Revisiting KCR’s Long-Running Thesis on the Opportunity in Oil Angst

Starting in May of 2020, KCR’s research team wrote nearly a dozen pieces making the case for oil.  On September 8th, we published Oil Company Stocks to Buy, which summarized our work up to that point and pounded the table for investing in oil stocks.  With oil trading below $70, we led out by explaining that oil and natural gas commodity prices did not need to rise to turn oil and gas stocks into powerhouses for investors.

Immediately after, we published our review of the IEA’s Net Zero Emissions report.  In that piece, we explained how ESG advocates and policymakers had woefully misrepresented the researchers’ work.  In our view, the report was a dire warning that barring changes nowhere in sight, that oil was heading higher.  After highlighting Devon Energy as our top energy stock in the oil and gas industry in September, we took on the speculative receptacles of capital and highlighted a group of renewable energy stocks as shorts in November.

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Prior to the geopolitical tragedy underway, oil and gas prices ran 50% and took Devon and the stocks we’ve highlighted along the way ripping higher.  Meanwhile, the clean-tech stocks we panned have imploded.  KCR highlights the above not because we got something right.  Instead, it is because in every piece we highlighted, ad nauseum, that we were not energy experts.  Our thesis was painfully simple and worked beautifully before the horrifying situation in Ukraine.

We grew up learning from Dennis Gartman that the “cure for high prices is high prices.”  We have no doubt that will be true again. Yet this paper explains why we believe energy stocks may run a great deal farther, and highlights some of our favorite oil stocks to buy.

Figure 1 below updates the lead in chart to our piece Are Crude Oil Prices Reflected in Energy Stocks?, which also featured a collection of magazine covers highlighting the madness of crowds.  KCR believes the chart below could almost be a stand-alone thesis for why energy stocks may have farther to run. 

Despite Strong Price Action Energy Stocks as a Percent of the SP 500 is Just Off the Trough 1

Valuing Energy Companies is Not Usually This Easy

KCR would like to reiterate that we are not energy experts.  We say that a lot.  But we do have a deep appreciation for the value of free cash flow as a powerful driver of returns.

Figure 2 below is a testament to just how unloved energy stocks are today.  Inventories of distillates and crude oil were well below long-run trends prior to the Russian attack on Ukraine.  Since the Russian invasion on February 20th and the West’s subsequent attempt to shut Russian oil off, the commodity closed today (March 10th) only $16 higher at $106.

Figure 2 below shows free cash flow yields by GICS sector[1].  To summarize the obvious:

  • Prior to the invasion of Ukraine, the world had a shortage of oil
  • The West is now in an existential crisis with the world’s third-largest oil producer
  • Energy stocks are still the cheapest and most unloved group in the stock market

To the degree the first chart didn’t convince you that energy stocks may have significant upside, KCR hopes Fig. 2 encourages some thoughtful reflection.

Incredibly Energy Stocks are Still the Cheapest Stocks in the Market by a Wide Margin 1

And by “thoughtful reflection,” what we really mean is: what the hell will it take for investors to provide energy stocks with the capital they need to meet the now-dire shortage of oil and gas supplies to ensure the liberal democracies of the world avoid an economic collapse?  Do we not all realize that the “S” in ESG might be temporarily more important than the “E”? 

As our renewables piece examining the IEA’s Net Zero Emissions research made clear: the world can wax poetic about what it wants, but our infrastructure, economies, and behaviors are a long way from making hydrocarbons obsolete.  For investors looking to compound wealth by investing in companies that make a product essential to life[2] that is in short supply, we hope you will read on.


Oil and Energy Stocks to Buy: The Why Now

Figure 3 below shows

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

[1] Excludes Financials due to the myriad issues with calculating FCF

[2] More on the looming human crisis at the end of this note

[3] The broad market is defined as Kailash Capital’s proprietary All But Micro Index, please contact us if you have questions


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

March 10, 2022 |

Categories: White Papers

March 10, 2022

Categories: White Papers

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