Pompidou en Houston
Here's a game: I have a coin. I ask you to call "heads or tails?" You pick "tails." The flip comes up heads. We play again. You pick tails, again. The odds are 50/50 right? Heads again. Over and over, the coin keeps coming up heads.
When do you shift your expectations? When do you decide the odds aren't 50/50? When do you decide we're not playing the game you thought? When do you just start calling heads?
DON’T GET BENT OUT OF SHAPE
A Houston company has been bending pipes into giant refrigerators for more than a decade now. With a little paint you might mistake their facilities for Le Centre Pompidou. This postmodern plumbing turns out liquefied natural gas, which gets loaded onto ships and delivered to ports around the world.
Natural gas is cheap in the US. Its unavailable locally in most other places. Turning it into liquid and delivering it to spots in need of reliable, cleaner power solves a neat market fit.
The rub is the natural gas bit. Commodities prices, including natural gas, swing wildly. That's annoying to investors. So the company's shares often trade in-step with the price of natural gas.
Management finds commodity prices annoying too. They don't want to hitch their wagon to natural gas prices either. In fact, they've spent tremendous effort taking the violent swings of gas prices out of the business.
Most of the company’s activity runs on ten to 20-year contracts that charge a fee on top of the price of gas. It doesn't matter much to the company if the price of gas is $1.00 or $10.00, it just collects its fee. LCM has a soft spot for long-term customer contracts. For the part of the business exposed to natural gas prices, where it charges customers an all-in price, it hedges its gas commitments.
HAVING A GAS
It all works. Quarter after quarter the company delivers consistent results. The coin keeps coming up heads whatever market conditions or gas prices may be.
Despite this, investors insist on playing the commodity game. "Energy" is in the name of the company. It must be an energy company! They're betting that the company's fortunes will rise and fall with the price of natural gas. This hasn't happened yet.
The company is playing the contract game, not the game investors think. Its sales come in like clockwork. Even back in the days of 2021, when oil prices went steeply negative and customers cancelled deliveries, its custom kept coming rolling in. The company's game is flipping a coin with two heads.
LCM is a big supporter of knowing your investment game. It's important too, to know what game your investments are playing. When you align your games, like with our friends in Houston, investments can all come together like a piece of fine art.