Investors,

Oil hit $130 per barrel last night when stock futures in Asia opened. Anyone exposed to unhedged oil production is going to print an insane amount of money. Buying oil and gas companies here reminds me of buying tech stocks in the depths of 2020.

twebs @twebs

What if long commodities is similar to Long Covid winners in Apr 20? What was pushback at the time? Too obvious. But maybe the way that Passive accentuates moves will work for commodity equities just like it did for Covid winner. And this is a MUCH smaller boat. 12:15 EST 👇

twebs @twebs

As many commodity linked Equities have gone parabolic, you would be crazy not to be looking over your shoulder… but does this risk walking away from a trade you’ve nailed in the 3rd inning? https://t.co/jyRPv55Ahq

March 6th 2022

33 Likes

Not only is the price of oil exploding to new highs, but pretty much every commodity on the face of this planet is exploding. That’s because we are at the tipping point in the business cycle where normalized inflation is beginning to turn into a hyperinflationary state. Prices are skyrocketing and its not slowing down…

Charlie Bilello @charliebilello

Commodity price changes over the last year... Heating Oil: +90% WTI Crude: +80% Brent Crude +79% Coffee: +73% Gasoline: +70% Aluminum: +70% Nat Gas: +69% Wheat: +59% Corn: +35% Cotton: +34% Lumber: +34% Soybeans: +18% Sugar: +15% Copper: +13% Gold: +12% CPI: +7.5% Silver: -4%

March 3rd 2022

148 Retweets311 Likes

Around 25% of my book is allocated to commodities but it feels like that is too low. My gut tells me I need at least half of my book in commodities. And the portion of my book that is not in commodities, well, that is what really scares me.

I don’t know how these high prices fix themselves. Typically, high prices are what cure high prices. As economic theory states, when price rise, producers will spend more capital to realize potentially higher prices in the future, which ultimately drives down prices. As for the case with oil and gas, if oil stays at $130, it is likely firms will increase capex to bring on significantly more production.

I’m not sure if higher prices will cure higher prices this time. I’ve written multiple times about how the excess levels of debt in the global financial system is a ticking time bomb for a hyperinflationary event of undue proportions. I’ve been preparing for a hyperinflationary event for years. But now that hyperinflation is here, I still don’t feel ready.

One thing I have done to prepare for higher prices is lock in a 30-year mortgage at an ultra low interest rate. Buying personal real estate with a 30-year term seems like a no brainer. I get out of an apartment complex that keeps going up in price and lock in an ultra-low interest payment below the rate of inflation.

Secondly, I have been researching as many commodity related stocks as possible. As most of you probably know, I killed in 2021 on coal names:

• I called Alpha Metallurgical Resources (AMR) a buy at ~$29 per share. The share price is now $116.15 per share.

• I loaded up on Ramaco Resources (METC) at ~$5.80 per share. The share price is now $18.41.

• And I bought Warrior Met Coal (HCC) at ~$18.40. The share price is now $38.35.

I exited Alpha and Ramaco way too early in the cycle, but still managed to get a great IRR. I’m still holding Warrior Met Coal, but probably don’t own enough of the stock as I should.

For those who missed the original thesis on the coal industry, here a rundown:

The price of coal was starting to increase and all coal producers were trading at an implied 1-2x EV/EBITDA. If the price of coal stayed at these levels for the next 2-3 quarters, all of these names would have enough cash to pay off all debts. If the price of coal stayed at these levels for 12 months, all of these companies would generate their entire market cap in free cash flow.

The oil and gas industry is eerily similar to the coal industry 12 months ago. The price of oil is soaring and the valuations of some of these smaller producers is still around 2-3x 2022 EBITDA. If the price of oil stays at this level, all of these producers will print a ton of money. And even if the price of oil collapses back to the $65-70/bbl range, most of these producers will still do relatively well.

My goal over the next couple of weeks is to identify as many low cost oil and gas producers with strong a balance sheets that will benefit from higher prices. I found one producer recently that I wrote up for Alpha Letter Pro subscribers. With the price of oil at $130/bbl, this company could generate more EBITDA than its current enterprise value. However, the stock has barely budged despite the higher price environment we are in. There are reasons why, but the risk/reward is extremely compelling.

There are also a handful of other obscure oil and gas companies I am currently underwriting. Should valuations stay muted, I may start to accumulate.

Finally, I am thinking about putting together a list of the most highly levered oil and gas companies I can find. In a high price environment, companies with heavy debt loads perform the best (take Alpha Metallurgical Resources as a case study). My goal with this list is to buy all of the levered names and wait a few months. My thought is that most of these will double from the current valuation if oil and gas prices stay the same, or hold their ground.

We are in an interesting time period where prices are rising. There hasn’t been an inflationary environment like this since the 1980s. Be ready for higher prices and increased volatility as the market attempts to adjust for this new world.

- Anon