So Goes US Shale, So Goes World Oil Supply?

The US shales have been the bulk of recent world oil supply growth. They are now peaking. Now what?

Peak Oil? Definitely Peak Permian Oil

Is the Permian Shale basin close to peaking? What are the implications if this basin is near a peak?

Peak Oil is not a theory, it is an observation that individual wells produce up to a peak, and then the output declines as the well’s initial bounty is depleted.

What’s true for every single individual well is equally true when averaged across an entire set of wells placed within any given oil basin.

It is arguably true that the US shale bonanza has been why we have not seen oil prices at stratospheric levels. But as Adam Rozencwajg, among others, has argued peak production is a geological fact. What happens when the Permian shale oil peaks? The Bakken and Eagleford shales have already peaked. That does not mean we run out of oil. It does mean that the growth of production will be difficult or impossible.

My thesis is that the easy and relatively cheaply produced onshore shale oil has taken up the slack for growing world oil demand. That is peaking, and because investment in other sources was not made over the last decade, we are facing some supply issues through the end of the decade.

That represents an opportunity as supply tightens and prices inevitably rise. My preferred way to play this is via offshore oilfield services.

Check out the chart below and focus on how many gallons of oil each US person uses relative to per capita use in China and India, which total close to 3 billion people (10x the US population). The US does have a unique car culture, so assume China and India get to Japan’s or Korea’s level of per capita use. That is still a lot of oil demand.

The rest of the world wants what you have

Gold. Big names moving into the market

Druckenmiller bets on the world’s two largest gold producers

The gold market and mining equities have struggled as investors have avoided the sector like the plague; however, sentiment could shift as at least one billionaire investor sees value in the industry.

According to updated F-13 regulatory filings, Stanley Druckenmiller’s Duquesne Family Office dumped its holdings in Google’s Alphabet (Nasdaq: GOOGL), Alibaba Group (NYSE: BABA) and Amazon (Nasdaq: AMZN) in the fourth quarter of 2023.

As Druckenmiller has pared back his exposure to the tech and e-commerce sectors, he has placed new, albeit smaller, bets in the mining sector. The filings show the investment office bought 1.76 million shares of Barrick Gold (NYSE: GOLD) and 474,000 shares of Newmont Mining (NYSE: NEM). At the same time, they increased their exposure to Teck Resources (NYSE: TECK), which represents the fifth biggest investment in the portfolio.

He dumped Amazon and Alphabet and bought Barrick and Newmont (sell overvaluation and buy undervaluation). Interestingly, he bought Newmont, considering that NEM has done a good job returning cash to shareholders. The current yield is 4.8%. Newmont reports earnings on 2.22.24, so this slide will likely be updated after the earnings call next week.

The other gold company he bought was Barrick, which reported earnings this week.

Barrick Gold Posts Q4 Earnings Of $479 Mln; Declares Dividend, Plans Up To $1 Bln Share Buyback

Barrick Gold Corp. reported Wednesday that its fourth-quarter net earnings attributable to equity holders of the Company were $479 million or $0.27 per share.

Sequentially, net earnings grew 30 percent from $368 million or $0.21 per share in the preceding third quarter.

Further, Barrick announced the declaration of a dividend of $0.10 per share for the fourth quarter of 2023. The dividend will be paid on March 15, to shareholders of record at the close of business on February 29.

Barrick also announced that its Board of Directors has authorized a new program for the repurchase of up to $1.0 billion of the Company's shares over the next 12 months.

I do not think many people had Barrick and Newmont as value stocks and the management focusing on shareholder returns. The gold miners have been famous for destroying capital, not paying good dividends, and buying back stock.

It has not been unnoticed that although gold prices are near all-time highs, gold stocks have been lagging horribly. Maybe Druck’s entry into these gold stocks will lead to more interest from other value and generalist investors.

FYI, we have a couple of gold stocks in the AIA portfolio, not the ones above.

Overvaluation versus Undervaluation

I speak and constantly write about “selling overvaluation and buying undervaluation.”

One of my favorite money managers is the folks at Kopernik Global Investors. They have well-thought-out research papers on value and opportunities wherever they exist around the world.

The latest paper is entitled “Don’t Cry For Me Argentina” and can be read by following the link. I am posting a few snippets that I think are interesting.

The main point of this letter is that times of fiscal and monetary profligacy create a fertile environment for active management. Currently, the markets are loaded with peril and with tremendous opportunity. This is a time when it really pays to comparison shop. Talking with individuals in Buenos Aires, they suggested going from store to store. They understood firsthand that a currency debased by 50% will not affect all prices equally nor promptly. One store quickly doubles prices, another by only half as much. Some won’t get around to raising prices for some time. This message is just as apropos to those of us who do our shopping at the stock exchanges. What should we be shopping for? Things of value.

Of course, all investors presumably want to hold valuable companies and assets. Different people may have different viewpoints concerning value. It’s well known that, in our opinion, the attributes of good stores of value include necessity and scarcity. While some may rightly point out that this definition applies to many of the products/services of the vaulted “Magnificent Seven” stocks, we agree, but must point out that these stocks are arguably not undiscovered, are highly esteemed, over-owned, and have already risen in price by more than the tenfold increase in the money stock. We calculate they are up 70 times (dividends reinvested) since March of 2007.

I share the view that active management will likely allow small investors the opportunity to outperform institutional investors. The ability to buy unpopular or forbidden ideas by institutions (oil, oil services, nuclear, certain emerging markets) gives the individual investor a chance to fish where the big guys can’t fish.

They go on to show examples of overvalued stocks among the MAG 7 and similar companies that are relatively undervalued. It makes for an interesting comparison and causes one to think about relative value.

I believe you will get value from reading through some of their other commentaries.

Cannabis

I am becoming more bullish on this sector. Virtually no one cares about this as an investment theme, and it seems there are some upcoming catalysts that could supercharge returns in the sector if they come to pass.

Good podcast by Value Hive with Aaron Edelheit who runs the “Mindset Value” fund and writes on Substack.

Aaron made a fortune during the GFC, going around buying houses at auctions and then selling them to corporate owners when the crisis passed.

He is trying to replicate his previous success in another beaten-down industry, cannabis.

Podcast description:

I hope you guys enjoy my podcast with Aaron Edelheit on the Cannabis industry.

I had Aaron on the podcast two years ago to dive deep into the cannabis space. Since then, the industry has done nothing but incinerate investor capital.

And that's precisely why I wanted to interview Aaron. I love his transparency, humility, and ability to objectively assess where/what he got wrong, and how he plans on fixing his cannabis investing process in 2024.

Thanks again to Aaron for coming back on the show. I had a blast!

That’s it for this week. Thanks for reading and following my work.

John Polomny

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