As the most powerful investors in the world are loading up on energy investments following President-elect Donald Trump’s victory, this investor highlights a profitable and lower-risk oil and gas play that is “set to outperform all the rest.”
What Happened: Warren Buffett holds $13.15 billion worth of Occidental Petroleum OXY as of the third quarter of this fiscal year. According to 13F filings, Carl Icahn owns $1.53 billion worth of CVR Energy Inc CV as of Q3. Meanwhile, billionaire Ken Griffin boosted his holdings in certain oil stocks by 150% in 2023.
However, Marc Lichtenfeld, the chief income strategist at the Oxford Club, on Monday revealed a little-known oil strategy that first caught the attention of Buffett's partner, Charlie Munger, in 1962. He explains, “It has nothing to do with oil futures, ETFs, or stocks. Yet the returns can be MUCH bigger.”
Lichtenfeld describes oil and gas royalties as a “backdoor way” to earn recurring payments from oil fields without the usual costs of exploration, labor, or transportation. “Instead, you simply collect incredible royalty streams for owning a very valuable asset… the oil or gas field. It's the ultimate passive income investment,” he says.
Before his passing, Munger earned $70,000 annually from an investment of just $1,000 made more than six decades ago.
Why It Matters: Highly regulated industries are likely to benefit under Trump’s administration due to his proposed deregulation efforts. This includes the creation of the Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy, aimed at cutting the government’s wasteful spending.
Lichtenfeld highlights that oil and gas royalties offer lower risk than traditional energy stocks. While conventional oil companies face operational challenges and heavy debt, royalties provide a more stable investment.
“It's a perfect investment during times of high inflation, like right now. In Texas, they call oil royalties ‘mailbox money,’ because you walk out, open up the mailbox, and the check is there. It's as easy as it gets,” he says.
Lichtenfeld also underscores the investment potential of Permian Basin royalties, noting that other U.S. basins are nearing the end of their productive life, while the Permian is at peak production.
“Unlike with Occidental, you're not investing in a high-capital company that needs to drill, extract, transport, or store any product. You simply collect royalties from this superstar basin. It's a win-win,” he adds.
What Are Experts Saying: According to Mario Georgiou, the executive director and head of investments at InCred Global Wealth, "Deregulation supporting oil production and geopolitical risks could sustain elevated oil prices and relative valuations are attractive."
"Fundamentally, (energy) companies are shareholder friendly with 8-12% shareholder yields, have strong balance sheets with low net debt to EBITDA ratios and high free cash flow yields of 6.50% and above," he adds.
According to JPMorgan, oil prices could reach a "stratospheric" $380 a barrel.
As per Morgan Stanley, the energy sector faces a divided future. Trump's deregulation could benefit traditional energy, but the outlook for oil is uncertain due to potential oversupply and weak global demand, especially from China. In contrast, natural gas may see growth from strong European demand and increased domestic use for electrification and AI-powered data centers.
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