Bloom is also involved in hydrogen. Another hydrogen company, Plug Power, has run into financial trouble because it has been burning cash as its factories get up and running. Is it fair to lump them together, or does Bloom have a different business model?
Byrd: The nice thing about Bloom is that it can use natural gas, which is what it typically does today. Some of its tech clients want to use biogas. Even though it is more expensive, it has negative carbon emissions. The same is true for hydrogen. Bloom is fairly fuel agnostic, which we like. Compared with Plug Power, Bloom has shown capital discipline. It is in a good position to produce 6% cash flow, whereas our concern for Plug has been a lack of capital discipline.
You expect natural gas to benefit as electricity demand rises. Are there other names that people should look at?
Byrd: Yes. Earlier this year, we were fairly bearish on natural-gas prices, and prices fell quite dramatically. Then we saw [gas producers reduce drilling], and now we look to be fairly constructive on U.S. natural-gas pricing going up to above $4 per MMBtu [million British thermal units] in 2025 from under $2.50 today. That's a real change to the narrative.
EQT is an example of a stock that should do well. A lot of what has been discussed in this roundtable has been around changes in supply, and in capital discipline. We like that a lot of oil and gas stocks are reflecting fairly low current prices. The cash flow for many of these companies is so attractive. I agree with Lucas and others that it may take time for the market to price that in, but that's OK.
Stan, for people thinking about traditional energy stocks, should they plow money into well-known names like Exxon Mobil and Chevron? Or should they invest in some of the shale companies, or even international companies, to get bigger returns over the next several months?
Majcher: All of the above. What we see in the stock market is that the valuations just don't reflect the free-cash-flow and earnings potential of these companies. Instead of focusing on the geopolitics or the economy, we would tell investors to focus on share repurchases.
Independent power producers were mentioned earlier. Those companies have come into favor in a dramatic way recently. Some of the stocks are up over 100%. If you look over the past five years, these companies were aggressively buying back stock. In the oil and gas business, companies are generating free cash flow, and they're buying back a lot of stock. With share repurchases, the lower the share price and the better the valuation, the more powerful buybacks are. Companies trading at large free-cash-flow yields that are buying back stock are compounding that free cash flow at a higher rate.
An example we own is Marathon Oil. Over the past 2 1/2 years, Marathon bought back 29% of its shares. So, what does that mean? For the same amount of earnings, the earnings per share grows more than 40% because of those share repurchases.
Looking at the big picture, what are the stocks that are interesting to us? In large-caps, we have Shell. It trades for less than 10 times earnings and free cash flow. They are synonymous to us. Shell has a fantastic balance sheet, probably with $40 billion of debt capacity. It has a 10.8% earnings yield. It is using all its earnings to buy back stock and pay dividends. The dividend yield is a little over 4%, and the share repurchases are about 6% of shares outstanding. We also like that Shell is in the natural-gas business. We think there's going to be volatility in gas, and that benefits their trading arm.
As for the smaller companies, we can find companies trading at 15% to 20% free-cash-flow yields. If you think about that relative to the broader market, the market is trading for 22 times earnings, or a little over a 4% earnings yield. If you can find a company with a 17% or 20% free-cash-flow yield, and it can buy back stock, that's truly amazing.
There are two names we would highlight in that group. One is APA, which used to be known as Apache. It trades around $30 a share. The earnings yield is about 17%. What's nice about this company is that it has about $13 a share in assets that currently aren't producing earnings or free cash flow. They range from discoveries off the coast of Suriname to an LNG [liquefied natural gas] contract with Cheniere Energy, and net operating losses that can shield taxes. All of those assets, you're getting for free.
The other one would be Kosmos Energy. It trades for about five times earnings, for a 20% free-cash-flow yield. It has some offshore LNG assets that should come on later this year that we think you're getting for free. They are probably worth about $3 a share, or half the current share price. Kosmos currently isn't buying back stock, but is going to start generating a lot of free cash flow to pay down debt. Eventually, it will buy back stock.
So, your sense is that even if oil prices don't shoot higher, things like share repurchases and increasing efficiency are going to keep these stocks going up?
Majcher: Yes. Eventually they will go up.
Lucas, you said your natural-resources fund is still mostly in fossil fuels. What is something investors should look at in that realm?
White: Stan hit on it. I'll characterize things slightly differently, but in the big picture, I agree with him. If you look at the big U.S. energy companies -- Exxon, Chevron, EOG, and companies like that -- they're priced to give you a good return, although you're not going to see the 15% to 20% free-cash-flow yields that Stan is quoting. If an investor is scared of investing in energy, and investing in Exxon or Chevron seems like a relatively safe way to invest, I can't say that's a bad investment.
But to Stan's point, you can find much higher free-cash-flow yields and expected returns if you're willing to look at small-cap stocks -- Kosmos being a good example -- or you're willing to look outside the U.S. or outside developed markets. Look to Brazil for Petrobras, or look to Argentina for YPF and Vista Energy. There are opportunities, once again, to find companies that are putting up midteen to almost 20% free-cash-flow yields.
Petrobras returned 80% or more of its start-of-the-year market cap last year in dividends, special dividends, and share repurchases. That's how you know there is a major mispricing. In one year, they give you back 80% of your capital. Things like that are going to happen -- not 80% necessarily, but you're going to see companies returning a lot of capital. Whether the market smartens up about it doesn't really matter. You're going to receive those returns in one way, shape, or form.
Which of those smaller companies with 15% to 20% cash-flow yields would you bet on here?
White: Kosmos is our favorite in terms of the smaller-cap names. That's a little boring, because Stan already mentioned it.
But now we have two confirmations. Stephen, independent power producers have been a hot story this year. Constellation Energy and Vistra stocks are looking like Nvidia right now. Do you think they are still worth recommending?
Byrd: Well, we do see upside in both. I'm excited because both of those companies have a rare commodity: nuclear plants that are perfect for powering massive supercomputers. There is a scarcity of those sites. If you can get a data center connected to power quickly, our math shows that hyperscalers [large data-center operators like Amazon.com] would be willing to pay a huge premium for power. We expect to see very lucrative contracts.
That said, clean-energy companies that are also going to play in this area have been overlooked. Let me walk through what I see happening. Phase one is essentially that huge supercomputers will be built at nuclear plants. A lot of the power that these nukes would otherwise provide to the grid is now going to be siphoned away by these data centers. There are hyperscalers with net-zero [carbon emissions] goals, and we would expect to see very large renewables projects built to try to offset that. [Hyperscalers, such as Amazon and Microsoft, would contract to receive electricity directly from nuclear power plants. Because those deals would siphon clean power away from the grid, they would then finance renewables development to compensate for the loss from a clean energy standpoint.]
If nothing else gets built, natural-gas plants will run much more often. But hyperscalers have a focus on trying to keep their emissions low. We expect to see many announcements similar to Microsoft announcing 10 gigawatts of renewables. AES would benefit the most, and it's not priced into the company's stock.
AES is a huge U.S. developer of clean energy. It has worked extensively with the hyperscalers. We'd expect the company to announce much faster growth in clean energy, driven by this sort of second-step dynamic that the hyperscalers want [financing clean energy to offset carbon emissions] to ensure that their overall power operations have low carbon emissions. That doesn't mean natural gas will lose; it will participate in helping meet the increasing demand for electricity. It's just that the share for renewables has been deeply mispriced. Today, AES looks more attractive than the nuclear players.
What about companies that build out electricity transmission?
Byrd: Siemens Energy would be a good example of that. Its grid-services business has been performing really well. The growth outlook for that business looks extremely constructive -- literally -- for decades to come.
Utility stocks have mostly been left out of this trend, but some seem to be benefiting from growing electricity demand. What is your view?
White: I wouldn't play a pure utility based on this dynamic. While you'll see higher power demand, there are so many other pressures on utilities. It is hard for them to achieve dramatically higher earnings-per-share growth.
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