An AI trade involving energy and infrastructure that’s doubled your money, topping Nvidia

(This is CNBC’s “Power Insider” newsletter, your inside look at the investments, people and companies powering the global energy industry. Click here to subscribe.)

What I’m hearing from energy insiders

Oil prices are off their highs this week and media reports are citing Trump’s comments that Iran negotiations are in their “final stages.” But that’s not the real reason. The real catalyst is that ships are starting to move through the Strait of Hormuz. Crude prices started pulling back as soon as hedge funds started seeing that traffic pick up, even before the Trump headlines hit.

Sure enough, oil prices have ticked higher Thursday morning on more negative “headlines.” Just keep watching the strait traffic as your guide.

Thankfully, that’s not my focus today.

There’s so much more going on in the energy industry beyond Iran and investors can’t afford to be consumed by the barrage of headlines on the conflict and miss the other big money-making themes unfolding.

In last week’s Power Insider, I talked about the massive scale of A.I.’s electricity demand. (I’ll have another interesting trade idea on that lower in today’s edition.)

Well…a few days later, I was on a plane to visit two huge liquefied natural gas (LNG) facilities in states near the forefront of the power story: Louisiana and Texas. About 48 hours after that, NextEra Energy (NEE) rolled out a blockbuster deal to buy Virginia’s Dominion Energy (D) and create America’s biggest utility. 

Let’s start with the Dominion Deal.   

NextEra shocked the energy world by announcing a mega-merger with Dominion.  The all-stock deal is worth about $67 billion, but the combined enterprise value of the new company will be about $420 billion – if the deal is approved.  That’s a pretty good-sized ‘if,’ because some on Wall Street aren’t convinced this deal will be approved by regulators.  The Jefferies team notes that NextEra “doesn’t have a great track record of approval” and they think the deal “could get rejected.”  But Jefferies also notes that Dominion wasn’t “loved in Virginia” – its home state – and is probably pleased to have a potential buyer in NextEra.   

Another energy insider I spoke with called the sale “surprising” and added that it will be a complex process to get this through multiple state approvals.  He understands the NextEra side – the Florida company likely wants to grow its regulated utility base and can use the big recent stock gains to help cover the cost.  But on the Dominion side, my insider calls it “perplexing” and notes that it might come down to a board frustrated by Virginia policies … and likely enticed by the promise of a big payout for its executives.

Don’t undersell the scale of regulatory approval, says Evercore ISI.   Analyst Nick Amicucci highlights that this potential merger will require approval from the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC), some combination of the FTC and DOJ, and all three of Dominion’s state commissions.  

What is clear is that NextEra and Dominion wouldn’t have entered into a deal if they and their high-priced lawyers had already thought of these hurdles.  Less clear is the ultimate outcome of the proposed deal.

Hot take → If you’re looking to make a trade on this, Jefferies says people are now likely to bid up both Duke Energy (DUK) and Southern Company (SO) as potentially “safer places” in the near-term.

Hot take #2 → Deal or no deal, the lawyers on all sides of this transaction are going to get paid.  Consider law school, kids!

Now, to our inside look at the already huge – but still growing – world of liquefied natural gas. 

In LNG, we had two big conversations.  Actually, three if we’re being honest (and we always are).  The first two were with the U.S. Secretary of Energy Chris Wright, the third with the Governor of Louisiana.  

We began the day before the sun came up, and spoke with Secretary Wright in Port Arthur, Texas.  The interview was also a first-look inside Exxon Mobil’s huge new Golden Pass export facility.   

Note → QatarEnergy is the primary owner of Golden Pass, and because its assets in the Middle East were struck by Iran, security is at a premium.  We appreciate Exxon Mobil letting us in the gates

In the morning interview, Wright was bullish on China becoming a bigger buyer of U.S. crude oil.   He also believes that America will soon have more oil coming out of Alaska, something my friend and colleague Morgan Brennan spoke with ConocoPhillips’ CEO Ryan Lance about in Alaska on the same day.  Friends, never let it be said that CNBC doesn’t go the distance for you.

We then hopped in our rented VW Touareg and zipped about 60 miles east to Cameron, Louisiana and the energy-famous Calcasieu Pass.  The Pass – or CP to the insiders – is the future home of Commonwealth LNG’s huge new export facility.   We were there during the groundbreaking, about ten years in the making (see the Inside Line below for more).

We also had the honor to speak with Louisiana’s enthusiastic Governor Jeff Landry.  Landry is fired up about the possibilities he has around natural gas, LNG and AI.   The Governor was proud to highlight that his state is powering America to the top of the ranks for LNG exports.   But our main question was direct: does Louisiana have enough natural gas to power both the LNG export boom and fuel the electricity dreams of AI?  Landry said the answer is yes.

WALL STREET’S TAKE →  What if oil and bond yields stay higher for longer?

Power Insider is about energy, and so is the recent stock market.   Energy stocks are up an average of 35% this year, more than double Information Tech, the next-best-performing group, which is up 16%.  Though energy is still just a small portion of the overall stock market, investors in ETFs like the XLE, XOP, OIH have done very well.

As oil keeps moving up, so do government borrowing costs.  This week the 30-year U.S. Treasury hit 5.17%, its highest since just before the subprime crisis in 2007.  Oil is a big part of the inflation story, so it’s also a major part of the bond market move.  As oil moves higher, bond yields often follow.

As Bespoke Investment Research notes, the CPI’s energy component has jumped to a 130% annualized pace in just two months.  That’s the second-worst two-month spike in recent history, second only to the reaction after Hurricane Katrina in 2005.

So what now?

The ‘battle’ ahead is going to be between rising inflation risks and the super spending cycle from A.I.  If the hundreds of billions in capital spending every few months around A.I. infrastructure holds up – and there is no indication that it won’t – it may trump higher energy and inflation risks in the market.  

Goldman Sachs says earnings are the key to stocks right now.  The firm notes that the recent rally has “corresponded with surging near-term earnings estimates,” which are up 8% YTD.  But don’t get complacent.   Goldman also warns that we could have some medium-term weakness in stocks.  The firm’s data shows that since 1980 there have been just 11 similar stock rallies.  In those, markets historically move higher for a short time and then face “soft returns during the following few months.”  In other words, it might be a flat – or even lower – summer.

Evercore ISI’s Julien Emanuel appears more optimistic.  The strategist has a year-end 7,750 target on the S&P 500 ..  but he also shows off an ultra “bull case to 9,000.”   Emanuel highlights that the “pandemic changed everything,” including how the market moves.  He writes that the odds of what he calls “extreme outcomes” are higher on both ends.  Emanuel recommends investors look to the options market, advising them to buy the SPY July 775C/725P collar if near-term “unimaginable upside” is in both the bond market and oil prices.

My take → Here’s an AI trade involving energy that’s doubled your money

Speaking of the stock market.  This would be a great RBI (random but interesting!) if we didn’t have another one for you this week.

If you invested in a basket of the “AI giants” – the companies that are spending hundreds of billions to build out the data centers – you have done okay.  An equal-weighted basket put you only up about 7% this year, but a much nicer 43% gain over the last 12 months.   However, if instead you put the same money into a basket of companies that are building out AI infrastructure and energy sources, you’ve done much better. 

In fact, over the last year you have literally doubled your money.    

Meta and Microsoft shares are actually lower over the past year. Nvidia appears stuck after earnings last night.

But look at the infrastructure list. And yes, while TeraWulf (WULF) has provided the bulk of the gains, data center builder Equinix (EQIX), engineering and power management company Eaton (ETN), and keeping-it-cool company Trane (TT) have also done well.  The investor money has shifted, at least for now.

Take a look → Lately, the only thing moving through the Strait of Hormuz has been water. But there are early signs that tanker traffic may finally be starting to rebound. I break it down in this video:

This week’s Inside Line is with Ben Dell, Managing Partner of big energy investment firm Kimmeridge and Executive Chair of Commonwealth LNG.  Ben didn’t take the usual route to natural gas.  He’s a graduate of St Peters College, Oxford.  We asked him a few questions about his $10 billion dollar-plus new LNG export facility. 

This week’s RBI gives it to you straight: The Strait of Hormuz is getting all the attention, but Asia’s little talked about Strait of Malacca is actually the large oil and liquids transit point.  JPMorgan commodity analysts lay it out nicely.