Oil is the new Oil

Secular decline? Value play? Let's dig in

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In order to live the lives we do today, we have needed and still need oil.

It is the lifeblood of nearly everything we consume, how we get ourselves from one place to another, and how we make things. 

In the industrial revolution, the iron and steel industry gave birth to new construction materials, the railroad connected the country, and the discovery of oil provided a new source of fuel. 

Oil is why we can take our fancy destination vacations, why we can consume cheaper goods, and live longer lives. It is woven into the fabric of the United States and was pioneered by John D. Rockefeller’s Standard Oil. 

While the last couple newsletters I have been marching to the beat of the renewable energy drum, I always like to take a look at both sides of every investment thesis. 

I’m a big believer in asking, “Why am I wrong?”, and I like to leave no stone unturned. 

Let’s put away our social ESG crusader swords and try to understand this better. 

If we look at the YTD performance of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP US Equity) it is absolutely trouncing the return of both the S&P and the NASDAQ. 

Although I may be a proponent for renewable energy, if we’re being honest, I’m more of a proponent of making money. 

And this is one helluva run…

This week, in <5 minutes, we’ll cover Oil:

  • Setting the table 👉 How I think about the demand/supply dynamics

  • Recent Activist Action 👉 Board seats & competitor subsidies, but focus on the DELTA

  • Recent advances👉 Value rotation along with the rate movements

  • How GRIT’s Playing it 👉 ADDING: Airlines + Oils

Let’s get started!

1. Setting the table 👉 How I think about the demand/ supply dynamics

Early in my career, every time that I tried to understand or predict the individual political components of the energy trade I felt a lot like this…

What is OPEC doing? Why are cartels actually legal? Why does oil come out of the ground when the Saudis stick a straw in it vs. so much more capital-intensive geographies? What role do state-owned oil companies have to play? How does the US Shale Revolution impact global supply? Why is Neil Young so pissed off all the time?

Give me an Advil and wake me up in a decade…

Basic economics tells us that as long as demand exceeds supply, prices go up. As pricing go up, more supply will come online, therefore reaching a new equilibrium. 

All this jockeying for position and posturing are attempts at measuring the levels of supply. The reason why I’ve stopped worrying about the minutia is that it is beyond my control. 

But more importantly, it is frequently beyond the control of even the most expert forecasters in the field. There are just too many moving pieces.

Instead, I like to understand the big pieces of supply, but shift more of my focus on the demand component. I like to step back and first say, “what do I know to be true?” The next step is the ‘Zero to One’ Peter Thiel thinking of, “what important truth do very few people agree with you on?”

What I “know to be true” is that when I look around, a lot of my friends are ready for some revenge travel, revenge shopping, and just more frankly - revenge spending. 

They have been cooped up for far too long, which has led to a spike in personal savings rates, which have sustained higher levels:

This money will be spent.

Increase in travel = increase in oil demand

Increase in consumption of manufactured goods = increase in oil demand

This leads me to the second part: “what important truth do very few people agree with you on?”… And for me, that truth is: Oil stocks are still great investments.

UNDER THE RADAR...

Canada? ✔️ 

U.S? ✔️ 

North America? ⏳ 

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Supply for housing is exhausted. There are literally more agents than homes for sale! Not for long. Greenbriar Capital’s Sage Ranch Project has $450MM in 1,000 soon-to-be-built entry level homes in the pipeline ready to go!

Relentless INSIDER BUYING of $115M at higher and higher prices over the last 12 months. Why is management so bullish? Solaris Resources: MAJOR COPPER DISCOVERY at the beginning of a copper supercycle.

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Now, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel and see what he thinks about oil?

2. Recent activist action 👉 Board seats & competitor subsidies, but focus on the DELTA

People claim that oil is in secular decline, and that’s probably right. But it doesn’t mean you can’t make money in the interim. 

The battle against Big Oil accelerated even recently as a bunch of headlines hit the tape:

  • Chevron shareholders voted against management last month, directing the company to cut greenhouse gas emissions.

  • Exxon shareholders defied the executive suite and voted to install three independent directors with the goal of pushing the energy giant to reduce its carbon footprint. 

  • Shell had a Dutch rule that it should slash its greenhouse gas emissions by 45% compared with 2019 levels by 2030. Shell said it would appeal, while environmentalists exulted that the decision set a precedent for concerted legal efforts worldwide.

And I think that this ESG movement is a good thing but hear me out on this one… it could be an even better thing for oil companies that reinvent themselves.

When it comes to ESG ratings - all the alpha has been ‘priced in’ from a multiple perspective. 

Most of the leaders with higher ESG scores already got their market premium as they were recently bid up. 

What companies have more to gain on the ESG front than oil companies themselves? Focus on the second derivatives, the rate of change. Skate where the puck is going.

If they can show steady incline in their shift to carbon capture in production, or electric drilling, etc… the rate of change in their score could be a solid catalyst for a re-rate. 

MAGIC, STOCKS, ROCK & BLOCKS... 

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The most expensive thing about building a gold mine? The infrastructure. That’s why Omai Gold Mines said “screw that” and decided to build theirs ON TOP of an existing mine! I smell BIG margins!

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3. Recent advances 👉 Value rotation along with interest rate movements

The “topic du jour” amongst the markets recently has been all the talk in the 10yr rate. To oversimplify, think of this rate as a gauge on the temperature of the overall economy. A low rate is supportive of growthier assets and a higher rate is more supportive of value plays. 

Over this time period, we’ve seen a huge shakeout in growth and rotation into value. The chart below is the iShares Russel 2000 Growth/Value ETFs.

If you look at Chevron, Exxon, BP, Shell: P/E ratios are in the 10-15x range, Price/Book ratios are 1-1.7x. Dividend yields range from 3% to 5%. FCF profile is strong. These are great value plays!

5. How GRIT’s Playing it 👉 ADDING: Oils, Natural Gas & Airlines

Two weeks ago, I added a junior energy position to my portfolio and it’s up almost 40%. Higher oil and liquid prices have led to significant free cash flow generation. They have had a “step change” in debt reduction and are accelerating drilling. The chart keeps climbing! If you want to find out which one click HERE and upgrade to my PAID newsletter to see my entire portfolio.

I also have exposure through oil’s slightly cleaner little brother: Natural Gas. In my portfolio, I own a company called Tourmaline Oil Corp (TOU-T). It’s up +40% since I first bought it back in December 2020.

Tourmaline is Canada’s largest natural gas producer focused in the Western Canadian Sedimentary Basin. It checks my boxes of strong management team, high quality assets, strong free cash flow, and reasonable valuation. 

I also own airlines: American Airlines (AAL-US), Cargojet (CJT-T) and Air Canada (AC-T). Although these are end consumers of oil and the increase in oil price ultimately increases their cost expense, some of these airlines appropriately hedge their input costs by locking in lower prices. 

At the end of the day, we are seeing numerous airlines have to actually CANCEL flights that are overbooked from the sheer demand of flyers. Revenge travel at its finest. 

If you want up to the minute tracking of my portfolio and the true inside track, subscribe to the paid version of this newsletter here <INSERT SUB BUTTON>

Wrapping up…

I really do believe that in order to become a more holistic investor, sometimes you have to wade into water (or oil) that you are not as familiar with. Lean on those in the industry that are much smarter than you, and build out a total mosaic of the opportunities out there. 

Oil is that for me.

Until next time. Always Yours. Incessantly Chasing ROI,

-Genevieve Roch-Decter, CFA

P.S This week Andreessen Horowitz, only the most well-respected VC in the world, launched a +US$2.2 billion crypto fund and is ‘radically optimistic’ despite price fluctuations.


What else we Grittin’ On?

GDP. Growth in Q1 was +6.4%. It’s expected to hit +13% in Q2, meaning the economy is on track to recoup all output lost during the recession. We'll be back to where we were- except with a $8 trillion Fed balance sheet...

Synthetic Stocks. 55 free-floating stocks including Netflix, Facebook, Tesla & Amazon will trade via synthetic stocks on the blockchain through FTX. A 24/7 stock market via the blockchain is going to happen, it’s a matter of when not if!

Taper Talk. “So much for all this tapper talk. The FED just added the LARGEST amount of assets to its balance sheet in over 1 year. +$200B in the last 4 weeks".”


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