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Idea Brunch with Josh Young of Bison Interests
Josh Young shares his approach to oil and gas investing, experience from the boardroom, and his three top ideas
Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Josh Young!
Josh is the founder and Chief Investment Officer of Bison Interests, a Houston-based investment firm focused on publicly traded oil and gas companies. He was previously Chairman of the Board of Iron Bridge Resources, a publicly-traded Canadian E&P, which he took control of, sold off non-core assets, and sold for a premium. Prior to founding Bison, Josh was an energy investor at a hedge fund and a multi-billion-dollar family office, an investment analyst at a private equity fund, and a management consultant.
Josh, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Bison Interests?
I had been investing in public equities as a hobby since middle school, starting after I found the Motley Fool newspaper column in the newspaper. I studied economics at the University of Chicago, where I was taught that markets are efficient and to ignore my personal investing success, leading to a management consulting job out of school. After doing consulting and while working as an analyst at a PE buyout firm, I had the privilege of hiring Morgan Housel as an intern. He introduced me to value investing, got me to read books by Pabrai and Mauboussin and to come along to a Berkshire meeting. He also encouraged me to look for a public equities job, which I found at a multi-billion dollar family office.
I joined the family office in 2007, a time like today, when energy and commodity supply shortages were a serious concern. I started as a generalist investor, but became increasingly focused on oil and gas stocks, with some success through the financial crisis. I left to try to start my own one-man hedge fund and run a set of one-off public and private special situations/deals. Post Madoff and global financial crisis, one-man funds were out of vogue and the fund never got to scale. And one-off deals were great when they worked, and they did at first, but the oil crash in 2014 resulted in losses for the deals that were active.
In early 2015, with oil and gas equities down 50-90%, I partnered with an asset allocator from a private bank and launched Bison Interests, with the concept of constructing a long-only portfolio of the kind of “special situation,” one-off deals that I had been successful with prior to the oil crash. Bison has since survived multiple subsequent crashes. It’s a bit like how Forrest Gump rode out the storm, survived with one of the last boats still on the water, and went from meager harvests to boatloads of shrimp.
Many investors avoid the oil and gas sector because of its complexity, volatility, and reputation for poor capital allocation. What are the ingredients for success when investing in the oil & gas sector? How can an investor do well over the long run in this space?
It is extremely difficult. It requires a lot of work and flexibility. I start by focusing on good management teams, survivable balance sheets, highly economic assets, and discounted valuations. I treat each company as a “special situation,” doing a deep dive on the assets, investors, people, service providers, and really anything publicly available to be sure I know what there is to know, good and bad. And after multiple washouts in the sector, few specialists, and little dedicated capital remaining, there is more relevant public information available that is not priced into stocks in the space than ever.
Good people matter a lot, as do low expectations and rapidly improving situations. Buying very unpopular stocks where there is a reason to “look past” the discounted valuation works well too. Taking a longer-term approach and “looking through” the volatility is gut wrenching but works better than we’re conditioned to consider in a short-term-oriented world. And there is a cumulative advantage in the sector, which is one reason I chose to focus on it. The more I know, the more people I know, the faster and more accurately I can assess a situation. Often I will have seen similar assets, a similar value unlock dynamic, sometimes the same people, etc. And it’s impossible to find a “perfect” situation, so this prior history and advantage helps in assessing appropriate compromises and managing an intrinsically imperfect portfolio.
You were chairman of Iron Bridge Resources, a Canadian upstream oil and gas company, from January 2017 until its sale in November 2018. During that time the company outperformed peers (~+20% vs -50%) and you spearheaded an initiative to mine Bitcoin with excess gas. Why did Iron Bridge outperform under you and how is Bitcoin related?
Iron Bridge had been a multi-billion dollar company previously and had assembled high-quality assets at a high cost before my involvement. They had gotten close to insolvency and been forced to sell a core asset at a bad time, and had a conflicted board and unclear direction. This was reflected in their heavily discounted share price at the time I got involved.
There was a great opportunity to add value with a board, management, and strategy refresh. The plan was to divest non-core assets at an accretive valuation, delineate the one premium asset still held by the company, and either shift into development mode or monetize.
We were losing money on our natural gas production due to local price differentials and processing fees. Bitcoin had been running up during 2017, and I found out we had some space in a trailer at our production site and multiple generators we were powering using our gas. I spent months doing a deep dive, figured out that we could pilot mining onsite and that we were actually in an optimal location: safe, good weather – Alberta being cold most of the year meant much lower A/C and power costs, and competent technical people in proximity.
The good news was that the plan worked. We cleaned up the entity and cap structure, delineated the core asset, and proved the Bitcoin mining/hosting concept. The bad news was that, because Bitcoin mining using otherwise uneconomic (“waste”) natural gas was such a new idea, people hated it. Investment bank analysts downgraded the stock or cut coverage altogether, our banks got heartburn, and funds sold the stock. However, the value proposition was so compelling that we received a hostile bid from a private-equity-backed company. We were able to get the bid raised to an acceptable level (an almost 80% premium to the prior stock price!) and were able to exit with a profit despite a ~50% drawdown of peer company stocks.
Has your experience as a board member/chairman of public oil and gas companies changed your investing approach at all?
Yes. It helped me understand how much more information is available about companies in the public domain if you know where to look. This helped me in my investment in Baytex Energy this year, where I found material well results in a government disseminated public document and was able to appreciate the significance and act quickly. It also helped me appreciate how much people matter in company outcomes, and how much more is going on sometimes at companies than is readily available to passive minority investors.
Josh, what are a few interesting ideas on your radar now?
Baytex Energy (TSX: BTE — CAD$2.05 billion) is interesting here. Despite the run-up after those good well results were disseminated, the stock is only closer to fair value on the company’s other assets, with little to no value attributed to a huge oil discovery. There is a good case Baytex’s valuation converges with higher valuation oil and gas businesses as they translate the discovery into significant production and show a much higher ROIC than their current financial statements display. There is upside from their current below 3x EV/EBITDA to a mid-cap US producer average of 5x EV/EBITDA, with growth over time and substantial free cash flow.
Another is Journey Energy (TSX: JOY — CAD$115 million). They are a very inexpensive oil and gas producer, with one of the highest free cash flow yields. There is less differentiation among E&P stock valuations, especially on the smaller side, so they don’t get much credit for their much lower than average decline rate and are still in the penalty box for having had a lot of debt despite paying most down and being on track to zero in the next 18 months. They also have a gas power generation business they have been ramping up, positioning them as an emerging independent power producer in Alberta, a province with rapidly rising power costs due to coal plant shutdowns and carbon taxes. Just the power generation business could be worth the current market cap over the next couple of years as they expand their first facility and build more. Due to their low valuation and low maintenance CapEx requirement, they are one of the most “torqued” equities to higher oil and gas prices. And their power generation business and low decline reserves offer some margin of safety if oil and gas prices were to decline.
Both of these companies organically generated opportunities to differentiate themselves from competitors, one with a greenfield discovery and the other with a power generation business. These are worth far more than the capital invested, and display talented, value-added management. Neither is priced in, and these offer the kind of “extra” margin of safety and upside that I look for in investment opportunities.
A third idea is SandRidge Energy (NYSE: SD — $392 million). SandRidge is one of the most hated and least understood oil and gas companies in the market. It is a post-bankruptcy company. The pre-bankruptcy entity was large, over-levered, and lost a lot of people a lot of money. It has been subject to multiple activist battles, and the board is currently composed of Icahn appointees. It is also a liquids-rich natural gas producer in Northern Oklahoma, an area where local realized prices have been historically volatile, as have the drilling results. However, new management has turned the company around since April 2020, taking similar steps to what I did when I took over Iron Bridge. They sold off assets, paid off debt, and are now in a net cash position. The company is now generating a meaningful portion of its market cap in free cash flow, while sitting on ~1/3 of its market cap in net cash, while keeping production flat. The degree of continued animosity and misunderstanding of the company is directly proportionate to its attractiveness as an investment. And the billion dollars of infrastructure, the $1.6 billion of NOLs (now very relevant due to all the free cashflow), and the pilot carbon capture project are all “free” along with a ~40% free cash flow yield. Hated or unknown, attractive cash flow, plus some stuff “for free,” with competent operators — if you’re detecting a theme, this is it.
I own all three stocks, this is not a recommendation.
What are some of the first things you do when researching a company? What does that first hour of research look like for you? Do you do anything that few others do?
Rather than pointing to one thing I do that few others do, I’d like to highlight one thing I don’t do that almost everyone else does. I don’t build detailed models on companies I’m evaluating, particularly not early on. They say that building a model lets you be “precisely wrong” about valuation. I’ve found that the model building exercise, particularly in oil and gas public equities, focuses investors and analysts on factors that are hard to predict and in many cases are not the actual drivers of the investment outcome.
Instead, I try to focus on what the market is expecting, why the stock looks cheap, and how that might change. After checking valuation, capital structure, and asset quality and composition, I look to see if I can validate whatever has caught my attention through mutual connections or third-party information. Local realized pricing, services costs and availability, and other specific factors that I stay up to date on play a major role in company economics and the outcomes of companies in the space.
Frequently I’ll have a mutual connection who worked for the company’s management team or on or near the particular assets. Sometimes there is state / provincial data that can be helpful. Sell-side research is good to understand the consensus view on the company, but often there are industry reports, well data libraries, midstream or royalty company presentations, or other such information sources that have information that can validate or invalidate a thesis rapidly. A friend likes to joke that “people will do anything to avoid reading a 10-k” and I find that they seem inclined to take what they find in a corporate presentation as a given.
What would you like Bison Interests to look like 10 years from now?
I love investing and think I have a meaningful advantage in my niche. But oil and gas is highly cyclical, and I don’t want to be there for the next down cycle. We plan to return capital after this down cycle in oil and gas has played out. There may be another bear market within the next 10 years, in which case we may raise capital and do it all over again. We’d rather miss the 8th inning of a bull cycle to avoid being there for the end of the 9th.
Josh, thank you for the great interview! What is the best way for readers to follow or connect with you?
Bison provides monthly updates, often with oil and gas market perspectives and specific industry insights, which can be found on or signed up for at www.bisoninterests.com/content. Bison’s Twitter is: @BisonInterests and I can be found on Twitter: @josh_young_1
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