Recurrent Investment Advisors

Below, we highlight energy infrastructure's valuation discount vs. other forms of infrastructure. Midstream is more cheaply valued even as midstream assets have generated higher returns on capital in recent years! Meanwhile, the fact that North American energy costs remain lower than the EU and Asia - even as GDP growth in the US has surged past the rest of the world - reflects just how enduring the American "BTU advantage" really is. Link to Recurrent's latest monthly 👇 letter in the comments.

"Beware companies (and fund managers) hyping the AI revolution," the Recurrent investment team wrote in our latest monthly letter. But why be cautious? Asset managers and companies themselves are buzzing with excitement over AI and the power demand it will create. With potential for higher returns for investors in a variety of sectors, from energy, to infrastructure, to REITs and utilities. Right? The reality is that for real asset investors, massive capex is a mixed blessing. From power deregulation in the 1990s and 2000s, to Shale during the 2000s and 2010s, to Renewables in the last decade, and now AI: these waves of investment involve high and certain costs, and typically involve low and uncertain returns. Historically, these waves of capex involve significant debt, and end with major equity dilution. So what's the good news? During the Shale boom, resource and midstream investors (like us) were footing the bill, and often left hanging when returns were lower than expected. As we show in our latest monthly, the costs of the AI buildout are expected to disproportionately hit REITs and Utilities, 2 sectors ill-suited to fund a new wave of massive capex. Meanwhile, commodity producers (and commodity infrastructure) can enjoy the benefits of higher demand while letting other real asset sectors pick up the tab. Read more at www.recurrentadvisors.com, under "Monthly Commentary"

The Utility sector's notable underperformance vs. the Midstream sector, as well as vs. the broad market has led many real asset investors to ask, "is it time to swap out of midstream stocks and buy utilities?" Recurrent's last investment letter (Feb 2024) examined the divergent trends evident in recent announcements by Midstream and Utility stocks. While Midstream companies are retiring debt and surprising the market with the magnitude of cash returns to investors, Utilities are piling up debt as low-return capex faces a world of rising rates and less friendly political landscapes. https://lnkd.in/dhyUEAF

Since CPI peaked at 9% in mid-2022, almost all of the moderation in CPI readings has been the result of ENERGY DEFLATION. In our Jan 2024 letter (published in Feb), we explained how the drivers of ENERGY DEFLATION - SPR releases, European recession, weak natural gas prices - have been exhausted. The next move for energy is inflationary. For investors who see today's low CPI as a pause between past and future CPI peaks, we explain how energy and natural resources equities are still more or less the only game in town. https://lnkd.in/dhyUEAF

Join us in welcoming Andrew Schodrof to Recurrent's growing team. Andrew joins as a member of our investment team, and his presence will help us to enhance our coverage of the midstream energy and natural resources sectors. Welcome to the team, Andrew!

Last year, we wrote that a unique historical moment for midstream stocks had arrived: with lower debt and stronger earnings, pipeline dividends were unsustainably LOW. We wrote last year that this unique combination meant that 50% dividend increases were possible while maintaining historically conservative financial metrics. Last week, we saw our first 50%+ dividend increase, by a top 5 Recurrent portfolio holding which had achieved balance sheet improvement and had reached an exceptionally low payout ratio. As more midstream companies hit debt targets, we expect more “resets” to higher dividend levels - in some cases significantly higher levels. From last July’s white paper, “More than just dividend yield”:

One of our most topical monthlies: First, will a Trump or GOP victory in November unleash a new wave of pipeline construction? Unlikely. We explain the economic - not political - variable that has been reducing pipeline construction for the last 10+ years. Second, Shale is growing again - so is Shale's long-term economic value increasing? Not necessarily. The late '90s and early 2000s saw natural gas power plants (IPPs) take huge market share. The result was less volatile electricity prices that ultimately reduced the value of higher-cost nat gas plants, and led to the absorption of the once-mighty IPP sector into diversified utilities (much like today's absorption of shale into Exxon and Chevron). Read here: https://lnkd.in/dhyUEAF

🌐 Our Alma Recurrent Global Natural Resources' Portfolio Manager, Bradley Olsen, commented on the latest oil price movement and the red sea conflict at Fundview. You can find his commentary (in German) here : https://lnkd.in/ejQqY4GK #AlmaCapital #AlmaRecurrentFund #NaturalResources #OilMarketInsights #MarketingCommunication💡

Hertz admits that offering EV rental cars was a nine-figure mistake.