We get asked this question. A lot. Investors, scorched by multiple expansion in speculative stocks, are understandably concerned about the movement of prices in oil and gas. We believe the reason to invest in oil stocks stems from a fundamental backdrop for the sector, unlike anything we have seen in our careers.
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We are going to generalize. No offense intended. We see three primary groups of equity investors today:
- Index Fund Investors: since we first wrote up energy over 18 months ago, the sector’s weight in the S&P 500 has doubled to 4.8%, so this group has “decided” to put less than a nickel of every dollar into some of the cheapest, most well-run and disciplined group of capital allocators in the market (we thank them for making what we believe is a catastrophic error)
- Active Managers: hewing to explicit or implicit environmental mandates that have deemed the producers of energy to be “bad” – this is a very large group of a shrinking pool of active managers who are willfully omitting energy and embracing “Clean Tech” stocks that often lack fundamental merit
- Active Managers who deviate from what we believe are flawed index funds and seek out firms with robust fundamentals that are often shunned by the crowds. These investors favor assets that provide a significant margin of safety based on a view that “risk” is defined as the permanent impairment of capital.
Fortunately, that third group has never been smaller from what we can tell. The capital discipline, commitment to healthy balance sheets, and exploding free cash flow that characterizes oil and gas stocks seem to count for little. This indexing age has created market inefficiencies so large and so slow to resolve themselves that it is almost hard to believe.
Figure 1 suggests this is the early innings for energy. Oversimplified? Yes. Compelling? Yes. Complicated? No.
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June 3, 2022 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
June 3, 2022
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
