'We enter winter in a bit of a natural gas crisis': Portfolio Manager

Rob Thummel, Portfolio Manager at Tortoise, joins Yahoo Finance to discuss the outlook on natural gas, opportunity in the energy sector, and gas prices.

Video Transcript

ALEXIS CHRISTOFOUROS: Homeowners now bracing for sticker shock this winter, as the government warns heating bills could jump 30% or more, as natural gas prices continue to soar. I want to bring in now Rob Thummel, who's portfolio manager at Tortoise, for a little perspective here.

Rob, always good to see you. So let's talk about those soaring natural gas prices. It's my understanding that the US and the world, we're not going through a natural gas shortage. So what is putting upward pressure on prices?

ROB THUMMEL: Yeah, no, it's a good question. So really, what's happened is globally, we just don't have enough infrastructure. So as you highlight, the world's not short natural gas. There's ample supply. In the US, we have probably have over 100 years of supply.

What the world and the US is short of is infrastructure. We don't have enough liquefied natural gas, or LNG, terminals. We don't have enough natural gas pipelines. We don't have enough natural gas storage facilities around the world. So the net result is we enter winter in a bit of a natural gas crisis that won't be solved with new infrastructure in the next day or two. It's going to take a while.

But we can solve this crisis and get energy prices and natural gas prices down to more historical low levels, which really help boost economies.

ALEXIS CHRISTOFOUROS: So what's it going to take to get us there then, especially when we have Europe and Asia seeing these skyrocketing prices because of growing demand and lower inventory?

ROB THUMMEL: Yeah, so we need to build. So for instance, number one, both in Europe and Asia, both of those areas of the world need to build more LNG infrastructure, liquefied natural gas infrastructure. They need to be able to import natural gas from around the world.

The US needs to be able to export more natural gas to the rest of the world. Australia, Qatar, other areas in the world can also export really low-carbon natural gas to those areas in the world. And that will really help stabilize the price, prevent future significant volatility in prices, like we're really experiencing right now.

ALEXIS CHRISTOFOUROS: So have natural gas prices, you think, peaked? And if not, how much further do you think they're going to go?

ROB THUMMEL: Yeah, well, I got to go outside and look at the squirrels and see how many acorns they're collecting to determine how the winter's going to be, right? So anyway, it really all is contingent upon winter and not just domestically but globally.

But if we just have a normal winter, natural gas prices are probably factoring in today at over $5, almost $6 a unit or a MNBTU. It's probably factoring in a fairly normal winter. So if we have a normal winter, I think natural gas prices come back down to around $5.

Now, we have an extremely cold winter-- you saw what happened last winter with the winter storm Uri. Natural gas prices skyrocketed in the US. They were up at $16 MNBTU, so three and four times the levels they are today. Now, that was only for a few days. But it just shows you the impact that extreme weather conditions can have on prices in the short term.

Longer-term, I do think we're going to-- we have plenty of natural gas in the US. Inventories will normalize. We'll get back to that $3, let's say, a unit, so that will be significantly lower from where prices are today. That's really healthy for everybody. It's healthy for the consumer. And it's healthy for the producer as well.

ALEXIS CHRISTOFOUROS: I want to switch gears and talk about the gas pump because we know that gasoline prices, or gasoline, is comprised mostly of crude oil. We've seen crude oil shoot above $80 a barrel recently. Gas prices are $1 more now than they were this time last year. Here we see from AAA that the national average for a gallon of unleaded is 3.29. Do you think we've peaked there?

ROB THUMMEL: Yeah. There's a seasonality to gasoline prices, as you've highlighted. We're entering the season of natural gas prices' seasonality and the potential for those to go higher. Gasoline, probably a little different story.

Yeah, potentially, I think you can see gasoline prices subside a little bit, come back to a little bit lower level. It will be contingent, as you highlight, on what the direction of crude oil is going to be.

Remember though, it's a little different for crude oil. We don't have a lot of natural gas right now that could just, all of a sudden, come to the market. Crude oil, different story. Remember, OPEC-plus still has almost 5 million barrels a day of oil that they're basically not producing that they can effectively turn on. And it can come back online. And it can be supplied to the market very quickly, within days or months. So that fact will, I think, keep gasoline prices from rising too high throughout the winter and likely even into next summer.

ALEXIS CHRISTOFOUROS: So Rob, if you're an investor looking at the energy space, which we know by its nature tends to be volatile and pegged to things we have no control over, like the weather, where are you seeing opportunities right now? Where is money flowing?

ROB THUMMEL: Yeah, well, so the entire energy sector's still, from a valuation perspective, very cheap. The biggest thing about the energy sector relative to other sectors-- and I think this is really important-- is the free cash flow yield. So there's a lot of cash coming out of the sector.

So if you just look at the yields of the free cash flow coming out of the energy sector broadly, it's somewhere between 12% and 20%. The S&P 500 free cash flow yield's 5%. So there's a big spread. So across the energy sector, lots of opportunities.

We in particular at Tortoise like the midstream energy sector, energy infrastructure. That's where we think there's a significant opportunity to build new infrastructure, but more importantly for a lot of these companies, just to take their existing assets and capitalize on them and pay investors some pretty high dividends, 5% to 7% dividend yields that you can get from companies like Williams Companies and Enterprise Products Partners and Plains All-American, Enbridge. I can just continue to name name after name.

There's a lot of opportunities there, in our opinion, to capture some really high dividends in an environment where investors around the world are starved for yield. And one thing that energy infrastructure does is it provides stable cash flows and high yields. And so that's a sector we really like within the energy sector.

ALEXIS CHRISTOFOUROS: All right, Rob Thummel, always here with the goods, portfolio manager at Tortoise. We appreciate it. Thanks so much.

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