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Oakmark Is Betting on Energy for 2020

Bill Nygren (Trades, Portfolio) and his partners at Oakmark are value investors. They buy companies at a substantial discount to intrinsic value. Oakmark focuses on free cash flows, intelligent investment of excess cash and a high level of insider/manager ownership. Oakmark's Win Murray was interviewed by CNBC on December 24, 2019.

Murray starts off by saying that "you never wake up in the morning wishing you had a chance to buy an energy company."

Energy has been a significant laggard in recent quarters. There has been a huge amount of underinvestment in the sector, and major energy indices are down. The market is giving away these companies at a discount to the run-off of their existing fields.

According to the interview, the criteria Murray values most when choosing energy investments are as follows:

  • Since the industry has a history of bad capital allocation, it is important to find managers that think like an investor.
  • Look for companies with oil exposure (as opposed to gas exposure).

For example, Diamondback (NASDAQ:FANG), Apache (NYSE:APA) and EOG (NYSE:EOG) are growing dividend and free cash flow yields. Meanwhile, their number of rigs is declining and offshore has collapsed. Oil price is going up, and these companies have a large amount of exposure.

Great investors deploy capital in industries that don't receive capital. If you can buy into companies that have survivability (to ensure they can get through a prolonged downturn), Murry believes you are well-positioned to take advantage of a rebound. The decline rate in the Permian basin is high, and with the low CapEx going into it, it is hard to see how shale can keep up with supply.

Disclosure: no positions

This article first appeared on GuruFocus.