The health emergency generated by the coronavirus and the subsequent Russian invasion of Ukraine has led the world to a complex economic context marked by inflation and also by changes in industries and their billings.
In this sense, in the first part of 2022, Antonio Velardo explains that he saw a 35% increase in his company’s oil stocks.
He explains this situation with the ESG narrative that has constrained supply leading to companies not really being able to spend money on exploitation to increase exploration or CAPEX, having difficulty catching up with supply.
He explains that while investors initially did not want to hear about CAPEX for new projects, understanding that companies were meant to be revenue streams that focused on returning capital to shareholders.
In this framework, says Antonio Velardo, a supply constraint has been created that will take time to catch up, which is, he argues, the reason for the rise in oil prices.
A future of growth for oil?
Responds Antonio Velardo
The above data leads Antonio Velardo to believe that it would not be a surprise to find oil near record highs during 2023 and 2024. However, he explains, the strategy is still to invest in undervalued oil companies that are able to generate cash flow and pay down debt.
Therefore, what his company believes is that investment in oil can continue to be very safe in terms of downside, while at the same time possessing a very high upside potential.
Along with this, Antonio Velardo says that some small hidden Canadian companies are able to trade at a very cheap valuation similar to the multiples obtained in Russian oil companies.
When asked why, he argues that this is because valuation has to take risk into account. However, the geopolitical risk of Russia cannot be considered in the same way as that of Canada, considering that the latter would merit a higher multiple.
While it is not clear at this stage why the efficiency of the market is not yet catching up with the spread, they continue to believe that it will at some point and that it could be soon.
Antonio Velardo and how to deal with investments in the short term
With the complex scenarios reported in this regard, Antonio Velardo’s advice to investors is to view the current picture as a multi-year opportunity.
While it is true that the situation could become more volatile and there could be some setbacks, especially in the event that OPEC accelerates the inflow of barrels to the market, it is also true, says Velardo, that this will be the only opportunity to add to the falls.
For this reason, Antonio Velardo considers this to be the current gold of investors. It is about finding stocks that have remained under a lot of pressure over the years and going on to sell for 4 to 5 FCF, with no intention of spending money for growth, but only buyback and dividend.
This remains an opportunity that, according to Velardo, investors should not miss and can overweight in the portfolio, and can think of the current time as something that, in the future, may be seen socially as the “investors’ revenge”.