Podcast Summary
Oil Expert Predicts Continued Strength for Oil Investments: Misconceptions about electric vehicles and failed energy policies have led to a hated status for oil, but underinvestment and highly correlated global production and consumption will result in a severe supply lag behind demand, leading to continued strength for oil investments. Key drivers include geopolitical conflicts and declining natural gas supplies.
Oil expert Josh Young of Bison Interests believes oil will continue to be a strong investment despite its recent hated status due to misconceptions about electric vehicles and failed energy policies. He notes that underinvestment during low oil prices and the highly correlated rise of global production and consumption will result in a severe supply lag behind demand moving forward. Key drivers of the oil price spike include the Russia-Ukraine conflict and Europe's decline of natural gas. Josh, who has accurately predicted oil price trends, is bullish on oil and shares his insights on oil producers he's invested in.
Misconceptions about fracking and oil market situation: Despite common misconceptions, fracking hasn't caused significant water contamination and the oil market downturn is due to a decline in long cycle oil investment and a complex shale investment cycle
The current oil market situation is the result of a prolonged downturn in long cycle oil investment due to a bear market that began in 2008, which was complicated by a boom and bust cycle in shale investment. This has led to a decline in production and misunderstanding of investment incentives. Regarding fracking, a common misconception is that it pollutes groundwater. However, this is a misrepresentation, as fracking has been going on for decades near population centers and aquifers without causing significant water contamination issues. The misconception gained popularity through sensationalized media, but in reality, the communication between different rock layers can be studied to observe the safety of fracking operations.
Misconceptions vs. Reality of Water Pollution and Methane Emissions in Natural Gas Industry: Despite improvements in reducing methane emissions and water pollution in natural gas industry, misconceptions persist due to sensationalized reporting and foreign-funded critiques. It's crucial to separate fact from fiction and understand the industry's actual environmental impact.
There is a disconnect between the public perception and the reality of water pollution and methane emissions in the natural gas industry. While there are concerns about industrial processes causing externalities, such as water pollution and methane leaks, the degree of risk is often misplaced and overshadowed by anti-energy independence rhetoric. Many of these critiques are funded by foreign entities, like Russia, seeking to reduce competition in the commodity market. The natural gas industry has made significant strides in reducing methane emissions through economic incentives and technological advancements, yet misconceptions persist due to sensationalized reporting and old data being presented as current. It's important to separate fact from fiction and understand the true impact of natural gas production on the environment.
Strict regulations in US and Canada reduce methane emissions: Regulated environments like the US and Canada reduce methane emissions from oil and gas production through strict regulations, making it a more responsible choice for the environment.
Producing oil and natural gas in regulated environments like the US and Canada is more responsible for the environment as compared to less regulated countries, as it reduces the amount of methane released into the atmosphere. This is because of strict regulations that require the capture and utilization or combustion of methane. In the case of Josh Young's company, they used excess natural gas to power Bitcoin miners instead of flaring it due to economic reasons. The argument for producing oil and natural gas in regulated environments is that it can reduce the overall supply of these hydrocarbons in the market from less regulated countries, making it a more responsible choice for the planet. However, it's important to note that while hydrocarbons have a negative environmental impact, they are also net positive for economic development and improving living standards, especially in developing countries like India and China, where the biggest growth in oil demand is expected.
Oil demand in less developed markets and the challenges of meeting it: As per capita income rises, oil demand increases significantly in less developed markets, but the industry's current state makes it difficult to meet this demand promptly, hindering economic growth for those relying on oil.
The demand for oil in less developed markets significantly increases when per capita GDP reaches a certain level, leading to substantial economic and life quality gains for individuals through purchases like scooters or trucks. However, the transition to accessing these resources is not as simple as it seems due to the long lead times for oil projects and the current state of the oil industry, which is at the tail end of a bear market and experiencing a shortage of rigs and talent in the oil services industry. This means that despite the price increase of oil, it may take a long time for new rigs to come online and for the industry to fully meet the demand. Additionally, the anti-oil and gas use sentiment in more developed markets can be seen as colonial and hinders the progress of those in poverty who rely heavily on oil for economic growth.
Oil market not in full-blown bull market yet: Despite rising oil prices, logistical and investment challenges prevent a full-blown bull market. Complex process to bring on new rigs and build necessary infrastructure may take years.
The current oil market is not yet in a full-blown bull market, despite the rising oil prices, due to several logistical and investment challenges. The production of incremental oil wells may not be highly economic for producers, who are under pressure to return capital and not drill. The rig count is rising, but not yet at a level that would lead to a drilling boom. The process of bringing on a new rig involves finding a rig, people, oil fields, equipment, and drilling inventory, and securing economic land rights, which is a complex and time-consuming process. The speakers suggest that it may take several years for the oil industry to build up the necessary equipment and infrastructure to support a drilling boom, and that the market may experience a crash when these long-lead time projects come online. Therefore, while the oil market may be set up for a long and strong bull market, there are significant obstacles that need to be overcome before it can fully materialize.
Uncompleted wells pose a challenge to the energy industry: Despite a drilling boom, many wells remain uncompleted, limiting production growth and setting up a potential bullish scenario for commodities
The energy industry is facing a significant challenge due to the gap between drilled but uncompleted wells and completed wells. This issue is similar to the underinvestment in rigs, where producers didn't build new rigs, leading to a limit on their usage before replacement. The process from drilling a well to bringing it on production involves fracking and tying it into a pipeline. During the industry's boom and bust cycle, many wells were drilled but not completed due to capital budgeting and timing, or because the wells were not good. This underinvestment in completing wells means that more wells need to be drilled to maintain production levels. This insight sets up a bullish argument for the commodity market, as the industry struggles to scale production as expected.
Mismatch between oil production sequencing and budgeting leads to supply crunch: Producers are increasing budgets to catch up on drilling, while countries with spare capacity choose not to produce, causing a supply crunch and rising oil prices
There's a mismatch between the sequencing and budgeting of oil production steps, leading to a crunch in completing wells. Producers are recognizing they did not do enough initial drilling and are now having to increase their budgets to catch up. Meanwhile, countries like the UAE, which have the capacity to produce more oil, are choosing not to, contributing to a supply crunch and rising oil prices. The issue is not just about adhering to production agreements, but the lack of spare capacity in many oil-producing countries. As demand continues to recover and grow, there's a risk that the promised production from OPEC Plus may not be available when it's needed. Additionally, the cost of offshore drilling may be a factor in the reluctance to invest in new rigs.
Regulatory issues limiting oil supply: Regulatory hurdles in US, Canada limit drilling, increasing oil prices. Consider investing in oil producers instead of futures ETFs.
Regulatory issues related to drilling permits in certain regions, particularly in the US and Canada, have contributed to higher oil prices by limiting the supply of oil in the market. This is due to the inability to drill economically viable wells, which can lead to less productive, less energy-efficient, and potentially more risky drilling. The cancellation of pipelines and drilling on federal lands by the current US administration, as well as similar issues in Canada, have also played a role in these higher prices. For retail investors considering a position in the oil market, it's important to note that investing in oil futures through ETFs may not be the best option, as these investments own oil futures rather than the commodity itself. Instead, investing in oil and gas producers, despite regulatory challenges, may be a better choice as some of these companies trade at very low cash flow multiples.
Disconnect between oil and gas stock prices and cash flows: Individual investors can find significant arbitrage opportunities in overlooked smaller cap and mid cap oil and gas stocks, despite a disconnect between stock prices and underlying cash flows.
The oil and gas sector is currently experiencing a significant disconnect between stock prices and underlying cash flows. This disconnect is due in part to a lack of institutional investment in the sector, which has left a large number of opportunities for individual investors. Smaller cap and mid cap oil and gas stocks, in particular, are being overlooked by the market and offer potential for significant arbitrage opportunities. Companies like Journey, which are producing thousands of barrels of oil and gas per day but have a sub-$200 million market cap and are being ignored by research analysts, represent particularly attractive opportunities. The lack of institutional interest in the sector, coupled with the extreme preference for "woke" investments over maximum returns, has created a stock picker's market in oil and gas equities.
Undervalued Oil and Gas Companies with Significant Upside Potential: Journey Energy, an undervalued oil and gas company, has assets worth three times its industry valuation, yet is not well-known or well-loved in the market. Its CEO's personal investment and creative initiatives add value, making it an attractive investment opportunity for retail investors.
There are undervalued oil and gas companies, such as Journey Energy, trading at a significant discount to their theoretical liquidation value. The CEO of Journey, who has a strong track record in the industry, is personally invested in the company and has been implementing creative initiatives like power generation, which adds additional value. Based on industry research, the average oil and gas producer is valued around $60-$65 per barrel, but Journey's assets are worth three times that based on their reserve report at that price. Despite this undervaluation, the stock is not well-known and heavily hated in the market. These factors suggest that there may be significant upside potential for investors in Journey Energy. Additionally, there is an active online community of retail investors who are beginning to recognize these opportunities in the oil and gas sector.
SandRidge Energy's Large Cash Pile and Financial Stability Present Investment Opportunity: SandRidge Energy, with a large cash pile and consistent net cash build-up, offers investors significant returns due to its financial stability and less exposure to oil and gas price fluctuations.
SandRidge Energy (SD), a company controlled by Carl Icahn, is currently sitting on a large cash pile of around $6 a share, despite predictions of bankruptcy in the past. With consistent net cash build-up every quarter, the company is poised to generate significant returns for investors. The undervaluation of SandRidge, which is less affected by oil and gas price fluctuations due to its financial stability, presents a compelling investment opportunity. Additionally, the correlation between COVID case counts and producer equity performance has emerged as an intriguing signal. During the last cycle, this correlation allowed investors to time moves in oil and gas stocks effectively. The recent Omicron wave, which proved to be less severe than anticipated, created an opportunity for front-running the market recovery. While it remains to be seen if Omicron was the last severe wave, the potential for continued upside in oil and gas stocks remains optimistic.
Potential for fewer COVID waves with Omicron and shifting oil demand: Omicron may lead to fewer COVID waves, reducing the need for frequent booster shots and boosting oil demand. Despite ongoing pandemic, oil demand remains strong. Geopolitical tensions in Ukraine add uncertainty to oil supply from Russia.
According to the discussion, Omicron, a new variant of COVID-19, may lead to fewer or less severe waves going forward, reducing the need for frequent booster shots. This could potentially mean a long period of fewer COVID cases and resumed demand for oil. Additionally, even with the emergence of Omicron, oil demand remained strong, indicating a shift towards returning to normalcy despite the ongoing pandemic. Another significant disruption to oil supply comes from Russia, which supplies a significant portion of US oil and a large percentage of Europe's natural gas. The ongoing conflict in Ukraine has brought this issue to the forefront, adding uncertainty to the oil market. Overall, the discussion suggests a potential shift towards a more normal economic situation, with fewer COVID disruptions and geopolitical tensions affecting oil supply.
Geopolitical tensions impact on global energy markets: Russia and China may challenge the petrodollar system, Europe-Russia gas disputes, and potential shift towards alternative payment systems and energy sources could impact global economies and markets.
The ongoing geopolitical tensions between Russia and the US, and Europe, could potentially lead to significant changes in the global energy markets. Russia and China are incentivized to find alternatives to the petrodollar system due to the US's ability to sanction countries. Russia's dependence on Europe for gas exports and Europe's reliance on Russian gas have led to contract disputes and rising prices. Russia's invasion of Ukraine, despite having a favorable economic situation, is seen as a miscalculation that has strained relations further. The potential shift towards alternative payment systems and energy sources could have far-reaching implications for global economies and markets. It's unclear how this situation will unfold, but it's worth keeping an eye on as it could impact energy prices and geopolitical risks.
Europe and Asia's energy uncertainty leads to oil demand increase: Europe and Asia's energy insecurity could result in sustained high oil prices, as they turn to oil for backup power generation due to their dependence on Russian gas and lack of alternative energy sources.
The uncertain energy supply, particularly in Europe and Asia, has led to a significant increase in demand for oil-based power generators, creating a structural shift in the oil market. Russia, as a major oil and gas supplier, could potentially benefit from this situation by shifting its exports to countries like China and India, rather than withholding oil and risking damage to the OPEC Plus deal. Europe's dependence on Russian natural gas has increased due to policy and company failures, making them more reliant on burning coal and oil for backup power generation. The failure to develop their own resources has created a situation where oil prices could potentially stay high, with some experts suggesting that $100 a barrel could be a realistic price given the current market dynamics.
Potential for High Oil Prices: Implications and Complex Factors: Experts predict oil prices could exceed inflation-adjusted highs, leading to increased consumer costs and potential government interventions. Industry trends, lack of investment, and geopolitical tensions contribute to this complex issue.
According to expert analysis, the price of oil could exceed its prior inflation-adjusted high due to cyclical industry trends and increasing demand, potentially reaching prices as high as $160-$300 per barrel. This could have significant implications for consumers, leading to increased prices at the gas pump and potential government tax adjustments. Additionally, the consensus view of lower future oil prices may be reducing industry activity, and a lack of investment in oilfield services could exacerbate price increases. It's important to note that the price of other commodities like lithium and natural gas have already seen significant increases, and the certainty of their impossibility to reach certain levels may actually increase the likelihood of reaching those levels. Ultimately, the potential for high oil prices is a complex issue influenced by a range of factors, including geopolitical tensions, supply and demand dynamics, and government policies.
Oil demand continues to rise in countries like India and China despite inflation: Oil demand remains high due to affordability and price inelasticity, with potential for further price increases
Despite rising wages and inflation, oil demand continues to increase in countries like India and China, and there is still room for oil prices to go higher due to the relative affordability of gasoline compared to other inflationary items. Additionally, the marginal benefit of consuming gasoline often exceeds the marginal cost, leading to significant price inelasticity of demand. For those interested in learning more about these trends and Bison Interests' research, visit bisoninterest.com or follow Josh Young (@joshyoung1) and Bison Interests (@BisonInterests) on Twitter. Don't forget to subscribe to Millennial Investing by The Investors Podcast Network and leave a review on your favorite podcast app. For more resources, visit theinvestorspodcast.com. Please consult a professional before making any financial decisions. This show is copyrighted by The Investors Podcast Network.
