A big decline in crude oil prices over the last two months where WTI crude dropped from just over $122 in early June to a little below $90 by the first week of August caused a decline in energy stocks. While the market was concerned about the impact of a recession on the demand side of the equation, energy investors saw another opportunity to fill up the tank and both company insiders as well as Warren Buffett decided to double down by buying more. I personally used the opportunity to add to my position in Diamondback Energy (FANG), an investment we discussed in our October 2021 newsletter as well as Continental Resources (CLR), which we discussed as our second spotlight idea last month.
Continental Resources now trades very close to Harold Hamm’s “go private” offer of $70 per share and is up nearly 300% since we initially added the company to the model portfolio in August 2020. Buffett picked up an additional $390 million of Occidental Petroleum (OXY) stock increasing Berkshire stake above 20% not counting preferred shares and warrants they hold. Last week we saw the Executive Chairman of Energy Transfer (ET) pick up $30 million worth of stock and the CEO of Civitas Resources (CIVI) pick up $2 million worth of stock. Civitas was created last year by merging the oil & gas production company Extraction Oil and Gas with Bonanza Creek Energy. Civitas is exclusively focused on Colorado’s Denver-Julesburg Basin and appointed a new CEO, Chris Doyle, three months ago.
We wrote the following about Energy Transfer in April after another insider purchase at the company,
Natural gas prices were range bound for the better part of the last decade, oscillating between $2 and $4 per million British thermal units (MMBtu) with the occasional spike outside that tight range. With a constant increase in supply and lackluster demand, beyond some unusually cold winters, many energy production companies started to shift production away from natural gas to focus on crude oil while others looked at more lucrative markets in the East to ship the excess natural gas. To ship natural gas to other international market, the gas has to be liquified first to create LNG and then shipped via special ocean tankers.
When you think about the big jump in natural gas prices in Europe and the upcoming disruption to supplies from Russia, Cheniere Energy (LNG) comes to mind. The company spent several years investing in building LNG terminals and in February 2016 started to export LNG. I had looked at Cheniere several times over the years but the company’s net losses, large capital investments and massive debt load in an environment that wasn’t favorable for natural gas prices did not give me much confidence. All of that changed with the current geopolitical environment.