David Heikkinen, CEO of Houston Pickering Energy Partners’ Asset Management, advises investors on oil and gas companies for decades, having worked as an engineer at Royal Dutch Shell early in his career. Heikkinen thinks oil and gas companies are at a turning point in energy transition, and he That current trends will be profitable for companies focusing on both old and new forms of energy.He spoke with Of the closet Recently on where to find opportunities. Below is an edited version of the call.
Of the closet: The transition to cleaner energy puts pressure on oil and gas companies. But a shortage of certain goods raises energy prices. Is it a moment to buy oil and gas stocks?
David Haykenen: What investors get with these stocks is a large return on cash.
Pioneer of Natural Resources
[PXD] Pay varying dividends;
[COP] Makes record amount of repurchases of shares. This is a real wave of cash returns. You do not really have investors who only enter the space for a long time. Value investors have seen the stock rise almost 100% and are probably thinking, “Should I sell?” But stocks have become cheaper, as commodities have risen faster than stocks. Investors need to reap the rewards. But they are not, and they are not really involved and involved in the energy space.
So, should they go in now, even after these huge moves?
We see stocks that can double more than double, just based on the returns in their free cash flow over the next three years. There are some gas stocks like
[EQT] Compatible with the account, especially in light of the fact that their balance sheets have been revised over the last 18 months. It’s wild to think that Entro was a stock of 70 cents, and now it’s $ 20 and we still recommend it. But these things can double themselves. One other name is
[CTRA], Created by the merger of Cimarex and Cabot. It has the same potential.
Do you also see oil names with such potential?
We see some stocks that can rise by 50%.
[FANG] Suitable for description. Pioneer and Devon can have an upside of 30% to 50% just on next year’s numbers. These are companies with significant market capitalization. There are smaller companies like
[TALO] That they are a decrease in liquidity and a decrease in market value that are going to make multipliers, like these gas stocks.
Will oil hold $ 80 a barrel, hence its price increase?
We went back to promoting Cubid [price] Levels without seeing the demand for jet fuel return yet. With inventory levels where they are now, with supply recovery and supply discipline, I think we are holding on to these levels, without any destruction of demand. Supply chain issues will be the main thing to expect. They may cause oil prices to not continue to rise. You see the backup in the supply chain leading to the bottlenecks. Every time you hear of a ship not sailing, or a train not moving, or a truck not moving, it requires the destruction of hydrocarbons.
When you are in a commodity crisis, there is always over-repair on the other side at some point. And sometime in the back half of next year, U.S. manufacturers will fix their balance sheets completely. We had 18 months of returning cash to shareholders. The world, President Joe Biden, Congress and the general public will call on the U.S. to produce more oil, natural gas, propane And natural gas liquids in 2022. The problem is that investors want U.S. manufacturers to return cash, as opposed to increasing capital expenditures. It is an unstoppable force that meets an immovable object event. I do not know what will happen.
In the back half of 2022, towards 2023, you can start to see an increase again in the side of supply growth.
Energy companies reported third-quarter earnings in the past two weeks. Do results stand out to you?
[EOG] Took a step forward. They have increased their base dividend, paid a special dividend, and have a $ 5 billion share repurchase program. They signal that they have the balance in place; In the case of another experience like Cubid, where oil prices become negative, they would buy back the stock, handing over the punch. They were unable to do so in 2020, given the fact that they had a debt due. They are signaling that they are going to be an unfunded company in fact entering the next cycle and will focus on returning cash. That’s pretty convincing.
On the other hand, Continental Resources [CLR] Some threw their hand, too, when they had to buy Pioneer’s position in the Delaware Basin [a section of the Permian Basin in Texas and New Mexico]. This shows that they needed inventory in a brand new basin. This is net negative. That probably means they’re going to make more deals. This confirmed the belief we had that the stock was highly valued, highly held.
You also did work on some “new energy” companies. Do you recommend stocks there?
That was about two years ago when we made a hard push to think about proximity. We have received coverage of a company called
[EVA] With purchase. It is a manufacturer of wooden pallets; Wood pellets are a substitute for charcoal. When you pick trees, there is a lot of wood residue. It is basically a carbon neutral fuel. Now you burn the waste product from the wood industry, emit it and ship it to extract hydrocarbons. Enviva is probably one of our favorites. The fuel can be supplemented or replaced at a coal plant or a natural gas plant with wood pellets. We think of it as an alternative also in the steel and cement industries, where you have heard a lot of discussions about hydrogen as an alternative fuel to high heat.
Enviva Exactly Limited Joint Master Conversion to C Corp. Much of the ESG [environmental, social, and governance–oriented] Funds did not own Enviva because it was an MLP.
Are there also no environmental disadvantages to burning trees?
Basically, you are returning the carbon. It’s not carbon negative, and it’s what green or blue hydrogen can be. But it’s basically carbon neutral fuel.
But does it not send a particulate matter that is harmful to your lungs?
It goes into the necessary bars in the power plants. This makes it possible to eliminate all this coal without having to oil all the coal plants. If you replace coal, it will always be better. Many of these coal plants already have scrubbers. The wood burns cleaner than coal. Their renewable alternative to the coal business produces a stable and predictable cash flow, resulting in an attractive dividend yield of 5.4% at current prices.
Do you prefer any investments in solar energy?
On the solar side, we are not so much interested in the big services that put in solar panels. We prefer the technologies that enable the environment and its surroundings. It’s a bit like a gold rush in energy transition. You do not necessarily want to own the companies that install the mines, or install the wind farms or solar fields. You want to find the companies that supply the locomotives and shovels.
Every time you put solar panels on a residence, you have a inverter to convert DC voltage to AC. There are technology companies that manufacture the same converters.
[SEDG] Is another company that enjoys demand for inverter. There we see the opportunity.
And what about the power of the wind?
We did a lot of work on [Danish power company]
[DNNGY]. What was interesting about Orstad is that the wind is not blowing as much around the world. You have seen a decrease of 20% to 30% in wind speeds, which reduces the power of their gains.
Does reducing wind speed kill part of a wind power thesis?
That means you have to diversify. Orstad owns a bunch of North Sea wind farms. Whenever the wind is not blowing so much, you may want a little wind from New Jersey and Maryland in the future to reach that balance.
Do you own Orsted?
No. Our concern is that yield expectations are lower and lower.
How should investors now think about owning energy, both in the old version and in the new version, in their portfolio? How much should they hold?
If you run a mutual fund, a rated energy is a weight of 2.5% to 3% in the index against which you are measured. At this point, I think you should be overweight for previous generation energy. You can probably have double weight.
The energy transition is going to see five times [as much capital investment as legacy energy]. Global capital investment in oil this year stands at about $ 600 billion, but it peaked in the 2014-15 period at $ 900 billion. For the energy transition, global investment is set to be between $ 3 trillion and $ 5 trillion a year for the next 30 years. What we are preparing for and focusing on is finding the enabling technologies that are going to enable this level of global capital investment.
Most of the companies we look at are pre-public. We had a conversation this morning with a battery technology manufacturer that is in the B series round [of fund raising]. We have another conversation with a silicone lithium battery manufacturer. Some of the best opportunities are in the venture and the pre-public side. We are trying to find the companies that may reach the public in the future.
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