Description: David Yepez, Investment Analyst/Portfolio Manager discusses how energy stocks may be the hidden gems of today's market.
Reflections on Investing in the Energy Industry
David Yepez, Investment Analyst/Portfolio Manager
It’s remarkable how quickly things change over the course of just one year. Last year, I wrote about1 the pessimistic sentiment in the energy industry and the conventional investor wisdom that oil prices couldn’t move higher. Today, however, the market is realizing electric vehicles are not going to kill energy demand just yet. In fact, countries around the world, including Venezuela and Angola, are experiencing deep supply disruptions2 and crude oil demand growth continues to be strong globally3.
John Neff, a well-known contrarian value investor, describes his process for finding hidden gems in the following quote4: “It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized.”
Energy companies have been unpopular investments, underperforming the market for the greater part of the last decade5. At this point though, energy stocks very well may be the hidden gems of today’s market as they slowly start to take a leading position. Patience appears to be rewarding contrarian investors.
The supply and demand equation is getting even more interesting with crude oil inventory levels below the 5-year average6 and Iran deal sanctions having the potential to reduce supply somewhere between 200,000 to 1,000,000 barrels of crude oil per day7. Analysts and investors are now getting concerned about supply shortages and some are sounding an alarm on the risk of oil prices spiking as high as $90 or $100 per barrel. There is a viable path that could make these price ranges a reality.
Another interesting dilemma is developing in the energy patch. Large global oil companies, such as Total S.A., BP and Eni, don’t have enough exposure to the best production region of the United States – the Permian basin8 – and the majority of land in the Permian is already owned by a public or a private company. While most of the transactions in the Permian basin have been small tuck-in acquisitions, there is a better chance that mergers will ramp up in the foreseeable future. Some of the frogs that looked like they were covered in warts during the downturn may now appear princes to buyers looking for a marriage through a strategic partnership.
The price of crude oil and energy sector price movement of the past couple years remind us that behavioral finance plays a big role in investments. Seth Klarman writes9, "The economics, the valuation of the business, is not hard. The psychology -- How much do you buy? Do you buy it at this price? Do you wait for a lower price? What do you do when it looks like the world might end? Those are the harder things."
This is part of the beauty of investing in the stock market. The sky can seem cloudy and investors’ opinions can diverge significantly, creating a great opportunity for those who can keep the noise from affecting their rational analysis. Independent and clear thinking provides the potential for excess returns and wealth creation over time.
2 reuters.com/article/us-global-oil/oil-prices-rise-on-venezuelan-supply-troubles-but-u-s-output-surges- idUSKCN1J304L
9 businessinsider.com/12-brilliant-insights-from-seth-klarman-2013-2#they-realize-investing-is-the- intersection-of-economics-in-psychology-3
PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of any securities mentioned. Any performance information provided has been calculated using a representative client account managed by the firm in Exencial’s SELECT Equity strategy.
Information on the methodology used to calculate performance information (if mentioned) and acomplete list of portfolio holdings and specific securities transactions for the preceding 12 months is available upon request by sending an email to Compliance@ExencialWealth.com. Holdings are subject to change. Exencial Wealth Advisors or one or more of its officers, may have a position in the securities discussed herein and may purchase or sell such securities from time to time.
Information and opinions provided herein reflect the views of the author as of the publication date of this article or video. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness.
The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in the linked article or video.
There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance.
Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.