Green joined this week’s “What Goes Up” podcast to talk about why she doesn’t think the sell-off is over, and to give her perspective on the outlook for oil and energy stocks. Below are lightly edited and condensed highlights of the conversation. Click here to listen to the full podcast, and subscribe on Apple Podcasts or wherever you listen.
Q: Do you think we’re down yet?
A: I don’t think we’ve got a bottom yet. I guess we’re not done yet. I think it’s a little bit more the first phase because I always ask, what’s our catalyst, how are we going to get the growth going? You really haven’t seen a lot of income modifications. And so we talk about, well, the valuation is down. Yes, the P part of the P/E has come down. What happens when E also starts going back down? It has two parts.
That being said, it’s held up – I don’t think we’re done yet. I think it’s like a relief rally. If you look for signs of capitulation – 90% down days, VIX spiking – we are not there yet. Yes, the cash balance has definitely increased and yes, we have seen some equity sell-offs, but not a good and true panic. Not to sound like a snob, but I need a solid panic. We just haven’t seen that solid, complete dedication, everything is selling out. We are not there yet. And then my concern is also where is your development. Margins are definitely being squeezed and we’ll have to wait until the Fed can stop some of this to send the economy into recession.
Q: Your firm is located in Texas. Does the Energy Industry Affect Your Customers?
A: It probably makes them a little bit more bullish on the energy industry. But some of our clients, in fact we run X-Energy because it depends on what their exposure is. So if you have a privately held company or you are on the board of a public company, you have already got that exposure. So we’re really trying to diversify and reduce that concentration because everyone in Texas knows very well that the oil market is cyclical. So you ride the good times, but you know there’s a flip side to it. And this past decade has been a very difficult one for the energy industry. We had like five accidents within 10 years. And so that’s just the fatigue, well, yeah, we’re doing a rapid energy and energy transition, while ESG is coming and electric is coming, it’s going to take a little bit longer to adopt. And we’re looking at that game here in 2022.
So maybe I would say, not to generalize, but the attitude of a lot of our customers is that the death of energy was exaggerated. So that’s not to say there’s no concern about ESG or climate change or things like that, but it does make them a little more inclined to get a foothold in that segment. So I think a little bit of what you know impacts what you feel comfortable investing in. The same thing happens to you in California—if you’re in the San Francisco area, you’re probably very, very comfortable with yourself. A little more comfortable with tech exposure and early stage and small-cap tech and innovators.
Q: Which energy companies do you like?
A: It goes into the larger topic of what’s happening in the world right now and deglobalization. And as you can see, Russia has been taken off the market, you’re seeing this rebalancing of supply and demand and it’s hitting commodities hard. It’s not just the energy that’s killing it. It’s fertilizer, it’s all export and some precious metals, palladium. They are a huge, huge supplier of palladium. And so you’re seeing this imbalance and change and it takes a lot of time to redistribute all these things and build up the supply chain. So our base case is that oil is staying high for the next 18 months. I don’t see it coming back. I don’t think the demand crunch is happening. Yes, China, you live and die by China, but if you look at travel and consumption in the United States and Europe and where the trends are, most developed countries no longer have a zero-Covid policy.
I know covid is like a dirty word these days because we are tired of talking about it. But it’s still there. This is affecting the demand of China and China. Chinese demand may also be a bit messed up as China and India have shown willingness to buy cheaper Russian crude. Some of it is easy for them geographically as well as they can buy it for $30 and they are concerned about their economic development. So we may see some demand reduction in China. But in general, I think $90 to $100 a barrel for the next 18 months is clearly possible. You have not seen this wild animal mentality come back.
And then clearly we had the OPEC change. And so you saw this grand disinvestment in the oil and gas industry. And we are still far below the summit. We are still well below the pandemic-era oil and gas spill. So you’ve looked at the oil companies — and you’ll see this theme in the oil and gas stocks that I’m like, Devon, EOG, FANG (Diamondback Energy), and Pioneer — they’re US-based. Large footprint in the Permian. They have a low break-even and are giving full cash to the shareholders. They are not putting it back in the ground. They are saying, ‘Thank you shareholders for trusting us. Here is your money back. Like ‘really sorry we didn’t make you money for a decade, but here it is. Let’s earn some money now.’
But you’re not seeing that wildcatter mentality that happened with the other oil-price spikes because that would happen and you’d have this massive influx of, ‘Let’s get more rigs out there,’ and only supply and demand would eventually outlast it. Will give If you look at the slope of how the number of rigs has grown, it’s a very low trajectory. No one is really putting a ton of money back into capex. That’s why we love stocks that are delivering better returns to our shareholders right now — like Devon Energy with like a 16% free-cash-flow yield at $100 a barrel. They are pushing 50% of their free-cash flow into a variable dividend every quarter. You’re talking a lot of money to sit and wait, plus you may get a price appreciation as they keep making more money. And if you look at where the earnings revision is happening, the only place we’re thinking is that earnings are going to grow. And so the P/S are actually still, even with the huge price increases in these stocks, the P/E is actually still very modest and very value-oriented.
This story has been published without modification in text from a wire agency feed.