The Ellis Martin Report Interview with Joshua Young
January 5, 2015
TEMR: Today I'm visiting with Joshua Young, the founder and portfolio manager of Young Capital Management. Previously Josh served as an analyst at a multibillion dollar single-family office in Los Angeles. Prior to that he was an investment analyst at Triton Pacific Capital Partners. He was also a corporate strategy consultant at Mercer Management Consulting and DiamondCluster. He holds a B. A. in economics from the University of Chicago. Josh is one of the fund managers I see regularly when I attend corporate presentations in Los Angeles. Josh, welcome to the program.
Joshua Young: Thank you for having me.
TEMR: Now we have not spoken for a couple of years. That doesn't mean we've had a problem between us. We just haven't visited for a while. About 2 years ago I think the price, and you'll correct me if I'm wrong, the price of oil was probably about $105.00 a barrel. Is that correct? Does that sound right?
Joshua Young: Yeah.
TEMR: It's a completely different ballgame right now. By that I mean as of this broadcast that let's just say oil is somewhere under $60.00 a barrel. I'm sure this is not a happy place for you. I'm sure it's not a happy place for many investors who, I'm going to use the word, piled into oil over the last few years, especially hedging against the dollar, perhaps hedging against gold. What do you think has been happening?
Joshua Young: I mean, there are a number of different theories about it, but it looks like the short-term supply exceeded the short-term demand. Any physical commodity market you need the supply and demand to match. In this case it looks like the price of oil has been falling in order to match the supply and demand.
TEMR: I've heard from a couple of sources that the supply has always been there, that the speculators drove the market up and perhaps the same folks that drove gold up to a place where that was never sustainable. What are your thoughts about what I just said?
Joshua Young: Well, I think gold and oil are very different. All of the oil that's ever been produced in history has been burned except for the oil that's been produced today and yesterday. Whereas all of the gold that's been produced in history more or less is still available today. The supply and demand dynamics are very different. It's hard to make comparisons. I think there definitely was a speculative effect on the price of oil. You can see that the speculative futures positions have changed a lot in the last few months. There are way fewer long speculative positions in oil then there were 3 or 4 months ago. It's hard to tell exactly whether that's following the price down or whether that's driving the price down, but that type of speculative open interest can have an effect on a commodity price and that may have been one of the factors that has driven the price down so fast and by so much.
TEMR: You don't think that the Bakken oil boom in the West 2 years has had any dramatic effect on the market and what's been going on in Canada with regard to shale or is that just part of the picture?
Joshua Young: I mean, I think that's a big part of the picture. If you look at global supply picture, the only place in the world where oil production has actually increased is in the U.S. and Canada. The U.S. and Canada actually represent more than 100% of the supply increase over the last few years, which means that global oil production outside of the U.S. and Canada has actually fallen while the U.S. and Canada have grown. Certainly oil shale fields, like the Bakken and up in Canada, like Duvernay and Motney and back in the U.S., like the Eagle Ford, have definitely been the large drivers of that oil growth.
TEMR: Is that production sustainable now given the drop in prices?
Joshua Young: Absolutely not. I think a lot of the wells that have been drilled, especially at the costs that they were drilled would be uneconomic at current prices. I think that the producers when they were drilling were not expecting current prices and I think that you're seeing that evidenced in capex guidance for 2015. I mean, you're seeing large companies that were absolute Wall Street favorites, companies like Oasis, where Goldman Sachs had them as their highest rated, strongest buy recommendation possible. They were touting them as a focused list cost and assuming everyone should own, that stock is down over 75%. Their drilling budget from 2014 to 2015 is changing so radically that they're dropping 10 out of the 16 rigs that they were running. They're going from 16 down to 6. Obviously, you can see that whatever supply they were going to grow they probably won't. Maybe it takes a few months for that to play out, but across the space you're seeing producers cutting back rigs dramatically. That will, first, slow down production growth. Then eventually if prices stay where they're at that will lead to shrinking supply from these same places where we were seeing some production growth.
TEMR: So potentially could we see that same sort of bust that we saw in the eighties with the oil companies when Houston became a ghost town more or less? I'm exaggerating a little bit, but you know where I'm going with this.
Joshua Young: Yeah, yeah. I don't think that will be the same type of bust. I mean, that was really bad and the biggest difference is that there was dramatic oversupply and overcapacity for production in the eighties. At that time I think there was something like over 10 million barrels a day of potential supply that OPEC could bring on that they weren't brining on. It might have been even as high as 20 million barrels a day. There was just this huge amount of supply that OPEC could bring on and they were signaling to the market that they were going to do it. They were starting to bring it on incrementally and that caused oil prices to fall and they fall more and there was effectively no bottom except the marginal cost of production for the Saudis, which was super, super low. Right now there is very little excess supply. The Saudis claim to have a couple of million barrels a day, which obviously is much smaller than 20 million barrels a day or 10 million barrels a day. It's unclear whether they even have that couple of million barrels a day of excess capacity that they claim. As a percentage of total production and total demand it's a very small percentage. That's the only available spare capacity across the whole petroleum system and across the whole world. From a spare capacity perspective there's much less spare and so it'll be much harder for things to stay bad as long. We're already seeing a production response. We're already seeing a large number of drilling rigs losing work and getting laid down and seeing companies that hire those rigs announcing plans to cut rigs further. I think we'll see a production response. That being said, things are not going to be pretty in Texas. They will not be pretty in Houston. That's going to be driven by these rig cuts and driven by the production cuts that are going to be associated with them. There's a whole economy associated with the oil and gas industry. That economy is headquartered in Houston. There are often major office in Denver and so things might not be so great in Colorado either. In addition to all of the direct jobs or all of the jobs that are at the oil producers, there's also all the oil service jobs. There are the oil supply jobs. There's other associated manufacturing and distribution, all of the jobs associated with that. Then there's everything that's servicing those so all of the hotel companies and the restaurants and the shops and the apartments. There are all kinds of things that go into an economy. Everything that's touching oil and gas producers and oil and gas service companies is going to hurt. I don't think people are expecting it. We're not seeing a reflection of it yet in the financial markets. Even though I think that oil prices may rebound at some point in 2015, I think that there will still be significant damage from an employment perspective and that will filter down to a number of different service industries and may affect the overall Texas economy.
TEMR: You're saying that oil is driving economy almost solely in Texas.
Joshua Young: I wouldn't say it's solely driving the economy. It is a big factor. It represents a large portion of Texas' GDP. Both directly, just from oil prices being lower and therefore the producers selling less oil and the measure of their product being lower and their revenue being lower, as well as the indirect effects of then spending less money and that filtering through and the whole trickle down of that money through all of the different service industries and through their employees and those employees spending money. Yeah, I think that you'll actually will see a slowdown in Texas' economy. Potentially you could even see the economy going from growing, I believe it was growing at faster than 3% a year as recently as a few months ago, to potentially seeing the Texas' economy actually shrink.
TEMR: Will the smart investor short oil stocks right now?
Joshua Young: That's a great question.
TEMR: Thank you.
Joshua Young: That's a great question. I'll just address one last thing that I forgot to mention on the Texas economy thing. If you look at countries that are exposed to oil in the same way that Texas is exposed to oil, you look at places like Russia, Venezuela, places in the Middle East, their economies are slowing down dramatically. Russia's in a recession already. Venezuela is a mess. Actually the stock markets for a lot of oil producing countries, even ironically Saudi Arabia, their stock markets are down a lot and those markets are pricing at a recession. The Canadian dollar is down and Canada's having trouble. I don't think it's so radical to look at Texas and say, okay, well, Texas has a lot in common with, let's say, Canada. Although, Texas and Canadians might not necessarily get along so well if you put them in a room together. If you just look at their economies they actually bear a lot in common. I think it's not so radical to say, in the same way as people are focusing on Canada and saying, oh Canada's having all these problems and focusing on Russia and saying Russia's having all these problems. Well, I hate to break it to you, but the economy is Texas is actually very similar to the economy in Russia.
TEMR: So does that hurt--- is that pain going to come to Texas perhaps in a year? When will they start to really feel the hurt as far as the general population of the State is concerned?
Joshua Young: I think it's going to be faster than a year. I think it's already happening. BP put out an announcement that they're planning to spend over the next few months $1 to $2 billion dollars in severance payments as they lay off people. BP has a large office and facilities in Houston. They're the start. I mean, you're going to see a lot of these things. There's a proposed merger between Halliburton and Bakers Hughes. If that happens they'll probably shutdown the Bakers Hughes innovation center and fire thousands of people in Houston. There'll probably all kinds of synergies and frankly synergies mean jobs. They'll be a lot of people that will get laid off. Maybe the innovation center doesn't get cut, but maybe the Baker Hughes headquarters gets cut or whatever it is they have to fund a merger of that size through rationalization. Even though they weren't going to rationalize, they still are going to see way fewer rigs both onshore and offshore. They'll need fewer people. Unfortunately you'll see people that were working on rigs and making $100,000.00 a year, go work at Wal-Mart and make $25,000.00 a year. Those people aren't going to be able to spend as much money. They're going to lose their houses in some cases. Their real estate values are going to go down. Restaurants are going to see less people eating at their restaurant. Hotels are going to see fewer hotel nights both from employees of companies on business as well for leisure nights on people traveling on their own. I think we're going to start seeing that really soon. I mean, you're already seeing people get laid off and furloughed. I think you'll see even more of that as the 2015 capital budget start to be implemented in 2015 and as you see these rigs go from, like Oasis, running 16 rigs, running 6. 10 rigs is a lot of people. Maybe the people that work on the rigs were in North Dakota, but a lot of them may live in Texas and commute back and forth. Then all of the service personnel that are based in Denver or based in Houston, I mean, that's really going to affect the local economy.
TEMR: So the Bakkens are done then too, right?
Joshua Young: Done is strong, but, yeah, definitely there is a big pullback. Actually Bakken oil right now is selling, at least the last I checked, it was selling at a greater than $10.00 differential to West Texas Intermediate. The last I check oil was at about $57.00 so Bakken oil might have been as low as $47.00. The last I saw the Bakken price, oil was at $60.00 or $62.00 and Bakken oil was below $50.00. It's really hard to make money in a Bakken oil well at below $50.00 oil.
TEMR: What are the repercussions for the U.S. economy in general?
Joshua Young: It'll be interesting. I mean, I think there's definitely a one-time gain for the economy just for consumers as they're able to spend less money on gasoline and do other stuff with it, especially around the holiday season it will probably actually help retail sales. People will feel a little more comfortable. Ironically though, our energy balance is much closer to balance then it ever has been in the sense that like we produce a lot more of our own oil and so there is going to be this short-term effect of consumers having more money and spending more, but there's also going to be a longer-term effect of lower employment. A lot of economic growth in the last few years has been in the oil and gas space. As we see companies cut jobs it's unclear where those jobs are going to be added. Economic recovery was tenuous as is so we'll see what happens, but it's definitely short-term, very short-term. It's good overall for the economy, but medium-term it may end up being more challenging then people expect.
TEMR: What would you say to the mom and pop investor who has been in the energy stocks for a while and they've taken a loss and they're asking you this question or me this question, what should I do? Should I cut my losses? Should I get out? Should I get back in? I understand it's probably company specific, but what's your general advice?
Joshua Young: Yeah. I think there's basically two types of companies out there. There are companies that have relatively low debt that have low costs of drilling that have their production hedged and that have reasonable amounts of cash flow relative to the amount of debt. Those companies are probably reasonable investments at this point even if oil prices go down they should be able to survive through a year or two-year or whatever downtrend. Those types of companies that have relatively little debt that are able to drill at $60.00 oil or $55.00 oil and earn a profit, those companies should survive. Likely at this point after how far down a lot of oil companies have traded, their stocks have traded, those companies, ex the majors, the majors are a totally different beast. A lot of people are pitching ConocoPhillips or Chevron or Exxon, like those are totally different stories. Focusing more on the smaller companies that are down a lot, the small ones that have good balance sheets are great investments right now. I think we'll look back and see the end of 2014 as having been this like golden era, great opportunity time to go and buy these stocks. On the flipside there are companies that likely will go bankrupt at $60.00 oil and might even go bankrupt at $70.00 oil. Those companies' stocks you probably don't want to own. They're very levered to the price of oil. IF there was an immediate recovery, if Saudi Arabia cut production by 2 million barrels a day tomorrow, those stocks would go up the most. There's also a real possibility that a number of these highly levered oil companies go bankrupt. Frankly, it's just speculation to own those stocks at this point. I would sell stocks that are highly levered, companies that don't have hedges in place that may be challenged to fund their next year's budget and I would buy stocks of companies that are under levered. In fact, I am doing both of those things.
TEMR: Did you see this coming?
Joshua Young: No. Absolutely not. Honestly, like, I think most people--- I've had conversations with clients about this and other investors and the best oil traders in the world who earn their returns from predicting oil prices rather than doing what I do and finding undervalued stocks, even those guys were caught, like, without their shorts on. Andrew Hall who's famous, he ran Phibro and runs Astenbeck Capital and manages billions of dollars trading oil, he was massively long oil and was interviewed, I think, by Forbes in early September talking about how the long dated price of oil was too low. At that point it was like $85.00 or something and how he was buying call options on it and thought it would be great. Recently he's come out and said now he's short and he actually made money in November cause he flipped his position and short it. Even the best oil traders were long going into this not short. If someone tells you they predicted it, maybe they did, maybe they didn't. It's like a lot of the people in 2009 who were saying, oh yeah, I predicted this and sold all my stocks in 2008. It was a good story, but the numbers show that almost no one was actually doing that.
TEMR: Don't you agree that the price of oil spiked up fast and stayed up for a long time and what goes up that fast has to come down essentially that fast eventually?
Joshua Young: No, I don't think so. I think that oil's a commodity and commodities trade typically in a range from on the low end when there's oversupply, around their marginal--- their cash cost of production, sorry, and on the high end typically a floor will be the marginal cost of production when there's not enough supply. A commodity will trade in that range. Then if there is tight supply for a while you could see it trade above the marginal cost of production. Typically in that type of tight supply and demand environment you'll see a commodity trading somewhere above the marginal cost of production. The marginal cost of production is what it costs producer to produce a incremental barrel beyond what they're currently producing. That'll be, like, the typical producer that's able to produce an incremental barrel. For oil, the cash costs of production is probably just a little bit under the current price. Maybe it's $50.00. Maybe it's $55.00. There are definitely projects that are going to have to get shut off if prices stay where they're at right now. A lot of the Canadian oil sand production requires $70.00 oil or $65.00 oil just to stay on production. Then the marginal cost of production has continued to rise over time. What that means is that the last barrel that's getting produced so you look at these, like, fringy Bakken drilling, the East Texas Eagle Ford, the oil in the Utica, these projects that really require $100.00-$110.00 oil to do these big projects out in the Caspian Sea and in Kazakhstan and wherever, the Kashkan that cost $50 billion dollars and is going to require $120.00 oil to breakeven. There are definitely very high cost projects and those projects were setting the price of oil previously when there was greater demand or equal demand of supply. I think that over time they'll be a production supply correction. There will then at some point in the future be less supply then there is demand. You'll see the price go back to the marginal cost of production.
TEMR: How relevant is production in Libya, Iran and Iraq with regard to supply right now?
Joshua Young: That's a great question. I think one of the causes of oil prices falling so much so quickly was unexpected production coming online from Libya. Libya isn't in the news that much these days, but there's a terrible civil war being fought there right now. It's actually, frankly, surprising that any oil's coming out of Libya at this point. The rebels seem to be somewhat successful. They've secured control of a number of different cities in the country. It's a relatively small country and not that many large area of land and not that many people, but the civil war is raging. I don't think anyone really expected the amount of oil production that's come online from Libya. That's actually started to pullback a little bit, but there was an incremental, something like 700,000 barrels a day of Libyan oil production, that came online starting in September. That's around when the price of oil started to fall. I think what's happened is between the Libyan production coming online and just it looks like on a number of different fronts, your political risk is getting talked down. I think geopolitical risk has, kind of, left the price of oil to a large extent. Right now the oil price is implying zero or even negative geopolitical risk. I don't think it's a terrible thesis to own oil on the back of, hey, like, one or more of the producing areas are going to have some kind of disruption or trouble. In the same way as 700,000 barrels a day of production came online from Libya, 700,000 barrels a day from Libya could very easily come offline. 3 million barrels a day could easily come off line from Iraq where there's a terrorist entity that's running 50% of the country. Very easily a bomb could go off on some kind of pipeline or supply terminal in Saudi Arabia or Kuwait and any one of those things would immediately send oil to a much higher price then where it was back in July.
TEMR: That can always happen any time, correct?
Joshua Young: Yeah. I mean, that risk is there and it's interesting how the market has addressed that risk. Rather than there being a consistent price premium that's paid for oil based on the pretty much persistent geopolitical risk associated with it, the risk premium has narrowed and widened dramatically over time. Right now it looks like the risk premium is very slow if potentially nonexistent. You could see that political risk premium widen again. In 2011 it may have been as much as $20.00 a barrel that was priced into oil for geopolitical risk. If you saw supply and demand tighten again so the scenario I'm painting where rigs fall off and production stops growing as much and supply and demand meet again in the middle or late part of 2015 and oil prices recover to closer to the marginal cost of production, at that point or leading up to that, if there's any kind of problem in the world that leads to additional political risk or an actual supply disruption somewhere, like Libya or Saudi Arabia or Iraq, you could see the price also, I mean, there is this range where we've observed in the last few years where geopolitical risk has gone from zero to $20.00 a barrel. You could see it on the high end of that range and you could see oil, again, trade $20.00 plus above the marginal cost of production or well in excess of $100.00 a barrel.
TEMR: Good, the cushion is not in there now, right?
Joshua Young: Yeah. I think it's nonexistent.
TEMR: We briefly talked about Russia earlier, where is Russia figure into any of this and as their control over energy in Europe wane?
Joshua You I think it's interesting. I think Russia's in a challenging position. I mean, to a certain extent, like, the leadership of Russia, kind of, asked for this. They invaded another country in Europe with impunity and annexed part of it. That hasn't happened in Europe for a very long time. The last time it happened to the scale Russia's doing it, it caused a world war. I think Russia's economy slowing down a little bit, relatively speaking is minor compared to what's happened in history for countries that try to take parts of other countries in Europe. When you look at their economy, I mean, the largest factor by far is the price of oil and natural gas. The price of oil falling is definitely hurting their economy. Their stock market is down a lot. I think things will be challenging for them economically. I think that there's some chance that they try to pullback on production themselves and try to force the price of oil higher. The problem is that for their budget to work they really need a much higher oil price and all of their production online. Every barrel they pull off they make it harder to meet their own budget targets. The other way they could go is they could do what Saudi Arabia is doing and produce extra oil and try to grow their production more. From the signals that they've shown it looks like they'll shrink. If you look at what Saudi Arabia did in the eighties they made up for lower oil prices by producing more volume. They produced more barrels and the more barrels they produced the more money they made even at a lower price. If you were producing a million barrels a day and oil was at $20.00 or you're producing 3 million barrels a day and oil is at $10.00, at the 3 million barrels a day at least your revenue is going to be higher than it was with 1 million barrels a day even with the lower price. There is a possibility that Russia goes that direction. They've signaled they're going the other way. They've signaled that they're potentially going to see supply drop in 2015. I believe it was Luke Oil that put out their capital budget and indicated that they might shrink their production by as much as a couple of hundred thousand barrels a day, but we'll see.
TEMR: So the best we can hope so, let's say if a number of these things happens, is maybe $80.00 oil. Is $80.00 oil enough to bring any of these producers back in Texas for instance?
Joshua Youn I actually think oil will recover to $100.00 a barrel.
Joshua Young: I think that happens over the next few years, potentially over the next 2 years. I'm a little bit less ambitious than T. Boone Pickens who came out a couple of weeks ago and said that he thought that within one year it would go back to $100.00. I think it will take a little bit more time than that. Herald Hand did that too like a couple a months ago. He said oil's going back to $100.00. He monetized that though as hedges. His investors are probably not super happy with him now for having done that. I'm not making bets on any like massive recovery of oil anytime in the immediate future. I think that you'll see the price of oil approach the marginal price of production. I think that the marginal price of production is around $100.00 a barrel and potentially in excess of that. I think that over time you'll see that. It may take some time to get back to that price. At $80.00 oil, like, things are still bad in Russia and they're still bad in places in like Texas. There's not--- You'll still see fewer rigs running. You'll see fewer people employed directly in the oil business and that's going to trickle through throughout the economy. I will say that Texas is a great place for people to live and a great place to do business. There has been a lot of economic growth there not directly related to the price of oil, but it's probably not enough for the State to be able to avoid the impact of a shock to the largest industry that's active in the space.
TEMR: Let's say you came into an inheritance of perhaps $5 or $10 million dollars, somewhere in that range, and you've not been an investor before, but you're going to invest. Let's say you have no particular knowledge of any specific industry or sector. What would you take a look at right now as an investment opportunity across the board?
Joshua Young: Well, I mean, I'm ramping up an oil and gas recovery fund right now so, you know, I'd say maybe that's not a terrible idea. I think honestly, like, the longer I've been an investment professional, the less I think it makes sense for people to manage their own portfolios. I think if you are managing your own portfolio you should do it with either low-cost index funds or by investing with investment managers that have put up great returns over a long timeframe and are intelligent and capable. I think it's not intelligent to as an individual investor who's not focused on it and who doesn't have a good track record of doing it already, it's not an intelligent use of capital to try to pick stocks on your own.
TEMR: What kind of real estate opportunities are there now in the oil and gas industry around the U.S.?
Joshua Young: From an actual real estate perspective it will be interesting. I mean, I think you'll see, like, actual office prices and residential prices and the like fall in Texas . . .
TEMR: I'm talking about . . .
Joshua Young: I understand. You're talking about like oil wells. It will be interesting. Actually the oil production deals I've seen recently have not been that substantially lower prices than they were at a few months ago. One deal I saw that happened a month and a half ago was for oil production in the Permian Basin and it was at $100,000.00 per flowing barrel. That same property a few months before that might have sold for $120,000.00 a flowing barrel. It was roughly like 16% or 18% cheaper. It wasn't a huge savings relative to the price movement. At that time the price of oil was already down 25% to 30%. There are properties available. There will be people in distress. Probably the best properties to buy aren't going to be producing properties. They'll probably be undeveloped shale properties that are uneconomic at current oil prices, but are very economic at higher prices. Very intelligent distressed investors that bought these types of properties through cycles and I was fortunate to have bought some of these types of properties through the public markets buying stocks that had those types of exposures through the correction in 2008-2009 and did well with those too. I think those are probably the best buys, but there will be a lot of properties on the market. From what I've seen so far, prices haven't fallen that much, but there haven't been that many transactions. I guess we'll have to wait and see.
TEMR: Let's talk about shorting oil stocks. Is this a profitable business for the savvy investor right now?
Joshua Young: I mean, any time that a commodity goes down a lot, the commodity producer stocks are going to go down a lot too. Obviously, the price of oil and gas stocks have gone down a lot. If you happen to have been short them from the outset you've made a lot of money or you've earned a high return on the investment that you've made by shorting the stocks. If you happen to have shorted into this as it happened, you've done well too. On a go forward basis, the companies that would be the best shorts, the ones that are very highly levered that have the risk of going bankrupt, are probably not great shorts now for a couple of reasons. First of all, the short interest in the stocks is already really high, which means that there's a high cost to borrow those stocks. There's a risk that you could get squeezed and forced to cover your position at a loss. There's a risk of a short squeeze where the price starts to go up really fast and you get margined out and forced to cover again at a loss. Then there's a very high cost to borrow so in order to be able to short the stock you have to actually borrow the stock and then sell it. The cost to borrow can be so high that it actually takes up a lot of your potential profit. In some cases the cost to borrow costs are almost as high as 100%. You need the stock to fall by 100% in less than a year in order to be able to make any kind of profit in having shorted it. Like, if you short, for example, XYZ Oil Company, and you think the stock is going to go to zero, if it costs you 100% a year and let's say the stock was at $10.00, if the stock goes to $5.00 in a year, it costs you $10.00 in interest rates while you only earn $5.00 profits so you actually lose $5.00 from having done it. That's the tough economics. It gets worse. The reason it gets worse is if for some reason there's some kind of supply disruption, which, again, could happen any day and I'm not saying it will necessarily happen, but there are a bunch of different terrorists groups and other, like, dissident groups across the Middle East and there have been all kinds of uprisings, if one of those has one bomb in like the wrong place at the wrong time, you could see oil supply disruption. Oil goes back up. The companies that are the most levered, those stocks are the most likely to go up by the most, especially because they have high short interest. Basically there's a freeze. I believe Warren Buffet used this and other value investors. They say it's picking up pennies in front of a steamroller. You really don't want to be the person who's picking up pennies in front of a steamroller. At this point if you're shorting a lot of the heavily shorted upstream oil and gas companies or even the service companies you're at risk of doing that. Potential small profit, you have to give a lot of that back because it costs a lot to borrow the stock to short it. Then there's a lot of risk that the stock might go up a lot just from something that's out of your control.
TEMR: The smart people, this is really risky. It's something you typically do. You wouldn't do this.
Joshua Young: Well, I mean, I have been shorting select oil and gas company stocks. There are companies that are frauds so I'm always interested in finding fraudulent companies and shorting those stocks whether they're in oil and gas or other spaces. It's amazing that within the public markets there's always a few companies that are just bad. The people that run them are criminals and they do this persistently. You'll see them run companies into the ground over and over again. I'm short frauds. I short frauds into rising markets and I short them into crashes. I'll continue to do that. I've also shorted very specific companies that have specific cost challenges or that were trading well above their fair value. Independent of the price movement of oil there was one company that was trading at two times its three P value. The proof problem and possible value of all of their assets as assessed by reserve engineers that they paid to do the assessment, assed that their properties, let's say, were worth $100 million dollars and their stock was trading at, let's say, $200 million dollars. Then actually I think it was a bigger company then that. There was multiples in that. It made no sense that their stock would trade at that level. Insiders were selling and so that's an example of something that I shorted. Right now I'm looking shorting companies that are levered to, secondarily or from a tertiary perspective, to oil. There are oil producers and service companies then there are companies that service them and then there's, kind of, these companies that are exposed to economies in the areas that those companies are active. I think that those companies, their stocks aren't down at all. I think that there's some interesting opportunities to make money from them.
TEMR: So this is what you do in times like this. This is or in any time actually. You look for opportunities to help continue to put people out of business and shouldn't be in any business and profit along the way.
Joshua Young: Well, I don't think I'm putting anyone out of business. I mean, me shorting a stock, I'm just a participant in the market. Whenever I sell a stock, somebody else is buying it whether it's me selling a stock I own or it's me borrowing a stock to short it and then selling it to someone. I don't actually put anyone out of business, but I think shorting is a good and healthy price discovery mechanism where it allows markets to get to a more accurate and fair price for a security over time. I think that it's really interesting that there are these companies out there that are exposed, for example, to the Texas economy, that are trading at all-time highs. They're trading at, in my opinion, stupid high EV to EBIDA metrics or PE multiples or whatever. You don't really see that in Russia, right? Russian banks that are exposed to the Russian economy are down 80% in the last 2 years. Right now the Texas banks that are exposed to the Texas economy are starting to go down, but there are other sectors where they just haven't moved. It seems obvious. The nice thing about it is if I'm wrong and Texas continues to grow, I could lose a small amount of money. If I'm right and things get bad and especially like certain specific areas which are particularly levered to the growth rate of an economy, if things even slow down a little bit, high multiple stocks that are directly exposed to those economies could do really, really poorly. Shorting those could do really well.
TEMR: You would think that geopolitically speaking, and as far as the energy supply that exists in Russia and the banking problem that they're having, the history--- that they're taking that it would behoove our beloved Vladimir Putin to get behind some mischief in the world.
Joshua Young: Yeah, I'm not a conspiracy theorist, but I don't disagree. I mean, like, it wouldn't be the craziest thing, the U.S.S.R. which is where Putin grew up and he was a KGB officer, like they did things that were much more radical than that. This is a small--- It would be a small thing for them to do relatively speaking. It's a small thing to disrupt the oil market relative to invading and annexing the Crimea. I mean, there was a whole war in-between Russia and the Ottoman Empire and the British and the French over Crimea. Disrupting oil markets, I mean, countries disrupt markets for all kinds of reasons. I mean, the Chinese disrupted the rare earth market. Was there a war? No. Like, they didn't really care. Not really. I mean, the few producers cared and a bunch--- there were a bunch of stock price manipulators that ran up and down rare earth mining stocks associated with that. There are supply disruptions associated with geopolitics all the time. I don't think it would be that surprising. That being said, I'm not buying oil stocks hoping that Putin goes and does something, but it's not unreasonable that he or someone else like him might do something.
TEMR: We can expect something like that as much as we could expect anything else, correct?
Joshua Young: Again, I'm not counting on it, but it could happen.
TEMR: So, Josh tell me, is now a good time to buy oil and gas stocks?
Joshua Young: Well, I think so. It's actually been pretty exciting for me, especially as I go and fundraise because while I think so, I'm relatively young and have only been a professional investor for less than 10 years, there are some really bright people out there and really famous people out there that are saying the same thing. PIMCO actually put in their monthly update letter last week they put out something saying that they think that now--- it was amazing. They said now is a good time to buy small-cap oil and gas stocks. Steve Schwarzman came out in an interview with Bloomberg today and he said that now is the best time to invest in energy stocks in many years, which is pretty fantastic. I mean, I'm not sure I could pay for that kind of advertising. It's pretty great. I'm not sure where else people would go to invest in small-cap oil and gas stocks frankly. I mean, there's not really a lot of choices in terms of advisors and then I think there's a lot of risks in the space where a lot of these companies that we talked about that are over levered. I think that if you're able to avoid those and able to find companies that are well positioned and are cheap that it actually makes a lot of sense. I think Steve Schwarzman and I think--- at Blackstone and I think that PIMCO are right. I think that people investing now will do very well.
TEMR: And you go along in these small-cap stocks, right?
Joshua Young: Absolutely. The cheap ones that are undervalued and under levered are very interesting right now.
TEMR: Any trading opportunities?
Joshua Young: Buy low, sell high.
TEMR: What if that happens every other day?
Joshua Young: That's a challenge. There was actually a position I initiated and I was telling one of my clients about it and suggesting that he buy some too. He wanted to do some more due diligence. I was planning on holding it for probably a year or two. It was a high-yielding company that happened to be under levered and particularly safe. It was a very unusual opportunity. We talked about it around 10:00 a.m. L.A. time and I put a modest size position on for my fund. By 1:00 p.m. L.A. time the stock had gone up 40% and I sold it because it achieved the full return that I was expecting over a year, except it achieved that return over like 2 hours. Yes, buy low, sell high, sometimes the same day, but definitely with a long-term orientation, but sometimes if the market just gives you a gift you take it, you say yes and move on.
TEMR: Not a bad way to make a living.
Joshua Young: Nope, not bad.
TEMR: A listener listening to the segment for the first time, whether they've heard us talk before or they're just hearing us again for the first time, they may be excited and want to follow you, follow your buys, follow your sells. Is that possible or no?
Joshua Young: Not really.
TEMR: Okay so too bad. You have great information and we can't find out what you're buying or selling, right?
Joshua Young: Yeah, basically. I've occasionally written articles on Seeking Alpha. I've occasionally shared specific positions, but, you know, realistically I'm in business and my business is to invest money for people. I think that people with capital are presented with a challenge of how to intelligent allocate the capital. There are lots of different choices that people have, anywhere from buying treasury bonds to putting money in the bank to going to Vegas and gambling, going and buying stocks themselves or hiring people to do it. I think that different people have different preferences. For some of those people, if someone is that interested in what I'm doing, maybe it makes sense to work with me professionally. If not, there's lots of other different options.
TEMR: So it's doable. Somebody can work professionally provided they have the means to risk, correct?
Joshua Young: That's right.
TEMR: We're not going to ask you for other recommendations because if they can't work with you then where do they go for information because certainly without that information you can't survive as an investor.
Joshua Young: Well, they can come to my website and they can email me. I'm happy to chat with whomever.
TEMR: Fantastic. Well, I'm sure there's a few more things we could talk about. This has been one of the best conversations I've had regarding anything involving oil in many, many years. I thank you for your time Josh. Thanks for joining us today in the program.
Joshua Young: Absolutely. Thank you very much.
TEMR: I've been speaking with Joshua Young of Young Capital Management. You can contact Josh through his website, youngcm.com. That's youngcm.com. Listen to this segment again on the homepage of our website, Ellismartinreport.com.