A Capital Return Story
Watchlist Idea: a unique O&G spin-off focused on capital allocation & returns.
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In this issue of the newsletter I set out the investment case for another watchlist idea that I believe is close to being actionable.
The subject company is a recent spin-off situation in the oil & gas sector with a differentiated business model relative to peers, being focused on capital allocation rather than simply growing production and is managed with a strong owner mindset.
Additionally, this stock offers a a maintainable ~8.5% dividend yield at current oil prices, and as such can be viewed as a high-yield, inflation-linked energy bond with a free option on renewed oil price inflation.
Despite renewed talk of peak oil approaching later this decade amid the expected shift to clean energy sources, I’m not convinced that demand for oil will materially weaken anytime soon - since 2004, the world has invested a cumulative total of $6.7 trillion in the energy transition, yet in that time oil’s share of primary energy globally has only declined from ~37% in 2004 to ~31%. Furthermore, oil is an essential feedstock for the industrial sector, used to make plastics, polyurethane, solvents, and hundreds of other intermediate and end-user goods. As such, I believe the outlook for the price of oil remains positive over the medium term at least; in this regard I believe seeking some exposure to the O&G sector is prudent, and I’m reminded of a Warren Buffett quote about oil in this context:
“I mean, just try doing without 11 million barrels a day and see what happens tomorrow.”
And now onto my new watchlist idea …