at forcing generators to reduce CO2 emissions by 32% from 2005 levels by 2030
CPP was like forcing car manufacturers to pay Tesla: The only way to achieve the CPP objective would have been for coal-fired generators to buy Renewable Energy Credits (REC) to offset CO2 emissions from its own plants, which is tantamount to subsidizing competitors’ generation

This would be equivalent to car manufacturers paying Tesla $X/car for every non-electric car that they sell to the consumers

EPA asks the industry for help in writing new regulations but what could be recommended? This was not expected. Regardless, we would expect that any proposed recommendations would involve inside-the-fence solutions

Conclusion is reserved for our paid subscribers.

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Our Expectations for 2H2017 is Better than would be Expected


Soft winter weather (warmer than normal) has not helped natural gas prices currently, nor the prospect for strong natural gas prices in 2H2017
However, due to declining production, storage levels have continued to remain below record levels seen last year


There was an article in the Central Daily News Agency (CDNA) of South Korea that predicted a large shortage of global LNG supply by some 2024 that would have a strong impact on pricing

In a related article, the CDNA is contending that India is set to renegotiate its contract with Cheniere Energy (LNG), also due to high pricing


Given our natural gas outlook, it is natural that investors may think that our view on the power sector is negative; however, it is not, particularly given the developments at NRG Energy
We believe that the power sector is at the cusp of another paradigm shift in which unprofitable assets finally exit stage left (or right, we don’t care which as long as they do)


We believe that the flight to safety is over and a general migration towards a “risk-on” portfolio started in 1Q2017, which we expect to continue into 2018
Also, we expect interest rates to continue rising, which isn’t going to do any favors for the utility and infrastructure sectors in terms funding costs and comparative investment profile relative to fixed income instruments

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