I love international real estate. But I am not all-in international real estate. I also have other types of investments, including equities.
Why? I like to be diversified not only across countries, but across asset classes as well. And some global trends are best played through the equities markets rather than real estate.
I’ve been talking about oil on this blog and channel since early 2021. And indeed, the results have been phenomenal if invested in the right stocks. Last year I did an episode on Colombia’s Ecopetrol. I initially bought the equivalent of a small car, but as the price of the stock when down I up-sized 5x and now have the equivalent of a small apartment in this stock which this year will give me a 20% dividend yield.
I had also invested quite a decent amount in Russian oil & gas stocks prior to the war. Needless to say, this did not turn out too well for me.
The point I am making is that people should be diversified. In the above video, I interview John to understand why he is heavily invested in oil stocks and how he is playing the market.
A volatile ride
Oil is very volatile. It’s not like real estate. You can’t just sit back and not monitor your portfolio closely, and you need to be ready to dump your positions. It’s a very different way of investing.
I’ve been following John for over 3 years and enjoy his Youtube channel. You can also sign up to his free mailing list on his website.
As for buying oil equities, my favourite broker is IB.
To a World of Opportunities,
The Wandering Investor.
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If you want to discuss your internationalization and diversification plans, book a consulting session or send me an email.
Transcript of “Why John Polomny is investing in Oil related stocks”
LADISLAS MAURICE: Hello, everyone. Ladislas Maurice from thewanderinginvestor.com. So today, we’ll be talking with John Polomny. John is someone that I’ve been following on YouTube for close to three years. I’ve really enjoyed following his weekly updates that he posts, religiously, every Saturday with a core focus on, how would you call it, John, on opportunities with potential asymmetric returns?
JOHN: Pretty much, yep.
LADISLAS MAURICE: So John, you’ve been hammering on about the oil market for the past three years. And everyone else in mainstream media is saying that oil is dead, ESG, there’s the Green Revolution, we’ll all be using solar and wind power, there’s no need for oil, etc., etc. And you’ve been saying, “No, that’s not true.” And for the past three years, essentially, the results of people who have been investing in oil equities have been really good.
Thesis
LADISLAS MAURICE: So, one, what is your thesis, John? And, two, you can answer that later, what do you think, because prices have gone up quite a bit now, they’re back to $90 a barrel, is there still upside?
JOHN: So basically, to keep it simple, oil is the lifeblood of industrial economies. I’m not going to get into all the uses, people can do their homework on that. It’s not just a transportation fuel, it’s a feedstock for many, many things that we use. And it has very good properties that allow it to be useful to us. As a matter of fact, the exploitation of oil that started basically in the late 1800s and up till now has allowed the massive wealth creation that’s happened in the world, the extension of longevity of life, and wealth creation. So, oil is basically the feedstock for civilization.
And I have been in the energy industry as my career for my entire life. When we had these conversations, especially during the pandemic when oil demand dropped after the lockdowns, people were running around saying, “This is the end of oil, see the opportunity, we can finally get rid of oil.” And it struck me that even with the world completely, basically, locked down, the demand for oil only dropped about 12% to 15%. And that really was a two-by-four upside my head and made me realize how necessary oil and energy overall is into an economy, into a society.
And so doing further research it became apparent, I think people may recall, like, when oil price dropped, there was a headline, -$47 a barrel, I think people remember that headline. And this was like the biggest layup in the entire world. So the ability to buy just oil producers, even well-run oil producers. I mean, as long as you understood that oil wasn’t going away, it was basically the biggest layup of all time. So that was kind of like the first manifestation of it. And as I’ve read more, as I’ve researched more, as I’ve talked to other folks that have the same type of views on things, that are far more intelligent than I am, and have written extensively on this, I realized that oil is what I said it is earlier, basically, the lubricant, the enabler of civilization.
So, then I started realizing that this is an extractive industry, and it’s difficult and expensive and time-consuming to continuously produce what you’ve extracted. If you don’t replace what you’ve extracted, you eventually will go out of business. And so as I delved down that road, other areas of potential opportunity began to manifest. So that’s basically, the long story short is we’ve had a tremendous underinvestment of oil, in oil, replacing oil reserves, you can look on various charts like BP’s annual energy review. And we haven’t replaced, worldwide, what we’ve been using. And so at some point, this is going to be a problem.
You couple that with the current zeitgeist, especially in the West, that is, basically, I call it at war, governments in the West at war via ESG and some of these other ideas around climate change and are at war with oil or are doing everything they can to limit its availability and exploitation. I think that this all comes together for higher prices over the next several years. And so we can get into it more in depth, but that’s my basic thesis around oil and energy in general.
LADISLAS MAURICE: A big red flag, I remember, was seeing when you had BP changing their names to Beyond Petroleum, and investing a lot of CAPEX into wind, and solar, all of these things, and just almost overtly abandoning oil and calling oil evil. And that’s when you kind of knew that there would potentially be a supply issue down the line when you have the majors behaving this way.
JOHN: Exactly.
LADISLAS MAURICE: And all of the funds as well, all these funds, pension funds that were moving away from oil investments, saying that it’s not ESG, etc. So on the one hand, you had these companies that were essentially restricting future supply of oil and, at the same time, you had all the investment funds that were selling their oil stocks. So not only were oil stocks cheaper, but the potential upside for pricing was even better for companies that were still producing and that still continue to do exploration and the like. So that looked very interesting when I saw this.
Investing
LADISLAS MAURICE: So how do you play it? Because, typically, people just go and buy whatever, BP or Shell, how do you play it? What do you feel are some of the different ways that people could play that are better than playing it the traditional way?
JOHN: So as I stated earlier, I mean, yes, you can be conservative and buy the big producers, but as you said at the introduction, we’re looking for asymmetric opportunities. We’re trying to turn $1 into $10, not $10 into $11. So what I understood was the underinvestment that had happened for many, many years, which I don’t want to get too far into in the overall non-OPEC, non-shale, there was tremendous amount of drops in investment, basically, for reasons that you stated. And the growth in shale in the United States, basically, sucked all the oxygen out of the room. I mean, it was a tremendous, over the last 10, 15 years in the United States, everybody is well aware of the shale revolution and the increase in production from about 5 million barrels a day up above 12 million barrels a day in the US.
What’s interesting to note is that is now looks like it might be peaking. Two of the three major fields, the Eagle Ford and the Bakken, have peaked. These are not unlimited supplies, as people should understand. And the last major field in West Texas, the Permian shale fields, they are forecasted to peak in production in the next year to 18 months to two years. So if people are interested, they can go online and read like Goehring and Rozencwajg, they’re resource investors, they publish quarterly reports, they do a lot of writing 40-page reports on a lot of this type stuff. So people can find that interesting.
Getting back to your question, though, the ability to find and exploit oil offshore was neglected for many years. And so the industry there, I’m talking about the companies that supply rigs, services, equipment, supply vessels, this because of the investment being basically shuttled to onshore in quick cycle projects in shale, this industry was ignored. There’s a tremendous amount of oil offshore, but the industry that was built around it to find and extract it basically atrophied, it went basically through the biggest probably depression over the last five or six years that it ever saw. And so a lot of companies went out of business, a lot of equipment was scrapped or cold stacked, never to come back into service, and a lot of people left the industry.
So now what has happened is there’s been a tremendous amount of interest now shifted back to offshore. And final investment decisions, investment in offshore, people may be familiar with some of the stuff that’s happening in offshore Guyana and some of these places where there’s a tremendous amount of activity. There’s not enough equipment, rigs, boats, because of the, as I stated earlier, the previous depression we had in the industry. And so as this investment increases in offshore, there’s not enough equipment. So it’s a supply-demand situation. And so that’s where I’m finding the majority of the asymmetric returns. This way, I think, it’s easier to make money in the energy market knowing that investment’s going to increase and the ability to supply the rigs, the equipment, and services is going to fall short for some period of time.
And what we’re already seeing is a massive recovery in day rates for rigs, boats, equipment. People can go on and look at the major providers of these services that trade on the NYSE, go through their quarterly reports, listen to there’s tremendous amount of optimism, and we’re seeing the results come through. So you’re seeing a lot of cash flow earnings and, consequently, stock prices have moved quite a bit in a lot of the stocks. And so I think there’s tremendous opportunity there. It helps you get away from the commodity price that you’re supposed to by buying just a producer of oil. Because when they do these projects, or long-term projects, they usually work, large oil companies like Exxon or Shell, they’re having offshore projects that work at $40 a barrel.
So unless we see oil drop to $40 a barrel, under $50 a barrel and stay there for a long period of time, then I suspect that there’ll be, we’re in an upcycle in offshore services. So that’s where my focus is right now. I do have some smaller producers, speculative names, but that’s the focus from my oil and gas investment, is the service providers offshore.
Supply and Demand
LADISLAS MAURICE: Yeah, and people need to understand that the service providers, there isn’t going to be supply coming around the corner. It takes expertise and a lot of time to be able to build these rigs, to build all these specialized boats, etc. You don’t just do that in like a year. Even just finding the talent to build these boats and these rigs is complicated nowadays.
JOHN: Let me just say one vignette that I find humorous, but it sums it up. The CEO of Seadrill, which is one of the major offshore rig providers, he said, in a recent commentary, that they keep a baseball bat in the boardroom, and if anybody walks in there and talks about building a rig, they’re going to hit him in the head with it. I mean, there’s just no appetite to do that. And it goes back to what you said before, this is why the opportunity, these cycles typically killed themselves in the past because rates would rise. And it’s economics, right, supply and demand, rates rise. So what would they do? Go out and build more rigs to capture that increased revenue. But like you said, there’s no appetite for that now. With the governments fighting against you, you can’t get a slot in a Chinese shipyard, or Korean yard, the banks won’t finance it.
And so it’s almost a situation where you have, I don’t want to say it’s a moat because I think rates will get high enough where they’ll eventually start doing this, but that’s years down the road, three to five years down the road, but you have this tremendous opportunity over the next 36 to 48 months, three to four or five years, where this looks to be a tremendous amount of cash flow coming out. I mean, you’re reaching close to now rig rate day rates that were getting close to the previous highs in the cycle in 2014. So it’s a tremendous opportunity. And I think you said it exactly right, the previous cycle killers of going out and building more equipment isn’t going to happen.
Renewables
LADISLAS MAURICE: Yeah. And I like your newsletter. I’ve subscribed to it since 2020. And it gives very interesting names in terms of companies that you, personally, I wouldn’t say invest in but rather speculate in. I mean, your portfolio is more of a speculation than an investment. Let me go on a little tangent here. You work in offshore wind farms, correct, or onshore wind farms?
JOHN: No, I was in the utility industry running and building all types of plants, and then I got into renewables. When I worked at a major utility, I was shuttled into renewables because that’s what they wanted to get into. So I do, basically, project management, construction management of wind farms and large solar farms. So I have intimate knowledge of this whole industry. And this is another thing that, I think, gives me a unique perspective how I just knew it wasn’t going to supplant the traditional, you know, this idea that we’re going to run the United States, we need trillions, quadrillions of BTUs of inputs to run these industrial economies with intermittent solar and wind. It’s farcical. And I think that really gave me a quick start of it. It was it’s never going to happen, it will not happen, it cannot happen. It’s the second law of thermodynamics, it’s just not. And people don’t understand this. So, yeah.
LADISLAS MAURICE: I’ve met quite a few people building wind farms, and I haven’t met a single person that thought it made any economic sense.
JOHN: There you go. I’m of this perspective. People will say, “Well, you’re a hypocrite, John.” I said, “Well, no, I’m not. I’m a construction and project manager. If you, as an EPC, want to hire me to supervise the building of ice machines in Antarctica, I’m happy to do it if you pay me.” I mean, that’s how I look at it. So it’s very lucrative and that’s it. [laughs]
LADISLAS MAURICE: [laughs] Fair enough. Cool. So I really recommend that people sign up to John’s free newsletter. So you send out a free newsletter every week, approximately, right? There’s also a paid version. Personally, I pay for the paid version, but the free one is very good as well. So there is a link below, you can sign up for it, and then also a link to John’s YouTube channel. John, thank you very much for your time today.
JOHN: Perfect. Thank you.
