TIP468: Why Buffett is Investing in Oil Companies W/ Josh Young

Episode Summary

Executive Summary: Josh Young argues the oil market is being driven by tight spare capacity, Russia-related supply disruptions, and underinvestment, making higher average prices likely. He says Europe may burn oil for power and heating this winter, while oil equities—especially small producers—remain extremely cheap despite strong cash flows. He also explains why Buffett’s Chevron/Oxy bets are a rational, leveraged bet on higher oil, and why airlines remain poor businesses.

Main Topics: Oil price volatility and OPEC+ spare capacity (Priority: 5/5): Young says 30%+ oil swings stem from Russia flood/pullback dynamics and the market’s growing realization that OPEC+ may be out of true spare capacity, removing the traditional backstop for supply shocks. Russia-Ukraine impact on energy markets (Priority: 5/5): He argues Russia has used the war and sanctions environment to constrain gas and oil exports, raise prices, and increase revenues, while Europe remains highly dependent on Russian hydrocarbons. Europe’s winter energy squeeze and oil-for-power demand (Priority: 5/5): Young expects European and Asian consumers to burn more oil and refined products for electricity and heat if natural gas remains scarce and expensive, potentially creating shockingly high incremental oil demand. Oil equities, valuation multiples, and recession fears (Priority: 5/5): He says small/mid-cap producers are trading at absurdly low multiples because of recency bias, hot-money exits, and mistaken recession narratives, even though many are making record cash flow. Capital scarcity, inflation, and producer capital allocation (Priority: 4/5): Higher rates and ESG pressure make it hard for producers needing external capital, but great for companies with low decline rates that can return cash via buybacks and dividends. Buffett’s Chevron and Occidental positions (Priority: 5/5): Young views Berkshire’s large positions in Chevron and Oxy as a concentrated, leveraged bet on higher oil prices, with Oxy offering more torque to crude and Chevron providing scale and quality. ETFs, passive investing, and airlines (Priority: 3/5): He is skeptical of broad passive and even energy ETFs versus active stock picking, and remains bearish on airlines as structurally poor businesses despite occasional periods of better travel experience.

Key Arguments: Oil volatility is being amplified by Russia’s supply actions and by the market’s lack of a reliable spare-capacity backstop from OPEC+. The market is underestimating how much Europe and Asia may burn oil and oil products for power generation and heating when gas is too expensive or unavailable. Russia’s economy is benefiting economically from elevated hydrocarbon prices even if sanctions impose real costs on consumers and elites. Oil and gas producers with low decline rates and strong balance sheets can generate exceptional free cash flow and use buybacks instead of growth capex. Small-cap oil equities are cheap because investors extrapolate recent price moves and recession fears, not because fundamentals have deteriorated materially. Berkshire’s Chevron and Occidental purchases reflect Buffett’s talent for buying cyclical energy assets at the right moment and sizing them according to liquidity constraints. Passive index and sector ETF ownership can be suboptimal in energy because sector earnings share and index weight are misaligned. Airlines remain unattractive long-term because the business is cyclical, operationally messy, and vulnerable to fuel-cost shocks.

Data Points: WTI oil price swing: $125+ twice and under $100 twice - Young describes Q2 as a period of extreme oil-price volatility tied to Russia and supply fears. European natural gas price increase: Almost 1,000% higher than 18 months earlier - He uses this to illustrate Europe’s energy stress and incentive to burn alternative fuels. Berkshire Chevron stake: $26 billion / about 8% interest - Buffett’s position cited as evidence of a major energy bet. Berkshire Occidental stake: $13 billion / about 24% stake - Buffett’s larger, more leveraged crude-price exposure through Oxy. Oxy cash-flow torque: Higher than peers at $110 oil vs $100 oil - Young argues Oxy’s earnings rise more per $10 oil move than many competitors. SandRidge stock move: From under $0.70 to about $30, then around $18.50 - Used to show how volatile but powerful oil-stock re-ratings can be. Journey stock valuation: Making more money than ever in company history - Example of a producer trading cheaply despite record fundamentals. Energy sector weight in S&P 500: About 4% of index / about 12% of earnings - Used to criticize passive indexing for misweighting earnings power. Tech/media weight in S&P 500: About 40% of index / about 30% of earnings - Illustrates sector mismatch in passive market exposure. XLE/XOP/PSCE comment: PSCE described as the least uninvestable of the sector ETFs - Young is cautious on energy ETFs, especially for retail investors. European oil burn for power last winter: 2 million barrels/day used for heat and power - He warns similar or higher demand could reoccur this winter. Potential high estimate for oil burned for power: 5 million barrels/day - Cited as a plausible upside demand shock from power generation. Oil vs gas price spread: About 3:1 in Europe - He says this economics gap encourages substitution into oil and refined products. Oil vs diesel/gasoline for power: About 2.5:1 in Europe - Supports the thesis that oil is favored for electricity generation under gas scarcity. Strategic Petroleum Reserves: 20-year lows - Raised as a concern about temporary policy band-aids and diminished buffers.

Pivotal Quotes: "They're making too much money. It's scary." — Josh Young: Explaining why investors sell oil equities despite strong fundamentals and low valuations. "The first rule of holes is to stop digging." — Josh Young: Critiquing Europe’s continued commitment to failed energy policies and more subsidies. "You might need radically higher oil prices, even if there isn't a squeeze on oil this winter." — Josh Young: Describing how underinvestment and capital discipline can still force prices higher.

Implications: Listeners should expect continued oil-market volatility, potentially higher crude prices, and persistent undervaluation in select producers. Europe’s energy crisis may intensify oil demand, while Buffett-style concentration in quality cyclicals remains a compelling framework for investors.