30 Sep ELCO Select Fund August Monthly Commentary
August turned out to be a strong month for the ELCO Select Fund (August +3.91, YTD +31.32%) as the energy crisis in Europe continues to rage on. These unfortunate events highlight the need for an “all of the above” global energy policy. This is especially true of natural gas of which there is no current replacement only complimentary energy sources like wind and solar. The situation in Europe could create significant opportunities for U.S. based liquefied natural gas (LNG) companies and the associated midstream infrastructure that supply those export facilities.
As a retaliation to the ongoing sanctions put on them for the Ukraine War, Russia has weaponized its energy supply. Russia announced the decision to shut off the Nord Stream gas pipeline. Much of Russia’s energy output goes to satisfying European demand, especially natural gas sent over a network of Soviet-era pipelines crisscrossing Ukraine and other Eastern European countries. For comparison purposes, last year the pipeline delivered about 35% of Western Europe’s gas. The economic pain has already and will continue to penalize Western Europe. According to Goldman Sachs, the average European household is facing a utility bill that is triple that of 2021. Goldman is also saying that the repercussions could be deeper than the 1970s oil crisis, as there are no indications of the Ukraine War subsiding. Finland is warning of an “energy-industry Lehman Brothers” moment, with companies facing sudden cash shortages. Both Finland and Sweden announced a $33 billion emergency liquidity facility Sunday to backstop utilities.
In the short term, as mentioned above, the energy crisis is a major tailwind for global LNG prices. Cheniere, the Fund’s largest position stands to be a prime beneficiary. The ongoing question which we have talked about many times this year, is to what extent European countries will be willing to enter into long term LNG contracts to provide energy security. In the meantime, Europe is adding two floating LNG terminals (Golar off the coast of Italy, and Excelerate Energy of the coast of Finland). These terminals and expected additional ones will provide some band aid solutions for Europe in importing LNG. However, Europe still needs to make a decision in terms of whether it makes sense to lock up the necessary LNG to reduce or eliminate their reliance on Russian energy.
Staying on the LNG topic, Energy Transfer signed a 20-year agreement to supply 2.1 million tonnes of LNG per year to Shell. This agreement increases the likelihood of Energy Transfer being able to execute on its Lake Charles LNG project which we believe will be a big catalyst for the stock. What makes this deal even more interesting is, unlike, other agreements where LNG is going to a specific energy consumer in a country, here Shell is taking ownership with the ability to sell this LNG to whoever they want (including European countries).
These are interesting times to be an energy investor. Political regimes around the world continue to force feed the transition to renewable energy sources. As stated in past communications, we have embraced renewables as a viable investment and highly complementary to traditional energy sources. But the fact remains natural gas will be the strongest growing fossil fuel and will increase by 0.9 percent from 2020 to 2035. It is the only fossil fuel expected to grow beyond 2030. Meanwhile, LNG is set for even stronger growth, as domestic supply in key gas markets will not keep up with demand growth. Demand is expected to grow 3.4 percent per annum to 2035, with some 100 million metric tons of additional capacity required to meet demand growth.
This document is provided for information purposes only and does not constitute an offer to sell or represent the solicitation of an offer to purchase interests in the ELCO Select Fund, L.P. Such an offer will be made only in connection with the delivery of an offering memorandum and only in those jurisdictions where permitted by law. ELCO performance figures are for informational purposes only and should not be considered indicative of future performance. All external data is compiled from sources believed to be accurate. Certain statements contained herein may contain “forward-looking statements” within the meaning of the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among others, risks and uncertainties associated with the timing and costs of energy sector production, the demand for and prices of oil/gas products, the timing and amount of capital spending in the nation and world wide, and general economic factors. This report is not a recommendation to either buy or sell any securities mentioned