Energy Stocks Remain Undervalued, Says World’s Best Performing Hedge Fund Manager | Josh Young
May 30, 2022
01:29:06
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Quick takeaways
Oil majors struggle to invest in alternative energy, facing challenges from activist shareholders and ESG movements.
Geopolitical tensions impact oil and gas supply, with Europe still reliant on Russian energy.
Europe's energy crisis leads to concerns about low natural gas inventories and supply constraints.
Deep dives
The challenges of oil and gas majors investing in alternative energy
Oil and gas majors, such as Total, Shell, ExxonMobil, and Chevron, are facing challenges in their attempts to invest capital into alternative energy. Activist shareholders and pressure from environmental, social, and governance (ESG) movements have pushed these companies to divest from traditional fossil fuels. However, the transition has not been smooth, with these companies struggling to adapt their expertise in offshore oil and gas projects to the renewable energy sector. The competition among majors for offshore wind projects has led to inefficiencies and a burning of capital, as they try to gain a foothold in an industry with different success criteria and economic dynamics. This shift in focus and investment strategies has also had an impact on their financial performance.
The impact of geopolitical tensions on oil and gas
Geopolitical tensions, including the Russia-Ukraine conflict, have raised concerns about the stability of oil and gas supply. While there were initial expectations of significant sanctions on Russia and potential disruptions to energy exports, the reality is that Europe continues to rely on Russian oil and gas. The lack of effective sanctions and ongoing consumption of Russian energy has mitigated the immediate risk of a supply shock in the oil and gas markets. However, the situation remains complex, and the geopolitical landscape could change in the future, which may impact energy prices. Additionally, the interconnectedness between political decisions and energy markets highlights the need for careful observation of political developments and their potential consequences on the oil and gas industry.
The challenges of Europe's energy crisis
Europe is currently facing an energy crisis, with concerns arising due to low natural gas inventories and supply constraints. Some countries, such as the UK and Portugal, have imposed price caps and implemented tax measures to support their energy needs and address rising costs. The reliance on Russia for natural gas and the limited domestic production have added to the challenges faced by European countries. The situation has led to increased prices and the need for imports of liquefied natural gas. However, the precise impact of these measures on the price of oil and gas remains uncertain, as they depend on various factors, including global market dynamics and political decisions.
The risks of economic slowdown and demand destruction
While the global economy shows signs of slowing down, the impact on oil demand and prices remains uncertain. A potential economic slowdown, particularly in Europe and China, could lead to demand destruction for oil and gas. However, policymakers have historically aimed to mitigate such slowdowns by implementing fiscal and monetary stimulus measures. These measures, including government spending and monetary easing, tend to support oil demand, as the transportation and industrial sectors are particularly resilient to economic downturns. Additionally, oil's price inelasticity and its essential role in various sectors contribute to its durability as a commodity, even in challenging economic conditions.
Challenging the Race to the Bottom in Alternative Energy Projects
The speaker criticizes the trend of oil majors engaging in alternative energy projects without considering their low return targets. This race to the bottom resembles the shale industry, where funds started with $25 million but grew to $5 billion, leading to diminishing returns. Smaller producers who stick to their business strategy can benefit from higher oil and gas prices as the majors waste shareholders' money on unprofitable ventures.
Evaluating Investment Opportunities: Pantheon and Oxenal Petroleum
The speaker expresses caution regarding investment in exploration companies like Pantheon due to the high uncertainty and negative feedback received from industry experts. While recognizing potential returns, it is concluded that in this case, industry expertise does not support an investment. Similarly, the speaker explains their reservations about investing in Oxenal Petroleum, highlighting operation inefficiencies, poor capital allocation, and overvaluation compared to similar competitors. The perceived risks associated with these companies outweigh their potential gains.
Josh Young is the founder and chief investment officer of Bison Interests, an energy investment fund whose returns since October 2020 are ranked #1 in the HFM database. Young argues that, despite the phenomenal performance of the energy sector over the past 18 months, there are upstream producers that remain extremely undervalued relative to their current cash flows.
Young explains why he thinks many of the major oil companies are “burning capital” and why he prefers smaller producers that are not on the radar of many investors flooding into the space. He shares his views on ESG, divestment, and the idea of a “carbon bubble.”
This conversation is not investment advice.
Filmed on May 27, 2022.
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Follow Josh Young on Twitter https://twitter.com/Josh_Young_1
Follow Bison Interests on Twitter https://twitter.com/BisonInterests
Follow Jack Farley on Twitter https://twitter.com/JackFarley96
Follow Blockworks on Twitter https://twitter.com/Blockworks_
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Today’s episode is sponsored by Jack Farley, the host of Forward Guidance. If you would like to get in touch with Jack to potentially become a sponsor of Forward Guidance, you can email him at jack@blockworks.co. Serious inquiries only, please.
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(00:00) Introduction
(00:10) Background
(01:01) Supply Constraints
(21:38) Is Energy Investing Just A Bet On The Price Of Oil?
(33:04) Risks To The Energy Trade
(56:14) Company-Specific Analysis
(1:17:14) Is There A Carbon Bubble?
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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