As Tesla reported financials after the bell yesterday following a volatile day in the markets, I was struck by their earnings. $2.52 a share in the quarter.. Annualize that and let’s call it $10.00. Grow it at 71% per year to match last years revenue growth, and let’s call it $17.00/share earnings. Now, cross the “i”, carry the 1 and … tada …. It trades at 51x forward aggressive earnings, even after falling 8% today.
Compare that to Exxon. In the third quarter, they earned $1.57 a share and pay $0.88 a share dividend. They trade at 12x earnings and pay a 4.6%. To be honest, if I were Tesla, I’d buy Exxon for stock and pay a 30% premium. At least then they’d have a real business.
But with oil nearing $90 and gas at $4.25 (the price deck we used in 2012!!), oil and gas companies are finding themselves flush with cash and nowhere to spend it. Sure, one may say “But they can accelerate drilling, look at that price deck!” True, but inventory is a real challenge, in particular tier 1 inventory. I did a presentation two weeks ago on this building off my series from September 2019 “Peak Oil USA” and show that in every basin but the Marcellus, peak performance was 2016 (the Bakken gets an * on this statement). As companies drilled tighter and tighter patterns to add inventory, they discovered how capitally destructive over drilling could be. So while we could intellectualize an NPV analysis at a reasonable cost of capital and argue over 20,000 bbls of true incremental oil, Concho’s Dominator project and Continental’s Wahpeton project from 2014 are all you need to know. The reason I don’t like energy stocks even at these prices is they have only so much inventory left, and it begs a real question of the future of domestic growth. I contend we will never get back to November 2019 highs of oil production.
So if they can’t drill, do they buy? Absolutely. We have seen that, but by and large it’s been stock for stock, which again points to the issue I address above. Without inventory and trading at cash flow multiples that look historically reasonable, companies don’t want to use their cash to bail out a peer company and get left holding the bag. For the same reason, share buybacks don’t make sense since I would argue that most companies are trading at PV0 of their reserves.
Which brings us to debt. There has been a small risk that banks, with their whole capital allocation kick, could reign in loans to fossil fuel companies. While I doubt this will ever happen (after all, Pfizer’s money is as green as Philip Morris’s), management teams will be less inclined to shrink the balance sheet by paying off relatively low cost debt with no real benefit to their own pocket book. So that leaves us with dividends.
My prediction is this year we will see lots of special dividends as companies pay their shareholders with surplus cash, while waiting to consolidate with peers for equity. It isn’t sexy, but when the market continues to look under the hood at the companies Cathy Wood owns, they will discover a whole bunch of businesses that will never ever be profitable while Exxon pays you almost 5% to hang around and wait for them to buy EOG.
In a totally unrelated note, I want to give Supreme Court Justice Stephen Breyer credit while at the same time giving kudos to the late Ruth Bader Ginsberg. RBG had the chance to retire under Obama and allow him to replace her with a liberal. She politely said “F off, I’d rather die.” She knew that her work was her life and retiring would have led her to pack it into the house prematurely. Instead, she set her sights on outliving President Trump’s time in office. She lost, but good for her. At 83, Breyer is nearing the age where most American men who reach 65 die (83.2 years). If you only got 6 months, why not go on a cruise, shake it up with some ladies and get after an eight ball or two. Want to hear my theory. Kamala gets the SC spot to meet the “black woman” promise Biden made during the campaign. It gets rid of a person that is more unpopular than the president and allows him (and by him I mean his handlers) to appoint a VP that will take over after the midterms when he is declared under the 25th amendment to be unfit. The real question is: which woman will be our next president? You have to think Hilary a which would set up a very interesting do over in 2024.
Gotta say..‘you’re in way over my head’ but I love ya for it…
David, good stuff. Agree shale has a rock quality problem brewing. The survivors will agglomerators like PXD in my view. Lately I've been looking north to the Canadian SAGD producers. Still some values left there. Also agree about Harris, Cheers