What are you buying today?

[Dave86ch]

META

[Blake Hampton]

9 hours ago, hardcorevalue said:

Give us your oil elevator pitch!

 

1. Oil is arguably the most important commodity in the world; It has incredible pricing power.
2. There's a chronic undersupply in the United States, which will likely worsen as shale production eventually levels off. It's very high-decline-rate stuff, meaning today's production is not a reliable indicator of future output. Currently, the U.S. consumes 20 million barrels of oil per day but produces only around 13 million.
3. Globally, reserve replacement is far below its current production. We're not finding new oil to replace what we're consuming.
4. I have a deep belief that the United States is inching closer and closer towards extreme fiscal and monetary instability. Since the dollar is the world's reserve currency, this essentially equates to future instability in the global financial system. The vast majority of global oil reserves are located in some of the most unstable, most corrupt countries in the world. Nearly the rest of it is located in countries directly adjacent to them. Oil is also priced in dollars, meaning that if the dollar ultimately ends up weakening, oil becomes cheaper for the rest of world in non-dollar terms. This could increase global demand, which is already set to increase.
5. The fiscal breakevens for a lot of these middle eastern countries are above $100 a barrel. Sustained low oil prices are unsustainable for them.
6. I have listened to many of the respected greats and they seem to share the same consensus. I've also seen a lot of studies that point towards oil outperforming during periods of high inflation, which is what I ultimately think we're going to have in this country.
7. Oil generally doesn't store well and the entire industry operates on a sort of just-in-time basis. If you take the current total crude inventory (commercial + SPR), you'll see that we only have about 1 month of our annual consumption.
8. Contrary to what some people here have said, I think that oil companies generally have some of the best capital discipline in the market. I've read and heard stories about past episodes being quite foolhardy, and while of course there are still companies that operate in a bad way, I feel like the oil industry treats its owners better than a lot of other companies. Shareholder returns here are quite meaningful.

[Blake Hampton]

12 hours ago, Gregmal said:

@Blake Hampton why are you so averse to buying Berkshire? Ignore all the old guys(whom have gotten rich from Berkshire) talking about it being “relatively” expensive for Berkshire standards. If you pant a piggy bank stock or something you can build a foundation on, there’s few better options. In you’re 20s the quote you get almost doesn’t even matter if it’s indeed a longer term hold.

 

I think Berkshire is expensive. However, Buffett's wisdom is priceless.

[kab60]

I agree that a couple of (select) oil companies look great here, but it's unfathomable to me why anyone apart from someone like Buffett would go with stuff like Oxy and majors, when you have small/midcaps in Canada with multi-decade years of resource life (in some cases +80 years), low decline rates, neglible debt and low operating costs since capex was spent upfront (SAGD). If we get inflation, I much prefer to invest in someone who already fronted the capex instead of some shale driller, that has to make new and more expensive meals every day, as wells quickly deplete. Also, while oil prices are down bigtime, less so for Canadian producers who are enjoying tightening differential.

 

I have no view on where oil prices go, but I do think check in on the Dallas Fed Survey every year, where they survey producers about break-evens (amongst other things). Steel tariffs probably doesn't help break-evens either. Considering how fast shale depletes, and that few shale producers make money at these prices, I don't think there's a big risk of an elongated downturn in oil. It's why it's also hard to imagine oil moving past 100$ for long, as production quickly ramps - unless, of course, oil "bulls" are right that rock quality is going down and Tier 1-acreage is quickly thinning out (it sounds plausible, but I would never be comfortable betting against human ingenuity).

 

As for buying stuff yesterday, a couple of smaller E&P companies as well as $MATR.TO and PAX/Patria Investments (I would think South American PE might look more attractive than many other alternatives currently).

Edited April 5, 2025 by kab60

[Blake Hampton]

11 minutes ago, kab60 said:

I agree that a couple of (select) oil companies look great here, but it's unfathomable to me why anyone apart from someone like Buffett would go with stuff like Oxy and majors, when you have small/midcaps in Canada with multi-decade years of resource life (in some cases +80 years), low decline rates, neglible debt and low operating costs since capex was spent upfront (SAGD). If we get inflation, I much prefer to invest in someone who already fronted the capex instead of some shale driller, that has to make new and more expensive meals every day, as wells quickly deplete. Also, while oil prices are down bigtime, less so for Canadian producers who are enjoying are tightening differential.

 

As for buying stuff yesterday, a couple of smaller E&P companies as well as $MATR.TO and PAX/Patria Investments (I would think South American PE might look more attractive than many other alternatives currently).

 

I largely agree though I do still think OXY is an incredible company. When thinking about it, remember that Buffet is an absolute genius, and also remember that he owns a third of it.

 

Edited April 5, 2025 by Blake Hampton

[kab60]

1 minute ago, Blake Hampton said:

 

I largely agree though I do still think OXY is an incredible company.

Why?

 

Whenever I look at cashflow statements of shale companies, they remind me of ponzi schemes. On top of constantly drilling wells just to stay in place, they have to do M&A on top. I think it's instructive that Crown Rock sold to Occidental, as Crown Rock thought/think the biggest technological breakthroughs are behind us in the shale patch (there's an interesting podcast with Crown Rocks GP). You also had Exxon splashing 60B for Pioneer, and IIRC, did that one perhaps already disappoint a bit? 

 

Occidental still has a 40B mkt cap and did what, 4B in FCF last year? And that's 4B after splashing 12B for Crown Rock and almost 40B for Anadarko. 

 

Considering they already had a business, how is that incredible? It looks awful to me.

[no_free_lunch]

Well, intentional or not, Trumps tarriffs are having a bigger impact on the oil market than 3 years of Biden smack talk.  If they really wanted to stop the war they should have crashed oil at day one of the Ukraine war.   We dont even need sanctions, we just need the value of oil to vanish.  I think this would solve a lot of other problelms as well.  Just a question f how long it can last.

[thepupil]

I don’t think they’re attractively priced now (despite optically high yields), but would put a plug in for my permahold positions in BSM and DMLP as potential alternatives, particularly DMLP which has a very simple formula: no debt, no UBTI, all royalties go to unit holders, heavy inside ownership, issuance to increase the base. 

 

because of how clean story is and because they’ve (in my opinion) done a nice job with accretive issuance over time, I’d be inclined to buy more DMLP On any kind of real pullback. At current prices they’re more of a hedge/bet on rising prices as opposed to assymetric across wide range of scenarios as they were in 2020/21

 

they, particularly BSM are more gassy though. 

 

Edited April 5, 2025 by thepupil

[Blake Hampton]

9 minutes ago, no_free_lunch said:

Well, intentional or not, Trumps tariffs are having a bigger impact on the oil market than 3 years of Biden smack talk.  If they really wanted to stop the war they should have crashed oil at day one of the Ukraine war. We don't even need sanctions, we just need the value of oil to vanish.  I think this would solve a lot of other problems as well. Just a question of how long it can last.

 

I thought we were allies with Russia now?

[Blake Hampton]

19 minutes ago, kab60 said:

Why?

 

Whenever I look at cashflow statements of shale companies, they remind me of ponzi schemes. On top of constantly drilling wells just to stay in place, they have to do M&A on top. I think it's instructive that Crown Rock sold to Occidental, as Crown Rock thought/think the biggest technological breakthroughs are behind us in the shale patch (there's an interesting podcast with Crown Rocks GP). You also had Exxon splashing 60B for Pioneer, and IIRC, did that one perhaps already disappoint a bit? 

 

Occidental still has a 40B mkt cap and did what, 4B in FCF last year? And that's 4B after splashing 12B for Crown Rock and almost 40B for Anadarko. 

 

Considering they already had a business, how is that incredible? It looks awful to me.

 

A couple of reasons:

- Geopolitically, there's no better place to produce than Texas.

- Management under Hollub is incredible.

- Though high decline rate wells do require more capex, they also have the ability to benefit from volatility in oil prices. You can produce it quick and shut it off quick. That has some advantages.

- Larger companies have better economies of scale, and Occidental specifically has relatively low production costs per barrel.

- They have better access to credit markets and can get stupid terms on their debt. I think financing the purchase of Crown Rock was quite smart.

- The Permian is one of the best oil basins in the world. Low cost, lots of reserves, and lots of future potential.

[Blake Hampton]

^ I'll also add that the above sounds nice and sweet until the Saudis and Russians decide to have a d*** measuring contest. Then you die.

[no_free_lunch]

Just now, Blake Hampton said:

 

I thought we were allies with Russia now?

Nobody said that was the case except the trolls.  IMO we are being pushed to fight Russia and we will if need be but prefer to let the EU take on Russia.  The west has its hands full with the rest of the world and its own issues.

[Hsmpanl]

38 minutes ago, thepupil said:

I don’t think they’re attractively priced now (despite optically high yields), but would put a plug in for my permahold positions in BSM and DMLP as potential alternatives, particularly DMLP which has a very simple formula: no debt, no UBTI, all royalties go to unit holders, heavy inside ownership, issuance to increase the base. 

 

because of how clean story is and because they’ve (in my opinion) done a nice job with accretive issuance over time, I’d be inclined to buy more DMLP On any kind of real pullback. At current prices they’re more of a hedge/bet on rising prices as opposed to assymetric across wide range of scenarios as they were in 2020/21

 

they, particularly BSM are more gassy though. 

 

Can you elaborate on dmlp and no ubti? Like the company but hate LPs and K1s… can I buy this in an Ira and not worry about it?

[thepupil]

DMLP has no debt which is one of the reasons it does not generate UBTI. Not tax advice and DYODD but I believe you can own in an IRA w/o problem. 
 

Edited April 5, 2025 by thepupil

[kab60]

23 minutes ago, Blake Hampton said:

 

A couple of reasons:

- Geopolitically, there's no better place to produce than Texas.

- Management under Hollub is incredible.

- Though high decline rate wells do require more capex, they also have the ability to benefit from volatility in oil prices. You can produce it quick and shut it off quick. That has some advantages.

- Larger companies have better economies of scale, and Occidental specifically has relatively low production costs per barrel.

- They have better access to credit markets and can get stupid terms on their debt. I think financing the purchase of Crown Rock was quite smart.

- The Permian is one of the best oil basins in the world. Low cost, lots of reserves, and lots of future potential.

I mean that's nice and all, and I agree on part of it, but does the numbers really support the above? FCF is expected to come in at 4.5B in '25 (and certainly lower after the recent drop in oil prices) and that's after spending more than 50B buying CrownRock and Anadarko. And I'd argue FCF is probably elusive/overstated, as acquisitions seems to be a form of maintenance capex. I guess I just don't get the attraction in buying a levered oil producer at 10xFCF, when I can find growing companies in Canada buying back 10% of shares/year with neglible debt. Political risk is real, but there's potential political upside as well if they decide to build more pipelines (less likely if Carney wins the election, which looks likely).

[Blake Hampton]

15 minutes ago, kab60 said:

I mean that's nice and all, and I agree on part of it, but does the numbers really support the above? FCF is expected to come in at 4.5B in '25 (and certainly lower after the recent drop in oil prices) and that's after spending more than 50B buying CrownRock and Anadarko. And I'd argue FCF is probably elusive/overstated, as acquisitions seems to be a form of maintenance capex. I guess I just don't get the attraction in buying a levered oil producer at 10xFCF, when I can find growing companies in Canada buying back 10% of shares/year with neglible debt. Political risk is real, but there's potential political upside as well if they decide to build more pipelines (less likely if Carney wins the election, which looks likely).

 

If you expect FCF of 4.5 B on a 38.1 B company, that's a current FCF yield of nearly 12%. Not too shabby. Also, I think margins can expand significantly in the future as my thesis plays out. But that's what makes a market. I do agree though that there are cheaper options the smaller you're willing to play it. They might also be riskier too.

[KPO]

26 minutes ago, kab60 said:

I mean that's nice and all, and I agree on part of it, but does the numbers really support the above? FCF is expected to come in at 4.5B in '25 (and certainly lower after the recent drop in oil prices) and that's after spending more than 50B buying CrownRock and Anadarko. And I'd argue FCF is probably elusive/overstated, as acquisitions seems to be a form of maintenance capex. I guess I just don't get the attraction in buying a levered oil producer at 10xFCF, when I can find growing companies in Canada buying back 10% of shares/year with neglible debt. Political risk is real, but there's potential political upside as well if they decide to build more pipelines (less likely if Carney wins the election, which looks likely).

Probably need to move this conversation to the energy thread, but I’d be interested in your views on specific O&G companies you like here and why. Over my ~30 year  investment life I’ve found O&G to be a great geopolitical and inflation hedge and have only seen significant rapid draw downs like last week a handful of times, all of which have been accumulation opportunities. I tend to like the majors due to the diversity that comes with LNQ, midstream and downstream/ 

refining/chemicals exposure, and largely agree with you on OXY despite owning some (bought well before CrownRock, which is a deal they didn’t need). Do you like SU here? Others? 

[Eldad]

Call me when XOM is at $30 again. Otherwise, get ready for a 50% drawdown. 

[Spekulatius]

I think the EU will respond with package that is liked  consist of

1) Target tariffs against aerospace products (to level Airbus versus Boeing etc’), Agricultural goods (hitting Mags home base) and maybe a few other product groups

2 ) a stimulus component to shield exporters hit by the recent tariffs

3) something related to hitting big tech. I am not sure what it is,  it could be restricting access to some markets, a digital tax or a security component that forces them to operate their European business somewhat independently (similar to utilities or defense cos that are foreign owned)

 

I don’t think the Mag7 stocks will like 3)

 

These are just my guesses based on chatter here there and what makes sense from an EU perspective in my opinion.

Edited April 5, 2025 by Spekulatius

[Paarslaars]

They will hit industries from swing states.

[Pelagic]

8 minutes ago, Spekulatius said:

I think the EU will respond with package that is liked  consist of

1) Target tariffs against aerospace products (to level Airbus versus Boeing etc’), Agricultural goods (hitting Mags home base) and maybe a few other product groups

2 ) a stimulus component to shield exporters hit by the recent tariffs

3) something related to hitting big tech. I am not sure what it is,  it could be restricting access to some markets, a digital tax or a security component that forces them to operate their European business somewhat independently (similar to utilities or defense cos that are foreign owned)

 

I don’t think the Mag7 stocks will like 3)

 

These are just my guesses based on chatter here there and what makes sense from an EU perspective in my opinion.

 

This seems like a sensible approach on their part. Trump's team is goading other countries to respond like China did by increasing reciprocal tariffs. If more countries respond with targeted measures that ensnare individual American firms, the closer their executives are to Trump the better, sooner or later a mob of American CEOs are going to be a permanent fixture at Mar a Lago advocating for tariff reform. Reciprocal tariffs against the US will likely worsen the situation but targeted measures where you're incentivizing Trump's base to negotiate on your behalf might just work.

 

The EU has the resources and familiarity with American businesses to pull something like this, other small countries who are still trying to calculate how they ended up with the rate they got are out of luck and have little leverage. 

[ourkid8]

Small amount of M call options.  

[Rainier]

5 hours ago, Blake Hampton said:

 

I largely agree though I do still think OXY is an incredible company. When thinking about it, remember that Buffet is an absolute genius, and also remember that he owns a third of it.

 

I have to disagree with you here. Most of the major oil companies have very mediocre management teams. They know how to drill and complete a well. They know how to negotiate leases and how to finance projects. They are technically proficient.

But in terms of capital allocation and visionary leadership, I just don’t think there are very many who stand out. They overspend when prices (and cost of drilling is high) and turtle up and don’t spend or acquire when the price drops.

 

In my opinion, really well run oil companies are very rare. Almost unicorns. And it isn’t surprising, since you have an in-demand commodity and maybe the incentive for the board to pursue any type of marginal risk is really low. Management teams know they can generate $X amount of cash flow and make an extremely good living doing it, so there’s zero incentive to really swing for the fences in terms of shareholder value creation.
 

Buffett’s play with Oxy was a play on the overly depressed commodity asset value with a company in a specific situation that allowed him to get the terms he wanted. I don’t think he was betting on management or the culture of the company or anything. 
 

Obviously there are top tier exploration companies and you can make money in different ways. But I would agree with others that the way to do that is to either wait until there is a lot of blood in the street with oil prices just absolutely cratered or to spend a lot of time finding the small niche setups with boatloads of cheaply accessible reserves or something similar.

 

It’s the same with almost every industry where the players are just providing a commodity. Banking is a good example. There are a few outliers who have forced their way into niche business models or refuse to give on pricing pressure or are excellent acquirers. But they are few and far between. The vast majority of banks are filled with lenders and executives who take orders from the competitive landscape, achieve mediocre/homogenous returns across the industry, and take home pretty far paychecks.

[Blake Hampton]

3 minutes ago, Rainier said:

I have to disagree with you here. Most of the major oil companies have very mediocre management teams. They know how to drill and complete a well. They know how to negotiate leases and how to finance projects. They are technically proficient.

But in terms of capital allocation and visionary leadership, I just don’t think there are very many who stand out. They overspend when prices (and cost of drilling is high) and turtle up and don’t spend or acquire when the price drops.

 

In my opinion, really well run oil companies are very rare. Almost unicorns. And it isn’t surprising, since you have an in-demand commodity and maybe the incentive for the board to pursue any type of marginal risk is really low. Management teams know they can generate $X amount of cash flow and make an extremely good living doing it, so there’s zero incentive to really swing for the fences in terms of shareholder value creation.
 

Buffett’s play with Oxy was a play on the overly depressed commodity asset value with a company in a specific situation that allowed him to get the terms he wanted. I don’t think he was betting on management or the culture of the company or anything. 
 

Obviously there are top tier exploration companies and you can make money in different ways. But I would agree with others that the way to do that is to either wait until there is a lot of blood in the street with oil prices just absolutely cratered or to spend a lot of time finding the small niche setups with boatloads of cheaply accessible reserves or something similar.

 

It’s the same with almost every industry where the players are just providing a commodity. Banking is a good example. There are a few outliers who have forced their way into niche business models or refuse to give on pricing pressure or are excellent acquirers. But they are few and far between. The vast majority of banks are filled with lenders and executives who take orders from the competitive landscape, achieve mediocre/homogenous returns across the industry, and take home pretty far paychecks.

I always appreciate input, and I want to take a moment to talk about oil prices because it’s something I’ve been thinking about. Back in 2020, during the global pandemic that brought much of the world to a screeching halt, WTI crude oil averaged around $40 per barrel. Adjusted for inflation, that would be about $50 a barrel today. This was a time when a lot of governments were literally conducting lockdowns and not allowing people to leave their homes.

 

Given everything happening today, I just don’t see how oil prices can sustainably drop much lower than that over the longer-term. You talk about oil prices cratering, that very well could be what's happening right now.

[Blake Hampton]