This article was first posted on July 24, 2024 — the ad is being driven by a new “NVIDIA’s Secret Royalty” intro this week, so we’re re-posting to answer reader questions. This article has not been updated or revised, but the teased stock is roughly unchanged.

Here’s the language that caught our eye in the last Behind the Markets promo piece (that’s Dylan Jovine’s entry-level investing newsletter, first year $99, renews at ?)…

First was the intro email…

“Did you know that there’s an investment that will give you the opportunity to collect “royalties” every time Nvidia makes a chip?”

And then, when you clidk through to the ad “presentation” itself…

“The Last Retirement Stock You’ll Ever Need”

“An $85 TRILLION mega-shift has begun… and the little-known company at the center of it is trading at just $15 a share.

“See how you could generate as much as 1,000% windfall over the next 12 months, and also a lifetime of income”

This is another pitch that builds around the huge concentration of data centers in the Virginia suburbs of Washington, D.C., which I recall was the cause of hand-wringing about whether they were overbuilding ten years ago… but has continued to grow dramatically, with demand also surging, and now is a point of stress as those data centers suck up so much power, particularly with the increasing use of NVIDIA’s power-hungry AI accelerator chips.

For a variety of reasons, this area surrounding Loudoun County has the greatest concentration of data centers in the world, including almost all the major tech companies and colocation providers, and by some reports those data centers touch about 70% of global internet traffic in one way or another — which makes it a good symbol for the huge spending on expanding capacity for AI, and for the massive power demand created by these facilities.

We covered a similarly themed ad from Marin Katusa a few weeks ago about how this concentration of data centers in Northern Virginia creates a “kill switch” for AI, and Katusa turned out to be mostly pitching nuclear power and a gas pipeline company as ways to slake the electricity thirst of those data center campuses… so maybe Jovine is pitching something along those same lines? Let’s check the details.

Here’s a bit of the intro…

“This has nothing to do with investing in Nvidia…

“Or Google…

“Or any of the ‘tech titans’ you hear about every day in the news.

“This runs much deeper.

“In fact, without this company’s breakthrough work — the entire AI revolution may come to a screeching halt.

“But thanks to this company…

“Early investors could see huge returns in as little as 12 months – as they unlock the final stage of artificial intelligence… allowing it to seamlessly integrate into our global economy…

“While simultaneously providing investors a lifetime of income…

“In fact, one privileged insider is already collecting $500,000 every 3 months…

“Another has become a multi-billionaire….

“… this single stock could put an investor on track to prosper as the greatest opportunity of our lifetime unfolds…”

OK, so sounds like it pays a high dividend… which means we’re leaning toward the energy MLPs… but let’s see what else we get from the ad:

“… a company whose name has not made it to the front-page of the Wall Street Journal.

“And yet, their work is vital to our future.

“Missing this opportunity would be like trying to launch the locomotive revolution in 1800… without the one resource which made trains actually move.

“It would be like trying to build the internet without fiber optic cables.

“Or trying to create a microchip without silicon.”

And the promised returns?

“… we’re talking about a gain as high as 1,000% in the next 24 months…

“While securing a potential income windfall every quarter… for the rest of your life.

“What I’m about to share with you is the greatest secret to wealth… the key that’s unlocked technologies and leaps in standard of living for centuries.

“And it’s crucial now, because it is the obsession of Bill Gates… Sam Altman… Elon Musk… the Department of Defense… and every elected official on Capitol Hill.

“It is the make or break which will allow artificial intelligence to change the future of warfare, of medicine, or even the possibility of space exploration…

“It’s the bridge technology must cross before it can join the world at large.”

So yes, at its heart this is another pitch about how AI is sucking up all the world’s electricity… and we need to generate more:

“Every tech revolution is an energy boom — at its core.

“When the railroad boom ripped across America, coal production surged from 10 million to 200 million tons to power the steam engine.

“When Ford’s assembly line began rolling out Model T’s, oil production exploded from 20 million barrels to 1 BILLION barrels.

“Even now, electric vehicles are expected to cause a 600% spike in electricity consumption before the end of the decade, according to the International Energy Agency.

“Nothing moves without energy.

“And right now, we’ve created the single biggest energy-consuming technology in history….

“… the window of opportunity created by the AI’s need for energy is at the center of the last retirement stock you’ll ever need.”

I guess that’s conceptually accurate, but let’s remember to keep things in a little bit of context… yes, AI is sucking up a lot more electricity, and companies are looking for places with cheap and abundant electricity to build more data centers, and the government and the utilities are chattering about how to deal with this rise in demand… but it’s not like electricity demand is about to double. This won’t happen overnight. I’ll repeat what I said when Katusa was making a similar “sky is falling” pitch recently:

To be clear, AI is bringing is a change in marginal demand growth, and a surprising growth in new demand, it’s not quite as shocking as some sources might indicate. The surge in demand for electricity for data centers might push them to consume 50% more electricity over the next few years, as is widely expected… but that would mean going from about 4% of power consumption in the US in 2022 to a projected 6% in 2026. It might be more than that, I’m certainly no expert on electricity consumption, and several of the big utility and grid operators are nervous about future demand… but the problem is not that suddenly we need twice as much electricity as before — it’s that even a relatively small change in electricity consumption, driven by EVs and re-industrialization and AI data centers, is a shock to the system after a couple decades of US electricity consumption remaining pretty flat.

The problem is not that the surge is absurdly dramatic, the problem is that nobody was ready for it, and the system was already pretty close to maxed out in terms of grid capacity and resilience, and, in some parts of the country, a lack of surplus power generation capacity… at the same time that a lot of older nuclear plants have been retired, or are about to retire, and most areas are trying to shut down their coal plants.

And this fight over power is probably going to get more intense, and to create yet more competition both between potential power customers and between states, which already fight over every potential new power transmission line, (which is part of the reason the grid is so out of date and inflexible).

So that’s what I think the situation is — it’s a good situation for power producers, in that the regulators are likely to look on them more favorably, the non-regulated generation companies should be able to charge higher prices, and there is general interest in increasing capacity and investing in the grid. Companies are likely to make money out of those shifts in trend, after being an electrical utility was a sad and lonely existence for many years, with nobody caring about them, and now they’re kind of popular and sexy again — especially the ones who might have surplus generation capacity from either nuclear or “green” plants, which is what the data centers really want to fulfill their net-zero promises.

But back to the ad…

“AI driven power demand is set to soar 900% in the Chicago area.

“The International Energy Agency anticipates it to grow 1,000% globally… and to ultimately consume 25% of the U.S. electric supply within this decade.

“Now, all this demand alone would send the company I want to share with you screaming higher.

“It’s a major player in the energy field… with control of more than 750 million barrels of oil a day… and 2.2 million barrels of natural gas liquids.

“We’re talking about 5 billion kilowatt hours of electricity possible thanks to this company…”

“Enough to power every home in Loudoun County, Virginia.

“As the need for oil skyrockets, a company with control over this much energy will be more and more important…”

That’s odd… the largest pipeline MLP, Enterprise Products Partners (EPD), moved about 7.4 million barrels/day of oil, liquids and refined products… a total of 12.2 million barrels/day of hydrocarbons (including natural gas) in 2023. Kinder Morgan (KM) moves about 40% of the natural gas produced in the US, and it’s nowhere near those volumes… nor is OneOk (OKE) or Plains All America (PAA), a couple other large players. I suspect the copywriter pulled that 750 million number from something else or put a decimal point in the wrong place, because total U.S. oil production is only about 20 million barrels per day.

And then we get to the pretty extreme return projections…

“Under normal circumstances, The Last Retirement Stock You’ll Ever Need — might jump 500% to 1,000%… while providing a lifetime of income.

“That’s no longer the case. It’s even greater now. I fully expect a return as high as 2,000% in the years to come.

“Because never before in history has the energy to power a revolution… been capped.

“Here’s the Paradox: Skyrocketing Technological Demand + Artificially Stunted Production = Parabolic Price Acceleration”

That’s basically built on the argument that because oil and gas production are stunted, largely due to either government restriction on fossil fuels or general social push-back against oil companies that has kept them from growing production (both for profit-maximizing reasons, and because they’re worried about regulatory pressure), and AI is driving more demand for electricity, we’re going to see extreme increases in prices.

I guess that’s possible, but we should note that oil and gas prices may not move with that kind of extreme — there have been big surges and collapses in the past, but they have corrected pretty quickly, and for the most part, other than some extreme blips (2007 spike and 2008 collapse, 2014-15 collapse, COVID collapse and recovery), WTI crude oil has been within a range of roughly $45-105 for all but six months or so since 2004. That’s a big range, and it’s volatile, but going from $50 to $100 is not “parabolic”. Maybe the next move will be, who knows, but oil specifically is not particularly tied to electrical power.

“Consider that drilling for new wells has fallen more than 20%… to 500 active rigs.

“The all-time low is 400.

“President Biden has forced oil and gas companies to pay even more to drill on federal land. In fact, The Interior Department raised royalty rates for drilling by 30%.

“And worse, not only has a new oil refinery not been built in America since 1977…

“But the CEO of Chevron said “the United States may never build another oil refinery” due to Federal policy.

“The cost and regulatory maze is simply too much — even for some of the largest corporations in the world.

“It all comes down to the extreme policies of governments around the world to move towards the “Net-Zero Emissions” by 2050.

“This has paralyzed the energy sector… and battered the electric grid of the United States…”

I’d say the grid has been battered by age, failure to maintain, and failure to extend new transmission lines, not by a lack of oil refineries or drilling — but I suppose in large part it’s the same NIMBY stuff, and the fact that states and localities have a huge amount of control in permitting, that stops all kinds of energy infrastructure. There are currently just under 600 active rigs in the US, with roughly half of them in the Permian Basin, in case you’re wondering, so that’s relatively accurate.

More from the ad:

“An artificially engineered government shortage… in the middle of escalating demand by a new technology.

“This upheaval created a fissure of opportunity — and smart companies exploded through it at blistering speed.

“It’s why I firmly believe the last retirement stock you’ll ever need… is on the cusp of a 2,000% breakout.

“Because there is simply no getting around the fact they hold the key to the single greatest resource the $150 trillion AI revolution needs.

“And thanks to Biden’s damning energy policies, supply is ultra-tight.

“That’s why this single stock is your chance to collect a royalty every time Nvidia makes a new smart chip.

“It’s your chance to profit from every kilowatt of power demanded.

“It’s your invitation to take a slice of the energy system needed to power the equivalent of a nation within the next 2 years.

“It’s like when Rockefeller’s Standard Oil monopoly collected a profit for every home heated, every mile driven, even every new oil well drilled.

“Because when oil runs… it gallops.”

And then we get to the key hint…

“… there’s another part to this situation we haven’t touched on.

“Not only does America have soaring needs…

“But it lacks the infrastructure to meet those demands.

“And right there is where the golden key truly unlocks wealth.

“Because the need to MOVE energy through the country… through the grid… through shipments… has been the ultimate struggle and strategic advantage of a few companies.

“We have to move more oil.

“It doesn’t matter what green tech advocates say — if these pipelines don’t push a lot more oil through the system…

“Microsoft, Nvidia, Google, and countless other firms totaling TRILLIONS in global economic value will find their AI ambitions completely beyond reach.”

Not sure where that notion is coming from — yes, oil is a critical ingredient for much of the global economy, but it’s rarely used to generate electricity — for that purpose, natural gas and even coal are much better. Oil is for petrochemicals and transportation, for the most part. We don’t have to “move more oil” to keep the AI “lights” on, we have to move more natural gas… and probably build more natural gas power plants, since other ways to increase electricity production take much longer to build or aren’t technologically ready or cost-effective just yet (like small modular reactors, or better energy storage to help turn wind or solar into “baseload” energy suppliers).

And in case you’re curious, no, U.S. natural gas and U.S. crude oil do not trade in unison — partly because there’s been a glut of natural gas, since fracking led to more production but we don’t have nearly enough LNG capacity to export as much of it as the producers (and customers) would like… here’s the 20-year chart of the changing spot price for WTI crude and Henry Hub natural gas, just FYI — big geopolitical events or recessions can impact both, of course, like the surge we saw for energy prices after Russia invaded Ukraine a couple years ago, but they’re not joined at the hip, mostly because they’re not interchangeable in any meaningful way:

Still, Jovine is hung up primarily on oil for some reason. More from the ad:

“Which is where our Last Retirement Stock has emerged….

“We know oil prices will rise.

“I expect it to top $200 a barrel within 24 months.

“But the real key here…

“The source of what I consider The Last Retirement Stock — with the ability to run upwards of 2,000% higher…

“As we speak, it is already generating over $500,000 worth of income for a select group of men and women every 90 days.

“It’s not a driller.

“They don’t pull oil out of the ground.

“It’s the ‘toll booth’ all oil has to pass through.

“Instead of trying to chase down the next wildcatter who will somehow overcome the miles of red tape created by Capitol Hill to operate a new oil well…

“You can collect a payment for every drop of oil that moves across this country.”

OK, so that means, yes, he’s teasing some kind of pipeline owner. And yes, the big pipeline companies do effectively act as “toll road” operators for the oil and gas industry — almost all of the gas and oil in the US moves by pipeline, since it’s by far the most efficient way to move those commodities… and the pipeline companies are not directly exposed to the commodity price, since they just charge per unit, but their stocks do tend to move with the price of the underlying commodities. When oil prices collapsed in 2014 and 2015, that was also a signal of lower oil demand, and that drove down the prices of the pipeline owners… and when oil demand disappeared in 2020, as COVID shutdowns closed down economic activity around the world, they collapsed again. Toll booths depend on steady traffic, and low traffic means that both revenue and margins fall, usually, which gives those pipeline owners a lot less surplus cash to pay out as dividends… and everyone who owns these kinds of companies does so with an eye on the dividend, so the prices can overreact pretty dramatically, both positively and negatively, to events that change the dynamics in the gas and oil markets.

And AI could certainly bring changing dynamics to the natural gas market, at least on the margin, and that has driven interest in both gas producers and the pipeline companies over the past year — just like that surge in power demand has driven higher interest in electric utility companies, nuclear power firms, and the like. Investors are generally good at reacting to these shifts in trend, and also usually good at over-reacting, at least in the short term… and rising power demand is certainly a shift in trend.

And he describes it using the “royalties” term, which always piques my interest:

“I’m talking about collecting a secret royalty on the AI boom by taking part in controlling the actual flow of energy around the United States.

“It’s like owning the royalty on a James Patterson book — you know everyone is going to buy it at the airport, that it’s going to sell about 17 million copies per year… but you didn’t write a single word of the book.

“All you did was make a single investment… and sit back to collect profits as the inevitable and unstoppable demand floods in.

“That’s what my #1 investment today represents.”

So… which one of the big pipeline stocks might he be teasing? He doesn’t drop a lot of clues, but we get this…

“I’ve spent three years studying this company — ever since the microchip boom in 2020 took off, sending energy demand soaring.

“Now, I expect them to blast off to unprecedented highs…

“For nearly a decade, this investment has beaten gold… crushed the oil sector… outpaced real estate… and even outperformed the entire global health care sector.

“These are entire sectors… some of the most important in the world.

“And this one company beat them all.

“Again — without having to actually drill for oil.

“They simply transport it.

“But every time AI has a spike in demand…

“Every time a new chip manufacturing plant is built to create the extremely specific semiconductors needed for AI…

“Every time a new data center gets planned…

“Oil must wash through this company’s pipeline.”

Again, not really. Taiwan Semiconductor and Alphabet and NVIDIA do not consume all that much oil, at least not directly… but they are electricity hogs, and that means they use a lot of natural gas, nuclear power, hydropower and/or coal, depending on the location of their facilities (and some solar and wind, but not in quite as much volume just yet, except in a few places).

More from Jovine…

“It’s why some of their top executives are earning $2 million… $530,000… even $92 million per quarter.

“And I’m not talking about salary.

“That’s oil money they reap the profits from… without drilling a single well.

“That’s the approximate quarterly payout they get from their shares.

“In fact, the company distributes 90% of their profits back to the shareholders because it’s more lucrative for the executives than collecting massive salaries….

“I expect returns as high as 2,000% on this stock in the next 12 to 24 months…

“We’re not even talking about the ceiling. It could rage even higher.”

So… hoodat? Well, with the limited clues, including one that’s just wrong, the best guess the Thinkolator can throw at you is Energy Transfer LP (ET), which is one of the largest midstream partnerships in the US, and is well-exposed to a lot of end markets, including power generation, and has handled around 2.2 million barrels of natural gas liquids/day.

Perhaps more importantly, this has also been one of the most volatile large MLPs over the past couple decades, so if you go back to the 2016 lows for all of the partnerships, a few of them have beaten other sectors (health care stocks, energy stocks, real estate, gold, even the S&P 500)… but the big player who has beaten those other sectors most dramatically is Energy Transfer. This is ET compared to those other sectors that Jovine mentions — that orange line is their total return number (purple is just the price, without the distributions/dividends)… it is pretty impressive:

And for that timeframe, it’s also quite impressive versus its major competitors in the US pipeline business — here’s a sampling of them, these are all total return numbers, with ET in purple:

But like I said, ET has also been one of the most volatile pipeline stocks, for a variety of reasons (partly because they’ve done a lot of acquisitions as they’ve grown, partly because of some midstream value-add services businesses that are more volatile than just “moving gas and oil”), and it has sometimes been seen as relatively risky, and traded at a lower valuation (higher dividend yield) than many of its large peers.

And when a stock is more volatile, it’s easy to make the charts lie for you about long-term returns — those exceptional gains were only if you bought near the bottom in 2016, and only because ET fell harder than the other pipeline stocks during the oil crash of 2014-2015. Here’s what the same charts look like if you just go back ten years from today instead of picking the bottom… here’s ET versus those other sectors (just total returns this time, ET in purple):

And ET vs the other pipeline companies (still ET in purple):

Right now, ET looks fairly average for a pipeline/midstream MLP — it’s a $50 billion business, the current yield is just under 8%, and it has done very well since the 2016 low and the 2020 low… but again, lows are good for more volatile companies. Since the 2020 collapse for all pipeline stocks (and most stocks, period), it has been above average, but not the best. Here’s the chart of those same near-peers (ET still in purple):

Sorry, didn’t mean to load you up with so many charts this time… that’s mostly just to remind you that you can make a chart say almost anything you want it to say, just by choosing the comparisons and choosing the time frame that suits you.

It is true that the relatively big swings in Energy Transfer’s share price can make it among the best MLPs to buy when things are terrible… and among the worst to buy when things are going great and might correct or collapse (not that anyone knows when a correction might come). Personally, I try not to cowboy around too much with the MLP sector, in part because I don’t like dealing with the tax reporting of K-1 partnership forms and in part because these partnerships have complex accounting, with massive depreciation and maintenance costs that are sometimes capitalized, and it’s not an industry where I’ve built much expertise… so I try to convince myself to settle for the ETF when I find the pipeline business attractive.

I bought the Alerian MLP ETF (AMLP) during the 2020 collapse and have added to it since, and it’s been a great holding as it gradually builds, growing and compounding the dividend (which is currently about 7%)… but it has definitely trailed ET since the COVID collapse. Here’s that chart, just to rub my own nose in it:

I actually like Energy Transfer, I admire the many things they do which are outside the mainstream for the pipeline companies, including a lot of exposure to natural gas liquids, propane shipping, and even electricity generation as they make supply deals with natural gas power plants, and they are pretty diversified with a bunch of crude oil and natural gas collection and transport pipelines, too. It’s been a good long-term hold for anyone who can tolerate their more volatile share price, and they’ve bought a lot of valuable assets to add to their portfolio over the years… which should be good, because one of my reasons for wanting to own pipelines in general is just that it’s so very difficult to build new ones in most of the country — if you can’t build new ones in many areas, or use new routes, and demand continues to grow even a little bit, then owning and maintaining the existing pipelines should be a lucrative enterprise.

But again, I don’t get into the company vs. company debate much in the MLP space — a lot of them are well run, as are some of the non-MLP companies if you don’t like the tax headaches and/or advantages of the partnerships, so if you want specific MLPs then ET and Enterprise Products (EPD) are a pretty easy place to start, and if you want the corporations, which tend to have lower yields than the partnerships, you can go with Kinder Morgan (KMI), OneOK (OKE) or Enbridge (EBD) (Enbridge is the one Marin Katusa was teasing a couple weeks ago, just FYI).

I would urge you, however, to get the idea of 1,000% or 2,000% returns in 12-24 months out of your head. It would be very extreme for the big pipeline operators to have even 100% returns in two years — I guess I can’t prove a negative or an impossibility, but here’s what happened the last time oil prices shot up dramatically in a short period of time, but had not been “depressed” before that (so unlike 2020, for example, they didn’t just collapse with COVID and then recover within six months). This is the chart of both oil prices and the total return of a few of those pipeline companies I mentioned from, starting from January of 2007, when oil was around $60/barrel, into the peak in mid-2008 at about $145/barrel, one of the most extreme oil bull markets we’ve seen since the oil embargo days, and I extended the chart about five years from that oil peak, just to show how some of the MLPs that were around at the time reacted (ET in orange, EPD in blue, PAA in green, OneOK in pink):

I added the S&P 500 in there, that’s the brown line — so the MLPs did quite well overall during that tumultuous time when oil soared higher and then collapsed during the great financial crisis, and they did nicely through the recovery, helped quite a bit by the low interest rates that prevailed after the crisis (and for a very long time after), since these investments are usually bought for their yield… but no, none of them reacted violently higher in 2007 or 2008 because oil prices doubled. The pipeline companies in general are more likely to suffer with falling oil prices than they are to celebrate with higher oil prices, but what they mostly like is steady demand and steady economic growth and low interest rates.

I feel reasonably optimistic about the pipeline sector, if only because it’s so hard to build a new pipeline today, and I don’t think we’re likely to see a meaningful drop in the demand for either oil or natural gas in the next few years… and we might see expanded demand if LNG export really begins to pick up in a few years. But I don’t think AI or data centers are a huge part of that dynamic in any immediate way, it’s more about interest rates and economic growth. And I don’t think it’s remotely likely for a $50 billion MLP to provide 1,000% returns in two years… but if economic growth picks up, more LNG export is approved, and we see a wave of new natural gas power plants built to help meet AI demand, it’s certainly possible that the shares of these big MLPs could double in a few years, and provide a nice 7-8% yield along the way if you buy at current prices. As long as interest rates don’t go up too much.

If you’re unfamiliar with MLPs, that’s the tax structure most of the pipeline companies have adopted — though there are more exceptions now (KMI, OKE, ENB, etc.). Master Limited Partnerships are similar to REITs, in that they have to pay out 90% of what would be their taxable income as distributions to unitholders, and they are all designed to provide high yields.

As a partner, though, rather than just a shareholder of a corporation, the tax reporting is a little more complicated, and can make holding MLPs in a tax-deferred account a problem, at least if you do so in any meaningful size. That’s because there are tax obligations on any unrelated business taxable income (UBTI) which can create tax obligations even in an IRA, if the position gets big enough (last I checked, record keeping obligations, and maybe tax liability, kick in when UBTI in an IRA is over $1,000 in a year, total). As long as you keep the positions out of your IRA or 401(k), the K-1 recordkeeping is a lot easier than it used to be, and tax software can usually handle it fine, and the reward for the hassle is that MLPs also effectively have tax advantages, too — since pipelines are depreciation hogs, the actual taxable income from them is usually low, so often a lot of the distributions you get (they don’t call them dividends, technically, since they’re not corporations) are “return of capital,” which is not taxable as income until you sell and turn it into a capital gain… so if you hold on, you can effectively defer taxation on part of your MLP distributions for a long time (I am NOT a tax expert, so don’t trust anything I just told you, there may well be other wrinkles I didn’t cover and I might have missed tax law changes — and I confess that it’s partly because my taxes are already complicated and my accountant expensive that I try to avoid owning MLPs directly).

So there you have it. The investment that Dylan Jovine is peddling as the “Last Retirement Stock You’ll Ever Need” is very likely Energy Transfer LP (ET). And it is a pretty decent high-yield investment, though it is a pretty average valuation these days — the stock tends to be more volatile than its pipeline-owning peers, so it has fallen harder during crashes for this sector, and also bounced back higher, so it has been possible to get pretty extreme returns from ET in the past… but only if you buy when things are ugly and everyone hates the sector, which is not the case at the moment.

Disclosure: Of the investments mentioned above, I own shares of the Alerian MLP ETF, NVIDIA, and Alphabet. I do have a stop loss order in place for part of my NVIDIA holdings, and that could trigger at any time, but I will not otherwise trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.