Have a great week.

By Charles Ruff, CFA

Stock Market History Illuminated

Nothing too profound but some great graphics.

Really gives you an idea of how exceptionally strong recent equity market returns have been.

The author also calls out US outperformance.

  • “US outperformance was either driven by something fundamental or economic (interest rates, free money, tech stock dominance, sales growth, improving ROICs, earnings upgrades, etc), something less so (flows, narratives, memes, psychology, FOMO), or a combination of the two. It is also not impossible that US outperformance was driven by nothing (aka it just happened).”
  • Cliff Asness also pulled the numbers on this phenomenon and we’ve covered it in previous Weekly Readings
    • Much of this outperformance can be explained by multiple expansion!
  • “In 2017, Mr. Market happily paid a 5‐ 15% premium for names in the “growth” bucket. Today, he is paying a premium of 55‐90%.”

Only once has the US had more houses under construction (1973).

Affordable housing is a political rallying cry these days… I’d say the market is responding just fine.

Affordable Housing Graph

Does the above chart suggest that a recession is around the bend? After all, prior peaks in 1973 and 2006 were followed by recessions.

I’m not so sure. First, it’s hard to draw strong conclusions when the sample size is 2. Second, much of the current building is making up for the dearth of home construction after the Global Financial Crisis (2008-2018) where the US significantly underbuilt homes.

Continental Resources Quarterly Earnings: American Shale in a Microcosm

REMINDER: Mentioning a stock is not a recommendation to buy. See full disclosure below.

Continental Resources (CLR) was a forerunner of the American shale revolution. Currently, the company has production from North Dakota’s Bakken Shale, West Texas’ Delaware Basin, Oklahoma’s Anadarko Basin, and Wyoming’s Powder River Basin. Continental is a very useful data point for US shale and thus, US oil production. CLR’s most recent quarter helped illustrate two trends impacting the energy industry.

First, it takes more capital to support production growth.

“Our projections are based on a flat year-over-year CapEx relative to 2022, delivering a low single-digit compound annual production growth rate. “

In 2016, capex of $920 mil helped deliver 205,000-215,000 boe/d (barrels of oil equivalent/day) in production.

Today, that capex of $2.3 bil is required to deliver 383,000-393,000 boe/d.

Production is up over 80% but capex is up 250%!

Production & Capital

CLR Investors Presentations

From February 2022 Slide Deck…


Second, shareholder returns are prioritized over production growth. CLR is emphasizing its free cash flow, dividend and buyback rather than production growth. Will US shale drillers be able to meet this challenge if they are focusing on cash flow generation?

The Energy Information Administration (EIA) currently forecasts oil production in the lower 48 states (Ex-the Gulf of Mexico) to rise from 9 mil barrels/day in 2021 to 10.4 million barrels/day in 2023 or 7.5% a year. This growth is entirely predicated on US shale output rising dramatically. In fact, of this 1.4 mil barrels/day, 1 mil is expected come from the Permian alone.

800-900 rigs worked for over a year to generate peak production of 10.4 million barrels/day in 4Q19. The EIA is forecasting that the US will be back at this rate in 18 months! I think oil production will grow dramatically but the EIA numbers seem very optimistic to me.

Shale Rig Count

Source: Baker Hughes Rig. Count

Last week we discussed how the inventory of DUCs (drilled, uncompleted wells) is drawn down. So the low-hanging fruit is gone. Companies will need to spend a great amount of capex to meet EIA numbers but the companies are not showing a willingness to spend big on production growth. What breaks this logjam?

In my opinion, higher oil prices.

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