VALUE: After Hours (S08 E10): Energy Stocks Rally: Devon, Occidental, and EPD Breakdown

During their recent episode Tobias Carlisle and Tim Travis discussed Energy Stocks Rally: Devon, Occidental, and EPD Breakdown. Here’s an excerpt from the episode:

[Tim] They really have. Yeah, absolutely. I know you posted a lot of stuff on energy and the undervaluation relative to oil.

I thought you were right on. We’ve got decent exposure to energy. We’ve been big in Devon for quite some time, Devon Energy.

I really like the management team there. I feel like I like that they focus on intrinsic value per share. They look at that, okay, what’s the valuation of the stock trading at?

Is it better to buy back debt or to buy the stock back, dividend? On the mergers too, when they do these acquisitions. That’s a management team that I think has built a lot of trust over the years.

It’s nice seeing the stock being rewarded again, obviously bolstered by the war. Occidental, which was Buffett’s big pick, it languished for quite some time. Then it was interesting last year when Berkshire had the deal for the chemicals company.

I don’t think the market loved that for Occidental necessarily, but that stock’s had a really great run. Then another area where we’ve been heavy in is I like the MLPs and the infrastructure plays. I feel like those were really cheap going into this.

EPD, ET, energy transfer. ONIOC is not an MLP, it’s actually an LLC like Kinder Morgan is, which is nice. You don’t have to file a K-1 or anything like that, but along with that, you have a slightly higher, a lower dividend yield.

That one’s had a really nice run. Those are great because even if commodity prices dip pretty substantially, if you do get some key steel or something like that, the pipeline company should still do quite well. I think it just reinforces more than anything.

How do you argue against developing our local energy infrastructure when you see the crappy situation that Europe’s in? Look at Europe. They are backs against the wall because of some of the political choices that they’ve made in relation to energy.

[Tobias] It’s to America’s great fortune that we have that huge shale in the middle of the country. I think they describe America as the Saudi Arabia of gas as well.

[Tim] Yeah. We’re super lucky for so many reasons. There’s a lot of stuff beyond that.

There’s a lot of oil off California. If they ever wanted to tap into that stuff, they could. But energy security just has to be the key takeaway.

You cannot be reliant on these nations. It’s a lot more dangerous environment shipping through the Strait of Hormuz than your own pipelines in your country. What do you make of that merger that Devon has going on?

I think they’ve done good, smart acquisitions over time. I think that they prioritise reducing their debt loads after them. Like I said, they’re one of the few companies that really is vocal and has a long-term history of looking at intrinsic value per share and what creates the most value for shareholders.

There’s a logical basis there. A lot of these other companies don’t do that. They’re empire builders.

I think that that’s where the biggest mistakes occurred. I think that a stock like Devon, a company like Devon, a management team like that, you can invest a lot more confidently than you can with some of those. Exxon is a wonderful company, but remember when they bought XTO at the peak of gas prices?

They’ve done that a couple of times. There are so many transactions like that. Even Occidental, that acquisition that they made right before oil collapsed that caused Buffett to step in with the preferred stock investments because they had screwed up their balance sheet so royally.

That’s a mistake that has cost so much to shareholders and taken years to try to rectify and clean up.

[Tobias] I do sometimes worry that the oil and gas guys are a little bit like precious metals in the sense that when the prices are low, they all get religion and they all make these really great capital allocation decisions. Then prices get higher and they all lose their minds and start doing all this silly stuff again. That’s why I like XTO.

[Tim] That’s been the history for sure. I think it was a while ago, but we invested over the last five, six years quite a bit in trans-ocean bonds. They’re high-yield bonds.

For a while, they were going for 12%, 13%, and then 10%. Those have worked out just fantastically well because they have a capital structure problem, not a business problem. They’ve had a good backlog.

They just had a lot of debt relative. It wasn’t an environment for offshore drilling where they could use all of their rigs, so they had to cold stack some of them. They just combined with one of their largest competitors.

The balance sheet looks a lot better after this acquisition. Those bonds have done really well. It’ll be interesting to see if now the equity could be a play.

It’s run up quite a bit now. I think it’s doubled not too long ago. It’ll be interesting to see how some of that stuff works out.

[Tobias] Do you want to talk about EPD?

[Tim] They’re utility-like in that they can invest a few billion dollars each year at a solid rate of return. When you combine that with a 6% or 7% or 8% dividend, depending on when and where you buy these things at, you get a little bit of growth on top of that. It’s a nice low double-digit type returning investment with a lot less risk than the overall market.

If you think that the market’s going to do what it’s done over the last 15 years, you’re going to lag behind in something like that. But if you’re like me and I would imagine you where you think that the next 10 years might be more like 2000 or 2013, where you get a few bear markets, big bear markets, and you get a lost decade, those types of investments can do really well.

[Tobias] I don’t hope for the bear markets, but I do hope for a better market for value.

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VALUE: After Hours (S08 E10): Energy Stocks Rally: Devon, Occidental, and EPD Breakdown

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