While the Linde results were very strong and surprised to the upside, we also want to focus on what messages they send about the broader economy. As recently as 10 years ago all of the industrial gas companies' results provided a reasonable barometer on the state of the industrial and other parts of the global economy. Industrial gases are an enabling raw material or process gas for so many industries that their direct use is generally a function of operating rates for the industry that they serve. Over the last 10 years, Air Products has deviated from the traditional model, with some very large investments targeting specific projects in Asia and the Middle East and their results are a less useful measure of overall economic activity. While both Air Liquide and Linde continue to reflect the broad economic backdrop well, both could be dragged into large projects around hydrogen over the coming years, and depending on how they choose to report earnings, we could lose the tangential “information” in their reported results. For now, the Linde results are very supportive of the broader industrial-economic strength that is being reflected in earnings and guidance across many industries, including chemicals and refining. The company has added comparisons with 2019 to show how much underlying growth has happened over the two years. While inflation and interest rate increases could slow things down, the Linde numbers confirm that we have a very positive demand backdrop today, and the company’s guidance would suggest that they think it can continue.
Following on from the Enterprise comments covered in our daily report, the company is more likely to acquire something in chemicals than build it in our view, especially if a move into ethylene or polymers is on the table. Today, building capacity will come with all sorts of emission-related restrictions most likely, and many of the new build announcements we have seen since COP26 have come with a carbon plan (Dow, Air Product, and Borouge). While it is not obvious today that any Gulf Coast ethylene capacity is up for sale, we would imagine that most companies are reviewing strategy and evaluating whether they have assets of entire businesses that may have a better owner. This would be especially true if a basic chemical business is holding back the valuation of a more interesting core. In the recent past, we have talked about the relative value arbitrage open to LyondellBasell from separating its compounding, licensing, and recycling business from the core. Maybe the core would fit well with Enterprise? As the chart below shows, there is money in buying ethylene for export, but there is more money in the US in making ethylene, as discussed in our daily report.
At this point, it has stopped being a story about how transient higher energy prices might be and instead become a story of how high could they go as well as how long the higher prices could last. With sentiment easing in the US because of an expected milder October, we also have the headline of the restart of Cove Point LNG, which should add to natural gas demand. The EIA, in the chart below, shows US prices peaking through the end of the year before falling again in early 2022. There remains an expectation that the rest of the world will be short of LNG and so we will either see the US natural gas competitive advantage remain strong, or the US LNG facilities will stretch their underutilized nameplate capacity and this could be supportive of higher US natural gas prices. New LNG capacity does not hit until late 2022 and how much is exported until them will be a function of the throughput of the existing terminals – which today look like they were very prudent investments.