The Banks are Broke.  Now what?

There’s a tremendous opportunity right now. And I can’t wait to get to some of this stuff. So I’m looking at charts and graphs that are nothing more than the bank’s own notes to themselves, and here’s what I see.  Banks don’t have as much money, and they’re raising lending standards; they just don’t have confidence in the future, and they don’t have money. Now, what I’m looking at is the history of domestic banks when they tightened their lending standards. And I can tell you, things are about as tight as they can possibly get.

You can imagine the effect this has on the oil and gas industry. Of course, nobody with a brain wants to stop the development of oil and gas. But just slowing down production is going to cause a gigantic crisis. The demand increases, and the supply decreases, and naturally, the demand increases.  It’s like being on a roller coaster.

These are political decisions; it’s not about supply at all.  The solution would be to keep using the energy. We have to produce new, clean, plentiful sources of energy. It’s already getting to be too late to avoid massive shortages over the next few years – and those shortages are going to produce the opportunity that we’re going to talk about right now.

This is about what’s happening with the demand for fossil fuel, as opposed to producing it, because that takes capital.  The oil companies don’t want to borrow the money at these very high interest rates to produce it, the investors don’t want to invest in it because it’s not politically correct. And the bottom line is our ability to produce and replace fossil fuels is being weakened and hindered by this fact – they’re making it difficult for us to produce enough fuel for the people in the world that need it and want.

Schlumberger is one of the great sources of all of that. And here is what’s happening. Their revenues, earnings, and cash flow are all increasing.  This is a highly profitable company. And I won’t try to show it to you here, but when you look at a 600-day moving average, you’ll see that the stock price correlates with how much money the company makes. And the earnings per share are accelerating. That’s because the world needs more of what they’ve got.

And what about the companies that have contracted with them recently?  There’s Total Energies, the French oil and gas company, Saudi Aramco, the world’s largest oil producer.  And Equinor, the Norwegian state-owned oil and gas company, has awarded SLB a gigantic contract to provide the digital solutions and teach their companies how to optimize their exploration and production. Occidental Petroleum, the US oil and gas company has awarded SLB a contract to provide these digital solutions, and Petrobras, the Brazilian state-owned oil and gas company has awarded Schlumberger a contract to provide these digital solutions and teach its people how to be more efficient.

Their earnings per share are going to increase over the future years. Now, they’ve launched a part of their company called Innovation Factory. And that’s a global network that enables energy companies to accelerate AI solutions. And this is created by SLB driving innovation and sustainable performance improvement, capturing and extracting insight from the large volumes of data that they’re using artificial intelligence to work their way through. They’ve also partnered with a company called Dataiku. This is a world leader in everyday AI. It’s a French company. They’re using the technology and the artificial intelligence developed by Dataiku to empower their customers to leverage a single centralized platform to design, deploy, govern and manage artificial intelligence.

Now with this company and its tools, the team can go beyond the lab and build real safe generative AI applications. And Schlumberger and Halliburton are both doing that. This is the opportunity of a lifetime. And Dataiku is not in the race to go public. What they’re doing is working and making themselves more and more efficient. And building the company.  They started out by raising $500 million years ago. And as they’ve built the company, it’s becoming more and more valuable. And have you heard? The rest of the world is thinking that this company may go public at somewhere between four and ten billion dollars. They thought it was worth $4 billion a couple of years ago – they think the company’s worth $10 billion now.  But this company does not want to waste its time going public and doing an IPO. They’re too busy making themselves worth more money. And they’ve produced all of this value, starting with $500 million.

Here’s another opportunity – VISTRA. It’s another way we’re going to replace the energy in the world and do the energy transition. Fisher is a Texas based retail, electricity and power generation company. It’s the fourth largest owner of nuclear generating power in the United States. Last year, they announced that they were buying, with a little bit under $4 billion, Energy Harbor. This is an Ohio nuclear power and retail energy business. The deal was completed last month. And now they own and operate three nuclear plants in Ohio and Pennsylvania, producing over 4000 megawatts of electricity with nuclear.

Their exposure to nuclear generating is significant. And nuclear power accounts for about half of their total generating capacity right now. They’re working on committing billions of dollars to building new nuclear plants, which they see as critical and important. They’re also important to the reliability of the electric grid in our interconnection. There’s a regional transmission organization (PJM) that serves 65 million people in 13 states. And they have said that nuclear power is essential to maintaining the electric grid and keeping the electricity where we need it.

So their exposure to nuclear is going to grow over the coming years. And they’re buying back a billion dollars worth of shares every year. Now, in their financials you’d find that they’re common shares outstanding are going down, not up – they’re buying back, they’re retiring shares, making their stock worth more money.

You know, we had that frost in Texas a couple of years ago, and VISTRA had to return its state-owned Texas utilities – Texas utilities had to return a lot of money to the people of Texas and the stock went down. And it has not really recovered. But their cash flow is growing very rapidly. And it’s way beyond anything that they ever had before. Their earnings per share are growing. And their capital spending is about double what it was in 2022. Bottom line is they’re investing in creating more infrastructure to generate more nuclear-powered electricity. And by the way, they’re taking advantage. Our government was encouraging people to retire nuclear plants a couple of years ago. Now they’re subsidizing nuclear generating, and VISTRA is taking advantage of those guaranteed loans, investing the money and also recovering the stock.

And so there comes a time when the likely price for VISTRA averages five times its cash flow over the years – that’s when the stock price average is five times cash flow. Well, the cash flow is going up and up.  But VISTRA’s stock price is not, because people are still living in the past and thinking about the issue that they had before, which was the winter of that frost when they had to return money.

Bottom line is that VISTRA is increasing its cash flow, and retiring its stock. And at five times cash flow, it looks like a couple of years from now that that stock is going to be somewhere in the 80s and 90s. And it could even be higher. If you look at what’s happening with their options, right now, this is a tremendous opportunity for us to take a long-term position in VISTRA using very, very little capital, so that we can own a lot of it.

The stock went down about 3% this week, because of the fact that the earnings were not as high as some of the analysts were predicting, based on the use of electricity due to the high temperatures. But the bottom line is that with the stock right now at 34, a 40 option that we can buy at about $2.50… Think about it, when the stock price is at 80 a couple of years from now, as the world goes nuclear, we’re talking about turning $2.50 for this multi-year option into about $40.

If we require an additional couple of years, and I had to put in another $2.50 or another $3 to get myself a couple more years of time to allow this to happen, the chances are that I will already have made a bunch of money on my first set of options at 40. And I will be in perfect position to renew this and extend it so that I can give it a few more years. And I will be taking advantage of any sell off in the stock market in 2025 or 2026 to renew my position.

This is one of the opportunities of our generation. And it is available to us right now. The smartest funds in the world are stocking up on VISTRA options right now. And this is what’s happening with those options right now.  Before the call starting in August was at about 75 cents. And it is now roughly three and a half times that. It has gone up by 350% just in the last few months. And remember this is a bear market that we’re in. This is an inevitable development that’s going on in the world because of the energy transition that will lead to replacing fossil fuels with nuclear. So in the words of Forest Gump, that’s all I have to say about that. (At least for the moment.)

That’s it for today – thank you all very much and we’ll see you next time.

Dan Frishberg


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