Thursday, June 22, 2023

"Hubbert's Peak is Finally Here"

We really like Goehring & Rozencwajg's quarterly commentaries on energy and natural resources. Here are a few highlights from their second quarter commentary titled "Hubbert's Peak is Finally Here":

  • The most crucial development in global oil markets is depletion in the Permian basin. We first warned about this in 2018, predicting the Permian would peak in 2025. In retrospect, our analysis was too conservative. We now believe the basin could peak within the next twelve months. The implications will be as profound as when United States oil production peaked in 1970, starting a chain of events ultimately sending prices up five-fold over ten years. If we are correct, this could not come at a worse time for oil markets: inventories are tight, production in the rest of the world is declining, and investors are incredibly complacent.
  • The trends first outlined in our 1Q22 essay, “The Gas Crisis is Coming to America,” are still all in place; the exceptionally warm weather has simply pushed them out. Even with warm weather, 100% of the storage surplus occurring over the last eight months can be attributed to the fire at the Freeport LNG facility in June last year, which took offline two bcf/d of export capacity. Freeport is again operational, and with the Marcellus gas fields plateauing and six bcf of additional LNG capacity coming on stream in 2024, we believe North American natural gas convergence with international prices could happen much faster than anyone expects.
  • Given its “pariah” status, no industry has been more capital starved than coal over the last ten years. As the structural deficit in global natural gas comes to the fore, coal prices should again become price leaders as this decade progresses. We have just started an enormous commodity bull market, similar to the commodity bull markets of 1929-1941, 1968-1980, and 1999-2011. In each of those bull markets, coal equities were the best-performing sector from trough to peak. Given underlying fundamentals, depressed valuations, and a complete lack of institutional interest, we believe coal equities could again become the best-performing equity group when this bull market is over.

Goehring & Rozencwajg manage a mutual fund (GRHIX/GRHAX) with a little over $200 million in assets. The fund owns oil and gas E&Ps (32%), uranium miners (15%), gold miners (13%), copper miners (12%), agricultural companies (12%), coal producers (6%), offshore services (6%), and other oil services (4%). The biggest position is in Range Resources (7%), followed by Cameco (uranium; 4.4%) and Pioneer (E&P; 4%).

If you look at our Shale Treadmill scatterplot, Range Resources is almost all (98%) natural gas and had 39% year-over-year capex growth (Q1 2022 to Q1 2023) resulting in a 3.5% increase in total BOEs produced. Pioneer is evenly split between oil and gas and their y/y capex was down 8% yet BOEs were up 7% - a very favorable result.

It is surprising that G&R do not seem to own any royalty companies (or coal or metals royalties), nor any Canadian oil or deepwater oil producers. They are very bullish on commodities and energy prices but they have a very different approach to constructing their portfolio.


PdxSag said...

See that a lot, fund manager's investments being curiously sub-optimal compared to their proclaimed investment thesis.

Einhorn's Green Light doesn't match his all that closely (IMHO).

Only reason I can think of is that they get stuck in legacy positions and have a tough time extracting themselves, ie. the difference between 6-7 figure AUM and 9-10 figure AUM. 8 and chill seems to be the sweet spot.

CP said...

The mutual fund is charging 1.25% on the retail class. It was up 62% in 2021 but only 16% in 2022. Over the past five years it has done 5.1% per year.

They are very bullish natural gas but our shale treadmill thesis implies that shale wells are going to keep getting gassier.

They will need lots of LNG export to get good prices for their gas. They better hope that the Freeport LNG fire was a one-time accident! (They must not be conspiracybros...)