A Potential Recession Won't Stop an Energy Bull Market

In my previous two essays, I discussed the four big reasons to be bullish on energy stocks... To recap, these are the facts that: OPEC is cutting production Russia is atrophying The Strategic Petroleum Reserve ("SPR") is turning U.S. onshore drilling is slowing As I said explained, the current state of the oil market is […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] A Potential Recession Won't Stop an Energy Bull Market By Whitney Tilson --------------------------------------------------------------- [It's time to get out... NOW]( That's what a financial legend told us in a closed door meeting the other day... He's been on TV numerous times and has made so many accurate calls that he's been dubbed "The Prophet." Now, he's issuing his next call... and urging everyone to GET OUT of this IMMEDIATELY. To find out what move EVERY American should be making ASAP, [click here for details](. --------------------------------------------------------------- In my previous two essays, I discussed the four big reasons to be bullish on energy stocks... To recap, these are the facts that: - OPEC is cutting production - Russia is atrophying - The Strategic Petroleum Reserve ("SPR") is turning - U.S. onshore drilling is slowing As I said explained, the current state of the oil market is following the script of a classic rom-com... Two people meet (investors and oil stocks), and they fall for each other. They have some laughs along the way and get to know each other better. But then, something happens that threatens the relationship. Ultimately, it gets resolved and with it comes a happy ending. In fact, today's flirtation between investors and oil stocks doesn't just follow any script, but the plot of 1994's Four Weddings and a Funeral. It's an up-and-down love story where celebrated events (weddings) are punctuated by turmoil, while difficult times (funerals) bring everyone closer. It maps perfectly to recent events in the oil market. The "funeral" in our Four Weddings and a Funeral analogy is that the U.S. is going into a recession... Or it's going to have a "soft landing"... Or maybe it will power through... Or maybe it's stagflation... Or maybe it's the new normal. The fact is, nobody knows... Turn on CNBC, check Twitter, or read the Wall Street Journal, and you will always find someone who is saying each of those things. For every bull, there is a bear. It has always been this way. President Harry Truman once demanded... Give me a one-handed economist. All my economists say, "On the one hand," then, "but on the other..." The reality is that nobody knows the U.S. economic outlook. It's just too complex. Nobody can figure it out for certain. Simply put, we can't predict demand... However, we can look at what demand has done, and most important, we can look at the stocks to figure out what investors expect it to do. Over the past year, the U.S. Federal Reserve has continuously raised interest rates, slowing the economy and possibly sending us into a recession. Back in June, the market estimated a 65% chance of a recession in the next year – the highest level we've ever seen without actually heading into an outright downturn. By now, the forecast has dropped slightly to 60%... all amid plenty of continued gloom and doom in the financial media. Who's to be believed? --------------------------------------------------------------- Recommended Link: [This rare market event has happened only FOUR times in 123 years]( Just FOUR times in the last 123 years, a massive surge has sent this one market sector soaring. According to one Wall Street legend, we could be headed for a FIFTH and FINAL mega-rally... with a chance at 10x returns. [Click here for details](. --------------------------------------------------------------- So, are we going into a recession? It doesn't really matter. Because energy stocks have already decided that we are... Here's the most important chart you will see in the energy sector... This is the energy sector's free cash flow ("FCF") yield. That is, this is the total FCF compared to the energy sector's total market cap. When the companies were drilling like crazy in 2015, the FCF yield was actually negative. Despite plodding energy giants like ExxonMobil (XOM) generating tremendous cash, the sector as a whole consumed cash. In more normal times – like earlier in the decade, and after the fracking bust – energy stocks sported an FCF yield of about 4%. That is, investors paid about 25 times FCF for energy companies based on some combination of investor expectations for cash return (through dividends or share repurchases) and some modest underlying growth for the sector. Today, those valuation parameters have been obliterated. The sector is gushing cash, and investors don't care. To buy the sector as a whole today – again, which the biggest, most stable names dominate – you pay just 10 times FCF. That's a fraction of the normal valuation. For every dollar invested in the energy sector, these companies are bringing in $0.14 after reinvesting into growth. This is a once-in-a-lifetime type of valuation, and it can only resolve one of two ways... The first is that the FCF estimates turn out to be wrong. Let's say the U.S. does go into a recession, and let's say oil prices collapse further. Sure, this will impact FCF. But by how much... 20% or 30% at most? These companies have spent the last decade fine-tuning their cash capabilities. If things get worse, they'll simply spend less so they can return cash to shareholders. And the thing about recessions is, they end. The market won't be in a recession forever. Demand grows over time. Energy is the prime mover of the world's economy, and nothing is going to keep it down. Take a look at global oil consumption over time... Even with the impact of COVID, consumption is at a new high. Even with the impact of rising interest rates, demand is at a new high. Even with wars, instability, and confusion... demand is at a new high. What the market is worried about is actually a slight softening in that long-term trajectory, a blip on the radar. That worry will pass. Nobody can know when. The near-term catalyst could come from a return to form of China's sputtering economy, or an end to the Ukraine conflict improving confidence, or a Fed pivot... or anything. But the long-term fact remains: oil demand grows over time. The setup for the ongoing energy supercycle is simple: Demand has been soft in the face of the Fed's unprecedented war on the economy. But it can't stay soft forever. Meanwhile, supply has been restricted dramatically and is only going to further tighten. All this is creating a kind of perfect storm for investing in this sector.... These kinds of market windows don't open up very often. But when they do open up, the opportunities can be massive...and you can watch those gains play out for decades at a time. That makes it especially important to get in early. In our Energy Supercycle Investor newsletter, we put together our best ideas for capitalizing on this new supercycle moment... now. [Get the details here](. Best regards, Whitney Tilson --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 1125 N. 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