The Big Contrarian Energy Trade

In the latest episode of the Acquirers Podcast, Vincent Daniel, Porter Collins, and Tobias Carlisle discuss The Big Contrarian Energy Trade. Here’s an excerpt from the episode:

Tobias: On the long side, on the more positive side, you still feel quite strongly about energy, because it’s underinvested? Is that like a capital cycle theory like that–? The book escapes me at the moment– [crosstalk]

Vincent: Yes, Porter’s going to roll it out right now.

Tobias: You got it there? Capital Returns.

Porter: Capital Returns.

Tobias: There you go. Thank you.

Vincent: I’ll tell you where the evolution this trade- [crosstalk]

Porter: A great book, by the way. People should read that book. It’s good.

Vincent: -which turned into an investment for us. The trade started– talk about a contrarian signal, bell signal was when Exxon was taken out of the Dow. And so, typical guys like us, all three of us here, Exxon is taken out of the Dow, the majority of people buy salesforce.com, we buy Exxon. And we bought Exxon on a trade and then started doing work on it more of a bottom-up perspective. We started to realize that, “Wow, there’s more to this than just being contrarian.” They have not invested in this space for 10 to 12 years.

We did this the other day. If you look at the total assets of, say, Schlumberger and Halliburton, let’s call it the picks and shovels for the industry, the total assets for both of them have declined over the last 10 years. That’s a very simple way of saying that nothing has been invested in this cycle whatsoever combined with the bankruptcies and the like. On top of the fact that you have government policies that were trying to put all of these companies, and the industry itself, and the energy source into the ground forever, despite the fact that it probably is the source of 65% to 70% of the entire world’s energy. None of it made sense.

Then on top of the fact, all the asset managers completely sold out of every single, large fossil fuel-oriented company. Remember, Porter, we did about a year and a half ago sort of this very simple screening of looking at the holders’ list of all the largest fund complexes and saying, “Okay, let’s play a game. Let’s choose the first energy name for, say, Fidelity or Capri.” And you had to go to number 85 to get to the first energy name. So, there were 85 other companies that they invested in and then Exxon Mobil at 86, for almost every single one of them. So, we realized that this was the perfect setup for a long contrarian value trade. So, that was the genesis.

Porter: Just to reference what Vinnie was talking about, pulled up Schlumberger. Some people call it Schlumberger. Schlumberger’s assets were 2012, $61.5 billion. Now, it’s $41.5 billion, down 30%. I don’t know if it’s a great litmus test, but all the big oilfield services companies are like that. And so, you can see the underinvestment.

Tobias: There’s been a big push from government directly and also secondarily through ESG initiatives and things like that. I guess the question was always, which one wins out, whether it’s politics or physics, I guess, eventually. But I think some of that question has been answered a little bit in Europe, I think, when they don’t have any choice. You’ve just got to switch on or keep the nuclear going. You take your energy from wherever you can get it.

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