Finding Worthwhile Energy Stocks Amid Rising Risk

Key Concepts

• Contrarian Value Investing in Energy: Identifying undervalued opportunities in the small-cap oil and gas sector despite overall market underperformance.
• Skepticism of Macro Predictions: Prioritizing current valuations and fundamental analysis over broad economic forecasts.
• Importance of Property Rights: Secure property rights are crucial for attracting long-term investment in resource development.
• Geopolitical Risk & Commodity Prices: Recognizing the influence of geopolitical events, particularly concerning Russia, Iran, and Venezuela, on oil prices.
• China as a Commodity Indicator: Observing China’s actions (buying/selling) as a potential leading indicator, diverging from prevailing narratives.
• Supply-Side Dynamics in Oil: Anticipating potential oil price increases due to prolonged underinvestment and declining well productivity.

Sector Underperformance & Investment Philosophy

Since 2015, the small-cap oil and gas sector has significantly underperformed, declining approximately 65-70%. Despite this challenging environment, Bison Interests, led by Josh Young, has achieved nearly 100% returns, demonstrating the potential for success through a fundamental, value-based, and contrarian investment approach. Young aligns with Rick Rule’s philosophy of being either a contrarian or a victim. Both Young and host Dan Ferris express strong skepticism towards macro predictions, emphasizing the “massive cone of uncertainty” surrounding future energy markets and advocating for a focus on current valuations. This bottom-up analysis prioritizes identifying undervalued companies with strong fundamentals.

Geopolitical Considerations & Resource Potential

Elevated geopolitical risk, particularly involving Russia and Iran, is a key factor influencing oil prices. The discussion also addresses the potential impact of a shift in US policy towards Venezuela’s substantial oil reserves (billions of barrels). However, Young argues that major oil companies like Exxon and Chevron face disincentives to invest heavily in Venezuela due to the risk of nationalization and the potential devaluation of existing assets in established plays like West Texas and the North Dakota Bakken. He cites historical precedent (Iraq) and Trump’s comments regarding writing off past investments as cautionary signals. A core argument centers on the fundamental importance of secure property rights for attracting long-term capital deployment, referencing the work of Hernando de Soto.

Contrarian Commodity Views: Copper vs. Oil

While acknowledging the bullish case for copper – driven by declining new discoveries (peaking around 2006, with some years having no new discoveries) and anticipated demand from EVs and grid infrastructure – Young presents a contrarian view. He highlights China’s recent actions as a seller of copper and a buyer of oil, suggesting a potentially different outlook. Robert Friedland argues that normal global growth requires the equivalent of eight of the world’s largest copper mines, a capacity that currently doesn’t exist. Young believes prolonged low oil prices are likely to be followed by a price increase, framing this as a promising future for oil demand coupled with a questionable future for oil supply, with a potential investment horizon of 2028-2029.

Specific Investment Opportunities & Case Studies

Young advocates for focusing on smaller, publicly traded oil and gas producers and service companies, which are currently undervalued. Specific examples include:

• Journey Energy (JI - Toronto Stock Exchange): Benefiting from a successful drilling joint venture with superior well productivity.
• Ensign Energy Services (ESVIF): A Canadian drilling rig company benefiting from a unique situation in California, where new drilling permits are tied to plugging abandoned wells. This represents a contrarian opportunity as the “last man standing” due to stringent California regulations, mirroring refinery shutdowns citing similar regulatory burdens.
• Exxon’s Pioneer Acquisition & Chevron’s Hess Acquisition: Used to illustrate the potential conflict between investing in Venezuela and devaluing existing assets.

Industry Trends & Data Points

Several data points were discussed:

• US Oil Shale Production Growth: Historically grew by approximately 1 million barrels per day annually, but has recently stalled.
• Well Productivity Decline: Per-foot well productivity in shale formations has declined significantly over the past five years.
• Commodities Boom: The discussion implicitly acknowledges the cyclical nature of commodity markets.
• Rig Growth: The potential for increased drilling activity as prices rise.

Additional Information & Upcoming Event

The speakers discussed “The Stocks That Save America” financial summit featuring Rick Rule and Nick Hajj, focusing on US companies poised to rebuild the nation’s industrial backbone and benefit from national security interests. A free stock recommendation will be provided at the summit. Promotional material highlighted past stock recommendations that surged 200% and 90% within 24 hours.

Conclusion

The discussion emphasizes a contrarian, value-oriented approach to investing in the energy sector, particularly focusing on undervalued small-cap companies. A key takeaway is the importance of independent analysis, skepticism towards macro predictions, and recognizing the fundamental role of property rights in resource development. Observing China’s actions as a potential commodity indicator and anticipating a future oil price increase due to supply-side constraints are central to Young’s investment thesis. The highlighted case studies demonstrate the potential for outsized returns in niche areas overlooked by the broader market.