11 August 2022

Trey chats with oil and gas expert Josh Young. Josh is the Chief Investment Officer and Founder of Bison Interests, which focuses on investing strictly in oil and gas, which has become very contrarian over the last few years. We had Josh on the show in Q1 and were blown away with the extent of his knowledge, which is very useful at the moment as oil swings from decade highs to average lows. A lot has been happening in the oil and gas markets so, in the first half of the discussion, they caught up on Q2 headlines, and in the latter half of the show discussed Buffett’s recent massive investments in both Chevron and Occidental. 

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  • Why the price of oil has been experiencing 30% swings in Q2.
  • How the war between Russia and Ukraine has been affecting the oil and gas markets.
  • Recession risks for oil and why some smaller producers are experiencing very low valuation multiples.
  • How interest rates continue to climb could affect the supply and demand of oil.
  • Why Buffett’s Berkshire Hathaway has now invested $26B into Chevron and $13B into Occidental and shows no sign of slowing down.
  • How retail investors can think about investing like Buffett with a much smaller portfolio.
  • A forecast for airline stocks.
  • And a whole lot more!


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Trey Lockerbie (00:00:04):
My guest today is oil and gas expert, josh young, Josh is the chief investment officer and founder of Bison Interests, which focuses on investing strictly in oil and gas companies, which has become very contrarian over the last few years. We had Josh on the show in Q1, it was episode 429, and were blown away with the extent of his knowledge, which is very useful at the moment as oil swings from decade highs to 30% lows. A lot has been happening in the oil and gas market so we spend the first half of the discussion catching up on Q2 headlines and spend the back half of the show discussing Buffett’s recent massive investments in both Chevron and Occidental.

Trey Lockerbie (00:00:38):
In this episode, you will learn why the price of oil has been experiencing 30% swings in Q2, how the war between Russia and Ukraine has been affecting the oil and gas markets, recession risks for oil and why some smaller producers are experiencing very low valuation multiples, why Buffett’s Berkshire Hathaway has now invested 26 billion into Chevron and 13 billion into Occidental and shows no signs of slowing down, how retail investors can think about investing like Buffett, but with a much smaller portfolio, a forecast for airline stocks and a whole lot more. I always learn a ton from Josh and this one is a doozy. I hope you enjoy it. So without further ado, here is my conversation with Josh Young.

Intro (00:01:20):
You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Trey Lockerbie (00:01:39):
Welcome to The Investor’s Podcast. I’m your host, Trey Lockerbie and like I said at the top, I’m here with our good friend, Josh Young. Welcome back to the show, Josh. Happy to have you.

Josh Young (00:01:48):
Great. Yeah. Thank you for having me back.

Trey Lockerbie (00:01:51):
Well, I had to bring you back on because oil has been one of the top stories of the year and just gets more and more interesting. And our last discussion, which aired March 10th, episode 429 a lot was just beginning to happen. So Russia had just invaded Ukraine. Only a couple of weeks earlier. CPI numbers were ramping up and oil had just hit a 10 year high. So I know a lot’s happened since then. Why don’t you go ahead and catch us up on some of the high notes that have been transpiring over Q2.

Josh Young (00:02:20):
It’s been wild from an oil market perspective. Just the high notes are that there have been two scares about Russian oil coming off the market and in the middle Russia flooded the market so we saw $125 plus WTI twice, and we’ve seen oil go under a hundred twice. And we maybe towards the end of the most recent pullback as Russian oil exports, again, start to fall off.

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Josh Young (00:02:44):
And then I think one of the really big things that’s happened in between when we last spoke and now, is that it’s gone from contentious and almost conspiracy theory sounding to say that OPEC Plus is out of spare capacity, to the front page of multiple Middle East newspapers with the Saudi officials and many others saying that OPEC Plus may be out of spare capacity. So that’s a real difference. And the world is very different when there isn’t a backup provider with extra capacity in case it’s needed.

Trey Lockerbie (00:03:15):
I’m glad you brought that up because that’s one of my biggest question marks, is just the volatility around oil. You mentioned Russia has been flooding the market, pulling back, is that the key driver for the violent swings in the oil price? And if they’re flooding the market and pulling it back, why is that?

Josh Young (00:03:32):
Yeah, so it’s funny, actually I have a few books on oil market history and volatility. One of them is Crude Volatility, sitting right here on my desk. And I think when you look at periods of time where oil prices were pretty stable, they were stable typically because the largest producers had a deal, whether it was government enforced or whether it was economically arranged, to reduce their supply in times of limited demand and to increase their supply in times of excess demand to essentially stabilize the market. And the thought is in those times that having a stable price is very beneficial for demand, because if you know what you’re going to pay, you can plan for it, you end up getting more comfortable with it and using more and more of it.

Josh Young (00:04:16):
Because the return economically on using oil and other hydrocarbons is very high. So as long as you can kind of know what you’re going to spend, it’s very easy to end up, you end up with like car size creep, SUVs get popular, trucks get popular. And it’s not from low prices, it’s more from just stable prices. So it’s beneficial for long term prices for there to be more stability and that’s part of why producers do that.

Josh Young (00:04:40):
And then from a business perspective, it’s very risky if you’re a producer and you don’t know if you’re going to get $10 or $300 for your barrels of oil. It’s very hard to justify investing and you end up with booms and busts that are much more pronounced. So both the producers and the consumers tend to be better off.

Josh Young (00:04:59):
But we are in this period where there’s been oversupply for many years and where the backstop had been from Middle Eastern countries and essentially Russia and a couple other places and I think it was very costly for them to provide this backstop. And I think with different budget issues, Russia obviously, but also Middle East, I mean, populations have grown a lot. There’s a lot of social spending. There’s also wars and other sort of conflicts going on in Middle East too, I think it’s just become less of a priority to stabilize the market.

Josh Young (00:05:33):
And then finally there’s something very interesting. So after we published our research at Bison on OPEC Plus spare capacity, we got a lot of different input from industry people and others that have worked on these fields and were able to provide some insight to either challenge or support our claims. And mostly, I mean, it was like 99% people saying, Hey, I worked on X, Y or Z field or X, Y, Z service company and you have no idea, it’s so much worse. So it was mostly that.

Josh Young (00:06:00):
There was one thing recently someone shared with me in the Aramco bond prospectus, they showed that Ghawar, the largest single oil field in the world and the backstop where everyone expected Saudi Arabia would be able to bring on multiple millions of barrels a day more from, Ghawar’s only producing, I think it was 3.8 million barrels a day and there was no indication of spare capacity in the bond prospectus. So you have this narrative of, oh, we have all these millions of barrels a day of spare capacity and they’re from here and then you have the financial document. One of my friends likes to joke that no one ever reads… People do anything to avoid reading a 10K. And I think bond prospectuses are maybe even more boring than 10K’s, but hey, there’s this beautiful insight embedded in there.

Josh Young (00:06:44):
So anyway, I think that really, it matters a lot for the oil market. It’s still very poorly understood. And I think in the current environment, it may mean much higher average prices. So it may destroy a little demand by these super spikes and prices, but because there’s been so little investment and because I think the whole industry in the world has grown so reliant on there being this spare capacity from these same people, that there’s going to be a lot of reorganization that needs to happen. And that stuff only really historically happens from really high or really low prices. And given the underinvestment, I lean towards the really high prices potentially for a while before we get back into a more stabilized period.

Trey Lockerbie (00:07:23):
Yeah. You’ve got those headwinds of ESG policies and just the unpopularity of oil and gas just in the zeitgeist right now. And so I’m sure it’s hard to get the private equity firms and the like, enlisted and excited about investing in this space, which is also concerning. Let’s focus in on the Russia Ukraine war for just a minute, because as that’s unfolded, what’s come to light is just how much Asia and Europe are reliant on Russian energy. And I’m curious if anything has surprised you related to the markets, just from the dynamics that have been playing out there with Russia and everybody else around them.

Josh Young (00:08:01):
Yeah. So there’s something that we picked up late last year that it’s been surprising that people have been so nonchalant about it and by people, I mean investors and governments and utilities. Russia has been constraining their supply of natural gas to Europe since around this time or earlier last year. And the price for natural gas in Europe is up almost a thousand percent from where it was 18 months ago. And I mean, that’s devastating, because Europe is very reliant on natural gas for power generation. They’re also reliant on coal, but they have these very high CO2 emission taxes and they also, I think philosophically want to move away. They want to move away from all hydrocarbons, but coal is the most polluting by a lot. So it does, I think like to the extent that they’re going to do that, it makes sense to de-emphasize it, but here they are burning more coal with natural gas, which the marginal source for something often sets the price.

Josh Young (00:08:57):
So with natural gas so high they’re paying, I mean the European gas prices are crazy high, European electricity prices are really high, and they’re in a situation where they’re still buying a bunch of gas from Russia, just not as much as they need. And I think Russia has figured out, hey, we could just squeeze these guys, sell them let’s say, half as much gas, get 10 times as much money, hurt them because they’re our economic and potentially military opponents. And then also, and this is, I think the part that people still… It’s very strange, it’s similar to the OPEC Plus thing. I think they’re just averse to it because it’s dumb and there’s aspects of it that shouldn’t happen. But things happen in life all the time that shouldn’t, that aren’t optimal and this thing is that Europe and Asia are burning oil and oil products for power.

Josh Young (00:09:44):
And again, it’s offensive. You look at the history of the world and generally as a species we move forward in the last 10,000 years we’ve really made huge steps. We’ve gone from living in caves essentially and being hunter gatherers, to sending a man on the moon. And yet here we are taking a very big step where there’s this phenomenal thing that we figured out how to harness and it’s changed the world in the last hundred years and we’re taking this phenomenal energy source that is storable and usable for transportation as the best and most efficient way by far and most economic by far and we’re taking this fuel and we’re burning it to generate electric power, which is something that we can do with many other much more limited fuel sources or much more limited electricity generation sources.

Josh Young (00:10:32):
And so I think people just don’t want to think about it. And I know that’s a big tangent from, hey, what’s happening with Europe and Russia to, oh my God, they’re burning oil, but oh my God, they’re burning oil and they could burn millions of barrels a day of oil and totally throw off the oil market and maybe it’s not an accident from Russia’s perspective because hey, if they can squeeze on natural gas and squeeze on oil, I mean, it’s a potentially… And potentially coal too.

Josh Young (00:10:59):
These are enormous products for Russia. They’re hugely beneficial for their economy. And if you think Russia’s economy is doing great, which many publications are saying they’re doing terrible and it’s just observably wrong. You can see their exports are booming. The prices they’re getting are booming relative to where they were 18 months ago. Life is great economically for Russia right now. Hopefully I don’t get canceled for saying that it’s just observable from the economics. You just see what they sell and what price they get. As oil goes up a lot because Europe and Asia are burning oil for power and oil products for power, things may get even better for Russia.

Josh Young (00:11:35):
And this is something I think, it’s risky to talk about this military situation. It’s risky to talk about a geopolitical situation just because it’s not something I’m an expert in, but oil and gas is something I think I know quite well. And this particular thing is something it’s still just not covered. And I think it’s something when you think about it, the whole thing makes a lot more sense. If Russia just started doing this without having invaded Ukraine and again, I’m not saying this is the only reason that they did it, but there is an economic factor having invaded Ukraine, having essentially an excuse to materially constrain natural gas exports to Europe, having an excuse to essentially constrain their oil exports and mess around with the oil market. They’re making a lot more money now and-

Trey Lockerbie (00:12:17):
We can just transact in the rouble instead of dollarizing it.

Josh Young (00:12:21):
Yeah. I mean, there’s a move away from the dollar for a certain hydrocarbon transactions. I mean, it’s very like, again we don’t want to talk about it, because we all don’t like it when a country invades another country and it’s morally reprehensible, but people do morally reprehensible things and win. It’s not all a fairytale and here we are and they’re winning and people don’t want to talk about it. And it’s centering on natural gas and oil and obviously Ukrainian civilians getting murdered. It’s terrible that it’s happening, but they’re making a ton of money and people make that trade off all the time. And so I think it’s important to be aware of it.

Josh Young (00:12:57):
And again, the next shoe to drop, I think is that there’s this increasing amount of oil being burned for power, because the economics are so overwhelming. I mean, at this point, the spread is three to one in terms of European natural gas and oil. And then two and a half to one European natural gas versus burning diesel or gasoline. And I mean, if you can make twice as much power and you’re power constrained in Germany, by burning diesel instead of burning natural gas and you’re really truly constrained on the amount of natural gas you can even get, you’re going to go burn that oil or diesel.

Trey Lockerbie (00:13:32):
And if we think the demand is high now, I mean, we’re not even entering into the winter months yet. So what does that do especially for Europe and the like, when we start getting colder temperatures and they need to power their homes and heat their homes even more. What does that do to the demand and what ramifications might we expect from that?

Josh Young (00:13:48):
So my paradigm is Western European countries are very wealthy, particularly Germany. And there is a lot of… People look at economies and they look at the ways that economists measure them, which is based on economic activity in any given day or year or what have you and they measure that as GDP, but there’s also assets and ownership of businesses. And when you think about the aggregate asset value in Western Europe, there is a tremendous amount of debt capacity there, again, subject to interest rates and subject to other measures, that could be used to afford solutions for their citizens and to be basically be able to stopgap a lot of this stuff.

Josh Young (00:14:27):
I mean, we saw this in the financial crisis where everyone panicked, because I mean, if you look at like how the stock market moved and how credit markets moved, people went from, this is fine to, oh my God, the world is ending with conviction, to this is fine, two years later and with various measures of each of those. And I think one of the things we forget, and I think unfortunately it’s encouraged by financial media and news media and whatever, as well as by people that make money from sharing these tremendously scary predictions, which often are wrong so there’s people that predicted the financial crisis coming back out and making all these dire predictions. And if you followed their advice over a two or five year period, you lost tons of money. They’re never actionable. It’s always by the time they come out, you know you want to be buying, not selling. .

Josh Young (00:15:12):
But the point of all that is that we know that there are huge assets available and that there is mechanisms for tapping those assets through central banks, through fiscal stimulus, through other measures, to be able to bail out financially problems in economies. And so there’s a physical problem, which is that there’s not enough natural gas, but there is enough oil at least in storage and there’s enough to be able to use. I mean, you could see the price go up double where it is right now, and there’d still enough.

Josh Young (00:15:44):
It might squeeze out some use of oil for various chemical products, it might squeeze out some whatever, but if you have 2 million barrels a day, like we saw last winter get used or 5 million barrels a day, which is the high estimate that I’ve seen from a reasonable industry source, I mean, you could see much, much higher oil prices and it’s not unaffordable. And there will be a significant reduction in demand, in aggregate for power and for heat and so on because a lot of people don’t want to spend it, but there is the ability, there’s the asset value, there’s the functional ability of countries like Germany and economic unions, like the EU to be able to fund the provision of much more expensive alternatives to natural gas.

Josh Young (00:16:28):
So I think it’s something that we’ll survive through. And again, optimism and realistic, calm thinking is not something that’s very much in demand here as the stock market has fallen and people are worried about all the different things. But this time probably isn’t different and the implications of that are that demand probably doesn’t fall off a cliff. And that means that supply comes from somewhere. And the thing that I see providing that supply is oil and refined products being used for power generation and for heat this winter. So I think, again, it’s a very specific variant view. It’s not something that people are talking about very much. Frankly, last winter people didn’t talk about it very much. Everyone was so worried about Omicron, that they missed that 2 million barrels a day we’re being burned for heat and for power. So maybe they’ll catch it this winter and I think it makes sense. I’m positioned ahead of it. I think there’s a real chance that we see just shockingly high oil demand from this particular cost.

Trey Lockerbie (00:17:29):
Sticking with Russia just a little bit further. Since we last spoke, we sanctioned Russia and we cut them off from the SWIFT system. It’s almost been a net benefit to your point earlier for them. I mean, economically, they seem to be doing better than expected. When do the sanctions catch up to Russia or will they?

Josh Young (00:17:45):
So, I mean, there are things that are less good. So when I was commenting on their aggregate economic benefit, as an exporting country where a big portion of their exports were coming from exported hydrocarbons, which have elevated prices relative to where they were a year ago, that’s a benefit. A detriment is that if you’re a wealthy Russian, you can’t import X, Y, or Z various Western European. If you want a Hermes scarf or if you want champagne or you want whatever, things got a lot more complicated. If you want to travel from Russia to Western Europe and use your roubles and exchange into another currency, it’s very complicated. And a number of different ultra wealthy Russians had their assets internationally seized. So those are negatives. So it’s not that the citizens aren’t hurt at all, but in aggregate, it does seem like there’s this extra benefit.

Josh Young (00:18:36):
So the reporting I’ve seen from on the ground in Russia is that things are pretty good, but they’re not amazing. So there is a balance. Their currency’s doing well. They’re getting a lot of money from hydrocarbons and various other things where the prices are elevated, but there’s also this negative impact from sanctions. So sanctions are working to some extent, but there’s also this other problem, which is that their exports are strategically necessary for their enemies. And I think Europe is in unfortunately, a very weak position economically. Again, they have lots of assets, but they’re dependent on products from Russia to a large extent.

Josh Young (00:19:11):
And their solutions so far, you mentioned ESG as a reason why there hasn’t been so much investment in oil and gas, their solution so far are just to double down on alternative energy. And if you look at Germany and you look at how much money they’ve spent, forget the private capital, just purely the subsidies that they’ve spent to supposedly modernize their energy, power consumption and production, and to modernize their grid and whatever, and look at how little impact it’s having on their power generation costs and on the retail price for their electricity.

Josh Young (00:19:45):
I mean, I think this is a amazing failure case that should be paid attention to and studied and have lessons learned from. And the lesson that’s currently being learned here in the US and Europe, other places, is to double down on the same policies that have failed. And so when you see that, I mean the first rule of holes is to stop digging when you realize you’re in a hole. And so either they don’t realize they’re in a hole, which is shocking but possible, or they’re just violating the first rule of holes. So if you violate the first rule of holes, the problem is when you do stop digging, you’re further down. So I think it’s a real issue. I think when you think about what Western Europe is doing to navigate, I think it’s quite tough.

Josh Young (00:20:26):
And then you think about the Russian economy, say what you will, they do have some benefit of not misallocating a large portion of their federal budgets to alternative energy and to various other things that are not so productive. So again, it’s very hard at this point in time to measure, to use GDP for example, because there’s a number of different things that we’ve been spending money on in Western countries and economies that don’t have a lot of output benefit.

Josh Young (00:20:54):
So a lot of the money invested in various tech startups or various biotechs or whatever, there’s not… I mean, a lot of the biotechs, I guess if you end up with a successful drug, that’s obviously beneficial, but a lot of the tech… Does having TikTok instead of Snapchat, instead of Instagram, instead… You don’t have an extra shirt, right? If you’re cold, it doesn’t help. If you’re bored, you already had infinite content without the latest and greatest tech device or whatever and so it gets really complicated.

Josh Young (00:21:21):
Again, getting back to this question about, Hey, what’s happening in Russia’s economy. They just don’t have as much of this drag of investment in either things that don’t work so well, like alternative energy, where the more investment you put in it, the higher your average electricity cost is for the consumer. And they don’t have the same drag because a lot of the money that is invested there, is invested in more real economy type stuff. So again, there’s lots of negatives. I don’t think they’ve done so well from having not modernized their economy more, but there is a benefit for them, which is having this real economy focused, producing the things that are necessary for the world, including their enemies.

Josh Young (00:22:00):
And it’s so necessary that their enemies have caved and are continuing to pay higher and higher prices. I mean, I think it’s indicative of the position that they’re in. So yeah, I think it’s like very poorly reported on. It’s almost politically incorrect to talk about or to just say, oh, that Russia might be winning economically or they might be winning militarily, which I don’t know. But given the economic reporting, it’s possible that a lot of the other things that we’re reading about might be wrong too.

Josh Young (00:22:29):
And again, it doesn’t take deep economic analysis to figure this stuff out. It’s Econ 101. The thing they’re selling is, Macro Econ 101, the thing they’re selling is high value. They’re selling a lot of it. They’ve constrained the supply a little, so the price they get is way higher. I mean, I don’t know what it is that people think is going on other than that they’re making a lot of money.

Trey Lockerbie (00:22:50):
Well, we’re all about contrarian opinions here on this show. So, I’m excited to talk to you about it. And you mentioned that Europe was in a weak position economically in comparison. And I’d like to focus in on some of those other countries that are in a similar position. Something you said in our last discussion really stuck with me. You said that the leading driver for oil was demand coming from poor people, becoming less poor. With inflation roaring like it is, we’re seeing riots breaking out all over the world, especially in poor countries. We’re seeing rationing at the gas stations and super long lines. If inflation is here to stay for the foreseeable future, does that in any way hamper your bullishness on oil or does it actually increase it somehow?

Josh Young (00:23:33):
So I think it’s a double edged sword. So when you look at demand in emerging markets, there are some emerging markets that are commodity exporters, and there are some that are heavy commodity importers. There are some that are very sold on using conventional, let’s say fertilizer and conventional industrial methods to ramp up the production from their economy and there are ones that have been sold on this alternative approach that’s been pushed over the last 10 or 20 years where they were, let’s say expanding large scale organic farming, which may have health benefits, may have less destruction to the environment or the land, but demonstrably has much lower yields. So you look at Sri Lanka, let’s say, versus in India.

Josh Young (00:24:13):
Sri Lanka has implemented a lot of these recommended policies. They were leaning heavily towards reduced fertilizer use and low and behold, the lower productivity that you could forecast and measure, took place and you had lower crop yields and you had other similar problems within their economy. And so you see their even nominal sales and nominal ability to compete in the world economy, really significantly hampered. So there’s probably going to be less incremental fuel demand in Sri Lanka than there would’ve been.

Josh Young (00:24:45):
But you look at India and India it’s a little more complicated, but they’ve been buying discounted Russian oil. So they’re on, I guess the winning side of this in terms of getting oil from Russia, because there’s sanctions and other stuff, they’re getting it at a discount to the world price. So they’re advantage from that perspective. There is inflation, but they’re not experiencing at least some of it because they’re buying this stuff for a discount. And then a lot of what their core differentiator in their economy is, and again, it’s like a very big country with a lot of different things going on, but a big source of their equivalent of exports. So for Russia, it might be oil and gas for India, it’s tech outsourcing, and other business process outsourcing and various other things associated with that. That’s a huge beneficiary of inflation.

Josh Young (00:25:34):
The more prices rise, the more you send your relevant tech stuff to India, and yeah, we’re in a tech slowdown, but a tech slowdown, if you’re the low cost provider of various tech services, isn’t necessarily what it looks like if you’re in Silicon valley hiring two or $500,000 a year computer science engineers, or whatever. And so I think India is actually probably a pretty significant beneficiary, and they’re also a large incremental consumer of oil and gas. And fortunately for them, they’re also price mitigated, because they’re buying discounted Russian oil.

Josh Young (00:26:10):
So I think you want to be India and not Sri Lanka economically in terms of those sorts of trade offs. And there’s enough countries like India that are well positioned for this, that there may still be substantial, incremental consumption growth. And again, it’s not like I wish the best for the people of Sri Lanka and I hope that they’re able to afford more gasoline and diesel for their scooters to get to work or to get to the grocery store, whatever else they need it for. But there is a reality and this demand growth is uneven both between countries as well as over time.

Josh Young (00:26:44):
And so I think my comments were more directed towards the fortunate progress, which is that the poorest people in the world are doing less badly than they were, but there is an unfortunate reality, which is that that’s very uneven. And so for example India or Brazil where they’re exporting a lot of various commodities might be doing better and the Sri Lankas of the world might be doing a lot worse.

Trey Lockerbie (00:27:06):
So obviously it’d be great if we could get some more supply into the market, but interest rates are a rising and the cost of capital for businesses is increasing, making it harder to finance the Cap Ex needed to increase supply. It just seems like there’s this vicious cycle at play since CPI is heavily influenced by the price of oil. So if supply is low, the CPI goes higher, which brings interest rates up, which makes it harder to create supply. I mean, how concerned are you about the rising cost of capital here, especially for smaller producers that you might even be invested in?

Josh Young (00:27:40):
So life is terrible if you need a really high, short term return, or if you need a really easily available loan for your oil and gas or other let’s call them undesirable type business from an ESG perspective. So life is tough if you need a loan and life is tough if you really want your 20 times multiple in line with the market, instead of the two times multiple or whatever that you’re trading at.

Josh Young (00:28:05):
Life is amazing if you’re a producer that has a relatively low decline rate, that so doesn’t need to reinvest too much because input costs are a lot higher, especially in the oil and gas industry. Oil services inflation is quite high right now, well beyond the average inflation for the US economy and the broader world economies. And so if you’re a seller of oil and natural gas at current prices, let’s say in the US, or even better in Canada where you get this extra currency benefit, because the dollar is done so well so you’re selling your oil, if the price here in the US is just under a hundred, you might be selling your oil for $130 Canadian. And your costs are a little higher than in the US, denominated in Canadian dollars, but they’re not 30% higher, so there’s some significant margin benefit. So you’re sitting in Canada, you’re producing oil, you’re at, let’s say two times cash flow. What do you do?

Josh Young (00:28:58):
You don’t borrow money from a bank, because the bank maybe they’re not lending, or maybe they’re coming back into the market and trying to lend, but you know that they pulled capital in the downturn. You know that their CEO is on TV, promising to only fund alternative energy and talking about how terribly you are, and your prime minister is on TV all the time, telling everyone that you’re evil for operating your business, that of course powers the SUV that he drives around in or the jet that he flies to go to a one day event across the country and of course those CO2 emissions don’t count. But you’re there, you’re being told that you’re evil and that you need to stop. You’re probably not going to go reinvest capital so much and try to grow a lot. You’re probably going to take that money and pay off whatever debt you have left and then buy back a lot of stock or pay your shareholders a really big dividend.

Josh Young (00:29:50):
So if you’re not in a position where you need a lot of capital, you can actually do extraordinarily well today through, let’s say share repurchases. If you’re at two times cash flow and let’s say three or four times free cash flow, let’s say we’re at four times free cash flow, if you bought back all your shares and the market didn’t trade them up, that last share after 3.99 years of buybacks, would be worth 10,000 or a 100,000 times what the first share is bought back is worth, because you’d have access to all of the free cash flow from the business. Assuming that the other half of the operating cash flow was spent to keep the business’ lights on and the production flat and so on.

Josh Young (00:30:30):
So it’s not a bad time at all to be an operator of these assets, you just need to not be dependent on banks. You need to not be dependent on private equity firms, which are rapidly dumping their holdings and returning capital to go reinvest in many cases in alternative energy, which these businesses are not very profitable or in tech, which is where various firms that have promised to get out of just raised mega funds to go put more money into. So yeah, I think it’s hard because it’s awkward and challenging to be at this ultra low valuation multiple, but it’s also very rewarding.

Josh Young (00:31:05):
And then if you think about it from a incremental supply perspective, which is where I started on this tangent, if you think about an incremental supply, you would need extremely high prices and an extremely high risk adjusted return to want to actually go and spend the money to grow production. So I think we will eventually have substantial oil production growth, it’s just going to be at… I have this hat that I think you got to see me wear when we saw each other in Omaha at the Berkshire meeting, but with the $250 WTI hat, I mean, you might need radically higher oil prices even if there isn’t a squeeze on oil this winter because of high natural gas prices driving oil demand in Europe and Asia. Even if there isn’t that squeeze, you might still need much higher prices just to have returns on drilling wells be so ridiculously good that it’s a better use of capital for businesses than just buying back their own share.

Josh Young (00:32:00):
So the competition, the more capital is squeezed, the more evil the businesses are from a politician and society perspective, the more that funds divest and reinvest in other stuff, I mean the higher, the price that’s necessary to supply the market adequately. And that’s a dynamic I really like, because either the valuations of the businesses need to rise a lot, or the commodity needs to rise a lot. And in either of those cases, I think you end up with much higher share prices let’s say, five years from now than you’re at right now.

Trey Lockerbie (00:32:35):
I want to talk about why we have such low valuation multiples as you just highlighted there, especially with the microcaps especially. They’re getting kind of murdered this year so far. I think they’re down 30 plus percent or more. And some of the equities we spoke about in our last discussion, like Journey and Sandridge, it looks like they had a nice little run up, but then they peaked around June and they’ve been coming back down. So to the best of your knowledge, what is driving this price action? Is it just this narrative about a recession? Is it something more? Is it founded in anything other than emotion? Why do you think this is happening?

Josh Young (00:33:09):
They’re making too much money. It’s scary. In the early seventies apparently, in New York City, you could buy an apartment building, someone was sharing this with me, for about one times the rent that you’d collect from it. And they were saying, I’m not sure I fully believe it, but apparently one times the free cash flow equivalent. So I don’t know what the real estate term is for that, but I mean, that’s, I don’t know if that’s cap rate or whatever, but a hundred cap rate. So I think it gets scary. The higher the return, the scarier it is to own the thing, because what am I missing?

Josh Young (00:33:38):
So I know those two particular companies, I still own more stock. I think I actually have bought more stock in both of those since we last spoke on this latest pullback. I mean, I think part of what happened there is that they started to make more money and at the same time, people got a little more interested in oil and gas equities because of the geopolitical risk and because of on the front page. And so there were a little bit of fund flows into the space so that these small and mid-cap producers, I mean their stocks went up. And from my perspective, it was rational, because we were in a different world that was even more supply constrained and demand wasn’t going away, so you just needed higher prices. And if you needed higher prices, the equities should at least reflect that and the starting valuations were very low.

Josh Young (00:34:21):
So to me it was rational. It was like, okay, hey, I have this thing at two times cash flow and oh, now it’s still at two times cash flow, just a higher price environment. So I think the move was rational. I think it moved based on funds coming in from essentially hot money. So people that got interested in the sector for various, either fundamental or technical reasons, and there were broad fund flows from giant hedge funds that started to put on positions. And I think what happened was this combination of extra volatility that I think was hard for newcomers to stomach.

Josh Young (00:34:52):
So let’s pick on Sandridge. Stock closed let’s say 18.50. I mean, it was under 70 cents a share and change years ago and here it is, it went to 30 or so. And now here it is at, let’s say 18.50. So huge move if you held it this long from that low, let’s say, I mean, I had owned some of it even before that, so I held it down. I bought a lot more. It went up, I trimmed some, it went down. I mean, it’s the move from 30 to 18, I mean, it feels really bad because the value of my holdings were a lot higher having started at a much lower price, but the actual like percentage movement, it’s like, okay it’s… There’s a meme where I chose. Was it Johnny Depp or someone, he is getting hung, it’s from Pirates of the Caribbean, and someone else is getting hung. And it’s like, oh, first time?

Josh Young (00:35:39):
So as an oil and gas investor, this is not the first time. But as someone coming into the space, thematic or technical oriented, you come in and you’re down 20% almost right away. It’s terrifying. So you sell and you like don’t come back. So I think that’s sort of what’s happened here along with maybe some people had more exposure and they had been trying to bet on a recovery for the sector because it’s been so long and so bad since essentially 2014. And I think those people, I think there’s always this tendency to bet on the bottom and I think or that all is clear. And I’m not sure what the expectation really is, I just know it exists and I see it. And I think those people panicked and sold as well.

Josh Young (00:36:21):
I guess there’s one other thing, which is that there are real recession concerns and people are worried that the world economy is slowing and the US economy is slowing and they definitely are. But when there’s that concern, people can take data, like we saw gas stations were slower to refill their storage, and consumers were filling their tanks a little less as gas prices went, let’s say here in Texas from $3 to $5 was the peak retail price here and now they’re back to the low threes or mid threes. So as it went up, people filled their tanks a lot because they were worried that the price would rise more. And so they just wanted to get as much as they could. And then as prices started to fall people, one, they maybe couldn’t afford to fill up their tank and then they also maybe wanted to wait and so they’d run with a little more empty tanks. And then gas stations too, they were quick to fill up on the rise and then they’re slower to refill their storage on the way down.

Josh Young (00:37:20):
And this might seem like trivial and like, oh, that’s just a gallon here, a gallon there. But I think I saw a number. There’s an enormous amount of unfilled storage in consumers gas tanks, which let’s say on average are half full. And so gas stations, they keep their storage a little more than half. So if they cut back a little, go from 50% to 40% full and consumers go from 50% to 40% full, it can look like there’s huge demand destruction, but the reality is there’s been no demand destruction. It’s not like there’s vehicle miles traveled that are lower and you can see this in the Tom Tom congestion data and other sources of data you can see the actual receipts at gas stations. The consumption hasn’t fallen, but the purchases fell for let’s say a month, month and a half or so.

Josh Young (00:38:08):
And so that shows up in implied demand numbers from the EIA government agency and it shows up in certain other data that I think panicked people at a time when they were already very worried about recession concerns. And so I think you have this baseline of, hey, I’m worried about a recession and wow, look at that terrible gasoline demand data. I’m going to go sell my oil, sell my oil stocks, maybe I’ll go short some. And it was just wrong.

Josh Young (00:38:34):
I mean, there is less oil demand than there was in 2019 because there’s more people working from home more often and a little bit of a change in that can have a big change in the demand for gasoline from that sort of thing. Plus if you go to work, you stop at the gym, you go to whatever, you just are more active. And some of that’s structural and it’s gone, but we’re seeing that we’re not really seeing less consumption from a recession. And again, when I listened to J Powell today, talk about, and not that he’s fully transparent about all the different factors, but there is a reality, which is there’s probably a recession coming, but there probably isn’t a recession right now. And if there isn’t a recession right now, then you’re probably not seeing a decline in gasoline consumption. And if you’re not seeing a decline in gasoline consumption, then you’re not seeing a decline in gasoline consumption. I mean, it’s not like very much of a logical leap, but you can acknowledge that the economy is getting worse without skipping to the it’s already a lot worse.

Josh Young (00:39:34):
And if you don’t skip to it, if you pay attention to what’s actually happening, gasoline is being consumed. And so I think there was this panic of, oh my God, there’s a giant recession and it’s here. And here’s the data based on people’s preconceived notions around what was happening and some of what they were seeing in other parts of the economy and in things that are very heavily owned, like tech, where you’re seeing these big misses in social media companies and other factors that are a big part of the investing universe, but aren’t necessarily related to whether or not people fill up their tank of gas and go to work or the grocery store or whatever. So long answer, but really the fundamentals are pretty good and the valuations are absurdly low and just the sentiment is abysmal.

Josh Young (00:40:20):
And that’s how you get crazy low valuations for companies that are making more money than they have. I mean, for Journey, they’re making more money than they’ve ever made in the history of their business, maybe by a lot. And Sandridge is making the most money they’ve ever made since before they filed for bankruptcy many years ago. So I mean, very good fundamentals, terrible sentiment.

Trey Lockerbie (00:40:41):
That’s why I mentioned the emotional aspect of this because I’m going to pull a quote here from your latest newsletter, which was just mind boggling. It says, “The equities are pricing in much lower commodity prices than seen in the futures markets, yet share prices still declined even more than the price of oil in the recent selloff. Some EMP, so exploration and producer companies, shares are now trading lower than they were last year when oil was $30 a barrel lower and far lower than the last cycle high in 2014.”

Trey Lockerbie (00:41:15):
So that just shows you the fundamentals there a little bit. I mean, you’re seeing that these guys, their margins are much higher now and they’re even priced as if oil was at a much lower price, which it’s not. So I’m kind of curious, is part of that also tying into the fact that Biden has been dipping into our savings account a little bit here with our strategic petroleum reserves, they’re now at 20 year lows. Is this a cause for concern? Is this a temporary bandaid, if you will, that has longer lasting implications?

Josh Young (00:41:44):
I think when people see the research from these different investment banks on what the implied price is for oil or gas in the share prices, based on their discounted cashflow models, they’re shocked. And I think they just write it off. They say, hey these banks, they’re trying to sell me something. They’re their research is unreliable, it’s compromised, et cetera. And so I had a conversation recently with a retired sell side analyst from a leading investment bank, but I’ll respect his privacy. And we talked about this and I think it’s always hard on individual companies and individual recommendations to trust the banks too much. But in aggregate, most of the work that they’re doing is pretty good. It’s not perfect and there are biases, but it’s pretty good.

Josh Young (00:42:28):
And if you have a whole bunch of different investment banks all say that mid-cap oil and gas producers might be pricing in, let’s say $65 oil in the long run and that small caps might be pricing in 50 or $55 oil, they’re probably not that far off. Again in aggregate over time, you look at these different analyses, you can see their models, I mean, if you’re a client of theirs and I mean, they’re not totally unreasonable.

Josh Young (00:42:51):
So if that’s the case, then something else must be going wrong. And the thing that’s going wrong is that, well, a few things. One, investors don’t think that current oil prices and that the forward curve is representative of what the prices are actually going to be. So they’re people, I think the market’s expressing functionally a bearish view, which is pricing in a much lower price for oil and for natural gas. It’s not irrational in a sense that that was the price, or close to that price for the past number of years, but I would equate it to driving entirely looking at the rear view mirror. And it’s fine, until you crash. And so you want to look at the rear view mirror, so you don’t get rear ended, which is the equivalent of being careful in case oil prices do revert back down for some amount of time, but also be aware of what’s actually happening and what’s different.

Josh Young (00:43:39):
And I think it’s very hard for the market mechanism to function, particularly for the smaller cap producers, because there’s not really an incremental buyer and SMID caps, especially on the value side, have massively underperformed most of the past 10 years, despite being the best performing asset class over the last 90 years. If you read stocks for the long run, you look at some of these other famous long term studies on the market, you want to be in small and you want to be in value and it hasn’t worked that well recently. So if you’re using your rear view mirror to guide where you’re going to go, you’re going to miss that this is potentially one of the best spaces to be in both because the fundamentals are good and because the long history way back before you’re even considering this thing worked really well.

Josh Young (00:44:26):
And so I think there’s some biases. I think a lot of it’s just recency bias that’s coming in. And then I think people typically the equity analysts aren’t doing that much work on the macro and the macro analysts aren’t doing that much work on the equities and almost no one is doing the cross border work to figure out if they want to own a Canadian small cap producer versus a US small cap producer. Even, hey, do I want to own a producer that’s small in Oklahoma that people hate versus a producer in west Texas.

Josh Young (00:44:54):
One of my competitors just announced they raised $300 million to go invest in west Texas. And it’s like, okay, that’s great, but why? West Texas is wonderful, there’s a lot of oil there, but there’s also a lot of oil in east Texas and in Oklahoma and North Dakota. And if you’re an operator in west Texas, that makes a lot of sense to me, but if you are just able to go anywhere. And so I think there’s a lot of very siloed expertise and siloed focus. And the more there is of that, the more value there’s going to be in places outside of the areas that are attracting capital, both in terms of industry, as well as in terms of specific opportunity. And I think that sort of thing is why you can end up with oil prices at a hundred and oil producers implying 60.

Trey Lockerbie (00:45:39):
One other bullish indicator to take note of, is our man Warren Buffett who has now invested 26 billion in Chevron and 13 billion in Occidental. This means he now has an 8% interest in Chevron and a 24% stake in Oxy. These are massive positions. And I mean, wow, and very uncommon for Buffett who usually likes to buy and hold companies forever and not trade in and out of cyclical type stocks like this. So he also likes buying things cheap and these companies are at 15 year highs. And you just did a deep dive on Buffett and his history in this market. What’s your takeaway,

Josh Young (00:46:21):
Buffett and Munger are among the best market timers at oil and gas alive. And they’re not known for that. And if you go around Berkshire like we did, and you talk to people and you listen to what they have to say about Buffett. One, many people worship Buffett, but didn’t even know what my $250 WTI hat meant. Very little knowledge or awareness of oil and gas or interest in it or whatever, but they’re amazing at it. So it’s wild. You have some of the best investors at this thing. You look at where Buffett has gotten into and gas, where he is avoided it. He got out and was negative on the industry in the early eighties. One of my friends found this, I think that was actually on your show too, he found this footnote in a annual letter in 1983 from Berkshire where Buffett talked about how you don’t need to own commodity producers in order to have inflation protection.

Josh Young (00:47:14):
And he’s right. But if he was talking about an environment where he had to buy commodity producers at 20 times cash flow or 30 times cash flow in order to get exposure at two times cash flow, he’s all over it. And because Berkshire has so much money, they can’t really go to where Bison can go or where individual investors can go. And so if you look at the largest companies that are the most liquid that are relevant for Berkshire, from a public equity share perspective, just getting to go and buy the stock in the market, you look at Chevron, which is probably the best run mega cap integrated producer and you look at Oxy, which is at the time that he started to buy it in March was the cheapest producer with the most upside to higher oil prices. And that was my analysis was it’s not.

Josh Young (00:48:03):
I don’t think it’s something specific to Oxy in terms of view on their specific assets. I think it was purely that their cash flow torque to higher oil prices was superior to companies of their size and their trading liquidity. And so if you’re only going to buy two, it makes sense to buy Chevron. Again, Mike Wirth is just absolutely a rock star, who’s done a lot of stuff right in terms of balancing, generating enough cash flow while also keeping activists, investors at bay through minimal ESG activity, but some in order to keep his job. So Chevron makes a lot of sense and then Oxy for their high oil price torque.

Josh Young (00:48:40):
And so when I look at that and I think about, okay, like what do I want to own? A number of people are just buying Oxy, because Buffett’s buying Oxy and Buffett tells you not to do that. He’s talked the, not this meeting, but the one I went to years ago, he talked about how, if he was running $50 million, he’d be doing everything different and he could get 50% a year compounded returns. And so I like to think that I’d rather be like 40 year old Warren Buffett than 80 something year old Warren Buffett.

Josh Young (00:49:08):
And so I think it’s possible to learn what he’s doing, which was the point of that letter. Hey, like he sees a lot of value in oil and gas and he is great at it. He’s done other cyclicals with mixed success, oil and gas he is great at, he made a fortune for Berkshire. He made a fortune for his partnership. He made a fortune for himself. I didn’t talk about in the letter, but Charlie Munger, the money that he had to invest a lot in Berkshire stock, he made from a massively undervalued oil producer that honestly reminds me a lot of Journey, where just you could do the math and it just doesn’t make any sense. And so it took a lot of trust in himself to just own it anyway, and just phenomenal, phenomenal run.

Josh Young (00:49:45):
And that was where a lot of the money that he spent in the early, I think it was the early seventies or early eighties, where he came in and bought a lot of Berkshire, was from a oil company too. So I think it’s possible to learn from what they’re doing without copying it exactly. And just to have that sort of exposure where there are these companies that can do very well from the things that would make a Chevron or an Oxy do well, but they can do potentially even better, because I don’t have to go put $10 billion to work when I’m buying it. And I don’t need to only own one or two oil stocks in doing it. So I observe the bet that it looks like Berkshire is making. And I try to express it in a way that has a much more asymmetric risk and reward and I’m able to do that because I just don’t need to do what Buffett’s doing.

Trey Lockerbie (00:50:36):
I totally get that. And it makes sense. I mean, given Buffett’s size of portfolio he’s working with. I’m kind of curious though, if something like a Chevron or even Occidental is just massive size of those companies, is that a moat in and of itself?

Josh Young (00:50:50):
I don’t think so. I think there’s diseconomies of scale for some of these companies. So you look at Chevron and their position in west Texas and Southeast New Mexico, and they are growing their production and they are an excellent operator, but I think it’s just hard at that scale, to be as effective of an operator as some of their competitors who are smaller. And there was this story that was told years ago about how the oil majors were going to inherit the Permian, the west Texas and Southeast New Mexico oil fields, because they were best able to optimize all these different factors. And how shale development was really a factory type operation. And there are aspects of it that are real, but there’s also aspects of it that I think people missed.

Josh Young (00:51:35):
And so I think there are diseconomies of scale as you get bigger. Companies like Chevron have amazing assets, and then they also have terrible legacy assets and you’re getting it all together. Same with Oxy. And you’re getting governance issues, I mean, Chevron was in and they’re still technically headquartered in California, so they have management policies that are more consistent with California companies and less consistent with, let’s say Texas companies, which is detrimental if you’re not having people let’s say come into the office as much, you’re not getting as many of this there’s a network effect from having people in an office, especially for a big company. And so there are various challenges that Chevron has, I think, from being big. Oxy, similar sort of thing. So I think there’s some benefit from being big in terms of lower cost of capital, better known, but there’s also some costs. And I’m not sure that it’s so obvious that’s something that should be awarded with a much higher valuation.

Trey Lockerbie (00:52:32):
Understood. I was kind of reminded of the, there will be blood scene, with the, I will drink your milkshake kind of thing. So that sounds like it’s not happening here, or not much of a risk. I just thought it was interesting if that was any added benefit, I guess, to Buffett’s decisions here.

Trey Lockerbie (00:52:45):
One other question I have, if we were trying to mimic a younger Buffett, obviously the micro and the SMID caps and some of these companies you’re mentioning, are very promising. If you’re not an expert like you are and you’re a retail investor, should they focus in on some of the sector ETFs like the XLEs or there’s XOP? Maybe walk us through the benefits or downsides of investing in ETFs of that kind of nature.

Josh Young (00:53:11):
I think we’re getting towards the end of the dominance of passive investing in ETFs. And I think it’s very risky to try to be an individual investor and pick your own stocks, but it’s becoming increasingly risky to have exposure through ETFs in the broad market and less so, but still challenging in terms of sector ETFs. So from a broad passive perspective, it’s hard to justify, it’s increasingly difficult to justify owning passive exposure to the market, because there’s overexposure to companies that are under-earning. So there might be 40% of the S&P 500 in tech or media, but it might only be making, let’s say 30% of the earnings for S&P 500. Whereas energy, I think I saw it was it’s about 4% of the S&P right now, and it’s generating about 12% of the earnings for the S&P.

Josh Young (00:54:07):
So that’s a problem from a passive perspective and the way that gets worked out. I think this is the first really big cyclical shift from tech into energy and other sectors while there’s been this huge amount of ownership in passive and then while also a lot of active management is basically just closet indexing. And so. I think that shift is going to take a while and be very painful. And there’s actually a significant risk of tracking error for passive versus active. So I think that’s hard.

Josh Young (00:54:38):
For XOP and XLE also, I think it’s hard. I think that they’re built in a way that’s not how a rational private business person would choose to allocate their capital to a space. And so it’s hard for active managers to do well versus benchmarks, but I think it’s getting easier as more and more money flows into those benchmarks. And so I think if it’s possible to find someone, if it’s you and you’re able to do it, and you know you’re good at it, and you have a record of doing it well, it’s maybe not such a bad idea to try to do it, especially in a space like energy where there’s so many different idiosyncratic opportunities and there’s so few active managers really focusing on it. Or if you can find someone that can demonstrate some skill doing it, there’s likely excess returns available because you have this weird phenomenon of even just of S&P 500 size companies of over-earning relative to the benchmark, or over-earning relative to the proportionate size of the sector in the broad allocation, I guess, of the index.

Josh Young (00:55:40):
And so, because of the nature of that, I think it’s a tough time. I think it’s the toughest time in my career to tell someone, hey, you should just go passive and put money in an ETF or an index. And again, more true, I think for the S&P 500 type indexes and less true for the energy. But still, I think if I were to do any of them the smallest one, the PSCE, which is the small caps because of the under performance of small caps over time, there’s been very little capital that’s been flowing into the passive as well as the active. And so if I had to, I’d say, hey that maybe is the least uninvestible of them, but I still don’t think it’s such a great idea.

Josh Young (00:56:19):
It’s also hard. If you don’t know what you’re doing, there’s a lot of risk, but I just don’t know that passive… I think passive solved a lot of problems when mutual funds were very expensive and when that was the dominant mechanism of investment in the market. But since neither of those are true anymore. I think there’s a lot more opportunity to earn excess returns from active management.

Trey Lockerbie (00:56:41):
I’ve heard you say that Buffett’s bet here is kind of like a leveraged bet. You used the term asymmetric earlier as well, with these smaller producers. What do you mean by that? How exactly is it a leveraged bet on the price of oil?

Josh Young (00:56:54):
So if you look at Oxy versus let’s say a similar competitor, and you look at how much more money Oxy makes if oil’s at 110 instead of 100, and then you look at versus how much our competitor would make if oil was at 110 versus 100, and you look at the enterprise value of Oxy versus the enterprise value of a similar size competitor, you’ll see that as oil goes up, the amount of money Oxy makes increases more than many of their competitors does, again, as the price of oil goes up. So that’s a way of measuring leverage or torque of cash flow to a business.

Josh Young (00:57:33):
So there’s the business level, which is that they make a lot more money from higher oil prices than their competitors do for various reasons. And then there’s also from an valuation perspective. So I think the valuation argument for Oxy got harder as competitors shares fell and Oxy shares didn’t because Buffett was buying it. So I think there was this valuation gap, and I do question it. I don’t know that it’s so obvious that Berkshire should be buying more. Why not have bought a third company that after this 30% drop in everything except for Oxy, had more of what it looks like Oxy was offering Berkshire in March. And I don’t have a good answer for that. I think it’s just, there is this desire to have a concentrated portfolio, either optimizing for concentration over return maximization, and maybe it’s a attention thing or an old age thing, or some other factor that I’m not aware of.

Josh Young (00:58:26):
But analyzing the businesses themselves and what their valuations are, as well as looking, I mean, I do a lot of work on the companies I invest in, as well as the ones that I don’t, and there’s not a lot of hidden value for Oxy or many of the midcap producers in that comp set. So it’s not like they have $10 billion of real estate that no one’s giving them value for or something like that. That would be a lever that they could sell or that Berkshire’s just awarding value to that others aren’t. So without that thing in a competitive market for a pretty large producer that trades huge average daily volume, I don’t know. I think it’s really, truly hard to rationalize.

Josh Young (00:59:08):
And I’ve redone my work on the company several times just to make sure there wasn’t something that I was missing and looked at various Sell-side research and so on on it, and talked to other investors who typically focus on that larger size company. And they all think I’m not missing anything and that there’s really just this inexplicable valuation gap currently, or at least that the valuation discrepancy that Buffett was capitalizing on when he first started to buy Oxy, maybe isn’t there as much anymore now that competitor share us have fallen.

Josh Young (00:59:38):
But again, that being said, I think there’s still a lesson in what he was buying when he picked Oxy and started to buy it aggressively, which is that owning a company that’s like that, but maybe at two times EBITDA instead of five or six times EBITDA where there’s that extra cash flow leverage from higher oil and where there’s also rapid debt pay down and management was a clear plan and a clear return of capital mechanism maybe it makes a lot of sense. And maybe it makes even more sense if they’re at two times cash flow and not five or six times cash flow.

Trey Lockerbie (01:00:10):
Adding a third position would’ve been really interesting, kind of similar to what Buffett did with airlines and Buffett smartly exited the airline positions right after COVID hit. I don’t know if you’ve tried flying lately, I’m flying tomorrow and I’m dreading it because the airline industry is extremely chaotic. There’s loss of luggage and canceled flights and they’re limiting travelers in airports due to capacity with COVID. I mean, do you have any particular bearish take on airlines, given the bullish stance on the price of oil, which would obviously negatively impact the margins for these airlines?

Josh Young (01:00:44):
So the only times I can remember traveling actually being not horrifically bad, have been during very bad economic downturns when utilization is very low. So post September 11th, again, it was a tragedy, but it was great to fly three months later. I mean, it was terrible to get through security, but afterwards it was great. Their planes were empty and life was good. Your bags didn’t get lost. Similar during the financial crisis in early 2009, you could fly, no problem. Flights were cheap, your bags wouldn’t get lost, no problem boarding and whatever. And during COVID, I mean, it wasn’t great to have to wear a face mask on a plane, but it was also very easy to fly and it wasn’t that much of a hassle.

Josh Young (01:01:26):
I mean, what I’ve noticed in most of my life is that it’s not those circumstances. Most of the time planes are pretty busy. Airports are pretty busy. When you’re flying it’s often a similar time to when everyone else is flying, because we all have time during the summer or want to go to a beach or something or a mountain during the summer, we all want to travel around Christmas or whatever and certain other holidays. And so I think travel is pretty miserable and it is a little worse right now, but I think people also want to travel a little more now. So that’s, I think, it’s just proportionate to how much we want to fly.

Josh Young (01:02:00):
I don’t think this time’s different for air travel. I think it’s just been miserable pretty consistently for my whole life and other than those few times, which were terrible for other reasons and often accompanying like human tragedy. So I don’t know, hopefully it just stays terrible. And I know that sounds bad, but just think that the terribleness means it translates to your freedom and ability to fly where you want to go. I don’t know. I mean, airlines are terrible businesses.

Josh Young (01:02:27):
Ironically Buffett bought them, but also talked about how capitalism would’ve been better served if they shot down the Wright brothers plane, which again, he didn’t mean from global commerce, just purely that airline stocks were terrible investments. So I don’t know what he was thinking. He didn’t stay in that very long and he certainly didn’t do what he’s done with Oxy and Chevron, where he just keeps buying, especially Oxy. He just keeps buying the stock in a way that’s very unusual for Berkshire. And I think is a very strong signal that he means business. He wants to own it. And he wants that exposure to potential higher inflation, higher oil prices and really believes in it.

Josh Young (01:03:01):
So I don’t know, I wouldn’t read too much into the air travel. Hopefully it’s not so terrible on your flight, but if it is just keep in mind, hey, this is humanity is, we’re getting more prosperous and things are getting better. And we’re not all locked inside and this person with their elbow in my stomach, or there being no space for my carry on, that’s just part of that.

Trey Lockerbie (01:03:23):
I’ll take that sentiment and I would not want to be running an airline business right now. I have a lot of sympathy for them.

Trey Lockerbie (01:03:30):
Hey Josh, this was such a fun discussion. I’ve been really excited to talk to you again. I want to keep doing this. It’s just such an interesting market and constantly entertaining with its twists and turn. So we’d love to have you back on and before I let you go, definitely give a handoff here to our audience where they can find more about you and your research, which is incredible.

Josh Young (01:03:50):
Thank you. Yeah, no, it’s wonderful to be on here. I think this is one of my favorite podcasts. I listen to your other guests come on. You guys do a great job.

Josh Young (01:03:57):
So Bisoninterest.com. We have various white papers and articles we’ve written about the oil market, sometimes general broader market, sometimes very specific factors that we’re finding particularly interesting. And then I’m pretty active on Twitter, Josh_Young_1 on Twitter.

Trey Lockerbie (01:04:16):
Fantastic. Josh, thank you again.

Josh Young (01:04:18):
Thanks a lot.

Trey Lockerbie (01:04:20):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app. And if you’d be so kind, please leave us a review, it really helps the show. If you want to reach out directly, you can find me on Twitter, @TreyLockerbie and don’t forget to check out all of the amazing resources we’ve built for you at theinvestorspodcast.com. You can also simply Google TIP Finance and should pop right up. And with that, we’ll see you again next time.

Intro (01:04:43):
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Intro (01:05:00):
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