By Todd Royal
From 2020-2024 the United States (US) is projected to produce over 24.1 million-barrel oil equivalent (BOE) of new oil and natural gas; a staggering figure of exploration and production (E&P) that every investor should be aware of in 2020. The problem has been the battered energy sector has seen some of the worst performing stocks and overall performers in 2019. This worst list is “riddled with energy names,” but new E&P estimates, and a strong US economy are reasons to invest in energy.
Billionaire investors Warren Buffet, Carl Icahn, Sam Zell, and NFL football owner Jerry Jones all believe energy stocks are prepared to stage a turnaround in 2020, and have become contrarian investors when it comes to these poor performers in previous years.
The question at the forefront of every investor’s mind considering energy is have we reached a bottoming out of US energy stocks and companies where now is the time to find value at lower prices and valuations? Seemingly, the answer is yes, if the smart money from these legendary investors is piling into energy then quite possibly you should be as well in the coming new year.
Why this could be a smart move is here is a list of some of the worst performing stocks of 2018 that have now bounced back with strong returns in 2019. This list includes: “General Electric, Applied Materials, Coty, Tyson Foods, Perrigo, and Lennar.”
There are a number of factors these investors have spotted that puts energy on line for a strong 2020. Energy sector’s valuation hasn’t been this low since 2014, and has lost over 40 percent of “the sector’s 1.5x multiple to book value way below the S&P 500’s 3.5x average.” Bullish sentiments are additionally evidenced by the energy sectors “earnings growth in 2020 is expected to click in at 23%, the highest by any sector.” Energy companies have also been increasing dividends recently, but prudence with your portfolio is wise, as the sector is expecting a 32 percent earnings decline in the fourth quarter.
The smart guy investors have put their money into energy in 2019. Warren Buffet’s Berkshire Hathaway committed $10 billion backing Occidental Petroleum’s bid for Anadarko Petroleum that was completed in August. Buffet’s energy portfolio also includes billions in Cheniere Energy and CVR Energy.
Sam Zell, billionaire real estate investor, and founder, and chairman of private equity firm Equity Group Investments is buying distressed energy assets at below market prices and value in Texas, California, and Colorado. Zell has stated publicly, “Some oil companies are running out of money to drill and are selling their cash flow to raise more capital.”
Starting out in oil and natural gas makes it a natural fit for Jerry Jones to invest $1.5 billion in natural gas company Comstock Resources in spite of persistent low gas prices. The downside comes from China where they are actively trying to resell liquid natural gas (LNG) on the spot market. This indicates signs of an oversupplied market, full inventories, and a possible slowing economy. LNG may also feel the wrath of climate activists, because new data has shown natural gas emits more CO2 than coal.
But Mr. Jones paid pennies on the dollar for the Dallas Cowboys in the late 80s, and now they are one of the most valuable sports franchises in the world. When the Cowboys were losing money the way natural gas is at this time he invested when no one else would in a losing franchise. Mr. Jones’ natural gas bet will likely pay off with Asia on track to consume more natural gas than projected supplies until 2050.
Carl Icahn’s, Icahn Enterprises has made large gains with CVR Energy, and Thomas Hayes, chairman of hedge fund Great Hill Capital has an interesting perspective on why he has built bullish positions on EOG Resources, Concho Resources, Occidental Petroleum, Pioneer Natural Resources and Conoco Phillips: Mr. Hayes sees value since Saudi Arabia, and OPEC+ committed to a new round of crude oil production cuts. This coupled with the Trump administrating delaying a December 15th scheduled tariff hike on China, and this usually causes demand spikes with supply being limited.
International affairs point favorably towards energy stocks gaining in 2020. The US House and Senate armed service committees reached a bipartisan agreement to sanction companies working on the Russian Nord Stream 2 gas pipeline project that will deliver Russian natural gas to Germany. US officials have conceded defeating the project, but companies will be reluctant to upset access to the US market. Forceful sanctions have the potential to open more US LNG to European markets. Proceed with caution when investing in Europe, because the Europeans just unveiled their version of the Green New Deal, which is their technologically detailed roadmap for zero emissions by 2050.
Whereas China is attempting to sell LNG on the spot market, Beijing imported 11.13 million barrel per day (mb/d) of crude oil. This is a record amount of imported oil and coincides with China “imports in the first eleven months combined totaled a good 10 mb/d, which puts them 10.4% up on the previous year.” This aligns with U.S. Energy Information Administration (EIA) projections stating a “nearly 50% increase in world energy usage by 2050, led by growth in Asia.”
Brazil is one of the largest South American countries, and will continue expanding their pre-salt E&P. Brazil’s Mines and Energy Minister Bento Albuquerque said Brazil “could not release its grip on hydrocarbons.”
The largest reason to be bullish on energy stocks and a major reason why billionaire investors have made large bets on energy is lower oil prices have “failed to stop U.S. shale growth.” Rystad Energy’s latest projections found “U.S. shale will grow even in an environment with lower prices.”
All of the positive financial and international trends give good reasons to examine investing in energy stocks with market caps above $500 million over projected growth in U.S. E&P, and Asian consumption. Have a prosperous 2020.