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Michael Boyd, Head of Research at Energy Income Authority, joined J Mintzmyer's Value Investor's Edge Live on November 6, 2020, to discuss the post-election energy market prospects and opportunities into 2021 and beyond. This interview and discussion is relevant for anyone with interest in the broad energy sectors, including the overall SPDR Energy ETF (NYSEARCA:XLE) and income-focused funds such as the Alerian (NYSEARCA:AMLP). Specifically in this interview, we discuss several individual names including Altus Midstream (ALTM), Calumet Specialty Products (CLMT), Cimarex Energy (XEC), DCP Midstream (DCP), Diamondback Energy (FANG), Energy Transfer (ET), ExxonMobil (XOM), Plains All American (PAA), RPC Inc (RES), Schlumberger (SLB), and Targa Resources (TRGP).
Topics Covered
- (<3:15) Intro/Disclosures
- (3:30) What does Biden Presidency and GOP Senate mean for energy?
- (6:30) Any risk to an energy export ban/shift?
- (8:30) Discussion on valuation levels and approaches.
- (18:00) What are your favorite sectors vs. avoids?
- (25:00) Top picks and a short candidate ideas to hedge?
- (32:45) You're negative on oil services: what about Schlumberger (SLB)?
- (35:45) Any views on ExxonMobil (XOM)? Are they attractive here?
- (39:15) Updated commentary on Altus Midstream (ALTM) after the triple?
- (46:45) Any firms which could be the ‘next ALTM?’
- (51:15) Any top picks without K-1 exposure?
- (53:30) How will the divestment wave play out? Interest in crude oil itself?
- (1:00:30) Overview of the Energy Income Authority research platform.
Full Transcript Below
J Mintzmyer: Alright. Good afternoon, everybody. Welcome to another version of Value Investor’s Edge Live. Today we're hosting Michael Boyd. He's an independent researcher and analyst with his own research service hosted on Seeking Alpha, Energy Income Authority, where he focuses on basically all spectrums of the energy sector, but particularly a little bit more focused on the dividend payers, helping investors find investment opportunities with a more stable dividend background.
The energy space, of course, has been notorious for both underperforming stocks, but also a lot of distribution cuts, a lot of landmines out there. Not all too dissimilar than in some of the stuff that we've experienced in the shipping sector. I know Michael has expanded his coverage a little bit more recently, and then we'll talk more about that in today's interview. But just a brief background of what he does. Michael, thanks for taking the time to join us today.
Michael Boyd: Anytime, you know, I'm always happy to have a chat with you.
JM: Yeah, man, it's always fun. We did a Traders4ACause Energy Seminar, about a month ago now, and it's interesting to see some of that stuff is starting to pan out here with the election and such.
MB: Definitely, I mean, you know, something we'll talk about, but there's a lot of fear around energy heading into the election, which I think you saw in some of the stock prices earlier in the year, but it really hasn't like panned out that way. And I think that's really true across a lot of the sectors in general. So…
JM: Yeah. I was hoping we'd have, you know, some, a little bit more concrete, I mean, it depends on who you talk to you, but some more concrete election results before we did today's event, hence why we scheduled it for Friday afternoon.
MB: You’re right.
JM: You know, I think this is probably going to be one of the most widely listened to, you know, events we've done, just because of the increasing interest in energy, and especially now that the election is done, I think the live attendance today is a lot smaller, because it's you know, Friday afternoon, it's Friday evening in Europe. But I think we'll see a lot of interest in this.
Before we begin just, you know, the formalities. Nothing here today constitutes investment advice in any form from myself or Michael. We’ll give disclosures as much as we can on positions we own. You can just assume if there's no disclosures, because we forgot or something you can assume we're probably talking our book. So, just be aware of that. Some of these names have been really volatile, one name in particular ALTM, Altus Midstream. I own a, I wouldn't say super substantial position, but it's a couple percent of my portfolio. And that's a name that is super volatile. So, even though we might talk about it, we're recording on 6 November at 1:00 in the afternoon. Look, I mean, if that thing doubled, I could sell it within hours. If it stays the same, I probably won't. Right. So, just stocks like that. Right. Keep in mind that those disclosures may change. Michael, anything you want to add to those upfront?
MB: I mean, yeah, I mean, like I said, like, as I go through, you know, if I mentioned something that I have, like a disclosure, I'll be sure to mention it. You know, other than that, I mean, I'm happy to kind of get into it. And we'll kind of go through it.
JM: Absolutely. So thanks, everyone, for joining us. And we'll jump right into it. So, Michael, I know we still don't have election results. I don't want to offend anyone, you know, on the call or listening to the recording later, but it seems like scientifically and if you go to the gambling markets and look at them, 97%, 98% Joe Biden Presidential victory at this point, and a pretty clear lock, it seems like. I know there's still some toss-up stuff going on in Georgia, but it seems like a Republican Senate, a very tight balance, probably going to be 51 barely, right. I mean, it's at that point where the Democrats get 50. They win on the VP vote, but point being a very narrow GOP Senate, a very close house with a slight democratic edge. And it looks like a Joe Biden administration going forward in January. So, with all that said, I know it's not 100% locked in yet, and hence why the news hasn't called and stuff, but what does that mean for energy and into 2021 and beyond?
MB: Yeah. I mean, that's been kind of my working assumption for the past couple months, is a Biden victory and, you know, a locked up Senate. So, it's kind of a more of a gridlock scenario. And you know, as we talk about energy and like the political and regulatory environment, you know, a lot of those topics matter. Whether you think about, like, you know, some things that been discussed, like a federal lease ban on drilling, you know, how green energy subsidies play out, you know, a fracking ban in whatever form that might take. And I think, in general, even if we think about it, you know, the Congress to get flipped, you always have the U.S. Supreme Court as a backstop. So, going through a lot of recent cases, like if you look up like Atlantic Coast and that whole pipeline decision that was actually very bipartisan, it was a 7-2 decision that was before Ruth Bader Ginsburg died, unfortunately, but you know, it's still a very common place where a lot of Supreme Court decision have been pretty actually pro energy in some ways, like, another example would be, they reversed a lower court ban on nationwide toll permits, which will play into Equitrans, which we'll probably touch on at some point in this call. But you know, looking forward, I mean, energy in general, I think, is actually in a pretty good spot heading into 2021 and forward.
There are only a few certain things that, you know, Biden, if we are in a situation where there's only some things he can touch. So, a few topics that he might actually be able to address, like the Keystone XL Permit, whether he wants to upset Canada in that way and actually kind of kill that pipeline. And in the border crossing, that's something he can try to do a federal lease moratorium on new permits. It's something he could do on his own without, you know, a substantial kind of congressional involvement. There's actually not really a lot of change that can take place, and even then, you know, obviously, it’s going to be a lot of lawsuits, a lot of uncertainty in that way, but actual firm changes are probably years away.
JM: Yeah, it's always interesting when you dive into the legalities of such and what can a president actually do versus what requires Congress and versus what will be challenged in the courts and whatnot. You know, one of the more extreme things I saw mentioned, as something that's within – technically within the presidential purview, is export controls. So, like some sort of export tariff or export ban on energy. That seems, to me it seems pretty extreme of a maneuver to do, but it seems like that's something that the presidential administration could at least get the ball rolling on. Is that been something that's come across your desk at all or you’ve thought about?
MB: Yeah, a little bit, I mean, if you go back a few years, when we actually had, you know, the oil export ban lifted, you know, it was actually a, you know, fairly bipartisan issue in a way to, and, you know, there was some pretty broad support from Democrats on that. But, you know, it's always something that might change, you know, obviously, the viewpoint on energy has shifted quite a bit on many of those topics, since, you know, I believe that was [15, 16], when that was lifted. So, you know, things might change. And I really don't necessarily expect. To me, you know, my view is there's going to be a lot more focus from Democrats on other issues other than energy early – especially early on in the administration, I think there's a lot of societal things that they want to touch first. So, I think it's probably going to take a back burner, so I wouldn't really expect too much change, especially 2021, 2022.
JM: Yeah, I'm hoping not, I mean, I'm a shipping investor, you know, so that would be terrible.
MB: I would definitely roil your book a little bit, too depending.
JM: Exactly. Exactly. And, of course, the VLCC market and Suezmax market for crude exports is already, you know, down. So, you know, an export ban would be devastating. But I don't think that's been a serious conversation in the United States for, I mean, five plus years now, right? I mean, and you got to look at it in a sense of like a global geopolitical realm as well. I mean, what would that require? What would that mean? That would be, you know, something involving, it would have to be some sort of global agreement where, you know, OPEC is also somewhat contributing to some sort of like, I mean, now we're talking about like, global carbon tax regime type, I mean, we're getting way outside of like presidential purview and stuff.
MB: No, no, I definitely agree on that.
JM: But I mean, I guess with that said, let's review, and I think most of the folks on the call today probably know this, but let's review kind of the valuations in the space, just writ large, on average, like what kind of valuations relatively speaking, are we seeing at the end of 2020 versus, I mean, the last 5 or 10 years?
MB: Yeah, I mean, obviously, valuations are down compared to where they were a couple years ago. I mean, it depends on the space you're looking at, but in general, especially if you look at something like midstream. You know, earnings really have not changed there, quite a bit over the past few years, really, you know, there's some topics, there's some discussion on, you know, over supply and some basins and how the shifting U.S. production market will impact some pipelines. And especially if you think about, you know, the natural gas pipelines on the midstream side, there's really not really a case of oversupply there.
Outside of a few very remote areas, so valuations there in the market, you're generally maybe paying on the low side, 5x to 6x EBITDA for gathering pipes, you can kind of run that up to maybe like 9x, 10x for, you know, diversified large cap midstream’s, like Kinder Morgan, or, you know, some of the Canadian Plays have actually traded a little bit firmer like you know, and bridges, someone like that around like 10 times. So that's the valuation range for midstream, I think, you know, upstream, you're generally paying closer to like 3x to 5x EBITDA in this market, you know, assuming like, current future strips, like $40 oil. Most of those firms are trading at a discount to NAV. If you look at valuations on what acreage has sold for, really not a lot of activity in recent years, but even discounting that back, or if you do some sort of like cash flow based model, you're definitely getting that as a discount as well.
JM: Yeah. It's very interesting to see when you do those NAV calculations, because I know they're a little bit different than what we talked about, like NAV and shipping, shipping is a little bit more of an active secondary market, but are you looking primarily at acreage comps or do you look at like a PV10 sort of strip?
MB: I do both. I think, there's pros and cons to both. You know, it matters, I think PV10, especially matters when you're thinking about something which might have, you know, a big topic in upstream shale, recently is kind of like the overall quality of acreage. So, how are well results in 2020, you're going to compare it to well results in like 2030 or 2035. So, generally, the view is something like the Permian or you know, the Appalachian, that Gas Plays really have a lot of quality, core acreage where, you know, well results really not going to differ from one to the other, or as, you know, maybe in the back end, or, you know, some of the more niche plays like Powder River Basin, you know, you might do extremely well on one well, and then move, you know, 1,000 feet down the road, and, you know, you see substantially different results. So, I think PV10 kind of like plays into that and how your assumptions kind of on costs and overall recovery throughout the years, but then also acreage, I think, kind of firms, you know, the valuations there, like a firm backstop. So, like, it's always pertinent to see what someone else is willing to pay, you know, a third party market for comparable acreage.
JM: Yes. Certainly makes sense in a volatile and downward trajectory market, like we've had in most of 2020. It's good to see, [a last on] and see that reaffirmed by some other deals on the market. But yeah, I mean, you mentioned I mean, different sectors, different valuations. But I mean, you mentioned 5x to 9x, maybe 10x, on the very high out layer, so call it like [five to nine, six to nine], if you will, for the enterprise value EBITDA and this is a time when the cost of leverage is like record low as well, which is fascinating, right? Because when you talk about multiples, to an EBITDA, that's kind of leverage neutral, if you will. Ito debts, of course, in the total, but the implication would be that, you know, the multiple would be probably a little lower, if your debt costs are really high, right. And the multiple would obviously be a little bit higher. I mean, we were talking about it, just, you know, I don't – I want you to correct me, because you're more the expert in the space, but we were talking about multiples, three, four or five times turns higher on across the board just a few years ago, right? I mean, what was the comp for, say like 2014, 2015?
MB: Yeah, no, if you go back to 2015, you know, people were happy to, you know, take 4% yield on some of these companies that are around at that time, you know, they're paying, you know, 15, 16 you know, in some cases on like growth to your place like 20x EBITDA at the time, and, you know that was when the market was so very accepting of, you know, MLPs in general or unlike the tax savings from a – and that's like the script there, it flipped so much, right.
So, we've seen so much of a move away from the partnership structure and incentive distribution rights, and all of those things. It's, you know, it's interesting to see how investor’s attitudes have changed to, you know, certain setups or governance structures, compared to what they were willing to (sit, except) back in 2015, and actually even encourage, right, because, you know, instead of distribution rights, when we talk about those, those were set up to try and tie the parties together, right?
So investors want a income, they want a growing income, so why not put an IDR in place. So, as you know, income grows, then, you know, the general partner shares the benefits. So, it's very interesting to see how the space has changed and evolved over time and how multiples have been, you know, absolutely, just kind of like crushed in, you know, I'm definitely more of a credit investor guy, you know, I come from a credit background. So, it's very interesting to see, you know, on the bond market side as well, you know, a lot of these firms you know, corporate debt is trading at you know, 3% to 5% indicated yields in a lot of places, you know, for investment grade or maybe just a touch below investment grade debt. And then you see the, you know, the equities on those securities trading, you know, you know, 15%, you know, well-covered yields, right. It's a very, very large gap in between what credit investors are willing to accept and what equity investors are willing to accept. And, you know, in general, creditors tend to have a much longer viewpoint. And if, you know, the big bearish argument for energy in general is a short shelf life then you would think creditors would be especially bearish at this time, but they're not.
JM: It's so weird to see that in the market. And you see companies like – and these are good companies, but they're not the best right? Stuff like Energy Transfer, which, you know, I don't know what your letter grade would be on that. I see them as maybe like a B- or something, but you see companies like Energy Transfer, you know, putting out unsecured, you know, 5, 10 year paper, like 3%. And it's just like, my goodness, and this isn't even like the top shelf company, right. And then you see, you know, in the shipping market, because that's where I'm from, you see these really solid companies like Navigator Holdings, which is a big ethylene, export – ethylene export facility, they're a big LPG transporter, and they have to do unsecured paper at 8%, you know, and their balance sheet is much cleaner than Energy Transfer’s. So, it's exactly what you said, like, the credit markets are fully backing these companies, and the equity markets hate them. Another thing you brought up with the K-1’s is interesting. I don't want to veer off into this too much. We're not tax experts, at least I'm not. But there's so much hatred for the K-1. And it's not. I mean, it's like the scam done by like tax preparer’s, right. I mean, they're not that complex of a forum, unless you have like some weird sort of like, you manage your investments through an LLC stack or something. I mean, I've owned companies with K-1’s for, you know, four or five years. And I probably [indiscernible], but I mean, I do my own taxes, and the K-1 takes five minutes. I think there's only been one K-1, maybe two K-1’s in my life, and there's only five years, but wild and one of them was actually a shipping company. It was TKLG when they did like a conversion. And that K-1 was crazy, because they did like a conversion. So, you had to do all these little, you know, there was like 20 different, you know, forms you had to [indiscernible] different places, but even then, I mean, it was like an hour or two?
MB: No, no, I mean, I do, I still do my own taxes. I don't, you know, actually still do them on paper. I'm weird like that. But, you know, I've never really had any real, you know, problems with K-1’s in general. And, you know, even if I was paying a tax preparer, and maybe they wanted like, $200 per K-1 further, you know, a couple minutes of work, right? I mean, you're seeding, you know, potential income in the 10%, 15%, 20% range, when, you know, your alternatives outside the sector, even if you went to something like, you know, AT&T or something like that, you know, it's a world of difference, if you do the math versus what you're giving up. You know, it just doesn't make sense to avoid it just because of a little extra paperwork, or a little extra money come tax.
JM: Yeah, we'll just leave it there. Because I know, everyone has different opinion, a viewpoint, but there's just, there's just a hatred for them. Everyone, almost everyone I talked to, mostly, I would say, kind of like that upper middle, sort of, like retail investor, I'd say that the person that invest, you know, anywhere from maybe 100,000, to like, maybe 1 million or 2 million, that sort of demographic seems to just despise these things. You know, 2 million north, you got a more of a Professional Tax team going on your stuff, and it's fine. And of course, if you're really, really small investor, it doesn't really, I mean, it doesn't really move them one together. We’ll move from that, but you mentioned sort of the different multiples across the space. So, what are some of your favorite sectors? Which sectors are you saying like this is the time to invest versus what sort of sub sectors are you still avoiding? And you say, you look, yes, it's value, but it's a value trap?
MB: Yeah, I mean, you know midstream is obvious that, you know, I've liked the sector for quite a while, you know, stretching back to like, you know, 2018. I mean, really, that's where like my background in energy comes from and you know, where a lot of my Seeking Alpha coverage started in energy. I'm a cash flow modeling guys so you know, the firm fee-based contracts that really underlies a lot of this stuff is, you know it makes it really easy for me to plug in on my side and kind of, you know, work out some assumptions and really build some cool sweet little models to play with. So, you know, that's definitely a sector I still love. I think it's, you know, had some interesting aspects on the credit side with a, you know, refinancing and stuff like that over the past few years, but still have a lot of love there.
Upstream, I'm actually starting to dabble there, a bit more than I used to. If you think about how upstream kind of treated investors in 2016 to 2018, it was still very much all about, you know, growing the business getting scale, a lot of you know, capital spending. It really wasn't really a lot of value that was left behind to be distributed equity owner. So, that's really not a really a space I really played in, but you know, things obviously change. There's been a lot of balance sheet effort over the past couple years to get them cleaned up. A lot of these companies now through efficiencies they can be, you know, extremely, you know, profitable and actually generate free cash flow even like $40, strip natural gas, I mean, I think you really have to be careful there in the space in general, because I think people tend to think of Henry Hub as, you know, gospel nationwide, and really, invasive pricing has been kind of a little spotty, especially in recent months, but there's a lot of appeal there too. Same thing, where there's, you know, a real big push to actually rewarding shareholders in a meaningful way. And I think, actually, compared to some of like the oil majors, where there's been a lot of topic on whether dividends are sustainable or not, I actually really like the direction they're going towards, I think the push has really been towards variable dividend payments.
So, when times are great, you pay out a little bit more, when times are tough, you kind of like trim it back. And you can kind of retain some to help you get through that period. And I think that's a great viewpoint to have from these management teams, and, you know, in a very cyclical business. So, I think those are probably your two main sectors, I'm really interested in right now. Downstream, you're talking about a lot of refined product inventory right now. And arguably a lot of permanent demand destruction. So, if you look out in the market, today, you're seeing Marathon Petroleum, PBF Energy, Shell, everybody is making a decision to actually, you know, bring a lot of refining capacity offline in the United States, which I think is a necessary step, I think maybe 5% to 10% of that has to go. So, we're probably, you know, 50%, 60% of the way there. And then, once that takes place, then you have to give it a little bit of time for inventories to work, and you know, crack spreads to kind of get back.
You know, there's still some spotty issues and some products like jet fuel. So, I think, you know, the low utilization rates, and that's basically going to take a while to work through, so I think we're maybe several quarters or a year away from where we can really kind of really talk about some upside in the downstream space. And, you know, on the flip side, I'm pretty bearish on another space to really look at would be oilfield services. So, you know, all those good things I really talked about, in upstream, a lot of that's coming from just operators being extremely efficient with how they drill wells, a lot less completions out in the market today, much lower permits being issued than what was in the past. So there's just so much capacity in that market. You're seeing all the big fish in the industry, like Halliburton (HAL) kind of move away from like these capital intensive, you know, completions focused businesses.
So, if you think about something like pressure pumping, or proppant like, you know, you know, the frac sand companies, you know, we've talked about high crush and companies like it before. You know, I think we're years away from that industry actually cutting enough supply to really kind of generate those mid-cycle earnings. So, I think there's still a lot of short opportunities in that space, which I think is, you know, great to have, because, you know, especially in energy, you know, it's always hard to tell where oil or natural gas prices are going to go. So, I always like having a little bit, you know, in my short book, you know, at all times, even I'm pretty favorable on a sector overall. So, I think there's a lot of opportunities in oilfield services to kind of, you know, put on a little short exposure and kind of like balance yourself a little bit. And I think you can actually make money on both sides of those trades so.
JM: It'll be interesting to watch. I've always valued some of the work you've done. If it wasn't bearish, it was at least cautionary. And I think you've had a lot of good reports in the past. I know you've been cautionary on energy transfer for years, just saying that, look, they got some troubles. They got some challenges. Maybe it's not a short, but it's just something to not get excited about.
I think there was a point with energy transfer, where every other day on Seeking Alpha, there was a new article out proclaiming that it was like the buy of the century or something. And so, you know, when there's so much groupthink on one stock, it's risky.
So just so I can sum that up correctly, and tell me if I'm wrong, I heard that you like the midstream’s the most. It's one of your favorite spots. You also think there's opportunity in natural gas upstream type businesses a little bit riskier, but some opportunity there. You do not like sort of the refinery business or downstream stuff. [It has] still some another year at least of headwinds and then oil services. Is that a good summary?
MB: Yes, yes. I think that's a good summary. I mean, you know, ups – you know, downstream, definitely had different, you know, angle to the business where you think about, like, petrochem versus like, actual refined products. But yes, I agree with you. I mean, if you think about, you know, just the refined product space in general, I think it's probably a little too early there so.
JM: So that's very interesting because I know there's a few sort of MLP companies that have a lot of exposures to refineries, which normally, you know, that refinery exposure is like, you know, chemical exposure and pipeline that's like top tier assets. But right now [multiple speakers].
MB: Yes, yes. Definitely. You know, most of those partnerships, they tended to, you know, be very willing to run pretty low coverage ratios. You know, on the distribution, you know, volumes are generally viewed to be intact. You know, I've covered like – PBF Logistics (PBFX), for instance, is one that I've covered recently. So, you know, PBF Energy (PBF) recently shut down an East Coast refinery. So there's, you know, minimum volume commitments that are on certain assets, you know, that they support.
You know, but what happens when you know the refinery is closed? What happens to all those storage assets, the pipeline assets, that kind of thing? And so, is it stranded? Or is there an opportunity to like, you know, pivot the business and just do some third-party storage deals, that kind of things? So, that's what really makes that kind of angle of that space a little bit different than if you're looking at something like, you know, a gathering pipeline or something like energy transfer, right?
JM: Certainly, certainly. Let's throw some meat on the bones here. So for folks listening, what are maybe like two or three of your top ideas or most interested stocks in those spaces that you liked, and maybe like a couple – maybe just one or two of stocks that are either outright shorts as a hedge, or just something that you think is overrated, or sort of a value trap that you'd avoid?
MB: Oh, yes. I mean, like, DCP Midstream, I always like to start with that one. It's been a favorite for a very long time, you know, went down into the twos in March and April, which is where, you know, I kind of like double down that position. And, you know, so I have kind of like, you know, positions across all sorts of different cost bases in that name, but, you know, they've beat earnings consistently, coming off the lows. They've – management team is great and pivoting to what the market wants. So they're actually doing away with distributable cash flow and their reports, everything's free cash flow now, which institutionals love.
I think there's been a fundamental misunderstanding of how they do, you know, they run their business, because they have a really great marketing arm and they actually tend to lease out pipeline space on other parties to flow products. So they’ve made a lot of money on that business. And I think a lot of investors kind of missed how attractive frac spreads were.
So for – if you think about natural gas liquids, right, you know, whether you reject the NGLs or you actually kind of process it and, you know, downstream it for sale. So I think versus Wall Street expectations, DCP is pretty continuously kind of been the biggest gap between my estimates and sell side in general. So that's really where I've had a lot of my investing dollars personally.
On the flip side, if you think about on the oil space, you know, Plains All American is a name I've covered on [indiscernible] before, so it's very, you know, oil focused. But once again, kind of really a misunderstood marketing business, which has really generated a lot of volatility in their EBITDA results in the past quarters, and really is, probably since 2018. But that business is kind of – it's working off a really low base at this point.
You know, looking at guidance next year, there's only $15 million EBITDA attributed to the marketing business. I actually think they can make more than that. That's against, you know, $2,200 million in EBITDA from, you know, their actual kind of core kind of fee-based business.
So if you think about like, their own assets, and like Cushing on the Gulf Coast, kind of like around [Mount Bellevue]. They have assets on the East Coast. They're very, like a hub centric model, so they really own a lot of really great assets that are basically kind of irreplaceable in this market. And if you think about even in a kind of a low production, low volume market, that's where flows are still going to be in place.
Actually, if you comp it against energy transfer, they're actually cheaper on EBITDA going forward. Even after the recent kind of like price dislocation, they put in place a $500 million buyback program, which is the largest authorization as a percentage of market cap in midstream right now. So they've got a great avenue to retire some units, and they've got a really conservative management teams. I think that's great pick.
Just on the short side, since I was kind of talking about oilfield services a little bit earlier, I'm sure RPC. Once again, disclosure wise, everything I've mentioned here, either long or short. RPC is a smaller player in pressure pumping. So basically, they operate the horse power and all the supporting equipment necessary to frac the wells. If you think about fracking, you know, pressure pumping has to be there.
They actually have a great balance sheet, but they trade at a premium to the rest of the space, on EBITDA and on per frac fleet, but they don't really earn better margins than anybody else. They're actually a smaller player, which really doesn't make sense. And if you look at what everyone else is doing around them, if we go back a few years, ProPetro bought pressure pumping assets from Pioneer Natural Resources.
A lot of the upstream players used to own a lot of the pressure pumping stuff themselves. CNJ merged with Keane Group, and then, recently Schlumberger merged its fleet with Liberty Oilfield Services. There's a lot of consolidation going around them. But if you look at their – some of their conference calls, they're very unwilling to kind of put their money to work that they have or put that balance sheet to work and kind of pick up assets on the (cheaps).
You know, I really think they're being too conservative, kind of the whole ostrich in the sand kind of thing and they're just [want to try and wait it out], and I think it's going eventually kind of lead to some downward pressure on their share price. So those are three picks that I think really have a lot of asymmetry to them like going forward into 2021.
JM: Yes, very interesting. So, long DCP, long Plains, PAA, and then, short RPC. RPC is kind of a small – you know, smaller companies smaller market cap, you know, here aside a lot of…
MB: Yes. I don’t think (you know, it's sized) appropriately, it's definitely – I mean, energy in general is volatile, but, you know, I think, you know, it's a percentage of my book, that's probably like, 2%. You know, generally, my shorts, I tend to take like a basket approach (strides), you know, size things in the 1% to 2% range, that's not, you know, advice or anything, but that's just the way I kind of approach the space.
JM: Yes. Is there a way to hedge that? Is there like a liquid options market so you could throw on like a protective call like (multiple speakers)?
MB: Yes, I think you can – I’m pretty sure there are options there, if not. You know, you actually just go long one of its peers, right. So Liberty oil fields, they're actually the largest player in that space now. You know, obviously, they got Schlumberger backing at this point, and they actually trade cheaper. So if you want to [pair trade it], I think that's a great way to do it too as well, if you want to kind of go that route. Or you could kind of, you know, go someplace else in the oilfield services, you know, something like, you know, rod lift or something like that would probably be a good balancing point.
JM: Okay, okay. Yes, that makes sense. I know, it's very interesting that you look at DCP, and, you know, that is where it kind of outlines the value of having an understanding of the sector, like you do, and like you provide in your service. Because you look – yes, their 52-week low was like $2. Of course, that was one day, it was intraday. It was like $4 the next day, but, you know, doubled it overnight, basically. But just as example of how, you know, information asymmetry was back in March, you know, everybody was panicking, everybody was dumping the stocks, and that's a six bagger, right.
MB: Yes, I know.
JM: And it's still not even – it's still very cheap, when you look at like, a five-year average.
MB: No, exactly. I mean, I think where a lot of my offers really come from, you know, looking back the past few years, it's really on kind of like those, you know, real strong troughs in this market, and really kind of picking up stuff for cheap and kind of taking a little bit, you know, off at the peaks. You know, even recently, DCP, and, you know, a lot of my members tend to trade it as well, I mean, it's been – if you look at the chart, it's been great to buy at 10 and sell at 15.
So, there's great ways to kind of like leverage, you know, how these companies are likely to react into earnings and how the outlook is and kind of, you know, trade around them. You know, much like shipping, you know, there's obviously some buy and hold opportunities, and I think you can make great money in energy, you know, just holding, you know, quality companies, you know, throughout, you know, five, 10, 15, 20 years, but there's also a great trading opportunities as well, if you kind of like have a – you know, you can kind of take the technical aspect, and then, kind of have like, a fundamental, you know, backing for what you're doing as well.
JM: Yes. You know, energy is hated and it has had overall a very brutal 2020. But just the – you know, with hindsight, of course. You know, we didn't know this back in March, but just a buying opportunity of a decade there. And, of course, we say that, right, and some of these names are doubled, or tripled. You know, DCP is up six times. But you look at big names, you know, the big kind of bellwethers of the industry, you think of like the Energy Transfer’s (ET) or the Schlumbergers or the Exxons (XOM), and, you know, they're still basically in the same neighborhood. Let's talk real quick Schlumberger (SLB) because you said, you know, like oilfield services, that's kind of the bellwether, right of that (indiscernible).
MB: Right
JM: How do you feel about it? Is that still kind of a value trap? Or is there some interest in a big company like that?
MB: I think there's some interest in like – I really like how they've kind of pivoted, you know, towards – they're definitely kind of going towards a more capital-light business model, more on the services side, some more software, which I think is really going to have a lot of appeal to the prototypical kind of, you know, institutional investor or the market in general, right. You know, everybody loves, you know, software-as-a-services or really capital-light businesses.
I think the question is how much kind of pain and pressure they have to undergo in order to get there, you know, with asset disposals, and, you know, and kind of like, you know, stacking, you know, equipment that really doesn't have much use in this day and age. I think we're maybe like a (year or two) early, in general, on some of the larger names, but I think, you know, contrary to some of what you might think, small cap might lead, and, you know, an upward move or something like that, but I would actually kind of would bias towards large names, you know, as we look out until, like – late 2021 and early 2022.
JM: Yes, it's interesting to see too. And, of course, you reduced your risk, because, you know, Schlumberger is not going to get blown out, or some of those other oilfield services. Yes, you might be batting for like a 4x or 5x or something if you're super bullish, but you could also be looking at a zero, right?
MB: Right.
JM: And the Schlumberger is not going to go to zero. I mean, but it might go down.
MB: Yes.
JM: But it's not that sort of magnitude. Whereas at the same time, if you look into Schlumberger chart and you look at their core earnings potential in a more bullish outcome, you're also still looking multi-baggers, so it's a very interesting sort of setup.
MB: Yes, and I think…
JM: It's very nice to see a company like that, right, with any sort of – usually when you talk about a company like Schlumberger, you're talking about an upside of like, 20%, right? Not much higher.
MB: Right. You definitely have to think about these companies and like a mid-cycle viewpoint. It’s really like any cyclical, right? You can't really look at like how it’s trading today, or how it was trading at the peak of the market. It's really what earnings are going to be, you know, on average over the long term for the business and how that compares against the pricing today. And if – I guess the bigger question is too, like you said, some will go up, some will go to zero, is whether they can survive to that point, right, because, you know, credit markets in general, for energy, are not really a great situation, and, you know, capital can be scarce.
So, you know, definitely large names have a much better potential to kind of get to that mid-cycle earnings, as you see kind of, you know, older equipment for whatever reason either get scrapped or it just becomes outdated or gets taken offline and that's when a lot of that value can accrue, and you can kind of get the margins back up to kind of like a mid-cycle level.
JM: Yes, it's not that much different than shipping in that sort of way, where it's – you got to be really careful looking at, you know, just historical price patterns and such. You really got to understand where the underlying value is at, where the near-term and medium-term earnings potential is at. And there's a lot of, I guess, value trap potential in this space. And there's a lot of stocks that are kind of under the radar as well. So, one more big name, just because it's controversial and a lot of people are talking about it, ExxonMobil, right, what's your viewpoint on them at this point?
MB: I mean, you know, I've always been a little bit skeptical of their dividend policy. You know, I kind of get the management viewpoint, you know, they've always said, you know, we're investors at the bottom of the cycle when – you know, whether it be drilling prices or services, or whatever it makes sense to buy at the bottom, but I think in general, just optics wise, you know, it's always painful to see a company kind of, like, you know, cut headcount or reduce benefits or, you know, abandon otherwise viable production fields, just because, you know, the equity shareholders are draining off a lot of the cash flow underlying it. I don't think there's any reason for them to cut. It's one of those situations where, you know, I might disagree with their policy, but I don't think that's necessarily enough to prop the cut.
You know, probably, if you look out to 2020 to 2023, you get to a point where they're at least, you know, breakeven on where their capital spending is likely to be, and, you know, all their cash obligations. They should at least be able to [try to water] at that point. You know, by comparison, I really like the push from shale plays into variable dividends. I think that makes more sense in this business. You know, I don't think you'll really see ExxonMobil ever kind of moved towards that, but – and I think their integrated model, you know, really kind of protects them from, you know, as much volatility as, you know, something like Diamondback or whatever.
But, you know, I think in general, I think the dividend at, you know, Exxon, the payments just, quite frankly, got stretched a little too far over the years. It's just a tendency, you know, to slowly kind of creep up a dividend and, you know, eventually it gets to be too much of a drag and it kind of got password, it should be. And it's tough to see them kind of lose some of their – you know, the credit rating status that they spent, you know, decades building towards, but, you know, still very high (quality papers), still very much in demand, and, you know, $10 billion, $20 billion, or whatever, they might need to get to 2022 or 2023, where they can at least kind of breakeven, and, you know, I think that's something they can raise and kind of get through just fine.
You know, I'm not personally long, I think, you know, a lot of the international plays, whether it be the European majors, make a lot of sense, especially if you're kind of pessimistic on United States oil production, you know, even for someone like ExxonMobil, if you told management that, you know, we're going to severely restrict your assets in the Permian and elsewhere, but, you know, market-wide pricing, it's going to push up everything, so now Brent's, you know, $80 a barrel whatever, I think they'd probably be happy to take the $80 and the higher margins that comes with it, you know, on their international assets. So, I think it's a great way to diversify if you're a little – like I said a little pessimistic on United States, but, you know, I personally don't have any positions there at the moment.
JM: So, in much less words like "meh."
MB: Yes, no. I mean, it's – you know, it's something where I think I'm definitely kind of counterculture or I think you see a lot of folks kind of very pessimistic on the dividend. You know, I'm always happy to call a dividend cut, you know, that but I don't necessarily don't – I don't really think it's going to happen here.
JM: Yes, so not much fireworks in either direction, just kind of [boring].
MB: Right.
JM: Okay, let's make things more exciting because Exxon was boring. I feel bad for you bringing it up. Look, ALTM, Altus Midstream, my gosh! You know, who would know that, you know, two of my biggest wins this year, and of course, it's been a tough year for me personally, just being honest. But two of my biggest wins would be like these fringy small companies, you know, Navios Container on the shipping side is my largest position. It's been enormous. And then, the second one, it was much smaller position for me, it was, unfortunately, way too small in hindsight, you know, it's always in hindsight, but ALTM and it tripled yesterday off, like, not much of a change in their business, right, just like…
MB: I mean, nothing – that’s a funny thing. It’s nothing really like change, it was just mainly capital allocation right. So I mean, it's a perfect setup for that kind of thing because, you know, for those not familiar with (offers), you know, it was a kind of like an IPO. It came from Apache to kind of support some of their drilling in the Alpine High play, which is like a natural gas angle in the Permian. That didn't play out as a lot of the management hoped it would. Drilling results were a little bit mixed. Costs are really high and basin pricing for natural gas in the Permian, and everybody's just lightened gas on fire in the Permian rather than actually shipping it because, quite frankly, you weren't getting any money for it, you know, (law hub) pricing was zero for a very long time.
You know, Apache still owns 79%, I believe. It was a, you know, broad public with Kayne Anderson. They own 10%, a bunch of other hedge funds on this thing, so really there is very little available float. Still, you know, it's 10% short, so, you know, for those not familiar, they implemented a dividend policy, and they said they're going to pay well. They recommended to the Board to implement a dividend policy, you know, to clarify.
So it’s not a 100% fact that this is going to be the path, yet. They wanted to pay off $6 a year in dividends and stock was at $10, so 60%, you know, indicated yield starting in 2021, so no short – I'm sure really wanted to own that. You know, everyone that wasn't really familiar with the firm suddenly had a lot of interest in something that was paying 60% and then got a stock that was trading, you know, 30,000 shares a day, and then, I think volume yesterday, it was like ($4 million or $5 million), I believe. It could be higher than that, so I mean, it was a great momentum trade.
You know, I had actually owned Altus earlier in the year. I had taken the position off a little bit for [tax-lock] sale, but, you know, I actually bought at the open yesterday. You know, even with it up, you know 70% or so, it’s pretty clear to me, there's a lot of meat left on that bone. So, it was a pretty easy, you know, five figure win for me just on a day trade. You know, for you, I think you had a basis, you know, down in the 10 range as well, so you actually were in there a little bit earlier than me, but, you know, it's a great opportunity.
You know, that's one of those cases where you're really having a lot of expertise and kind of like a niche company, and kind of recognizing when there's going to be a potential for a big win like that and, you know, you don't really see those every day. I'm not going to say that, you know, I know exactly when, you know, there's going to be another Altus right around the corner. But, you know, it only takes a few of those every year to really kind of like, you know, create some big wins for your portfolio so.
JM: Yes, that was just such an exciting stock. And, you know, that the funny thing, like you mentioned – I mean, all the fundamentals, all the value case, everything, nothing changed, right. I mean, it was more or less the same. It was just a matter of like making that policy of a dividend, just a recommendation of a dividend, right [indiscernible].
MB: Right, I mean…
JM: That one thing, you know, woke some folks up. They're like, oh! This is actually, you know, if you take 60% yield, and it's covered by 1.8, that thing was trading at like one times cash flow. I mean, it was just insane. And it's like, you mentioned quality pipes, backed by, you know, very strong firms. But it was just sitting out there, right, and no one really covered it. I think, Climent Molins is actually on the line today, our associate analyst at Value Investors Edge. Here he actually wrote a public article about ALTM, just like two months ago, and, you know, when he put out the public article, you know, it was well written, but I was kind of thinking, well, you're kind of a year early dude.
MB: Yes, I think so.
JM: This guy just like nailed the bottom of it.
MB: Yes, great timing, because if you go back to – I mean, the dividend policy was always going to be a thing, right? So like you said, earnings expectations really haven't changed. So, if you go back to like Q4, they're like, alright, we're going to implement a dividend 2021, maybe 2020. And then, you go forward a quarter, and then it was like, alright, it's going to be 2021. And then, if you go to Q2, and the market was like, you know a big mess. They're like, suddenly the dividend mentioned was, like, erased from like their IR slide deck, right?
So everybody was like, alright, you know, they've got, you know, a decent amount of debt. They have these, like, somewhat [indiscernible] preferred, you know, sitting out there, and maybe they're going to retain that cash, you know, hold it, pay that down, and, you know, maybe this dividend thing is going to be like a 2023, 2024 story, right? So it's a big change to actually kind of flip the switch and go back to, you know, pretty aggressive – you know, I think 1.8 times coverage is actually, you know, probably the normal nowadays, but, you know, going from nothing to $6 of shares is a very massive change and I think it's kind of interesting to see how that stock reacted and in contrast that against, you know, the rest of midstream, which has really been very much.
You know, we're going to lower the distribution, kind of increase coverage, focus on delivering. So, you know, this management team took a very, very aggressive stance in a sector that's really been quite cautious even with all the bullish fundamentals that we've talked about, right? So, it's interesting to see how investors reacted to that. And it's curious to see if that, you know, might actually lead to a little bit of change, or if we do see some dividend hikes from midstream in general, a little bit more aggression since – you know, at least if you look at what the outlook was in Q2 of this year. It's certainly not as bearish as many feared.
So, you know, looking forward, I think there's a lot less risk and you might see management teams willing to actually kind of like increase payouts to shareholders going forward when [indiscernible] necessarily expected.
JM: Yes, it's very interesting. And I think it's obviously way too early to say that was the right move, of course. You know, there's still – even now they're trading at, what is it a 20% yield right now at $30? So I mean, it – and that's an insane yield or so. I mean, it's too early to say there's a right move, but I say, you know, write down ALTM on a piece of paper today, and write down $30, but also again parentheses, you know, write down 10 or 12, because that's kind of where it was before the policy was announced.
And then take a company that is just taking the opposite, you know, spectrum, say, like a company like ET like Energy Transfer, and write down $6, right, and put that on your piece of paper. And then, if you want to throw a shipping comp in there, one that we love to hate, Capital Product Partners, CPLP, just go into complete opposite, just mind boggling, stupid direction, in my opinion, take that company and write down $750 on your piece of paper, and let's come back in a year, right, and let's see, you know, if that helped, right.
Because right now it’s too early. We're just talking about day trades, and, you know, phenomenal trade, by the way, Michael, I actually wanted to grab some of that yesterday morning as well. I, you know, posted that in the chat, but I didn't have any – I had no cash really in my tax free accounts.
MB: Yes.
JM: And, you know, a day trade it's risky and you don’t want to do it on margin. With a stock like ALTM, I'm not going to put that on margin.
MB: Right.
JM: So, I missed out, but congrats on you dude, that was an awesome day trade. I think everyone besides listen to us chat, we could do this all day, but I think people want to know – and I know it's not an easy questions, it’s kind of silly in some ways, but like, what's the next, you know, ALTM? Is there a couple, maybe just like two or three sleepers, that, you know, no promises that they're going to be multi baggers, but have multi bagger potential that are kind of like sleepers that everyone's kind of just like kicked around and forgotten about?
MB: You know, I mean, there's definitely some opportunities out there. I haven't really covered it yet. I'm going to cover CLMT, in the coming, you know, weeks, probably. They've been trying to pitch a sale of refinery, and now, they're kind of like pitching, maybe selling a lubricants business. There's a lot of kind of, like, up and down on what exactly, they're going to – you know, what direction – strategic direction they're going to take. But, you know, the lubricants, you know, does have a lot of value. I think it's undervalued, in general. They put a lot of money into some of their refining businesses that they have.
You know, those businesses are profitable. You know, I think there's some upside optionality there. But, you know, I don't even necessarily think you need to go like too speculative or fringy on some of these things to really see a lot of upside. You know, going back to DCP, you know, that's trading at like, you know, still seven, you know, 7.2 times, you know, EBITDA for next year. You know, this is a company that used should trade at, you know, 10 to 11. So, if you really see a lot of multiple expansion in some of these companies that – you know, I think it'll take off.
Actually, on the upstream side, you know, I own XEC. They're really beaten down. They own a lot of federal land exposure on the New Mexico side of the Permian, so they're kind of split 50/50 between New Mexico and Texas, right. So, if you think about, you know, a potential Biden restriction on leases on the New Mexico side, that might impact – people tend to think that might impact them a lot. It really won't. They have quite a lot of inventory of in hand permits to drill there, if they want to. They have substantial inventory on the Texas side to drill there until some of this – all gets shaken out.
And right now they're trading at a several term discount to EBITDA versus peers. And you know, we haven't really talked about it today, but there's been a lot of upstream consolidation, a lot of pickups from many different companies kind of rolling up a lot of these smaller drillers with really quality acreage. I think XEC makes a lot of sense there for someone to buy. At least for the moment, those purchases have really been kind of like stock-based, but not a lot of premium, but that might change as opportunities kind of dry up. So, I think there's – that’s an upstream play with a lot of great potential as well.
JM: Yes, very interesting. So, you know, on the risk spectrum, I imagine CLMT is kind of the riskiest, XEC is kind of maybe in the middle and DCP is probably one of the least risky, is that fair to say?
MB: Yes, that's a fair assumption to make, yes.
JM: Okay. But even with maybe the companies that are, you know, a lot less risky, like DCP, you know, theoretically there still maybe two to three times upside, if you assume some sort of like reversion to, you know, call it 10x EBITDA multiple?
MB: Yes. There's definitely a lot of – you know, when you – a lot of times, some of us, you know, when we talk about, you know, something revaluing 1, 2, 3 turns on EBITDA, I think it's easy to forget how much leverage especially is on some of these, and this is true in shipping as well, I'm sure, but, you know, in midstream, you know – so, you know, those small moves can have really drastic impacts on the underlying equity price. You know, DCP, you know, if we go back to even before like, 2020, right, you know, this was a stock that was – you know, it's trading, you know, in the 25, 26 range.
So that's a double from here, and if we just get back to where it was, you know, in – you know, in December, right, you know, it seems so long ago in some ways, but, you know, in the grand scheme of things, it's – you know, it's less than 12 months where we were trading, you know, double from where we are now. And fundamentally, the company is posting, you know, record quarterly earnings, you know, quarter-after-quarter. So, I think that's the really special thing, in a lot of these energy companies is, you know, the quality of the earnings and how well they've stood up to arguably the most, you know, disastrous period in their history in many cases.
JM: Yes, for sure. You know, one of the questions we had in the chat, which I think is very relevant, I apologize to Europeans when I said K-1s weren't a big deal, I realized they are a very big deal.
MB: Yes, I was going to caveat international is different.
JM: One of the questions was, you know, what are some of the players that are not partnerships? I think you've already mentioned a lot of them. I think, you know, CLMT, is that a partner? I think that's not a partnership, right? And what about XEC? What about FANG? Are those…
MB: Yes, I mean, those are – you know, Altus actually, you know, 1099 issuing, so that's a great way to kind of, like, play something with a little bit more leverage. But, you know, there's a lot of 1099 options nowadays. You know, I think a lot of folks like Antero Midstream, depending on how they feel about, you know, Antero Resources, that's a 1099. Or you can go really safe into something like, you know, Williams or Enbridge (ENB), you know, Plains. We talked about Plains earlier, you know, they have a 1099 ticker through a PAGP, so you can kind of take that route and kind of avoid the [K-1], and you're not really like, missing out on much because they trade pretty much in parity.
So, definitely, you know, in the midstream space, there’s plenty of 1099 payers that you can kind of like go with, and I don't necessarily think it hurts you. I think Targa Resources would be another that definitely gets mentioned on [VIE] quite a lot. So definitely, more than a few ways to play it. You know, if you want to – really want to avoid the [K-1s], you know, for whatever reason including, you know, international investors, which definitely have more than a few reasons to avoid them.
JM: Yes, certainly makes sense. I think PAGP is especially interesting because of the conviction, right, you have on the overall business there. And it's – you're just buying basically the K-1 firm minus the K-1, that's all that is.
MB: Yes, yes. It's a – you know, for an American investor, it's whether they want the tax benefit, or you know, what structure they want, but, you know, for investors, like, you know, internationally, it's a great way to get into it without that, you know, or someone on the institutional side that just really wants to avoid K-1s, you know, for like, whatever reason, whether that be like structural in a fund or what not.
JM: Absolutely. Well, we're coming to the close here, but I think one of the questions that was posted in the chat is just a great way to kind of – you know, sort of like in this conversation, the way we began sort of a big picture view on the sector. You know, the question is basically asking about this huge divestment wave that we're kind of in the middle of right against the oil and gas sector. I think Jim Cramer said about a year ago that big oil is big tobacco, right. He made that analogy and we're seeing that happen that all these large funds, whether they're sovereign funds or hedge funds, they're pulling out of oil and gas left and right.
And as – you know, as mentioned by the person who made the question, look, we're nowhere near the end of this wave. I mean, I don't know where we're at, you know, if we're [threatening] but we're somewhere in the middle of it. You know, if we believe that it was going to be higher, which I think that's a whole another discussion, but if we believe that oil is going to be higher once COVID is done, which again, different belief, but if we believe that is it better to just go long oil and go long futures or some sort of like instrument there versus like the pain and frustration and agony of like buying these EMP companies? How do you look at that? Do you consider maybe just buying the commodity? Or do you view the companies themselves more interesting?
MB: I mean, I – the way I tend to, you know, approach upstream is, you know, I have – you know, I don't believe I have a material advantage in being able to protect, whether oil is going to go up, down, sideways, or wherever it might be. So, I tend to kind of price these, you know, based on models, if they're trading at a discount (on future strip), right. So, if I'm in something like XEC, and I'm looking at the quality of their acreage and the cash flow, it's going to throw out, you know, at an appropriate discount rate, whatever I might assign, which, you know, these days, in energy tends to be like, between 10% to, you know, 12%.
You know, is the future flows that they're going to present, you know, better than what I might get in oil, and, you know, for me to take a stake, the answer is always yes. So, you know, for me, personally, I don't really tend to play in the upstream side or on the actual commodities or future side. But, you know, thank you for [worry] about the divestment wave. You know, it's a very relevant topic. I think, at the end of the day, there will – you know, obviously, the pool will be smaller, but, you know, there's going to be a certain subset whether it be, you know, hedge funds or retail investors or whomever that's going to be willing, you know, to kind of take a step there and, you know, take on that kind of like a anti kind of consensus view.
But broadly too, I think we can have a discussion, and we talked about this, you know, in the panel for traders for a cause, right, you know, the ESG and its industry, right, so you're seeing a lot of these companies – you know, Enbridge has a pretty strong renewable side of their business. If you're starting to see Williams or various upstream companies start to use, you know, solar out in the field to kind of reduce energy costs, you know, a lot of these companies are starting out – putting out some great presentations talking about reducing methane emissions or how their businesses, you know, flare less gas versus peers.
And I think those are steps that, you know, the industry can take. I think that can eventually, you know, work its way into lowering back some of the capital that's been lost, or at least do a better job relative to, you know, the rest of the industry and how outflows are going to be. So, you know, I think there's opportunities there regardless, and I think there's, you know, different ways to approach it whether you think, you know, if it's going to be like tobacco, and, you know, or since stocks in general, where some investors just won't touch it.
But a lot of these stocks still perform, you know, great from – you know, if you look at the back end from likes the 90s, you know, to today or whatever. Or if you take it from the viewpoint that these companies are going to actually going to take some steps to actually mitigate some of the, you know, the ESG kind of risks to their business, I think oil and gas in general, has been very slow to respond to that. But I actually think they've kind of learned their lesson a little bit, and they're actually putting forth some pretty solid effort, I think, in actually responding to investor, you know, cares and needs, you know, beyond just, you know, numbers based return on invested capital or something like that. They're actually, you know, broaching some of these topics.
JM: Yes, it's very interesting. And that really is like the question to ask, right. I mean, we kind of just put it in there at the end. But, you know, the next question, you kind of hit the next question, but the next question is, like is there even an investable future in the space? And I think the big tobacco parallel is so interesting because, you know, regulation – there's this multi-billion dollar lawsuit, right, with like a 15, 20-year tail payout and people were saying that was the death of tobacco, this was in the mid-90s. And it turned out to be like one of the best things that ever happened to that industry because it just bankrupt and drove out every little French player in the tobacco space. The regulators and tobacco were almost like partners, in a sick way.
MB: Right.
JM: They were like raising taxes, and like. So it actually turned, I think, I don't have the number right in front of me, but I think from like, 1995 to 2010, that 15-year period, maybe even 2015, call it 20 years, I think tobacco even outperformed Apple. I mean, it was just insane. So, you know, some of these things in energy, if you think about regulators coming in heavy handed, there's not going to be any new pipelines, or at least a (indiscernible) ones, right. There's not going to be a lot of new supply.
A lot of those things in a weird way are actually bullish, right, for the pipes that already exist, and for the fields that are already being exploited. And so, we don't know how it's going to play out. But I think the tobacco analogy is so often used to like, you know, ridicule people who want to invest in energy. And if you actually study the numbers, tobacco was like a fantastic investment in 1995.
MB: Right. And that's why we focus so much on yield, right, because, you know, in the grand scheme of things, if you're buying something, you know, 20%, 30% yield, right, you're getting your cost back in, you know, three to five years, give or take, right, you know, assuming no changes to the payout, right. So, I mean, obviously there's opportunity costs for that. You know, what if I invested in tech? What if I invested in, you know, Apple or something instead? But you know, that's a decent, you know, backstop, right, you know, compared to, you know, 2016 if we're having discussions where, you know, upstream energy was – unless you were like Exxon, you were paying like nothing, right?
So there's there was no even like, promise of, you know, cash to, you know, to an equity investor who is just, you know, hopefully selling the share to someone down the road at a higher price. At least in these cases, especially midstream, starting to be so on upstream and other areas of the market, you know, you're getting those cash flows, you know, the money's flowing into your, you know, investment account, you know, on a quarterly basis, and, you know, whether you want to reinvest that in midstream or maybe that's just your cash flow that you dedicate to tech or some other sector that – you know, you just need to treat these as like a – you know, almost like, you know, like a buffet algae and, you know, like the cigar butt kind of viewpoint here and, you know, whether the residual value as, you know, if you think oil and gases, you know, on its way out the door, you know, if it's going to happen in 2035, 2050?
Is this – you know, everyone is just way too bullish on the energy and it's going to be further down the road, you just have to have your own assumptions on know how long that will take and how these businesses are going to be impacted and what capital would might be returned to you over that period of time and weigh that against what you could have gotten in, you know, in the market, you know, which, you know, obviously is trading at, you know, pretty crazy valuations at the moment.
JM: Absolutely.
MB: You know, it's that – the same thing with energy is the relative valuation of the sector today, you know, it's cheaper than 2016. Whereas the rest of the market, you know, if you look at something like, you know, tech or Apple or whatever, you know, Apple was a great buy in 2016. Was it a great buy in 2020? That's the question.
JM: Yes, absolutely. Yes, that the market is basically saying that energy is dead in like 2030. And if you believe its 2040 or 2050, it's going to be a great investment. If it's 2030 or sooner, then yes, the markets probably closer to correct on this one.
Michael, we reached the end of our time, but I want to give you the opportunity – since we're hosting this on Value Investor’s Edge, I want to give you the opportunity as well, to just talk about your service for a minute, and how folks can get a hold of you there and what sort of stuff that you provide specifically on that service.
MB: Yes, sure. I mean, you know, Energy Income Authority, you know, started as a midstream focused service. We've kind of, you know, expanded coverage out to upstream. You know, and also any picks outside of the energy space that I find appealing, I throw those in there, too. So, you know, the stocks, bonds preferred, you know, wherever my, you know, investing mind takes me, you know, I definitely share that with everyone.
A big focus for me, within the service is making sure that, you know, Number 1 thing is not getting into a situation where you investing in poor companies, bad companies, you know, any situation where you're going to eat a massive loss. You know, my focus has always been risk management. And, you know, to a point too, on the subscription side of business, I [plow] a lot of the money back into the business, so there's a lot of data that I provide on permits, completions that I think, you know, a lot of investors have a lot of interest in.
So if you want to see how many wells, you know, ExxonMobil drilled in the Permian in 2018, I've got that data for you. If you want to see what permits they go buy for this year, I've got that too, provide a lot of really great tracking tools and services, you know, a lot of investors really enjoy using. You know, I have a midstream energy tracker that has, you know, 40 or 50 firms on it at this points to compare really try to kind of, you know, taking a page out of (J’s) book and, you know, on his tracking and tools, you know, a lot of the – you know, some investors tend to be very, you know, chart and graphic focused or really like playing with spreadsheets, so I try to make them happy, you know, as well beyond just, you know, the prototypical kind of like, you know, stock write up or whatever.
So, I think – you know, I like to think I provide a lot of value. And, you know, I think members seem to really – you know, really enjoy the service. It's, you know, since I've pivoted to energy, you know, this point last year, and you know, I have four times the members that I did then. So, definitely trying to continue to grow and I'd be happy to have more folks on board with me.
JM: Absolutely. Thank you, Michael. Appreciate you joining us and apologies for running a little bit long, but I think there's good value in this conversation.
Just again, for disclosures, Mike already mentioned pretty much all the stocks that he's long and short, respectively. I have a long position in several of these names. I think the names that we discussed most was ALTM, Altus Midstream, a long position there. Energy Transfer, Plains All American and Exxon would be the – I think the big ones that I have long position in. Michael, anything to add on disclosure basis?
MB: That looks like – I mean, I'm long DCP as well. Other firms that we might have mentioned, I think that was it. And I'm short RPC. So, I think that covers the basis on our book.
JM: Alright, fantastic. Thank you everyone for listening in.
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