Investments by Houston hedge fund Bison Interests rose 390% last year and have kept ripping higher in 2022. Net of fees, the fund rose 349% last year and is up 27% through February, according to a disclosure obtained from an investor in the fund.
Bison invests in small oil-and-gas stocks in the U.S. and Canada, and owns several stocks that have multiplied many times over since 2020. Chief Investment Officer Josh Young, who founded the firm, tells Barron’s that he has found success by investing in small stocks that other investors have ignored.
Bison may be outperforming its peers, but attracting capital has been a challenge. In November 2020, Bison lost its biggest investor, an endowment that Young believes pulled its money because of the environmental social and governance (ESG) movement. The endowment, which he would not name, told Bison “this was part of a divestment strategy.” Bison now has $50 million in assets under management.
Young spoke recently with Barron’s about how Bison chooses investments, and why he thinks politics has gotten in the way of smart energy policy and investing. The interview has been edited for length and clarity.
Barron’s: The ESG movement has had a big impact on oil and gas investing. From things you’ve written, you seem to think that ESG is both bad for investors, because they’re missing out on gains, and misguided societally. Can you explain your thoughts?
Josh Young: I think that there’s been a lot of misinformation. You have a starting point, which is that there were terrible environmental practices by many industries for way too long. And that’s a kernel of truth. And then that somehow gets warped. Solar, wind, et cetera, weren’t really ever replacements, at least in their current form. They’re very low EROI [energy return on investment, which measures how much energy is used to create energy infrastructure, versus how much is generated]. And somehow there’s a story that they’re going to replace everything. So you end up still burning a ton of coal and oil and natural gas to manufacture and transport and install and maintain and then decommission these things. It was just this wrong story that’s made a lot of people a lot of money, but also resulted in a material shortfall that we’ve been talking about for years and just no one cared. Or they didn’t believe it, because the price wasn’t moving.
Is this a moment of reckoning for energy policy—both from a geopolitical perspective, because so much of Europe and the world is dependent on Russian energy—and also from an environmental perspective?
I think we’re getting there, but we’re not there yet. Some participants and some policy makers have had their “aha” moment. But most are still doubling down on failing policies. The valuations of producers of oil and gas and other commodities are indicative of this kind of consensus view that this is temporary, without an understanding of what’s actually happening. We’re not there yet. I don’t think we’re even close. And I think that’s part of the opportunity.
What about the argument that climate change is an existential issue—that to drill new wells now will lead to temperatures rising more than 1½ degrees Celsius and mass casualties and displacements in 15, 20, or 30 years from now.
There have been catastrophic predictions made of this sort many times in history, and they have almost never happened. So that’s the starting point. I’m not saying that there isn’t global warming—there is good data that shows that there has been warming and it is associated with some of these activities. You look at a reasonable case for what might happen. What we’re doing right now may be substantially worse. And it’s definitely happening, versus there being a lot of model uncertainty and huge one-sided errors in that modeling so far. There have been many catastrophic predictions that have not happened, and they generally don’t get covered in the news. They just get updated and pushed 10 or 20 years further out and then renamed. So it was global cooling, global warming, climate change. The renaming often is indicative of a failure of a theory. I think energy security and available low cost energy for the incremental user is a bigger factor than climate change.
We have had the hottest years on record by far in the past decade. And there is evidence of real impacts, like the melting of glaciers in Antarctica. Is your issue about that data, or the predictions about the future?
When you back up to the models that alarmed everyone, and generated various documentaries, and billions of dollars for the people that made them and then became venture capitalists and so on. The predictions that were made in those about how much temperature would change did not happen. So yes, there’s been change, but the modeling has all been wrong, all one sided. It was similar to oil demand modeling by the EIA [U.S. Energy Information Administration]. It was all also wrong over the last 18 months, all one sided. So when that happens, that tells you there’s something else going on, besides the honest attempt to forecast something.
Whose predictions are you referring to?
Like the IPCC [Intergovernmental Panel on Climate Change] I think. I don’t remember. It’s been a minute since I went back through these models.
The price of oil is now hovering around $100. It’s come down a little, but obviously is high in historical terms. Do you see this strength continuing for a long time? Do you see it surpassing previous highs, going into the $150s?
In the short term, there’s just too much complexity to accurately forecast. I think there’s a really good case that in the medium term, let’s say in the next six to 24 months, that prices will rise to their inflation-adjusted all time high.
Because there’s underinvestment in supply?
There’s structural underinvestment and there’s still a kind of political punishment. It’s very weird. Various governments are trying to coerce producers to magically produce more, but they’re not facilitating it from a regulatory perspective, and they’re threatening additional taxes. There’s a supply-demand imbalance. It’s evidenced by rising demand despite rising prices. And it’s evidenced by supply not responding how it has historically to rising prices.
There are various problems when you underinvest in an industry for too long. And then when you punish it from a regulatory perspective for too long, you can end up with persistent undersupply. And that’s where I think the 1970s is a good analogy. It’s different because this time, there isn’t that significant OPEC capacity there was, and they just chose to withhold it. Now, it looks like they’re out or close to out [of capacity]. And we also have been dumping our strategic petroleum reserve for political reasons and balanced budgets and stuff. And so the cushions are not there for the market.
In the U.S., analysts are saying we’re a year away from record oil production again. Do you believe that we’re still underproducing dramatically, despite the fact that we’re likely to hit a record next year? What more could be done?
If you just look at rig activity versus price, there’s just way less activity than there would be. And many of the claimed efficiency gains [in the oil market] are turned into dis-efficiencies as stacked rigs [rigs that were not being used] are coming back to market. It’s not just a supply chain issue. You fire all the lowest performing people in a down market and get your hyper-efficient staff on crews and on rigs. And then when you staff back up, you have all kinds of problems. Then there’s also inventory degradation.
Part of the problem with having a negative regulatory environment and having investment leaving a sector is you end up not investing enough in exploration. There’s not enough good new inventory being discovered.
Oil and gas were up a lot last year, but Bison was up much much more. How did your fund beat the industry? Can you give me a sense of what names really stand out and how you found them?
Sure. I’ll share two Canadian ones and one U.S. one. We’re pretty balanced between the U.S. and Canada. On the Canadian side, there’s a company called Journey Energy (ticker: JRNGF), which is actually one of our largest positions. There were a few things that people didn’t understand about them that allowed for extra return beyond just oil beta. One was that they had already paid off a lot of their debt and so deleveraging has been a material excess return factor. When you look at the average oil company, ones that were punished for being considered overlevered that paid off a disproportionate amount of their debt did best. So that was just a very simple factor. Another thing that’s been working is companies that discovered big fields, and also companies that have been acquirers of distressed assets have outperformed as well. So Journey had too much debt going into 2020, they restructured their debt, and were able to pay down. At this point, they’re on track to pay down potentially all of it by the end of this year. And then they did a couple of acquisitions.
What’s the other Canadian stock?
The other Canadian one, which actually has substantial U.S. assets too, is Baytex Energy (BTEGF). Baytex got delisted from the New York Stock Exchange because their stock went below $1 In the U.S. during the downturn. They’re still listed on the Toronto Stock Exchange, but that killed a lot of the retail interest. And you killed off a bunch of the institutional interest as the company got close to a potential insolvency event in 2020. We owned a little bit before and then bought a lot when they were already paying down a bunch of their debt. Similar to Journey, it’s a big deleveraging story. And then they had a big discovery in the [Canadian] Clearwater oil play. [The economics there] from my calculation are as good or better than the very best wells in the core of the [U.S.] Delaware Basin, where companies have much higher valuation multiples and where there’s very limited remaining inventory.
And you said you had an American name, too?
Yeah, it’s SandRidge Energy (SD). It’s been negative for Bison to own Sandridge and talk about them because people have so many negative associations with them. [Sandridge filed for bankruptcy protection in 2016 and emerged later that year.] Even now, after it went through its pit of despair and is flourishing, you still get funny looks. There’s still people that will post anonymously on various websites about how the company is going bankrupt.
But Sandridge is in a material net cash position. And they’ve been growing their net cash by about $1 a share per quarter. It’s a $14 stock today. Their production is flat, and they’re building $1 a share per quarter plus or minus a little bit, and they’re sitting on $4.50 or something in net cash per share and they don’t have material negative working capital. I struggled with the bankruptcy thing, but I also get excited when I hear that. If things are heated because of past management and historical problems, that often yields extra potential returns.
Is there a specific catalyst that can lift energy more now, or is it simply that we’re in a long secular bull market.
We’re in a multiyear bull market for oil. And that should translate to even better performance for oil equities, which have lagged behind.
You invest mostly in small-caps, but most investors are more familiar with the large-cap names. Larger oil stocks appear to have stalled out a bit in recent weeks. Do you think they have another leg up ahead?
Some of the large-caps might require much higher commodity prices to move higher. With the mid-caps and large-caps, there are some that are value-priced but many of them are at valuations that are well in excess of what it would cost to buy similar assets and piece them together. And my strategy is to buy assets through the public market at a large discount to their private replacement costs.
Thanks, Josh.
Write to Avi Salzman at avi.salzman@barrons.com