April 19, 2022
We continue to view Energy as a secular opportunity that will play over several years. The industry creates hydrocarbons, which is unattractive for investors and it’s limited the industry’s ability to access capital, leading to underinvestment at a time when oil and gas are still the dominant sources of energy. Companies in the industry are basically attracting capital by paying high dividends that come before reinvestment in maintenance and increased capacity. At the same time, companies in the industry are trying to become greener/attract capital in new renewable businesses, pulling capex away from the existing/core oil and gas business. Many companies also entered the current cycle with stretched balance sheets, and using cash to reduce leverage before they reinvest in the business. Meanwhile OPEC+ has been under-delivery on monthly quotas for several quarters and there seems to be far less spare capacity than consensus estimates of ~2Mbbl/day. The Ukrainian War wasn’t in our original theme, but it has caused disruption to a very important region for the oil industry with an estimated ~1Mbbl/day of Russian capacity likely gone forever. The eventual appreciation of actual spare capacity (probably half of consensus) will reinforce a supply-based premium and keep Brent north of $80 for years. You can use $65 crude estimates in some US oil and gas companies that will produce enough free cash flow in 5 years to buyback their entire market capitalization.