Jim Pearce is out with an ad that says we can “Own a Piece of ‘The Next Chevron,'” which was apparently a successful recommendation of his Personal Finance newsletter (long before Pearce was there). Here’s how he puts it in the ad, which is trying to sell Personal Finance subscriptions ($39/yr):

“Just $33 Today Locks On To A Possible 3,204% Profit Starting As Soon As Tomorrow

“Investors who took our recommendation on Chevron — and held on — are currently sitting on a fat 30X return. Now, thanks to a unique behind-the-scenes move on Capitol Hill, it looks like it’s about to happen all over again….

“Fair Warning: To lock in maximum returns, make your move before November 1, 2023.”

And a little later on, they clarify just how long that holding period was for their 3,204% return…

“Investors who snapped up shares on our Chevron recommendation in 1990 — and held on to those shares — have seen the value of their investment skyrocket by 3,204%.”

Man, that’s a LONG time.

But yes, that’s true, Chevron (CVX) shares are now about 900% higher than they were in March of 1990, and if you include reinvested dividends that would get you to a total return of about 3,300% for those 33-1/2 years. Which is pretty impressive, though not completely shocking — the S&P 500 would have given you 2,430% total returns during that same time period, and as recently as a year and a half ago, before Russia invaded Ukraine, the returns for the S&P and CVX were pretty much identical over 30 years. (If you want something a little more shocking, lots of smaller or growthier companies blew those numbers away — and I didn’t have to look far for examples… Apple (AAPL), for some context, has returned 68,000% to investors who bought in 1992, and Microsoft (MSFT) about 48,000%).

And here’s the PSA that I should include whenever I mention those dramatic historical returns: Not many people earned those returns. Just sticking with Chevron, it would have been challenging to hold the stock during times when the oil price weakened or the company was perceived as a laggard. There were at least four or five periods in those 30 years when Chevron shares fell by more than 50%. Some people can hold through that, but if you’re someone who tries to use “stop losses” to make sure you don’t lose a lot of money in any one stock, do note that this means you don’t ever get to have those kinds of stupendous long-term returns. There aren’t any stocks that beat the market for decades without also having some substantial drawdowns along the way.

Which isn’t to say that stop losses are pointless — they have their place, and if you’re more focused on trading positions for a couple months or a couple years and don’t intend to ever let investments build and compound over decades, then selling at a stop loss somewhere in the 15-25% range might make sense for you. There are plenty of academic studies that support the power of stop losses in a portfolio — just remember that in order to make stop losses work, you have to put the money back to work in something else productive. You can’t sit back and congratulate yourself for selling and keep that money in cash to make you feel wise and safe, because then you’ll often miss the rebounds that happen after stocks fall. Miss a few of those “bounce back” days, and eventually you’ll notice that you you’re not making anything close to the market’s average ~8-10% annual return.

Sorry, got distracted by my soapbox there for a moment… let’s get back to finding this oil stock.

So what’s the “next Chevron?” Here’s how Pearce puts it in the ad:

“… while Chevron is likely nearing the end of its long profit run…

“A behind-the-scenes move in Washington, D.C. meant to save our energy independence has unlocked a similar opportunity.

“And today, you have a golden opportunity to stake your claim with just $33.

“Mathew Iak, executive vice president of The U.S. Energy Development Corporation, calls it: ‘The greatest generational opportunity for investors today.'”

Iak has been quoted by a bunch of newsletter pundits over the past year or two, and he has been saying that we started a “supercycle” for oil and gas stocks in recent years that he believes will continue. The last three years have indeed been pretty good for energy stocks, though the oil producers have so far done significantly better than the natural gas producers.

And Pearce implies that there’s some secret oil cache that the rest of the world doesn’t know about…

“The largest natural oil reserve in history.

“Not in Venezuela, Saudi Arabia, Canada, Russia, or Iran…

“But right here in America.

“Sitting under a pristine pasture in West Texas.

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“A reserve that while relatively unknown to the world at large… could give you and your family a first-class ticket for the rest of your lives.”

I don’t think it’s fair to say the Permian Basin is “relatively unknown” — it’s pretty widely discussed as one of the best oilfields in the world, and the clearest example of the amazing productive power of fracking, as what was once a pretty worked-over oil field near Midland, Texas turned out to have layers upon layers of oil-bearing shale in addition to the “easy” fields which had been so easily tapped decades before.

And Pearce says that he sees a boom coming, which seems pretty close to “consensus” among newsletter editors these days…

“If you thought the last oil boom made investors filthy rich…

“What I’m about to show you is likely to make those profits look like a drop in the bucket.

“Because, unlike previous super-cycles, this new opportunity in oil isn’t just a temporary solution to a short-term supply crunch.

“It’s a matter of national security.

“That’s why, despite President Biden’s ongoing flirtation with electric vehicles and environmental lobbyists…

“The U.S. government has quietly embarked on an all-out ‘oil spending spree’ that’s bigger than we saw in the 1900s and 2000s….

“The Biden Administration is Desperately Begging to Buy Three Million Barrels of Oil From at Least One American Company.”

What’s that about? Apparently, just the comment that the US would like to replenish its strategic petroleum reserve (which was tapped as part of the effort to soothe inflation and/or please voters over the past year or two) … here’s how Pearce puts it:

“We found this document buried in the Department of Energy files. The Biden Administration has put itself in such a difficult political and logistical situation that the order gives no guidance as to how high the price of this sale can go, which means unlimited profit potential for the company I’ll tell you about today. Read on for details on the $33 play that could net you a 3,204% windfall starting as soon as November 1.”

That’s definitely not true — the US has been planning to begin buying back oil for the SPR for about a year now, and has contracted for some purchases of up to three million barrels or so as far as I can tell, with plans for six million, but a lot of those plans have been scotched by higher prices recently. The administration seems to really not want to be in a position where they lose a lot of money on the SPR release and then replenishment, particularly going into an election year, so they’ve been hoping (and planning) to refill the reserve at lower prices (the first bunch of replenishment was supposed to be in the low $70s, I think), and don’t seem super likely to be aggressive about it if prices stay well up into the $80s. Maybe this even got squirreled up with the government shut down plans or the debt ceiling debate, I don’t know, but it’s certainly been a political hot potato.

Either way, that’s a tiny part of the market and should not have a huge impact on prices — even Pearce notes that the government is talking about buying back three million barrels at a time, or maybe six million, over some period of months, and that sounds like a big number… but US oil production is about 13 million barrels per day. That’s not going to be a windfall for any specific oil company, particularly because the government is not going to be that picky about which producer sells them the oil — whoever has the right kind of oil, produced from the right place, will be tapped to sell some to the Feds, and they might even offer the government a little discount if they’re feeling particularly patriotic (just kidding!)

So this whole argument sounds a little fishy… but we’ve gotten this far, let’s see which stock Pearce is pitching.

He goes into a spiel about the billionaires and insiders who are buying shares… which sounds encouraging (at first)…

“The World’s Biggest Billionaires Are On Board Right Now, With a Roster Including Names Like…

“Barry Rosenstein, who recently reported a $1 billion stake.

“Cliff Asness, who disclosed ownership of over 1 million shares.

“Ken Griffin, who bought $55.6 million worth of shares.

“And Israel Englander, who bought 1.4 million shares alongside six other billionaire investors.”

And “insider buying”….

“All told, insiders snapped up 653,526 shares over a 12-month period…

“I don’t know about you.

“But when prominent institutional players, savvy billionaire investors…

“And company insiders alike all load up on ONE little-known stock…

“That tells me they likely know something the average investor doesn’t…

“Which is that this company has a ‘speed-production advantage’ that positions it to deliver substantial gains in the race to save America’s energy independence.”

He even includes a chart of all the “insider buys” that were made in this company recently, so this seems like a good time to tell you that insiders executing options doesn’t mean they “snapped up” shares because of some insider knowledge about how awesome things will be… it means they effectively claimed their compensation. Stock options are part of how many employees are paid, and if they don’t exercise them then they’re worthless… it would be like you giving a third of your paycheck back to your employer. Sometimes employee stock options do end up being worthless, of course, if the stock never goes up… but that’s not typical for large, mature and profitable companies.

So what’s going on with those “insiders” who “snapped up 653,526 shares” over the past year?

Well, if we start from the first example, an “option execute” trade for 15,742 shares that happened to take place in May (there has been one more since then, but presumably Personal Finance pulled the data before that happened), then yes, there have been a bit over 650,000 shares “snapped up” in options exercise trades just so far in 2023. But of those, the “insiders” turned around immediately, usually on the same day, and sold more than 580,000 shares. Over the past 12 months, there has not been a single “open market” acquisition of shares by any insider, and in total insiders have sold almost a million shares. Nobody inside the company is “loading up” on stock.

Which doesn’t mean the company is junk, it just means that the executives and insiders would prefer to have cash rather than use their stock options to own more shares of the company. There are lots of good reasons they might want to do that, including just diversification, and some of them still own plenty of shares… but there is no particular trend toward insider buying, and no particularly obvious “ownership culture” at this oil company.

And how about those institutional holders, those “billionaires on board” who Pearce thinks should inspire you to buy shares?

Well, Barry Rosenstein at Jana Partners did buy a $1 billion stake in the company… though that was over nine years ago, and Jana pressured the company to make changes and later sold. They don’t own any shares today, and haven’t for quite some time… and in fact, they don’t own any oil stocks today, as of their last 13F filing. Seems awfully shady to include that as part of the tease when they do include updated mid-2023 numbers for other stuff.

And Cliff Asness may well have disclosed ownership of over a million shares at some point, but his fund company, AQR, does not have a meaningful stake today.

Ken Griffin’s Citadel did buy 321,000 shares in the second quarter of this year in the mid-$30s, but also sold 902,000 shares the prior quarter at around $40. They don’t often hold no to large stakes for many years, there’s always a lot of trading in and out at Citadel.

Israel Eglander’s Millennium Management hedge fund did buy about 800,000 shares last quarter, and they currently hold a stake of about $75 million.

So what’s our “secret” stock today? Sorry, just wanted to get some of that fog lifted before I “reveal” the name: According to the specific insider “option exercise” details Pearce shares, along with the Permian Basin reference and the other “insider” references, this must be APA Corp (APA), formerly known as Apache Corp., an energy producer with a global footprint (they have major production in the UK and Egypt and a big discovery offshore Suriname, though, thanks in part to Jana’s activism many years ago, they did sell some of their international projects over the years and maintain a clearer focus on the US, both offshore in the Gulf of Mexico and onshore in Texas, primarily in the Permian Basin but also in the Eagle Ford and Austin Chalk).

APA Corp is not a small company, though they are much smaller than Chevron or Occidental or the oil giants — they have a market cap of about $12 billion and have paid down a fair chunk of their debt in recent years, so the enterprise value (net debt plus market cap) is about $18.5 billion. They’re trading at a valuation similar to the larger US oil companies, a little bit cheaper (APA is at about 8X earnings, most of the larger players are in the 9-11X earnings range), and are right now at only about 7X 2024 earnings estimates ($5.87 per share)… though, of course, nobody really knows what oil prices will be next year, and that’s the major factor which will make their earnings grow or shrink (about 2/3 of their production is liquids, either crude oil or natural gas liquids, and a little over 50% of their production is in the US). Like many oil companies, they also pay a dividend — though they slashed their dividend back in 2020, when oil demand collapsed, and just last year got it back up to 2019 levels ($1/year, so the yield is about 2.5% at the current $39 share price (the stock was around $33 back in the Summer, as teased, but that was a few months ago — it also got as high as about $45 last month).

Egypt is their second-most important location, extracting mostly oil from the Western Desert, and they’ve invested a lot into building up that production, so I imagine that’s probably where most of their geopolitical risk lies — Suriname is still a discovery, not yet in production, and their North Sea platforms in the UK are quite mature. The company does not talk much about hedging in their investor materials, so I assume they don’t hedge a lot of their production, which will probably lead to more volatile results as energy prices rise and fall.

APA hasn’t really stood out over the past decade, so I don’t know why Jim Pearce expects big things to happen soon — maybe he’s extra optimistic about the Suriname project taking off, or believes that they’ll just enjoy high prices from their Permian production in the near future. Here’s what the stock has done over the past ten years, in purple, compared to the most relevant ETF (the SPDR Oil & Gas Exploration and Production ETF (XOP), in blue), and, for context, to the S&P 500 (orange) and the WTI crude oil spot price (green):

Will that be the story of the next ten years, too? I have no idea. Certainly there are a LOT of smart people arguing for a real renaissance in the oil & gas stocks, as investment in production has lagged for a long time and demand continues to rise around the world, partly because there’s a pretty long time lag between our ambitions for a “clean energy” future and the reality of a growing planet’s energy needs today, and that chart is not necessarily entirely fair, since it starts near the 2014 peak in oil prices, before they had their nasty decline that year… but still, there’s a reason why the energy stocks have become a smaller and smaller part of the S&P 500 over the past decade — the companies, in general, are shrinking. They might be profitable from this starting point, particularly with oil prices looking relatively strong in recent months, and they are not very richly valued if we assume that oil prices stay relatively high, but the history doesn’t endear us to the idea that these will be real compounding machines — the message of the trailing stock chart is that you might have to get in and out of these investments with some degree of nimbleness if you want to keep up with the broader market… maybe we’ll have a runup in the oil stocks like we did going into the 2008 collapse, or the 2014 oil price drop. This is the chart if you look back at Apache/APA over 20 years, so we’re going back to before the XOP ETF existed — this time it’s still APA in purple, but the blue line is the crude oil spot price (orange is still the S&P 500):

It might well be that the recent trend, in which the oil price does better than APA and most of the other oil producers, is just a social story — lots of investors avoid oil stocks right now, including some big institutional investors, so there’s less demand for the stocks, which means the valuations will likely be lower. At some point that might tip more aggressively back to oil, I don’t know, but it could be that oil remains a hated sector, and trades at a low valuation, for a long time.

The other lesson? It’s the same as with most commodity producers — if you tell me what the oil price will do over the next couple years, I can probably do a pretty good job of predicting how the stock of APA will do. There hasn’t been any evidence that I see, at least in the charts, that tells me APA is better than the average company in their sector — maybe that’s an edge you can find with further research, but it’s at least not obvious.

And not to put too fine a point on it, but the past 20 years haven’t indicated that APA can keep up with Chevron, let alone be the “next Chevron” — doesn’t mean it’s impossible, but it means there has to be some reason for APA’s outperformance that the casual viewer doesn’t see just yet (if you know what that is, just holler at us in the comments below, please). There are companies that have had great long-term performance in the oil patch, including Chevron, so let’s note that the possibility for excellence exists in commodity sectors even as we point out that APA hasn’t yet demonstrated that excellence… this is that same 20-year chart with APA in purple and oil in blue, but we’ve added Chevron in pink, with dramatic outperformance, and Warren Buffett’s other favorite oil company Occidental Petroleum (OXY) in green (Berkshire owns big chunks of both CVXY and OXY), and the longtime sector leader Exxon Mobil (XOM) in brown.

Lots of companies have done much better than Apache/APA over the past couple decades… will it be APA’s turn next?

Personally, I don’t own a bunch of oil stocks, I don’t mind letting Warren Buffett pick those for me and I generally prefer to go with royalty companies in the extraction industries when I can (though not Permian Basin Royalty Trust), but if I were betting on oil doing way better than expected over the next few years, I’d probably be lazy and stick with the XOP ETF… or maybe go a little bit wilder with some of the international producers who also trade at very cheap valuations, like Petrobras (PBR), or the much smaller drillers in the US and Canada who might be more nimble and exciting (oil’s been a popular story this year, so we’ve covered a bunch of those, from the Permian producers to Paramount Resources or Journey Energy up North. (I don’t own any of those and am not recommending them, to be clear, they were just more interesting stories).

There can be exciting discovery stories even out of the biggest names, as we saw with Hess last year, after that stock had done nothing for a decade, so never say never… but I can’t say I’m getting a lot of exciting vibes from APA, but my ears are wide open if you’ve got an APA story to tell… just use our friendly little comment box below. Thanks for reading!