Energy Sector should outperform Tech in 2025 - Nov 21

[dan_s]

Note from HFI Research

First half conclusion: Tech Stocks are selling at extremely high multiples and growth for most of them cannot match the hype.

Energy Stocks
Meanwhile, in the land of energy investing, sentiment could not be worse. Despite global oil inventories turning lower in Q4 and beating consensus expectations, people are still forecasting massive surpluses in 2025.

But despite the oil bears throwing the entire kitchen sink at the oil market and energy stocks, technical patterns have remained strong. WTI, which has had ample opportunity to crash to $55, has remained steadfast around $70/bbl.

And despite oil future positioning near multi-year lows, physical markets are improving, and refining margins are moving higher.

To me, these are all signals that the market is starting to look past some of that bearish consensus sentiment. Oil market fundamentals are clearly better than what people believe, and with energy stocks starting to outperform the most popular sector, smart fund managers are starting to pay attention.

Peak Supplies
On Nov 9, we published a contrarian article titled, "The Peak In US Oil Production Is Here And Why You Need To Own Energy Stocks." In it, we explained our rationale for why US oil production is going to peak a lot sooner than people expect. The fundamental reasoning behind our call is the realization from Permian producers that they need to start managing the assets for the long haul as opposed to the old method of growing production and selling out. With most of the Permian now operated by a handful of large players, managing the assets efficiently is the name of the game, and that usually means very little production growth, because higher production will only increase the base decline rate.

As US oil production starts to show signs of peaking in 2025, market participants will realize that non-OPEC production growth won't be what it used to be. This sentiment shift coupled with disappointing Brazil production growth will reinforce the idea that OPEC+ barrels are needed to avoid a sustained deficit.

We think oil prices will remain largely rangebound in 2025, but investors thinking about the possibility of future deficits will start to buy energy stocks. < My 2025 forecasts are based on WTI averaging $75/bbl, but without a global recession the "Right Price" for WTI is in the $75 to $85 range, plus higher natural gas prices are going to offset lower oil prices next year.

With many names like MEG Energy trading at ~10% FCF yield at $70/bbl WTI, the downside is limited, while the upside to $85/bbl WTI is +57.9%. < Our Sweet 16 closed last week at just 3.78 X operating cash flow and all them are free cash flow positive with solid balance sheets.

Investors buying high-quality names will get free optionality to higher oil prices while being protected on the downside.

That's why I think energy stocks will outperform tech. Not only are the valuations more compelling, but the sentiment indicates to me that the extreme is here and something is about to change.

HFI's Conclusion
It's a contrarian call, and it's not the first time I've done something like this. But what we are seeing in the market won't persist. Maybe the craziness in the Tech Sector continues a while longer, maybe it doesn't. But there's one thing I know for certain, staying rational when everyone is losing their mind is usually the best strategy.

I think energy will outperform tech in 2025.