Author: Josh Snyder, CFA
Active growth managers need to embrace energy in their portfolios, argues Josh Snyder, CFA, Global Investment Strategist, GQG Partners.'And Lord, we are especially thankful for nuclear power, the cleanest, safest energy source there is... except for solar which is just a pipe dream. Anyway, we'd like to thank you for the occasional moments of peace and love our family's experienced. Well, not today. You saw what happened. Oh, Lord, be honest, are we the most pathetic family in the universe or what?'
- Homer Simpson, The Simpsons, November 1990
The energy sector was the best performing sector in the S&P 500, with a cumulative return through November 30, 2022 of more than 65%. Despite this, it appears the space couldn’t be further from a “consensus long”. In fact, out of 269 US large cap growth managers reporting sector data in the eVestment database through the end of Q3 2022, the median exposure to the energy sector was a paltry 116 basis points. In the same way that missing technology was the Achilles Heel for many value managers during 2020, energy seems to have played that role for the vast majority of growth managers throughout 2022.
Why should this be the case? Shouldn’t active managers be just that – active! The current energy cohort today is not the same group of companies pumping in tens of billions of dollars in CapEx at the peak of the last cycle. Quite the contrary. What makes this space so attractive, in our view, is that they are growing, they’re just not growing production this time around but rather free cash flow and EPS growth.
Contrast is a key tenet. In the long-only equity space, we think it’s important that we relate stocks/sectors to one another, which we believe is really the only way to determine what areas are more favorable prospectively. GQG Partners is a growth investor, but our lens of growth is rooted in the compounding potential of a company’s earnings, not simply high revenue or high earnings growth hurdles.
Now, in keeping with these contrasting views, quoting Homer Simpson on the subject of energy instead of say, Nobel laureate Murray Gell-Mann, is something of a contrast from the standard fare from an asset manager. It seems like an eternity ago, more than 30 years from Homer’s quote, that prime time television (the Simpsons is the longest running prime time show in the United States of all-time) was touting the positive aspects of nuclear energy while longing for the development of proper solar power.
More importantly, over the last 30 plus years, we’ve seen incredible advances across the broad spectrum of energy sources, both in hydrocarbons and renewables. However, over the same time frame, while the technology has advanced, sadly, the dialogue in the public domain around specific energy sources and their merits has devolved. For example, BP is considering ceasing the publication of its 70-year-old “Statistical Review of World Energy”. How losing this treasure trove of data and graphics for one of the planet’s most valuable resources helps anyone, is difficult to understand in our view.
It's important not to shy away from areas that may be helpful from an insights perspective, say BP’s data, despite the fact that the current zeitgeist rarely paints the traditional energy sector generally and many of its companies more specifically, in a positive light. And in 2022, for one’s portfolio to avoid Homer’s lament about his family’s plight above, it would have been quite difficult to do, in absence of short sales, without owning the most unloved of sectors – energy.
In our view, commodity cycles are won and lost based on unanticipated supply. As Exhibit 1 illustrates, from a supply dynamic, upstream oil and gas capex at the end of 2021 fell by nearly 55% since the peak of the last cycle (2014), with the total spend in the four years 2012-2015 ($2788bn) exceeding the total in the succeeding six years (2016-2021) ($2508bn) by over 11%. Further, this sector’s CapEx is not projected to move much higher through 2025.
Exhibit 1: Upstream Oil & Gas CapEx (2012 – 2021)
With this renewed capital discipline and focus on core assets, we now find ourselves in a setup where, as Exhibit 2 shows, the largest US oil major by market capitalisation, operating in the universe, a very capital-intensive area, is delivering higher trailing 12 month (TTM) returns on equity, than the largest US social media company operating in the metaverse!
Exhibit 2: Metaverse vs. Universe – TTM Returns on Equity (2017 – 2022)
While we prefer old episodes of the Simpsons to current ones, we certainly prefer the discipline of the current crop of energy companies to the prior ones. Those managers who lack energy may find themselves not only having a hard time getting out of bed, but they may also have a difficult time navigating the road ahead. In short, you can’t be active if you’re out of energy!