Energy Stocks Remain Undervalued, Says World’s Best Performing Hedge Fund Manager | Josh Young

Episode Summary

Executive Summary: Josh Young of Bison Interests argues the oil and gas sector remains undercapitalized despite higher prices, with capital flowing mostly into financial trades rather than new drilling. He favors small/mid-cap producers and special situations over majors, royalties, or exploration, emphasizing low valuations, strong cash flow, and balance-sheet repair as key to upside and downside protection.

Main Topics: Bison Interests’ strategy and origin (Priority: 5/5): Young explains that Bison launched in 2015 after the 2014 oil crash to invest in publicly traded oil and gas companies that were undervalued and ignored. He frames the firm as a contrarian, value-driven specialist that survived a long bear market before benefiting from the current bull cycle. Capital discipline, underinvestment, and supply constraints (Priority: 5/5): He argues that capital entering oil and gas is not funding meaningful new drilling; instead it is mostly hedge fund relative-value, Berkshire-style stock buying, or recycled capital from private equity exits. In his view, the industry remains undercapitalized versus demand growth, leaving supply structurally tight. Why he prefers smaller producers and special situations (Priority: 5/5): Young says Bison seeks off-the-run, structurally undercapitalized companies with strong assets, capable management, and survivable balance sheets. He likens the approach to early private equity and favors securities trading at deep discounts to liquidation or intrinsic value. SandRidge as a case study in turnaround investing (Priority: 5/5): He uses SandRidge to show how post-bankruptcy stigma, asset sales, debt reduction, and rising commodity prices can create massive equity convexity. The stock rose from distressed levels as the company liquidated non-core assets, paid off debt, and generated strong free cash flow. Majors, ESG, and capital allocation criticism (Priority: 4/5): Young criticizes Exxon, Chevron, Shell, and Total for deploying shareholder capital into alternative energy and other lower-return projects rather than their core strengths. He sees this as value-destructive and driven by activist pressure rather than economics. Macro risks: demand slowdown, geopolitics, and policy (Priority: 4/5): He acknowledges near-term recession and China/Europe demand risks, but thinks fiscal and monetary stimulus will ultimately support oil demand. He also argues Russia/Europe dynamics, energy taxes, and policy responses have not materially changed the bullish long-term supply-demand picture. Carbon-bubble skepticism and hedging view (Priority: 3/5): Young dismisses the carbon-bubble thesis as inconsistent with the behavior of its proponents and believes ownership at low cash-flow multiples reduces exposure to regulatory or transition risk. He views hedges as company-specific liabilities or protections depending on context, not a universal good or bad.

Key Arguments: Oil and gas capital is not flowing into enough new drilling; most new money is either financial trading capital or recycled capital from private exits, so the industry remains undercapitalized. The real bull market in energy began in 2001, not 2009, and the long cycle included a huge private-equity buildout that is now largely over. Publicly traded small/mid-cap producers offer better risk-adjusted upside than supermajors because they can be bought at much lower valuation multiples and have stronger convexity to higher commodity prices. SandRidge demonstrates how balance-sheet repair, asset sales, and hidden asset value can create equity value even after bankruptcy stigma. A company with a lower break-even is not automatically safer if it trades at a much richer valuation; valuation matters as much as operating cost. Majors like Exxon and Chevron are pressured by ESG-minded shareholders to allocate capital away from their core businesses, which Young believes lowers returns and raises long-term risk. Commodity investing is not just a macro bet; security selection, asset quality, management quality, and balance-sheet structure can dominate outcomes. Short-term oil demand could weaken due to recession, but stimulus and underinvestment should keep the medium-term setup bullish. European energy policy and Russia sanctions have been less decisive than expected; practical economic behavior has kept Russian energy flowing in many cases. The carbon-bubble thesis is overstated because those warning about it often behave inconsistently with that view. Hedges can be useful, but in rising-price environments they act like liabilities; Young prefers companies that have transformed their economics enough to withstand downside without heavy hedging.

Data Points: WTI crude price: ~$115 per barrel - Referenced as the current oil price during the bull market discussion. WTI crude price at COVID low: - $38 per barrel - Used to highlight the shock and recovery in oil prices since April 2020. Oil demand growth: ~1% annually - Young says global oil demand continues to grow at roughly this rate. Bison fund launch year: 2015 - Bison Interests launched after the 2014 oil crash. SandRidge initial thesis publication: Late October 2020 at $1.70/share - He says Bison publicly shared its investment thesis around this level. SandRidge stock low point: ~$0.40 to $0.50/share - He notes the stock fell to distressed levels during COVID. SandRidge later purchase range: ~$1 to $2/share - He bought additional shares around this range. SandRidge current free cash flow: Just over $1/share per quarter - He says the company is generating strong free cash flow while keeping production roughly flat. SandRidge cash position: ~$5/share net cash - He states the company has nearly $5/share of net cash after liabilities and debt. SandRidge valuation: ~2x EBITDA - Used to compare SandRidge with Exxon and argue it is cheaper on valuation. Exxon valuation: ~5-6x EBITDA - Used to argue Exxon trades at a much richer multiple than SandRidge. Natural gas price: ~$9 per MCF - He notes U.S. natural gas has risen from about $2 to nearly $9 in the thesis window. Potential gas upside discussed: $4+ per MCF - He says the original underwriting assumed a move above $4, which later proved conservative. Potential summer WTI scenario: $130-$140 per barrel - He speculates oil could spike to these levels before pulling back. Potential downside oil case: $60-$70 per barrel - He says this may be a more reasonable downside range given supply-demand conditions. UK windfall tax on producers: 25% - He cites the UK’s new tax as an example of policy that can lift prices rather than reduce them. UK energy support package: £15 billion - Announced alongside the windfall tax to support energy bills. Bison 2021 return: ~390% net - Referenced as the firm’s strong performance during the energy rally. Occidental acquisition financing: ~10% interest paper - Used to criticize the Anadarko deal as expensive and poorly timed. Texas Pacific Land Trust yield: ~2% - Compared against higher-yielding royalty peers in arguing TPL looks expensive. Alternative royalty yields: ~6%-7% - He argues some peers offer much better yield at lower valuation multiples.

Pivotal Quotes: "Bison are the only four-legged animals that, when there's a storm, they face into the storm and they get through it safer and faster." — Josh Young: Opening explanation of the firm’s name and contrarian investment philosophy. "A real oil company doesn't need the bank. A real oil company is the bank." — Josh Young: Explains why strong cash flow and balance-sheet strength can replace external financing needs. "Total and Shell are competing to see who can burn more capital." — Josh Young: Critique of major oil companies’ alternative-energy capital allocation and low-return projects.

Implications: Listeners should see oil and gas as a security-selection market, not just a macro bet. Young’s view implies the best opportunities are in cheap, undercapitalized producers with repaired balance sheets, while majors and expensive royalty names may offer less upside.