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Join us in a riveting discussion with Josh Young of Bison Interests and host Jimmy Connor, diving deep into the volatile world of oil prices and their broader economic implications. From geopolitical tensions to investment strategies, uncover essential insights into navigating the current energy crisis. Discover how these shifts could affect your portfolio and the global economy at large. Tune in for expert analysis on building and protecting your wealth in uncertain times.


James Connor 0:05
Hi and welcome to Wealthion I’m James Connor, and wealthy on we’re always striving to introduce you to experts, speakers who can provide insights on where the economy’s going. And a big driver of the economy is the price of oil. If oil goes to 100 or $125 a barrel, it can have a devastating impact on individuals like you and me, and also the economy. Our guest today is Josh Young Chief Investment Officer Bison Interests. Josh and his team are focused on energy. And we’re going to hear his views on where the oil price is going up in the coming months. Josh, thank you very much for joining us today. How are things in Houston?

Josh Young 0:42
Yeah, things are good. And you know, things are looking up, I think for the oil and gas industry.

Speaker 1 0:48

James Connor 0:48
Josh, before we do the deep dive on energy, I want to ask you a question that I like asking a lot of my guests and in what are you most concerned about? Is there anything that keeps you up at night? And that can have something to do with the economy? or politics or even the Houston Texans?

Josh Young 1:03
Yeah, sure. So I think, you know, aside from the oil industry, the thing that sort of is most scary and topical, there was just the State of the Union address. And this whole sort of concept around Biden omics is really concerning. It feels like it feels like things are way less good. And we’re being told they’re great. And we just saw it in the numbers today for payroll where the numbers were supposedly higher than expected, in terms of new jobs, but then the numbers for last month were revised down. And we’ve seen this with a number of different economic statistics for a while now. And it just seems like the numbers are sort of being massaged. And the way they’re being communicated is sort of disconnected from the reality that a lot of people are experiencing. And so you will, I’m not saying that there’s some big economic slowdown right now, I definitely think that the policies that are being implemented and the trajectory that we’re on from an economic policy perspective, is negative. And so I worry about when that comes home to roost, and when we end up with a shock to the economy, just how resilient things are versus how resilient the stock market and many economists think they are.

James Connor 2:26
Yeah, very interesting points. And I wondered the same thing myself, especially when it comes to the inflation numbers, the government’s always telling us inflation is getting under control. It’s down around two to 3%. I beg to differ. But let’s move the discussion on now toward energy, the price of oil is hanging between 70 to $80 a barrel. And with everything going on in the world, I’m surprised it’s not significantly higher. But why don’t we just start here, I want to get your views of the price of oil. And why don’t we do a top down approach? What is the daily demand for oil? And how many barrels are being produced?

Josh Young 3:03
Yeah, so we’re just over 100 million barrels a day, both for demand and supply, the roughly one 1.5 to 102, depending on sort of which source you look at. And, you know, you and I chatted briefly ahead of this about how it depends on which natural gas liquids and what exactly we’re talking about with that. But you know, the market is sort of balanced here. And I would actually argue that we’re slightly under supplied, the global inventories are down by close to a million barrels a day since the start of this year. So maybe we have demand at let’s say, one Oh, 2 million barrels a day and supply at 101 based on that. And then it gets even foggier when you look out at various forecasts where there’s a huge amount of differentiation between let’s say, the EIA and IEA, which both have world demand growing by a little over a million barrels a day versus, you know, OPEC forecasting demand growth of over 2 million barrels a day for this year. So there’s a lot of sort of uncertainty and a lot of variance in forecasts, which I think are driving a lot of the uncertainty in the market for oil and gas prices, as well as the related equities.

James Connor 4:25
And so that’s an interesting point. So demand is 102 million barrels a day supply is around 101 million barrels a day. So we have a small deficit there. But is this why the price of oil has been migrating toward $80?

Josh Young 4:42
You know, I think it’s a really good question. I think I think people have strong views on that. And I think it’s really hard to say, and I like to joke that in the short term, my crystal ball is broken, but part of it is that there’s a lot of disagreement about what’s happening right now. And sort of my general comment on economics statistics and on headlines and sort of the various folks that are sort of the most well known about these different topics, sharing things that make no sense that are often contradictory. I think that’s true for oil and gas, too. And part of it, I think, is that it’s an election year, and that last year, we were leading up to an election year. And so we have this sort of nonsense on Biden omics. And obviously, failing energy policies with a long and variable lags sort of similar to monetary policy is not a monopoly on long and variable lags being problematic just for monetary policy. That’s also true for various other policies, including for energy. And so, you know, I think that that level of uncertainty and that level of unreliability and frequent substantial revisions and adjustment factors and error factors and data and models, I think, is really it’s creating a lot of uncertainty. So I would say that the oil price currently is more reflective of this uncertainty and a big discount attributed by the market to that uncertainty, as well as to this sort of bearish narrative that’s gotten tons of attention and sort of shifted from different one thesis to the next, and so on and been wrong repeatedly. But it just, you know, you say something negative, and you get 100 times as many views and follows and so on is saying something positive for almost any subject. And so, you know, the bearish narrative is has people’s attention very much. So I think that’s probably more of what’s driving the price of oil right now, than any sort of specific, strong fundamental view on on the market currently.

James Connor 6:43
So let’s look at the top three producers in the world because I want to dive in a little bit deeper what you just said there, but the top three producers in the world, number one would be the US how many barrels do they produce daily?

Josh Young 6:55
Yeah, we’re producing around it looks like around 20 to 21 million barrels a day of petroleum.

James Connor 7:03
And then number two is Saudi Arabia, how many barrels they produce?

Josh Young 7:08
So number two, and number three years, sort of Russia and Saudi Arabia, both around nine to nine and a half million barrels a day. And that’s, again, where you get into these sort of fuzzy numbers, even that number for the US? Is it 20? Is it 21? Is it 20 and a half? Are you counting your field condensate? Are you counting various other NGLS in that petroleum number? Same issue with with Russia and Saudi Arabia, but let’s just say 90 and a half for each of them, and 21 for the US.

James Connor 7:41
So I want to look at each of these three players individually, because they each have a different motive and a different objective, beginning with the US. It isn’t an election year. And of course, the current administration wants to keep the oil price down. And then when you look at Saudi Arabia, they have a different objective, and they wanted to get the oil price higher. And they’re building this new city in the desert is called neon. It’s a futuristic Giga city. And that’s how they refer to it as the cost is somewhere around a half a trillion dollars. So they have to pay for that. And they’re going to do that through their oil. But who do you think’s going to went up between the US and Saudi Arabia in terms of the price of oil?

Josh Young 8:23
That’s it’s a great question. I think it’s really unfortunate because, you know, I think there is this misconception, and it’s very firmly believed that it is consensus. So what I’m about to say is very, is very contrarian. It’s a strong variant view. But I think that higher oil and gas prices are actually positive for the US economy. I’ve seen no one say this up until on another podcast recently, I sort of tried to walk through this with some retired energy executives, and they seemed a little confused about it. But I’ve heard them talk about it a little bit since then. But no one else talks about this. Trump thinks low oil prices are good for the economy. And Biden thinks low prices are good for the economy. And the reality is, we’re the largest producer of this stuff. And if you include natural gas and natural gas liquids, we’re way in excess, an exporter of it versus an importer and consumer of it. And so if you just do the simple economic math on that, if you’re a net exporter of something, you benefit from it being higher, especially because it’s capital intensive. So that being said, the whole Biden omics thing I think it’s illustrative of this just, you know, disinterest in the reality and just focus on sort of this headline thing that the easiest for people to understand and sort of consistent with the narrative or whatever. So you know, they’re trying to suppress the price of oil, however possible with dumping the SPR they cut 50% of it and they’ve been rebuilding but so far, they bought back less than a 10th of what they sold in the 2022 election year as well as partly the following year. So, you know, I think I think the Saudis actually did a smart thing in terms of waiting until sort of mid to late last year to do their big voluntary cut. And then they sort of set a baseline where they’re just going to keep producing around that sort of nine to maybe 10 million barrels a day level. And by doing that, they got Russia to participate with them. Russia has sort of been historically a cheater, and the OPEC plus sort of construct, and they got various other OPEC plus countries to agree. And then ironically, they ended up putting pressure on some of the smallest producers who have failed miserably to meet their OPEC quotas, they fail because they under produce, because they’ve under invested and frankly, a lot of their fields are old and depleted. And so we had one OPEC member leave last year and a second, it looks like may leave. But again, there’s this there’s this narrative from various big media outlets. Oh, this means there’s OPEC plus descent and therefore a price war. And the reality is, I don’t know, I mean, this this could have been engineered. It couldn’t have been a surprise to Saudi Arabia and Russia and some of the other big producers. And frankly, you know, an OPEC that actually has a little spare capacity that they’re pulling back is way more powerful than an OPEC that is ineffective, because their members are repeatedly. I mean, we put out these things for months, eventually, we just stopped because it was just so ridiculous. You know, the end goal, so I’m just missing their quarters by giant percentages, because they just weren’t able to produce that much oil. Even at $120 a barrel, they couldn’t produce that much oil as their quota. So So anyway, I think, I think the Saudis were smart with their timing. I think the Saudis and the Russians and various others are pretty motivated to have higher prices. Incidentally, I think, actually, the Saudis and the Russians might have a different view in the short term, I think, Biden has been very negative in terms of Middle East stability. And so the Saudis might want Trump to get elected, whereas Russia is benefiting greatly from Biden’s presidency. I know, it sounds strange, because Biden has been very pro funding Ukraine and so on. But if you look at the advances that Russia has made, in terms of sort of its dominance and power, and again, I’m not obviously I’m an American patriot, I believe in the American idea, and I’m firmly an advocate for the US. But even so you can just sort of dispassionately look and see that Russia is winning, and Ukraine, unfortunately, and Russia is winning from this whole sort of setup. And so I think they like having an ineffective president with failing economic and other policies. So between the two of them, you know, the Saudis might rather have a higher price right now, because that’s perceived as negative for this election for Biden, and Russia might rather have a lower price right now. And then a higher price, let’s say, Come November, or, you know, maybe December, maybe October unclear, but wherever the point is, where it won’t matter as much for the election. But I’m not sure that for either of them that’s really truly dictating what they’re doing with with their oil supply. I think they want a stable market. And then maybe incrementally Saudi wants a little higher price, and Russia wants incrementally a little lower price for now.

James Connor 13:27
So there’s a lot there to unpack. But I want to start with what you said about Russia, and how they’re benefiting from the current administration. And as you know, numerous countries have placed numerous sanctions on Russia. And a lot of it a lot of their sanctions had to do with energy, both oil and natural gas, do you think these sanctions are having any sort of impact on Russia?

Josh Young 13:50
So, but it’s sort of been interesting to see sort of the mainstream narrative these like big economists with large followings from the various large NGOs or government organizations or quasi government, and then the think tanks that are affiliated with the leading political parties and various governments, at first, claiming the sanctions would be devastating. And then restating the definitions of devastating and then restating it again, I mean, there’s a reality which is you can observe economic activity, and if you measure it, not in the sort of Keynesian, like, break a window and then fix it and counted as economic growth. But if you if you frame it in terms of productivity, and manufacturing capacity and sort of creation of services and various other things, I mean, things have actually not been so bad for Russia economically, until pretty recently, and there have been more sanctions very recently that have been a little bit veteran force, but if anything, some of the sanctions were amazing for Russia and actually led to and it’s I tried to explain this a couple years ago on TV to I think it was on Al Jazeera, and they were just so confused. They were like, oh, no, you must mean that sanctions are bad for the Russian economy. It’s like, well, if Russia exports a lot of oil, and the oil price is now 120. And it was 70 before, maybe, even if they have to discount a little to sell their sanction oil, they’re making more money than they did before, and so on with other sorts of commodities that spiked in price after that invasion. Again, I’m not in favor of that invasion. It was terrible. And it’s a humanitarian disaster. But there is a economic reality, which is just numbers and analysis. And when you look at the numbers and analysis, you can see that it’s actually not been so bad. I mean, there’s been a terrible human cost. And having fewer young men in Russia, because so many people have died, is really bad for the economy. But in terms of the impact of sanctions, they’ve been beyond ineffective, they’ve actually sort of backfired. And at least for periods of time, there’s actually been substantial benefits to Russia. They’ve also had some benefits from offshoring. And you there is comparative advantage over the longer term, but in the shorter term, if you get investment booms, and with a low local labor cost and a low, no other other factors, there’s actually been some significant benefit, and also a wealth effect where the reinvestment has taken very concentrated wealth in Russia, held by Putin and the oligarchs has sort of partially redistributed it. And they’ve been forced to hire more people and pay them more to employ them in the various industries that had been sanctioned. And where they needed to onshore various manufacturing. So it’s actually been sort of helpful, and again, not perfect. And, you know, I think Russia and Ukraine and the world would have been better off if Russia had not invaded Ukraine. But the sanctions have totally failed. And frankly, I think backfire just some extent.

James Connor 16:54
Yeah. So I recently had a discussion with Jim Rickards, and he said the same thing, sanctions never work complete was a waste of time. Makes great headlines, but they don’t work. So to that point, who was Russia selling their oil to? Because supposedly they’re not selling it? You’re allowed to sell it to the Europeans? Who are they selling it to?

Josh Young 17:16
They’ve been selling it to us. There were reports early on Russia, Napa, and so on showing up in the US showing up in Canada, places where there was just extreme sort of these narratives about that. There were reports about Zelinsky, trading Russian natural gas, which were shocking. And I posted some of that, again, these were from sort of mainstream media sources, they were well sourced reports, and people flipped out, they decided I was evil, because I shared these news reports about this and sort of joked about Solinsky, being a good natural gas trader, like, you know, the tall and Glencore and so on. And, you know, maybe it was in that case to joke about it. But there wasn’t reality, which was that, you know, a lot of these Russian products that supposedly were sanctioned, were being bought by folks that supposedly were vehemently opposed to Russia. And even today, there have been recent reports of Russian oil ending up being bought in Western Europe, and Russia, natural gas is still actively being bought by Western European countries. So there’s a sort of very weird thing where there are sanctions that aren’t really enforced or that are sort of very easily loosely sort of skirted. And then money being sent, essentially to Russia, while also sending money to Ukraine to fund the war effort. It’s a very weird, perverse thing. I’m sure people will hate that I talked about this. But again, I’m pro us, I’m anti this war. I think it’s terrible. But there’s just the numbers and the economics. And you know, I think it’s really too bad that people have been shamed and screamed at and coerced into not talking about this stuff. So you know, all you’re hearing this?

Speaker 1 18:55

James Connor 18:55
Yes, no, you raised some very good points. And once again, when it comes to, there’s so much going on behind the scenes that we’re just so oblivious to, right. And that’s one of the great things about commodities, right, the geopolitics associated with them. One other point that I want to clarify on and you said higher oil prices would be good for the US economy. Okay. But as a consumer, I’m thinking higher oil prices, higher prices at the pumps would not be good. For me. It’s just one more additional expense that I have to deal with. So how I just want to clarify or get some understanding, why do you think higher oil prices is good for the economy?


Josh Young 19:36
Yeah, so um, I think I think it’s sort of a it’s a tough concept. Economic growth is uneven. And so anytime there’s growth in some thing, I guess there’s different concepts like creative destruction where you know, you have Facebook met at take off and it hurts the Yellow Pages, right. So there’s employees of those companies and there’s printers and there’s paper suppliers and all that stuff, they get hurt, because advertising goes towards Facebook or towards Google, right. But it’s great for those companies. And so Google and meta and so on hire tons of software engineers, and they pay them more than the paper suppliers and the ad sales people, these yellow pages and newspapers and stuff, we’re getting paid. And so it’s good for some and bad for others, and in aggregate ends up creating economic activity and wealth. And so similar idea, a higher gasoline price might marginally impact your wallet and might force you to spend a little more on that immediate, little less somewhere else. Again, it’s a very small percent of market share, or sorry, wallet share. It’s a very, very small expense, people know about it well, but it’s really not a you, when you compare it to rent, or you compare it to various other items. It’s just not medical care, very small. And those other factors have grown tremendously, while gasoline prices today are actually much lower than they were 15 years ago. So what else is much cheaper today than it was 15 years ago, your Microsoft Word is like five times as expensive, you have to pay for it annually. You know, you’re supposedly technology is cheaper, but your you know, basic productivity software is radically more expensive. So how is that fair or possible, and you know, you look at that versus gasoline, you look at these phones that are crazy expensive. And there’s an oligopoly and no government enforcement in that. But then the government gets really worried when Exxon’s buying pioneer, which is you take a 2% producer globally of oil, buying a half a percent producer. And in aggregate, they’re still less than a 10th of the market size, maybe even a 20th of the market size of Apple in phones, and they investigate the 2% and not the 40%. So I think a lot of this is just sort of the industry doing a very bad job with PR. And I think very basic economics being ignored. Or, you know, very basic economics having been done 20 years ago, people not bothering to refresh their understanding to the reality that the US is awash in available oil and natural gas resource, which is very economically beneficial to develop when it’s done locally.

Speaker 1 22:19

James Connor 22:19
Yeah, so you mentioned Exxon and pioneered I do want to go there. But before we do that, I want to stay on supply and demand and the impact on pricing. China, everybody knows what’s going on in China, it’s not recovering the way we thought it would. And therefore, their demand or use of oil is not as high as is I think a lot of people thought it would be. But what do you see happening with China, when it does start growing at the rate that it was growing at? And what’s that going to do to the oil price and also in India?

Josh Young 22:50
Yeah, so China, economic statistics are even worse than Biden era US economic statistics. They’re just sort of totally made up. But what you can tell so so this is directional. It’s not precise. But it looks like trying to grow their oil demand last year by close to 2 million barrels a day. So I actually would push back. I think China’s oil demand has actually well exceeded consensus expectations. There were a number of folks a couple of years ago, that were arguing that China might not ever fully reopen from their COVID lockdowns, they argue that China would never get back to its prior peak levels. And they showed all kinds of different analyses. And it just was nonsensical. What we’re seeing I think, in China is that we’re seeing demand growth, even with an ultra weak and ultra weak real estate sector, which had been one of the big drivers of oil demand in China. And I think what we’re seeing is this impact of additional private gasoline powered car ownership, as well as the impact of a growing consumer economy. And this isn’t to say things are fine in China, mercantilist Systems Command and Control Systems, socialism, communism, their failed economic systems. It’s not that those are so great. It’s that when you take a country where the per capita consumption of oil is four barrels a day, and it was one barrels a day, let’s say 30 years ago, and the US is consuming, sorry, a year and us is consuming 21 barrels of oil per person per year. You know, there’s a lot of room up. And so as you had wages rise in China, you had just structural consumption growth, even without there being positive GDP or substantial positive GDP. So the China sort of economic growth story. I think the consensus is at this point that it’s broken, and I don’t think that’s necessarily wrong. I think they may have spurts there may be additional stimulus, but the China reopening driving additional oil consumption along with certain other commodities, some commodities, I think are getting hurt from that, you know, it’s really hurt iron ore, and it’s really hurt some of the other commodities that are necessary for that real estate boom, which is turned to a bust. But yet you’re seeing oil demand rising in China. And then the flights, you’re seeing international flights, I think are still slightly below their peak pre COVID levels from to and from China. But the domestic flights I think, are actually a little above. And you’re seeing that growth trajectory, actually pretty substantial. And it seems like for China, as well as certain other emerging markets, and, you know, non western Europe or US markets, it seems like the, the constraint there is actually planes, so they need more planes to get delivered to get more flights to get more jet fuel consumption and more travel. And with that, as a bottleneck, it’s very promising because those planes are coming. And as those planes come, you’re gonna actually see that oil intensity in China rise. And then just quickly addressing India, India’s oil consumption is growing about 10%, year over year. And there have been all these bearish narratives about oh, this is a one time thing or here’s why, and it’s not going to happen again. And it just keeps going. And the per capita consumption in China in India is actually lower than China. And it’s growing faster than China. And then the demographics are better where the population is growing. And then again, it’s not, you know, every country has their problems and challenges. But I think the Indian economy has moved much more towards decentralization, and therefore, the Indian economy is much sort of fundamentally healthier than the Chinese economy. And so I think it’s very exciting to see the mantle of rapid oil consumption growth on a percentage basis, moving from China to India. But at the same time, I think it’s reasonable to expect that China’s oil demand will grow rapidly. And I think the the projections from the IEA and EIA that show very low or no demand growth in China are political, which is inappropriate from these agencies that are supposed to dispassionately assess demand, for planning purposes, and for the public good. And unfortunately, not realistic, and don’t actually capture what you can see on the ground. And again, using flight activity plus understanding when it doesn’t grow looking into it and say, Hey, wait a second, they’re out of gates, and they’re out of planes, as they put more gates at these airports, build more of these airports and get more planes, you know, you can actually observe now the step changes in that activity and then talk to the various aircraft leasing folks and the various other folks on on the, the airline side and sort of see some of the other the other forecasts. And just one last thing on that people will push back and say, Oh, jet fuel is only X percent of oil consumption. But the reality is, there’s a multiplier there, sort of similar to the the first order thinking on oil, where oh, the price of oil is only X percent contribution to US economy, there’s a multiplier effect, where when you fly somewhere you drive from wherever you fly to wherever you’re going, and then you’re gonna stay in a hotel, or Airbnb or whatever. And that’s all very oil intensive. And so similar idea on oil prices, when oil prices are higher, you have more rigs running in the US. And those are costly on a number of different aspects of the value chain, which each have their own multipliers. And so you have to really, I think, be careful with the economic analysis to sort of fully capture and that’s why it makes so much sense to talk about jet fuel, which is a small percentage of the overall oil consumption, but as a very good signal for the broader oil consumption growth in those places.

James Connor 28:57
I like that stat you threw out. So in the US, each individual consumes 20 barrels of oil annually,

Josh Young 29:04
Yeah, might be closer. Yeah. 2021 Somewhere in there. And, you know, it’s it’s pretty remarkable when you think about many there’s billions of people that use one barrel of oil a year and you know, Alex Epstein and others have done a great job of advocating for energy literacy, where you know, there’s these various environmental folks that that claim to be worried about the world and the poor people and so on. But the reality is that you’re step up in longevity and your step up in quality of life, as measured from an economics perspective is enormous as you go from one barrel of oil consumed per person per year to four right you look at the enormous step changes in lifespan and in the ability to earn an okay wage and you know, if you’re a farmer to be able to get a better price for your crops. I mean, just life gets radically better from when you’re desperately poor, to when you’re less poor and so, you know, this idea that we’re going to withhold these energy supplies to virtue signal or because of some other issue. You know, the the issues on climate are real, but they’re they’re minimal compared to the enormous benefits of going from desperate poverty, which billions of people are experiencing right now to a more adequately supplied lifestyle. And so I think it’s really the humanitarian approach has to be pro energy of all forms, and to really be not. So anti development in various in various ways, like so many, unfortunately, are

James Connor 30:37
Very interesting point, Josh. But one of the things that comes to my mind is the fact that in the US, each individual consumes 20 Barrels annually. But you mentioned in a lot of other countries, you mentioned billions of people are only consuming one barrel. But if you were to double that to two to four to eight, you gotta think the price of oil is gonna go significantly higher over time.

Josh Young 31:00
Yeah, I mean, that’s, that’s sort of my investment thesis is that demand is growing structurally, much faster than supply. And then electric vehicle adoption is challenged. And then in the places where there’s been a lot of electric vehicle adoption, they still end up consuming towards the high end of the per capita range of oil consumption, versus, you know, some of these poorest countries. So a number of the perceived threats to that higher demand level are, I think, misplaced. And, you know, fortunately, some of the poorest people in the world are getting wealthier, pretty fast in various places, not just in India and China. And fortunately, because of that, there’s been surprising oil demand, per you know, the IEA and EIA forecasts where they’ve been wrong repeatedly over many years. And I think it’s just this failure to appreciate, again, central planners, these organizations that want to sort of dictate how people should live and whatever, they’re always going to sort of fever. You know, many of these organizations were very pro China economic policy for many years, The Economist and various other magazines with similar newspapers with a similar sort of globalist bent, but like centralized control bench as well. We’re very big advocates of these sorts of systems. But the reality is, historically, they’ve always failed. And so what you see is in places that are decentralizing and where they’re they’re opening up and liberalizing, you see rapid economic growth, and rapid moves out of poverty, which leads to rapid improvements in per capita, oil consumption metrics. And again, it’s not universal, and there are places that are getting worse. But in aggregate, fortunately, life is getting better for people on the planet. And that does mean more oil consumption. And in certain places, it means rapid changes in oil consumption. And I’ll just pick on two examples. So South Korea, if you zoom back 50 or 60 years ago, the per capita consumption was on the very low end. And now it’s very close to the US. So you’re talking about a 10 to 20x increase in per capita oil consumption. And, you know, similar similar examples and other economies, and you can see it famously in China, where it’s sort of gone up Forex, from a very, very low level to still a low level, but a lot higher than it was 20 or 30 years ago.

Speaker 1 33:44

James Connor 33:44
So you touched on Exxon and pioneer earlier. So why don’t we talk about m&a Now, there’s a lot going on. And as you mentioned, Exxon is buying pioneer for 60 billion Chevron is buying has for 53 billion. And there’s been a number of smaller transactions. But what’s happening here is because Exxon and Chevron can’t find or can’t replace the reserves. Is there no more oil to be found, and therefore they have to go out and acquire it by acquiring other companies?

Josh Young 34:13
Yeah, I think it’s a complicated question. I’ll just throw in that. It’s such a tight market for oil assets that Exxon wants Chevron Chevron’s acquisition to the trying to exercise a right of first refusal or something similar on on Hesse’s Guiana asset, which is sort of the prize there. And the reason Chevron is trying to buy them, too. We’ve done a lot of research and shared a lot of perspectives on transactions in the Permian Basin, West Texas and Southeast New Mexico, which is where Pioneer is focused. And what we’ve noticed is that transaction values are rising pretty significantly, even with oil prices, having come down quite a bit from their peak in the last couple of years. And even with natural gas prices down by even higher percentage from their peak, especially in the last few months, where you see natural gas prices go ultra low. And you know, people think of these as oil fields, but they do produce a lot of natural gas. And if you think about it, when you when these wells are drilled, if you segment the economics by commodity type, you can sort of see the oil in many of these wells, getting companies to break even on the drilling cost. And then natural gas liquids and natural gas being the sort of profit component. And so with lower natural gas prices, and lower natural gas liquids crisis, like we’ve seen recently, because of this more winter, and because of a glut and dry gas, and so on, you’ve actually seen those profits suppressed from those fields. And despite that, you’re seeing these valuations go sky high. And well, I don’t know about sky, but they’ve gone up a lot relative to where they were a few years ago. And I think they will get sky high, I think you’re seeing just this, this rush to buy the remaining assets with inventory in places like West Texas, and frankly, even in places that people that sort of thought were mature and had given up on to some extent, there’s a high value acquisition happening, sort of acquisitions slash merger happening in North Dakota, there have been some pretty big deals in South Texas as well. And so and you’ve seen some multibillion dollar acquisitions happening in Canada, so I think you’re seeing an m&a Boom, I think it gets bigger, not smaller over time. And I don’t know how many more houses and pioneers there are to buy. But there’s many of these billion dollar to $10 billion type companies, and numerous private companies that are getting bought, but a lot fewer than there were two years ago. So there’s a boom happening. There’s different motivators for it, but I think one of the biggest ones is scarcity. And, again, when you do the numbers, it sort of sounds a little weird, because there’s a lot of these private companies, but again, there’s a lot fewer of them than there were and of the size that are getting bought. And there’s even fewer when you look at the ones that are willing to sell. And so scarcity really drives buying interest, and it also can drive price.

So why don’t we talk about valuation. Now, because 2023 wasn’t a good year for oil, and oil equities. I guess a lot of it had to do with the oil price. But here we are, in early 2024, the oil price is starting to move up eight or 10%. On the year, a lot of the oil equities are starting to move up with it, but they’re still trading at a very cheap valuation. And a lot of them are cash flowing, they’re paying dividends, they have little or no debt. But they’re still trading very cheap. Why?

James Connor 37:47

Josh Young 37:47
Yeah, so so I’ve been looking at this closely recently, to try to better understand the situation, especially as the stock market is sort of had some craziness with Nvidia sort of blow off top, potentially and SMC and various other cyclical companies having these sorts of really significant moves in the stock market, having had a pretty unusual move higher last year, and so on just trying to see sort of where energy is at, and maybe why it’s done poorly and where the upside is, if there is, and what we see is that the large energy stocks are trading at about half the valuation of the broader market, which is unusual and promising for their valuations or their their share prices, because their return on invested capital and return on capital employed metrics are actually quite high. And historically, when they’ve had those metrics, the high their valuations have been at the market multiple or at a premium to them. So it’s a very unusual situation. They’re very compressed relative to the market, and relative to their very solid asset level performance and on the important sort of accounting indicators that often people don’t even use, because generally, if you have a high return on equity, high return on invested capital company, the stock is already expensive. So there’s nothing to do about it. So in this case, it’s nirvana for value investors to get to go buy these things. And then there’s an even more interesting from my perspective phenomena happening where the large caps are very cheap relative to the broader market and other large caps. But because of indexing, there has been this rush towards investment in large caps generally, and large caps versus small caps are trading at much higher valuations than they have historically. And oil and gas where there’s even less fund flows into the space. There’s been some significant divestment by endowments and foundations and institutional investors and so on. There’s very little stock picking, especially among the smaller producer equities. And so you have these sort of disconnects where you the larger companies will treat it pretty big premiums relative to transaction values. And when they get bought out, they get it gone out at very high valuation. So you look at Pioneer, for example, PES is complicated because of IANA. But Pioneer is getting bought at close to seven times cash flow on a monthly basis, which is a pretty high relative to operating cash flow, there’s a lot of required reinvestment, there is low free cash flow, relative to the purchase price, there have to be a lot of success on integration and synergies and growth for Exxon to earn a really attractive return on that. When you look at where the smaller companies trade, and then we’re assets that are smaller, or transacting, the assets might be selling typically, for half of that. And then the smaller public companies in some cases are trading at half of what the assets are selling for, and so of the size that that they’re at. And so there’s this very unusual evaluation, dispersion and disconnect. And, you know, historically, we’ve seen this running bison since 2013, we’ve seen this a couple of times. And it’s been the start of incredible moves up with a lot of volatility. So I think it’s a really great time to own oil and gas stocks. And I think it’s an even better time to be able to go down cap to get into the sort of scarier, smaller, less liquid names, and be able to potentially get five or 10x type returns over time with again, more risks and more volatility and more uncertainty. And these smaller names at huge discounts, liquidation value, and an even bigger discounts relative to larger caps. But again, it’s not to knock the larger cap producers and integrators which are also trading at you know, they’re also discounted versus the broader market. So when you think about all that, if you look at the the large cap, sort of universe versus the small cap oil and gas stocks, there’s almost a 10x potential return from the market multiples of those small caps to the broader market. And then it ties with the tenure performance, where when you look at PSU E, the sort of small cap index for oil and gas, versus the s&p 500 ETF like SP y, you see that PSE is down about 70% Over the last 10 years, whereas s&p is up almost 20%. And so that sort of disconnect, you can actually see it on a chart, and it also ties to the valuation disconnects that I’m talking about. And so I think I think there could be a real reversion to the mean, maybe in both directions. And that could be very, I mean, this barons thing behind me from when we were up hundreds of percent in one year. So it’s not like a dream anymore. It’s happened. And it was a very similar setup, I think, to what we’re seeing right now.

James Connor 42:43
No, you’re right. We know we all know we have volatile and how fast oil can move. We’ve seen it so many times. And it can happen in a matter of days or weeks, right. And I’m always surprised it’s one of the largest commodity markets in the world, if not the largest. But I’m always amazed that the volatility just on any given day can move 5%, which is, you know, quite normal. And the other point I would just make too is and you did touch on this, but I’ve seen the same sort of discrepancy right across with all commodities, many commodities, including precious metals, base metals, battery metals are trading at big discounts. And and I think a lot of it just has to do with the competition in the marketplace. Now. There’s so many other sectors that investors are going to, you know, maybe other sectors that are perceived as being more sexier if you will bitcoins up 60% on the year and NVIDIA. I’m not even sure where that is now. Is it up 102% on the year I lost track. Right. But I think that’s another big issue.

Josh Young 43:46
Yeah, I think I think it’s one of those things. I listened to this interview of Howard Marks recently the co founder of oak tree and you know, someone with a phenomenal long term track record. And he said that the the life, the important things from an economic perspective are like a movie, but it goes so slow that we have to find the other things to distract ourselves with. And so I would think of some of these sort of FAD stocks or, you know, tradable collectible sort of things or alternative currencies, as as that sort of distraction, maybe some work and maybe some don’t, but they don’t really have the sort of intrinsic value that consumable commodities have, where there is, there is a real sort of current use and economic value add from using them. And then they don’t have cash flows that can be discounted, and understood and then distributed out via dividends or captured via share repurchases for economic value creation that can compound over time. And so, you know, I think, I think we all get distracted by these things. And, you know, I think I think Howard Marks is right. I think it’s important to be able to, you know, Oh, look at these things. And, you know, I think it’s one of the ways that we’ve been able to, to do a lot better than the oil and gas indexes. And many of our peers when we started in 2015, are out of business, because they couldn’t sort of get past this, it’s just sort of accept that there will be periods where we look like geniuses and periods where we look like idiots and evil. And, you know, it’s okay, sort of comes with the volatility. And then just one, one thought on this, there’s a terrible misconception in modern financial theory, where risk is conflated with price volatility. And the reality is, if you can find extra money over 10 years, you should be able to close you’re in something with a very low fundamental risk across the thing, you should be able to just close your eyes, ignore the monthly statements, ignore the day to day, whatever, own the thing and hold it. And it’s a very difficult emotional exercise. And it’s why so much institutional money has gone to private credit and private equity, where they just get sort of marked model marks that are disconnected from the market, maybe reality too. And so that’s, I think, money’s gone towards that, because it’s just so hard to suffer from these, you know, mark to market drawdowns and this sort of volatility. But I think it’s a total misconception. And I think it’s probably my single biggest advantage is just failing to find things that have high price volatility, and where I can get a pretty good idea of what the intrinsic value is, and be able to buy them at a large discount to the intrinsic value, when most people won’t touch them, because they measure them as risky, even when they’re not. In some cases, we own stocks that have large cash balances, and substantial positive cash flow. Occasionally, we’ll own small things that are more speculative, and they don’t always go well. But in general, you can figure out what these things are worth and buy them at large discounts. Most people are scared. And then, you know, we experiences in 2022, where we did this were called crazy people thought I mean, I don’t know all sorts of terrible stuff. And then in 2022, that was that was obvious. And you should everyone should have been doing it. And you know, there’s nothing special about it. It’s like, well, you have to be able to sort of take the volatility, I think and be able to buy the things when no one likes them. And people think you’re crazy or stupid or whatever adjective for doing it. I think you have to be able to do that. And again, you have to be careful, I think and you have to be right. And then you can end up getting this sort of extraordinary return. I think there is no there’s no promises, there’s always risk. But I think the volatility is actually a sign that capital isn’t flowing to space. And it tells me that it’s promising. And you look at it, the commodities are volatile. But if you look back to commodity bull markets, they’re volatile, but they ended up getting a persistent bid. And the percent changes end up really sort of compressing as as the as the have rerated, and especially on the equity valuation side. So I think I think it’s pretty promising and exciting to get exposure here, not just oil and gas. I agree. I think there’s similar dynamics and other commodities. And what I like so much about oil and gas is that when you understand the supply and demand dynamic, you know that when there’s demand almost entirely, the demand represents the commodity being consumed and being combusted. Almost always in sometimes it’s turned to plastic, but the reality is, that’s not really recycled too much. So mostly, it’s it’s being consumed, and it goes away. Whereas if you have iron or copper or various other commodities, in many cases, those are recyclable, and for gold, and so on, it’s, you know, typically reused and held for decades or centuries. And so that dynamic, I think, makes it much more tied to the supply demand dynamics over the medium term than maybe some other commodities.

James Connor 49:08
Great insights, Josh. And that was a great discussion as we wrap up if investors or viewers who would like to learn more about you and the various services you offer, where can they go?

Josh Young 49:17
Yeah, so I should clarify, none of this is a solicitation or recommendation or anything of that sort. Always happy to chat with folks. They can find us at Bison, or website. They can sign up, we put out a roughly monthly note about various things. And then we’re pretty active on social media at Bison interests.

James Connor 49:39
Well, once again, Josh, that was a great discussion. And thank you very much for making time.

Josh Young 49:43
Thank you.

James Connor 49:44
Well, I hope you enjoyed that discussion with Josh young on the energy markets. If you have any suggestions on anyone else that you would like to see on the channel, please let us know in the comment section below. We’d love to hear for you. And we’re always looking for new speakers. If you’re also trying to find someone to help you with your financial future and guide you through these tumultuous times. Consider having a discussion with a Wealthion endorsed financial advisor. All you have to do is go to provide some basic information and wealthy I will put you in touch with a vetted advisor. There’s no obligation to work with any of these advisors is a free service that will be on offers to all of its viewers. Don’t forget to subscribe to the channel and also hit that notification button so you can be kept up to date on future events. We have some great guests coming on here in the coming days and weeks. Once again, I want to thank you for spending time with us today and I look forward to seeing you again soon.


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