Pro Perspectives 2/8/23

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February 8, 2023
Let’s talk about oil…
Last night, Biden, unwittingly, in off-script comments in his State of the Union address, made the case for precisely why oil and gas companies have no incentive (more like disincentive) to invest in new production, and every incentive to produce and return profits to shareholders, at higher and higher oil prices, driven by lower and lower supply.
This was Biden’s script:
You may have noticed that Big Oil just reported record profits.  Last year, they made $200 billion in the midst of a global energy crisis. It’s outrageous.  They invested too little of that profit to increase domestic production and keep gas prices down.
Here’s what he said off-script:  “When I talk to a couple of them [oil executives], they say ‘we’re afraid you’re going to shut down all of the oil wells and all of the oil refineries anyway, so why should we invest in them?‘   I said, we’re going to need oil at least another decade.
So, both domestic and global anti-oil policies are ensuring structural oil supply deficits, into perpetuity.  And energy companies are doing the right thing by their owners (shareholders), by maximizing profitability on existing production (while they can) — and then returning loads of cash flow to the owners.
With this model, energy earnings are proving to be levered to the performance of oil.  The average price of oil in Q4 of 2022 was up 7% compared to Q4 of 2021.  During the same period, the reports from the energy sector thus far, show earnings growth of 58% year-over-year.
And keep in mind, those earnings are generated from oil prices that were trading in the lowest quintile of the range of the past year.  With the lack of incentive to invest in new supply (globally), prices will be going higher, much higher.
This comes as the President has drained 40% of the country’s Strategic Petroleum Reserves, in an explicit effort to manipulate oil prices lower.  It has worked.  But it’s temporary.  And they will be forced to restock those reserves as prices are moving higher, which will exacerbate the rise.
With oil prices now in the high $70s, this is a second chance to get involved. 
This dynamic in the energy sector is what led a Texas billionaire, that made his money in distressed real estate, to set up a company buying existing, cash flowing oil and gas assetsat a discount. He says it’s the biggest opportunity of his lifetime. 
We own his stock in our Billionaire’s Portfolio, along with two other stocks that give us the opportunity to see gains leveraged to the price of oil.  For details, subscribe to our Billionaire’s Portfolio here