She gave her perspective on the outlook for oil and energy stocks, as well as why she doesn’t think the selling is over on the show. The highlights of the conversation have been edited. You can subscribe on Apple Podcasts or wherever you want to listen to it.
Do you believe we have bottomed yet?

I don’t believe we found a bottom yet. I think we are not done. I always ask, what is our catalyst, how are we going to get growth, and I think this is more the first leg. You haven’t seen a lot of earnings revisions. Well, valuations have come down. The P part of the P/E is down. What happens when the E goes down too? There are two parts.
I don’t think we’re done yet, it has held. This is a relief rally, that’s what I think. We are not there yet, if you look for the signs of capitulation. Cash balances have increased and we have seen some equity selling, but not a real panic. I need a panic but not to sound snobbery. Everything is selling off, but we have not seen that capitulation. We aren’t there yet. My concern is where you are growing. We are going to have to wait for the Fed to send the economy into a recession to stop the squeeze on margins.

A: We are based in Texas. Does the energy industry have an effect on your clients?

It makes them more bullish about the energy industry. We run ex-energy for some of our clients because of their exposures. If you are on the board of a public company, you already have that exposure. Everybody in Texas is aware that the oil market is always volatile. There is a flip side to riding up the good times, but you know it at some point. The last decade has been very hard on the energy industry. Within 10 years, we had five crashes. It is going to take a little bit longer to adopt, because we are bullish energy and the energy transition, while ESG is coming and electric’s are coming. That will play out here in 2022.
A lot of our clients think that the death of energy was overblown. Not to say that there aren’t concerns about ESG or climate change, but it tends to make them more willing to have a foothold in that segment. I think that it is a little bit of what you know that influences what you feel comfortable investing in. If you’re in the San Francisco area, you’ll probably be more comfortable with the early-stage and small-cap tech than you are in California.

Which energy companies do you enjoy?

The theme of what is happening in the world right now is the deglobalization. Russia has been removed from the market and it is hitting commodities harder as a result of this rebalancing of supply and demand. It is hitting, not just energy. It is all of the exports and some precious metals. They are a huge supplier of the metal. It takes a lot of time to build up supply chains when you see a rebalance and shift. For the next 18 months, our base case is oil stays elevated. I don’t think it will come back down. I don’t think the demand crunch is going to happen. If you look at the travel and consumption in the United States and Europe, they do not have a zero-covid policy anymore.

Covid is a dirty word because we are so tired of discussing it. There is still something there. China and Chinese demand is affected by that. China and India have shown a willingness to buy cheap Russian crude. They can buy it at $30 and they are concerned about their economic growth, so it is easy for them. Some demand in China may be waning. $90 to $100 a barrel for the next 18 months is definitely possible. The mentality of the wildcatter has not been seen before.
We had the change in the oil group. The oil and gas industry had a grand de-investment. We are well below peak at the moment. We are still below the oil and gas rigs of the past. You will see this theme in the oil and gas stocks that I like, like the Pioneer, the EOG, and the FANG, they are US-based with a large footprint in the Permian. They have low break-evens and they are pushing cash to shareholders. They aren’t putting it in the ground again. They are thanking the shareholders. Here’s your money. We didn’t make you money for a decade, but here you go, really? Let’s make money now.

You don’t see the wildcatter mentality that happened with other oil-price spikes because you have this massive inflow of rigs, and just supply and demand would flip it over. The slope of how the rig count has increased is a much lower one. A lot of money is not going back into capex. We love the stock that is giving our shareholders the best return right now, like the one that is giving us a 16% free-cash-flow yield, like the one that is giving us $100 a barrel. Half of their free-cash flow is pushed out in a variable dividend every quarter. You might get price appreciations still because they keep making more money, even though you are talking a lot of money to sit and wait. If you look at where earnings revisions are happening, we think earnings will go up in energy. Even with the massive price moving up in a lot of these stocks, the P/Es are still very nominal and value-oriented.

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