Dallas Buyers' Club

by William Smead, Smead Capital Management

Dear fellow investors,

In one of his best movies, Matthew McConaughey plays a blue-collar guy who is quite the ladies’ man. His wide array of sexual partners quickly moved from being a badge of pride to a ticket to the scariest sexually transmitted disease of all, HIV/AIDS. A frantic quest took him to Mexico to find a medicine that was proving beneficial in slowing the progression of the disease.

Once he brought the medicine back to the U.S., he found out that you couldn’t sell the medicine to a large community of gay men with HIV/AIDS, because it had never been approved by the Food and Drug Administration. In response, a club was formed with membership dues to receive the medicine via membership in the Dallas Buyers Club. He was a blessing to those who needed the medicine.

In 2022, oil prices shot all the way up to $120 per barrel as war raged in Ukraine and massive underinvestment in energy sources around the world came home to roost. Oil prices were a part of the economic disease called inflation. Even though the effect on the U.S. economy of higher oil prices has become muted in the last 20 years, it became politically expedient for President Biden to sell 200 million barrels of oil out of the Federal Government’s Strategic Petroleum Reserve. The added supply blessed gasoline buyers by bringing prices down temporarily. Numerous major oil companies took one look at refining oil without pulling it out of their reserves and formed their own Dallas Buyers Club.

As we look out into 2023, there are many things we don’t know and a few things we think we know. We know that U.S. oil production averages around 16 million barrels per day. We know that oil and gas companies have been dissuaded from increasing oil and gas drilling as fossil fuels are treated like a pollution disease. We know that President Biden’s reserve release represented about 6.5% of U.S. oil production for about 200 days in 2022. Lastly, we know that the Strategic Petroleum Reserve must be refilled in the event that the U.S. is lured into a war somewhere around the world.

At the margin, a seller of 200 million barrels in 2022 would become one of the largest buyers of oil in 2023. As the chart below shows, oil and commodities hit a 246-year low in April 2020:

History would argue that we have years of higher oil and gas prices ahead of us, especially if the Communist Chinese release their population from its COVID-19 imprisonment and start competing on the world economic stage. Therefore, we are making every effort to over-weight our oil and gas stocks despite their stock market success in 2021 and 2022.

We run a concentrated portfolio of primarily large-cap value stocks with boringly dry turnover. Thank you for participating as we work for investors who fear stock market failure.

Warm regards,

William Smead

The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

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