An energy super-cycle bull market has just begun, an investment expert told Hart Energy, citing a global imbalance between supply and demand and pointing to the perspective of legendary investor Warren Buffett.
This forecast from Matthew Iak, executive vice president of US Energy Development Corp., comes as S&P Dow Jones sector indices show energy has enjoyed a boom over the past year as most of the market struggles.
From the start of the year to the end of the first quarter, Buffett’s Berkshire Hathaway stake in Chevron Corp. soared from about $4.5 billion to nearly $26 billion.
It’s true that Chevron’s share price rose more than 30% in the quarter as crude oil prices rose, but that wouldn’t explain the increase in the value of Berkshire’s stake. Buffett saw the trend and invested many billions. He also pumped about $7 billion into Occidental Petroleum Corp.
In total, Buffett’s holdings in the oil and gas sector exceed $40 billion, Edward Jones analyst James Shanahan told CNBC.
And what’s not to like about oil and gas stocks? In the 12 months ending May 11, the S&P Dow Jones Energy Select Sector Index boasted a soaring 53.8% net total return. By comparison, the financials and health care sectors generated anemic returns, the financials (-9.2%) and industrials (-10.8%) sectors suffered setbacks, and the S&P 500 index lost 4.3%.
‘Ultra-long run supercycle’
But what about mere mortals who lack the stature of the Oracle of Omaha? Is the race over? Too late to enter? Is it time to get out of energy stocks?
“Quite the opposite,” Iak said. “If anything, we are in the early innings of a very long-term energy supercycle bull market. Many investors confuse the current short-term volatility in energy prices, attributable to geopolitical issues, with the long-term upward trend in commodity prices caused by a global imbalance between supply and demand.
If anything, Iak thinks there needs to be greater awareness of a massive imbalance now forming for fossil fuels.
“Regardless of an investor’s opinion on renewable versus traditional energy, it is becoming more apparent every day that we need substantially more production from fossil fuels and renewables, as neither can meet growing energy demand on its own,” he said.
Smart investors should consider the diverging valuations of fossil fuel and renewable companies, Iak said.
“Fossil fuel stocks are traditionally more mature and based on current cash flow, while renewable energy investments are a bit more speculative and unknown, with value based on future cash flow and potential,” said. “Wise investors and stakeholders stick to what they know and understand.”
In addition to his enthusiasm for oil and gas, Buffett is also keeping an eye on renewable opportunities. By the end of 2021, Berkshire Hathaway Energy had invested about $6.7 billion in solar energy projects.
Of course, the returns are not convincing for everyone. Remember the movement to divest from fossil fuel companies? It’s still there. So are investors who are dogmatic about supporting fossil fuels.
“One faction will continue to divest and argue that rising energy prices are a reason to invest more in renewables,” Iak said. “The other faction will continue to invest in fossil fuels and will claim that we need to invest more in security and help insulate the economy from geopolitics. Both views have a confirmation bias and will cite these points to support their claim.”
When considerations other than economics govern investment decisions, the free market can become distorted. The pressure on publicly traded companies to have capital discipline has resulted in what many call the most unfair advantage in private company history, he said.
“Consequently, this move results in inherent losers, including publicly traded companies that would have been better positioned to benefit from this opportunity under free market conditions,” Iak said. Long-term fossil fuel companies will continue to practice capital discipline, while developing transformational business models that balance the need for renewable energy targets.
“In fact,” he said, “as demand grows and supply shrinks, we believe that traditional energy offers the greatest generational opportunity from an investment perspective.”