For the past 2-3 weeks, most of my time has been spent on two topics: Researching / writing up / live tweeting / doing spaces on the Twitter / Elon Case. As I write this, TWTR is trading for ~$39. If you assume the only two outcomes are a flat win for Twitter (they get $54.20 through specific performance) or a loss for Twitter (Elon wins and the stock crashes to ~$15/share), the market is currently pricing Twitter as ~70% to win the case. Based on everything I’ve seen so far, that is materially too low. Elon has absolutely no case here; I’ve been using 90% odds for Twitter to win but honestly the 10% chance relates to negative externalities having nothing to do with the case (the board caves for some reason, the SEC doesn’t approve their proxy, the whole market blows up and Elon can’t fund the purchase, etc.). On the merits of the case I’ve seen, Twitter is over 95% to win (but that’s not investing advice, and you should certainly keep in mind that I am not a lawyer. Plus, I just spent most of my Saturday morning writing a substack post on energy companies; am I really someone you would want to take advice on even if I was offering it?)
I think it's simple what's going on: many of the co's on a look back basis are absolute train wrecks. Share issuance is through the roof, losses are material and in many cases consistent or at least lumpy - to me, most of them look like a text book example of what should be avoided under normal circumstances, especially with half the worlds governments painting them as Satan himself.
Now, the difference is that circumstances are certainly not normal and many of these co's will earn substantial amounts of money, certainly in the short term and likely in the medium term (perhaps even longer term) - but what does management do - do they s**t the bed like many have done consistently for the last decade or have they suddenly seen the light? - I'm sure some will be the latter but it's hard to argue that many will be the former.
Can they hold it together for long enough that investors net a substantial return?
Again - I bet some can - maybe many can - but it's still a ballsy proposition to throw any material amount of capital at these guys - at least that's the case for a generalist like myself.
I am currently allocating capital to companies with:
- Pricing power given recession (Well known brands and essentials are going to do well. Commodity businesses do not have pricing power by definition because they're subject to the insane booms and busts of the speculative market and rarely have any significant premium to spot prices)
- Solid balance sheet (I actually like sustainable high debt levels right now because the market is not pricing in inflation deleting huge chunks of that debt over time, as long as the company has the cash flow to maintain the debt. But low debt works too, pricing power will drive revenues higher as inflation bites, and that will make any existing debt even easier to service. Commodity businesses may or may not have solid financials, but the prospect of losing over half your revenue due to a random crash does not bode well for taking on debt or even just running a business day-to-day.)
- Stable cash flows (If you're looking at commodities I think fertilizer is currently more attractive than oil/gas. However, commodity businesses do not have forecastable cash flows, it's always boom or bust. Consumer staples, healthcare, etc will do much better in the coming crash n' burn because their cash flows are so predictable due to their pricing power and general stability)
- Bright future (Oil/gas do not have a bright future. They're a necessary evil right now but the replacement pace for them is only going to get faster over time, so any current cash flows are unlikely to be sustainable in the years to come, especially with significant demand destruction from the crash n' burn. Also as oil/gas lose scale they will also lose lobbying power and economies of scale, and those will really bite revenues/profits hard. The market is aware of this and is therefore heavily discounting any future predictions.)
Not legal or investing advice. On TWTR, the scenario that worries me is: a few days before trial, Musk offers say $5bn to terminate the merger agreement and settle the litigation. As I understand, the board has a duty to act not only in the best interests of shareholders (for whom litigation would be by far the better choice -- I have the prospects of getting an order for specific performance a bit below you but not materially; and I don't think Musk can realistically do anything other than comply with a Delaware Court order) but also the company itself and they are free to consider the interests of other constituencies as part of that assessment. I can see the board deciding that the company and its employees would be better off remaining independent with the benefit of the hypothetical $5bn to support the strategy and (potentially - as above, not legal advice) getting advice that the balancing of conflicting interests of the company itself and the shareholders is a matter for the board's judgement. If this is wrong, please let me know (I currently don't hold, but would if I got myself comfortable (not relying on anyone's comments here) that this scenario wouldn't arise).
Look at Baytex. Canadian producer. Much like OXY had a near death experience in 2020, now doing well and has clearly communicated capital return goals.
For some reason I thought EQT hedges a significant portion their gas production. If so, they wont benefit (at least, not as much) from spikes in natural gas prices. I have come to abhor E&Ps that hedge production. I have found that they are not consistent with hedging (that is, they "hedgulate") and wind up hedging into a price spike, get frustrated with margin calls, listen to all the media mumbo jumbo at the top, and ultimately fail to hedge before the bottom falls out. I have gone back to tally up the hedging P&Ls for some E&Ps thru a cycle...I damn near blush at the amount of money some of these companies lost thru an entire cycle. If a company "needs" to hedge, its because they stretched the balance sheet by trying to be a little too big for their britches (another deadly sin for an E&P, but for some reason E&P companies attract personalities with big egos that want to do big deals...its nearly the perfect boom/bust industry). /end of rant
For some reason I thought EQT hedges a significant portion their gas production. If so, they wont benefit (at least, not as much) from spikes in natural gas prices. I have come to abhor E&Ps that hedge production. I have found that they are not consistent with hedging (that is, they "hedgulate") and wind up hedging into a price spike, get frustrated with margin calls, listen to all the media mumbo jumbo at the top, and ultimately fail to hedge before the bottom falls out. I have gone back to tally up the hedging P&Ls for some E&Ps thru a cycle...I damn near blush at the amount of money some of these companies lost thru an entire cycle. If a company "needs" to hedge, its because they stretched the balance sheet by trying to be a little too big for their britches (another deadly sin for an E&P, but for some reason E&P companies attract personalities with big egos that want to do big deals...its nearly the perfect boom/bust industry). /end of rant
Some risks are a global recession that curtails demand, lower metal prices allowing for a faster EV roll out and natural gas utility replacement, and successful scaled solid state batteries.
Other than the recession, I think the EVs and natural gas replacements will take longer than some companies stated plans of 2030 or 2035. Solid state batteries for EVs might be out by 2025, but I haven’t seen an estimate on consumer prices.
There is a nonzero chance that oil and gas demand in developed nations and some emerging permanently drops faster than expected.
But given my current expectation of the timelines and the current cash return, I’m allocating to oil and gas stocks. Even despite the economic indicators of recession.
I think it's simple what's going on: many of the co's on a look back basis are absolute train wrecks. Share issuance is through the roof, losses are material and in many cases consistent or at least lumpy - to me, most of them look like a text book example of what should be avoided under normal circumstances, especially with half the worlds governments painting them as Satan himself.
Now, the difference is that circumstances are certainly not normal and many of these co's will earn substantial amounts of money, certainly in the short term and likely in the medium term (perhaps even longer term) - but what does management do - do they s**t the bed like many have done consistently for the last decade or have they suddenly seen the light? - I'm sure some will be the latter but it's hard to argue that many will be the former.
Can they hold it together for long enough that investors net a substantial return?
Again - I bet some can - maybe many can - but it's still a ballsy proposition to throw any material amount of capital at these guys - at least that's the case for a generalist like myself.
I am currently allocating capital to companies with:
- Pricing power given recession (Well known brands and essentials are going to do well. Commodity businesses do not have pricing power by definition because they're subject to the insane booms and busts of the speculative market and rarely have any significant premium to spot prices)
- Solid balance sheet (I actually like sustainable high debt levels right now because the market is not pricing in inflation deleting huge chunks of that debt over time, as long as the company has the cash flow to maintain the debt. But low debt works too, pricing power will drive revenues higher as inflation bites, and that will make any existing debt even easier to service. Commodity businesses may or may not have solid financials, but the prospect of losing over half your revenue due to a random crash does not bode well for taking on debt or even just running a business day-to-day.)
- Stable cash flows (If you're looking at commodities I think fertilizer is currently more attractive than oil/gas. However, commodity businesses do not have forecastable cash flows, it's always boom or bust. Consumer staples, healthcare, etc will do much better in the coming crash n' burn because their cash flows are so predictable due to their pricing power and general stability)
- Bright future (Oil/gas do not have a bright future. They're a necessary evil right now but the replacement pace for them is only going to get faster over time, so any current cash flows are unlikely to be sustainable in the years to come, especially with significant demand destruction from the crash n' burn. Also as oil/gas lose scale they will also lose lobbying power and economies of scale, and those will really bite revenues/profits hard. The market is aware of this and is therefore heavily discounting any future predictions.)
Not legal or investing advice. On TWTR, the scenario that worries me is: a few days before trial, Musk offers say $5bn to terminate the merger agreement and settle the litigation. As I understand, the board has a duty to act not only in the best interests of shareholders (for whom litigation would be by far the better choice -- I have the prospects of getting an order for specific performance a bit below you but not materially; and I don't think Musk can realistically do anything other than comply with a Delaware Court order) but also the company itself and they are free to consider the interests of other constituencies as part of that assessment. I can see the board deciding that the company and its employees would be better off remaining independent with the benefit of the hypothetical $5bn to support the strategy and (potentially - as above, not legal advice) getting advice that the balancing of conflicting interests of the company itself and the shareholders is a matter for the board's judgement. If this is wrong, please let me know (I currently don't hold, but would if I got myself comfortable (not relying on anyone's comments here) that this scenario wouldn't arise).
Look at Baytex. Canadian producer. Much like OXY had a near death experience in 2020, now doing well and has clearly communicated capital return goals.
For some reason I thought EQT hedges a significant portion their gas production. If so, they wont benefit (at least, not as much) from spikes in natural gas prices. I have come to abhor E&Ps that hedge production. I have found that they are not consistent with hedging (that is, they "hedgulate") and wind up hedging into a price spike, get frustrated with margin calls, listen to all the media mumbo jumbo at the top, and ultimately fail to hedge before the bottom falls out. I have gone back to tally up the hedging P&Ls for some E&Ps thru a cycle...I damn near blush at the amount of money some of these companies lost thru an entire cycle. If a company "needs" to hedge, its because they stretched the balance sheet by trying to be a little too big for their britches (another deadly sin for an E&P, but for some reason E&P companies attract personalities with big egos that want to do big deals...its nearly the perfect boom/bust industry). /end of rant
For some reason I thought EQT hedges a significant portion their gas production. If so, they wont benefit (at least, not as much) from spikes in natural gas prices. I have come to abhor E&Ps that hedge production. I have found that they are not consistent with hedging (that is, they "hedgulate") and wind up hedging into a price spike, get frustrated with margin calls, listen to all the media mumbo jumbo at the top, and ultimately fail to hedge before the bottom falls out. I have gone back to tally up the hedging P&Ls for some E&Ps thru a cycle...I damn near blush at the amount of money some of these companies lost thru an entire cycle. If a company "needs" to hedge, its because they stretched the balance sheet by trying to be a little too big for their britches (another deadly sin for an E&P, but for some reason E&P companies attract personalities with big egos that want to do big deals...its nearly the perfect boom/bust industry). /end of rant
Some risks are a global recession that curtails demand, lower metal prices allowing for a faster EV roll out and natural gas utility replacement, and successful scaled solid state batteries.
Other than the recession, I think the EVs and natural gas replacements will take longer than some companies stated plans of 2030 or 2035. Solid state batteries for EVs might be out by 2025, but I haven’t seen an estimate on consumer prices.
There is a nonzero chance that oil and gas demand in developed nations and some emerging permanently drops faster than expected.
But given my current expectation of the timelines and the current cash return, I’m allocating to oil and gas stocks. Even despite the economic indicators of recession.