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Top Energy and Industrials Stocks for 2021

In this episode of Industry Focus: Energy, we're continuing our theme week on Top Stocks for 2021 with Motley Fool contributor Jason Hall and host Nick Sciple, each sharing two of their favorite stocks for 2021. Find out what the growth opportunities are for these companies, what the challenges are, and why they are a good buy at the moment.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on January 7, 2021.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. Today we're continuing our Top Stocks week on the podcast, with Jason Hall joining me to share some of his favorite energy and industrial stocks for 2021. Jason, welcome back to the podcast.

Jason Hall: It's good to be on. Belated happy birthday and happy new year, my good friend.

Sciple: Thank you. It's great to be in 2021. I'd be remiss if we didn't mention, obviously, the news yesterday, with the Capitol Building being stormed by rioters, shutting down Congress' certifying of the election results of the 2020 presidential election. Not exactly what I asked for on my birthday, we watched the Capitol Building. We got a view of the Capitol Building outside of our window here in Alexandria. I was telling my fiance yesterday, I was like, "Hey, if this building lights on fire, we're going to see this, right?" I don't think when I moved into my apartment, I ever thought I would be saying that, much less on my birthday. But we're here, we're not a political show, we don't have any special insight on politics. That's beyond what any informed citizen has, but we are citizens of America, and the citizens of the world are watching this. Jason, what was your reaction from an investment point of view, and from a citizen's point of view seeing the events yesterday?

Hall: Well, we're human too. This isn't the sort of thing Americans of this generation have had to deal with. You have to go back to Vietnam the last time there was anything like this happening in the presence, in the halls of Capitol Hill, and certainly nothing like what we saw yesterday. I was flabbergasted. I was absolutely flabbergasted. I don't want to say anything partisan here, that's not what anybody is here to hear from me. But I think it's pretty easy to say that it was disgraceful and shameful, but to your point, what happened this morning?

Sciple: Sun came up.

Hall: Democracy worked. I think my favorite quote is ''Democracy is the worst form of government, except for all of the others." Government is ugly. It's hard, it doesn't always work, and nobody ever gets exactly what they want. Sometimes the people that don't get what they want lash out in ways that we don't expect. Here we go, we move forward. Maybe the biggest takeaway is don't make your investing with your partisanship, whatever it is.

Sciple: That's true, I was flabbergasted seeing the market OK to empower through this with the results. But again, it just goes to show it's impossible to predict the market. I think the important thing for me is what precedents do we set, and I think the precedent that we should set and I hope we set is that our institutions will hold strong in the face of these sorts of events. That's important for the world. It's important for markets. It's important for us as American citizens, me and you, Jason. I'm hopeful the worst is behind us, and things look better going forward. But either way, the sun will come up tomorrow. We'll try to be optimistic about what we can control, and we can change, what we can improve going forward. With that being said, we're here to talk about top stocks. What do you look for in a top stock, Jason? Is that a good transition? How did I do with that?

Hall: I think you did about as well as any of us can. I mean, here's the bottom line. I'll say this one little thing. I think one of the great things about America is capitalism. This is the home of capitalism, and this has been the biggest test-bed to prove that great companies can thrive. You know what? Sometimes it's that strife and disruption where they come from. You think about David Gardner, and think about Rule Breakers, looking for companies that disrupt the industries. Look for big trends, big things that are changing. That's informed a lot about the way that I invest, and the things that I look for. The big thing that I start with is, what is the trend driving a company's prospects? Usually, I start the other way, I think about trends a lot. I think about things like the global middle class. This is just an interesting statistic that came across for me from following Starbucks and looking at Starbucks' growth in China, and the expansion of China's middle-class. China's middle-class is going to be in a couple of years, like, 500 million people. China's middle-class is going to be bigger than the entire United States. Then I'm like, well, Africa is growing a lot. Latin America is growing.

There are all of these other places that are growing, and then you start finding out that the bigger trend for the middle class around the world is just going to grow by a billion people over the next 10 years. Then the 10 years after that, it's probably going to grow by 1.5 billion people. As much as the middle class trend hasn't been great here, around the world, that's a big trend. Then you have a big trend here where you have the aging of the baby boomers. There's this big need for all of the things to support them as they age in terms of healthcare and housing in that kind of thing. You find these trends, there's the cashless trend. You find all these trends, and then you have to figure out who's going to benefit from it? Who can profit from it? Brian Feroldi, our colleague, that's somebody I spend a lot of time talking with, talked about figuring out what stakeholders are going to benefit the most. Let's be honest, a lot of those trends, society wins, but maybe investors don't really ever make a lot of money. Figuring those two things out first is the starting point for me. What's the trend driving a company's prospects? How much is the addressable opportunity for that company to profit? Now, then when I start digging into the individual companies, there are a couple of key things that I like to see. One thing is, who is running the business? What is their track record of success? I think of two different approaches here.

One thing I love, I love founder-led businesses, but I don't exclusively invest in founder-led businesses. But if I found a business that the founder is still in charge, still relatively young, has a lot of skill in the game, and has a long track record of success doing whatever they're doing, that's a big green light for me. On the other hand, some of my biggest holdings, the founder has nothing to do with the business at all. But if there's an institutional history of success, that can carry a lot of value too. Winners continue to win usually is the case. Those are the key things that I look at, if you were to boil it down into four or five things.

Sciple: Awesome, yeah, I think that's great. I think that the trend stuff is something that I definitely use when it comes to where I think the world is going to be in 10 years. What kind of insights do I have about changes that are going to take place? For me, I've tried to really simplify things a lot, particularly through 2020. I think the big lesson for everybody is just that the future is very hard to predict. Even if you think you've got to be on what's going to happen tomorrow, you probably don't, and we've been reminded of that repeatedly this year. One of them is just, can I understand it? Do I understand what's driving this business? Sometimes it can just be common sense. So I've talked about online dating, just kind of absorbing how people behave around me. I remember when I invested in PayPal, the big kind of insight for me was they started accepting Venmo for paying for clubs on my college campus, and I was like, well listen, this thing is going to be a runaway winner if everybody on here is using this platform. Something that's just simple and easy to understand and behaviors that are predictable or something that I look for. Along those lines, I think, as a beginning investor, you always get this idea of I want to find this kind of unique thing that nobody else understands. Like, I read this thousand footnote that nobody else saw.

One big thing that I've kind of reached is you don't ever get any bonus points for degree of difficulty or for uniqueness in the stock market. Sometimes those great companies are out there and they just hit you over the head and are pretty obvious. So, I don't want to make things too hard on myself. I think David Gardner saw in his podcast recently, one of his things that he talks about is, if it's a great stock idea, you don't have to think about it too much. Sometimes you just understand them and they make sense. So, I look for something like that along those lines. How easy is it to replicate? If you understand something well, you can see how hard it is for somebody else to enter into this market. What are the behaviors that are driving this business? I think along those lines too is I'll know when I'm wrong. If my insight turns out to not play itself out in the market, then that's something important.

Then lastly is just, can it withstand uncertainty and what's my risk and rewards? So again, going back to what we saw this year, you want to understand, OK, in a worst-case scenario, what's the worst possible thing that could happen to me and then what's my upside available, because no matter how good of a beat you think you have on what's going to happen tomorrow or next week or next year, you will be surprised. Try to have something where it's easy to understand so you can stick to your thesis if it's still intact and to where your downside is protected for when the inevitable hits you. Those are a few things that I look for, obviously not every investment checks every box, and I break my own rules all the time. Just like Ben Graham, I think would say, his best investment he ever had, he broke his own rules. Not to say you won't look at anything in my portfolio and see me breaking that rule. But in a perfect world, stuff that can check all those buckets have to be easy to understand, have a high-risk reward and be something that I think can withstand a lot of volatility, unpredictability in the market. That's something I really like and have looked for as I talk about some of these companies we'll talk about today. Along those lines, Jason, the name of the show is our Top Stocks in Energy and Industrials for 2020, what's a pick that you have for us for this year?

Hall: This is a company that people hear me talk about an awful lot and that should be a key that it's probably a pretty good business and that's Brookfield Infrastructure (NYSE: BIP). It trades under two tickers. There's BIP, which is Brookfield Infrastructure Partners, that's the limited partnership. Then there's BIPC, which was recently created and it's a one-to-one economic equivalent, and it's a corporation. I don't want to focus too much on this, but there's a huge price variance, I think market closed yesterday the BIPC traded to a 35% premium to BIP, and the entire difference is that BIP is a limited partnership, BIPC trades as a corporation, so it's like Coca-Cola. The reason that matters is because this is really a dividend investment, a dividend growth investment, and the bottom line is a lot of institutional investors will not invest in partnerships. They're very rarely included in indices or they're more likely to be excluded from indices maybe is a better way to put it, because there's different tax implications. The limited partnerships issue a scheduled K-1. The dividends are typically taxed, the dividends that the distributions pay to you, part of it might be taxed at your nominal, your tax rate. So it might be taxed if you pay a 22%, 23% tax rate, maybe that's what you pay on it versus that 15% long term capital gains rate on regular dividends, and BIPC pays regular dividends, so that's one of the things. It also issues just a 1099-DIV. So there's a lot of large money investors that will buy BIPC, that BIP is excluded. So that's the biggest reason you see that variance there.

So, why am I interested in which company-wise that I top picked for this year? First of all, it's talking about the trends.

We've heard for years and years and years that U.S. infrastructure is in serious need of modernization and expansion. Whether you're talking about water infrastructure, here's the stuff that just blew my mind. This is something that American Water talks about, 20% of the treated drinkable water in the United States is lost in the system every year, 20% leaves the treatment plant ready to be consumed and never reaches a consumer. It's just lost. The system is so aging and so old. You think about the electrical infrastructure, the fact that Edison would recognize most of the components as being things that he helped design. You think about our roads, our bridges. The list goes on or not. Besides the rail, which is owned by the railways, pretty much anything that's a public property is in dire need of modernization and then you start just thinking about the growth. You think about around the world, that big trend of the global middle-class. I think the exact number that the global infrastructure hub, which is a G-8 or G-20 initiative, I can't remember which, says that between 2010 and almost 2050, like 2047, I think is the number that they pegged to, that the global infrastructure spend really needs to be like $90-SOMETHING trillion to modernize and then meet the global need.

Over the next 20 years, the annual spend needs to be somewhere between $3 trillion and $4 trillion every single year. That is a ton, a ton of money, and Brookfield is in the middle of this. I can't think of any other international company that's better positioned to play a role in the deployments and the modernization of all kinds of infrastructure around the world. Whether it's water, whether it's transportation, ports, roads, telecommunications, natural gas, and other energy transmission, power transmission. This is their business, this is what they do and they're very, very good at it. In terms of generating returns, since the stock went public in early 2008, it's up more than 584% when you factor in the dividend. It absolutely crushed the S&P 500 over that period. The dividend has grown over 700% since it was initiated, and you can buy it today. I haven't looked at it at this exact moment, but it's around 4% dividend yield, which is very high, particularly when you consider the interest rate environment. That's because the stock is still down about 7% from the 52-week high back in November, it closed 2020 down about 1% over the full year. You think about a high-quality dividend stock with an incredible record of growing the dividend that's tied into some mega-trends. The stock fell last year. It's absolutely stunning to me that the Brookfield Infrastructure Partners' stock is still as cheap as it is right now. Honestly, I think it's my top buy right now, for anybody that's looking for a long-term dividend growth stock. I love it. I absolutely love it.

Sciple: Jason, one thing that I think is interesting with this company as well, you mentioned how big this opportunity is, but also, there's not a huge number of companies in the world that can go buy up and operate these infrastructure projects on such a huge scale. I don't know if it is a Brookfield Infrastructure entity, but Brookfield's like nationalizing South American power grids and things like that. There aren't a ton of companies out in the world with that type of expertise. You have this big opportunity and a limited set of people in a position to exploit it, at least, in a big way.

Hall: Yeah, there definitely aren't very many pureplays. This is a subsidiary of Brookfield Asset Management (NYSE: BAM), ticker BAM, which is one of the largest alternative asset managers in the world. This is one of the instruments they use to acquire, improve, operate, and deploy those infrastructure assets which fall right in that alternative asset class for people that are looking for things besides stocks, or bonds. It's right into their wheelhouse. In terms of their history of allocating capital across the cycles, the corporate culture there is just incredibly good. They've had a couple of CEOs in Brookfield Infrastructure's history, but the corporate culture from the board, through every part of the executive suite and then all the way going back to Brookfield Asset Management, the parent company, is incredibly, incredibly strong. They have a process, they're really good at it. They are really good at being counter-cyclical. In other words, they like to play the game of having access to capital when nobody else does and everybody needs it. That means they can buy great assets. They can go spend $1 billion or a couple of billion dollars to buy an asset that's a regulated monopoly in an area so they don't have to compete. Think about the durable, competitive advantages that their assets have, it's enormous. It is absolutely enormous.

Sciple: Yeah, I really like that one. I would tell you, for my first pick, I mentioned earlier, you don't get any bonus points for the degree of difficulty here for originality. I'm not going to get any bonus points for Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), that's ticker BRK.B, unless you're super-rich and want to buy the A shares, BRK.A. I don't have $300,000+ sitting around to buy one share of stock. But if you do, thank you for listening and give me a call. Berkshire Hathaway, I think you mentioned the movement on Brookfield Infrastructure, you look at Berkshire over the past year, basically hasn't really moved significantly about 0.5% off its high over the last three years. But you look at how the company performed through the pandemic, this is a company that just can't be killed. You would think an industrial conglomerate would have some issues during the pandemic, have some type of speed bump operating cash flow up in the second and third quarter.

The company is now trading at 1.3 times book value. Warren Buffett has really turned on the buyback canon in the most recent quarters. They've bought $16 billion in stock so far this year, during the pandemic, $9.3 billion of that in the most recent quarter. We've got data in September, and paid about $216 per B share. Today the shares are around $232, so maybe about 10% or 15% above where Buffet was really turning on the buybacks. But you say Berkshire is really boring, but when it comes to the recoveries, you've got this valuation. Lots of the market is up as super-high. I would say Berkshire, from a value perspective, is about in the midpoint of where it's traded as far as price to book value over the past 10 years or so, 1.3 times price to book, so really reasonable valuation. You look at how some of its underlying businesses setup for these recoveries. You've got the railroad, so if you want to transport anything in this country from L.A., Chicago, or any of those western parts of the country, Berkshire Hathaway's railroad is a significant player there. You look at building supplies, everybody is excited about trends. You want to invest in an exciting trend. I think one of the obvious ones right now is there's not enough starter homes for the demand that there is in the market. We've seen this huge spike up in home prices this year. We're going to have to see new homes built. Acme Brick, Benjamin Moore Paints, Shaw carpet, Johns Manville insulation. Did you know Berkshire Hathaway owns the largest seller of recreational vehicles in the world? We've had this huge year for RVs in 2020. You look anywhere in this company --

Hall: Nick, I didn't know that. [laughs].

Sciple: One of the ones I'm really excited about, moving forward, everybody is excited about electric vehicles, going Pilot Flying J and 38% now. In 2023, they're going to take their stake up to 80%. I think truck stops, when you talk about electric vehicles coming to market and taking a bigger share, they're going to do pretty well. You talk how long it takes to recharge these vehicles, you've got to sit there an hour to recharge your vehicle. Pilot Flying J is the third-largest franchisor of quick-service restaurants in the country. When you talk about, if I want to go to a place where I'm stuck for an hour recharging my electric vehicle, I think they own the property that may be the best positioned to do that going forward. I think they have exposure to some of these trends.

But really, the takeaway is, you have this company generating massive amounts of cash. We just had, basically, the worst pandemic that could've happened to them and they've powered through without any significant hiccups. Buffet is turning on the buybacks, as I said, $9.3 billion in the most recent quarter. They still have something on the order of $140 billion worth of cash on the balance sheet that he has available to deploy. I think he's just going to keep buying back stock in an incredible way. If you look back, sometimes we'll go back and you can read some of his old partnership letters. There was one he wrote in October 1967, about market conditions right before he wound down his partnership. He says, "Opportunities for investment that are open to the analysts who stress quantitative factors have virtually disappeared, after rather steadily drying up over the past 20 years." That sounds familiar for where we've been over the past 20 years or so. We also talked about the size of the fund getting in the way of some of these opportunities. Buffet has had this incredible investment success with the Apple investment, that's about half of his investment portfolio today. But when you talk about the size of the company, if he is going to pursue value opportunities, he's really too big to be going after a lot of the small value where would traditionally be his bucket he would shop in. I think what's going to happen is, like he did in the late '60s in the go-go market, you're going to see him start returning capital to shareholders in a really significant way. I think we're going to see just massive amounts of buybacks from Berkshire Hathaway.

Warren Buffett was already featured in the Will Thorndike's, The Outsiders book, which is all about capital allocation historically and companies that really bought back massive amounts of their stock when opportunities presented themselves or just weren't great opportunities for redeployment of their capital. I think we're going to see a similar thing play out this time with Berkshire. I think you're just going to buy massive amounts of stock, just plow other cash flow into that. The stock is going to outperform the market as some of these other areas in the market are a little inflated relative to what they can produce. I think Berkshire isn't appreciated for the massive amounts of cash they can generate and how they can withstand, basically, the biggest disruption you can imagine for them and just power right through.

Hall: A couple of observations about Berkshire, when we did our year-end pre-record with Lou and with Matt a few weeks back, we were talking about Berkshire and I pointed out that for a 10-year period, at one point earlier this year, the S&P 500 had actually doubled Berkshire Hathaway's return,s like in total returns over that same period, it was just absolutely being crushed. And it's narrowed, but over the past 10 years, the S&P 500 has generated about 320% total returns, with Berkshire a little bit around 250%. It's still outperformed, but I don't think I've ever been more interested in buying Berkshire than I am right now. Talking about that book value, I pulled the chart just to look. I think I mentioned too, that it was like it'd been seven years since Berkshire had routinely traded this cheap. You look back and there's been little blips on the radar where Berkshire stock for a few days or a week fell to below like around 1.2 times book that had always quickly regained that value; 2020, if you look at the sustained valuation that the stock has had for the entire year, this is the cheapest Berkshire has been for this long in a decade. Really, you got to go back to the prior crash for Berkshire to be this cheap.

Here's the thing. I think it's easy to anchor on that under-performance and not acknowledge that there was this change in the environment for banks, and the way investors viewed banks that weighed heavily on the performance of the Berkshire stock portfolio. Buffett made a couple of really bad investments in big oil. The ConocoPhillips investment did not go well at all. The ExxonMobil investments did not go well at all. The IBM investment did not go well at all. There are a handful of big bets that just didn't work. But you think about the strength of this operating business, and by the way, we just had a 10-year market bull run that was almost unprecedented. Buffett told us back before, he said, "In strong bull markets, it's going to be hard for Berkshire to outperform. But when the market is down, that's where we can really win." Put all that together, and it seems like a lot of things are lining up in favor for Berkshire to be a great investment over the next decade.

Sciple: I would just say, I'm taking up for Warren Buffett like he needs defending, but we shouldn't overlook the Apple investment. He's got $100 billion in the thing, and Apple was the net with the best performing FAANG stock in 2020, even amid all this stuff. I don't think the guy has lost it at this point, a lot of the talk about his issues. Again, we see how big that Apple investment got and the size of their investment portfolio and just the limited opportunities you see in the market, just with how high private market valuations are getting right now. I think he's going to see the best opportunity being, buy back your own stock, and he is just going to plow massive amounts of cash into it over the next few years. If and when the valuation catches up to where he thinks is fair value, we'll see. The last thing to point out is, we're just a couple of years on since July 2018, Berkshire's board changed the policy around when they could buyback shares. Historically, it had been 1.2 times, 20% above book value. Once they are below that range is when he and Charlie Munger could purchase. They've since removed that restriction. Wherever the stock goes, he could feasibly continue buying indefinitely, if he sees that as the best use for capital. We'll see, it cannot sit in cash forever, I'll tell you that.

Hall: Well, the demand was at Dominion Energy, the pipelines that they purchased and the LNG export facility there. I think we're going to see more of those things, like these steady cash flow assets that become wholly owned subsidiaries. I think we'll see more of that. Apple was like, that's Coca-Cola part two. That's this massive, valuable consumer brand that its IP isn't just the product that it makes. It's the name and the value and the ability to make this huge profit off of something that users really like. Yeah, we'll see what happens next. But I love this pick Nick, I really do.

Sciple: We've got a couple of more picks to run through. Let's do this next one quickly, Jason, what have you got for your second pick?

Hall: This is a stock that's had a pretty good year. It's NV5 Global (NASDAQ: NVEE). The ticker is N-V-E-E. This is a microcap stock here. I think the market cap's maybe $1 billion, maybe a little more. But it's had a pretty good run lately. The reason why is, this is an infrastructure engineering company. Here we are with Democrats having control of both houses of Congress and the White House coming up. There is this idea that we're finally going to see a big push on infrastructure spending. This should be bipartisan. It should be something that gets done. I don't know if I buy into that happening or not, but here's the key: it's been great for NV5 investors over the past few months. The bottom line is, whether it happens or not, this is a business that's going to continue to ride some of those same trends that Brookfield Infrastructure, my first pick, was set up to profit from.

Here's the things that I like about NV5 Global. This is a company that is founder-led, Dickerson Wright. Dick Wright, the CEO, is a founder. He owns over 20% of the company's shares. He has a really long track record of success prior to founding NV5, which has been around for over a decade. The thing is this is an acquisitive model. They grow organically 8%-10% a year, which is really solid. But they do make a lot of acquisitions. There're a lot of bolt-on acquisitions of small engineering firms that maybe have a regional coverage or maybe they have a certain discipline that fits within the NV5 model. They bolt-on these acquisitions. They convert these acquisitions over to their backend, so they wring out some of the costs. But then they also benefit from cross-selling. If you buy an engineering firm that focuses on one thing and they are working with the client on a project and they need engineers that do something different, or maybe they have a property in a different area that they need to develop or something like that, NV5 can meet that need that that small engineering firm couldn't meet on their own. That's how they can cross-sell and that's where a lot of their organic sales growth comes from. They're actually attached to the fact that the original deal maybe came through an acquisition.

The bottom line is it's hard to do this well, but NV5 has a really good model. They're really good at wringing out those costs, they're really rigorous about it. A lot of companies that do acquisitions end up really bloated. These guys have been really good about not letting that bloat come along for the ride. You think about sales growth. This is a company that still doesn't do $1 billion a year in revenue, but over the past year I think they grew revenue something like 70%, just absolutely delivering. It is also a profitable business. Even with the stock price having run, say, well, at 60% or so over the past year, the forward price to earnings ratio is about 23 times. This is a stock that still trades for a really solid discount to the market, which I think their forward P/E for the S&P is over 30 times right now, it's just that market trades for really high valuations. You can buy a very small company participating in a really big growth opportunity, it's founder-led, it's profitable, at a great price. I think it just checks almost every single box for me. Again, the big caveat is the way that they've done a lot of their growth is a hard way to do it. The bigger they get, the harder it's going to be to find acquisitions to give meaningful growth. But they're still so small, I think it's a great company to buy.

Sciple: Awesome. NV5, that's an engineering firm. They're folks who are during the construction of some of these projects?

Hall: They do the engineering, they do a lot of the pre-work, they do project management, they recently made a big geospatial services acquisitions. That's a big deal in the West with the wildfires and all that stuff, to do geospatial work and to help companies, like, powerline transmission and that kind of thing. They're expanded a little bit outside of their initial scope, but it's a really smart place that they've expanded into. They've been really disciplined.

Sciple: Awesome. My second pick, just as quickly as Texas Pacific Land Trust (NYSE: TPL), they discussed this company on December 10th with Luis Sanchez. The stock is up about 15% since then, trading about a little over $800 a share. Today it's Texas Pacific Land Trust, on January 11th it will become Texas Pacific Land Corporation. If you listened to the episode back on December 10th, the history of this company was back to the 1800, there was a company called the Texas Pacific Railroad that went bust and had a certain amount of land. They formed a trust for the shareholders in that company to hold and maintain that land over a period of time. Well, we're here almost 140 years later, and that company is now going through the process of becoming a corporation. On January 11th, they will distribute one for one for shares of Texas Pacific Land Trust, they will distribute shares to Texas Pacific Land Corporation. Phone number is the same, addresses the same, the ticker is still the same, TPL, but the company will change into a corporate form.

Just from a business operations point of view, what's interesting about this company? I think over the past year, obviously, really rough for oil and gas, the oil price is down significantly as demand throughout the world has fallen. Also, there were some supply issues, obviously, in the spring with Saudi Arabia and Russia, going to war with one another. But now, we've seen prices stabilize and they are above $50. Now, Saudi Arabia has done a significant cut in an attempt to support the market. It appears, with demand returning later this year and with the measures that some of these producers are taking, we're in an environment that should be constructive for oil prices. So we said, "Okay, oil prices are headed up, generally, a lot of these companies that will be exposed to that aren't attractive investments. We've talked about in the podcast a lot about exploration and production companies. You have these fixed costs you had to put in to keep your wells maintained and that sort of thing which you're exposed to lots of commodity risks.

These companies sometimes have misaligned management teams, those types of issues. You don't necessarily want to invest in those businesses. But what Texas Pacific Land Trust gives you is a way to get some exposure to that without having some of these operations that an E&P company has. Just straight from their perspectives, TPL Corporation is one of the largest landowners in the state of Texas with approximately 880,000 acres of land, comprised of a number of separate tracks located in 19 counties in West Texas, they also own 128 royalty interests on 85,000 acres of land, and 116th non-participating royalty interest under 371,000 acres of land in Western Texas, and 4,000 additional net royalty acreage. Basically, they own massive amounts of land in West Texas. This is the Permian Basin, this is the area where among these shale plays, where the cost of production is the lowest, where you hear a lot of these companies that have talked about focusing their investments like Exxon and Chevron and others said, "Hey, we're going to deemphasize some places like the Bakken, we're going to emphasize the Permian where our prices are lowest.

To the extent oil production is reducing, and it's certainly as reducing in the U.S., some of those dollars are going to flow to the ,which is where Texas Pacific Land Trust is located. They have surface rights, that's where you see pipelines and the like constructed. Just on January 4th, Kinder Morgan turned on their Permian highway pipeline, taking natural gas out of the area, fully subscribed on regular contracts. The big issue in the Permian for the longest time has been takeaway capacity. If you want to install these pipelines, Texas Pacific has those service easements that folks have to pay them to get access to that as well. I mentioned they have this royalty acreage. Whenever oil gets pulled out of the ground on the acreage that they control, they get income coming in. They don't have to pay to build the pipeline, they don't have to pay to drill the wells, they just get an income based on the oil and gas that's produced. They're predominantly in the region in the Permian Basin where we're going to still see some continued production of oil and gas.

Essentially, you look at the balance sheet for the company, no debt, over $300 million in cash. If you look at their free cash flow yields, this is their free cash flow divided by the market cap of the company, it's the inverse of the free cash flow multiple, if you like, the price to free cash flow multiple, if you like to look at that. It's basically the highest it's been in five years. We have this conversion taking place. Jason mentioned earlier with the Brookfield Infrastructure Corporation, now, their conversion opened up access to a broader variety of investors, those same factors are at play here with the conversion to Texas Pacific Land Corporation. The other thing is you just get better corporate governance. This has been in a trust management style for an excess of 100 years, the trustees were appointed for a lifetime appointment.

Now, you're going to get regular reporting fully, they're going to have a new board in place, eight of nine members being independent, different incentives. If you were a trustee, you're just trying to preserve these properties going forward, you have a lifetime appointment, nobody is going to fire you. If you were a manager, someone who is a corporate manager, you can get fired if you don't do a good job, and you have incentives based on the performance of the company and all those sorts of things. Basically, what you're getting with Texas Pacific Land Trust is exposure to what is likely to be an area of the U.S. where oil and gas production continues where there's demand to either get pipelines installed on their land or to continue to extract oil and gas from that region. You get in a company with a super strong balance sheet. Even if there's continued volatility in the oil and gas market, this company is not going to go bankrupt on you, they're going to stick around to collect that value, and that value really is the oil and gas in the ground.

I think today, if you look at the valuation relative to where it's been in the past five years, that's attractively valued. Issues that might not work out for them, obviously, if oil and gas prices are low over a period of time, people might not choose to produce oil and gas on their land and they don't get money if no oil and gas comes out of the ground or if nobody is using those surface easements to install new pipelines, because producers have decided to not install more pipelines. But if you do believe that oil and gas production is going to continue in a meaningful way in the Permian Basin in the U.S., and I think it will, because if you want to think about it just from the future perspective, we need natural gas to light our homes. I know renewable energy is certainly on the rise, but natural gas is going to be an important contributor to our energy grid for decades to come, just as oil is going to be an important contributor to travel and those sorts of things.

Also, from just a national security point-of-view, the Permian Basin is probably our greatest asset when it comes to oil and gas production here in the country to develop over the next few decades. Does that mean we're ever going to get our production back to the peak it was a few years ago? No, but I do think they're going to continue generating cash out of this region for a long period of time, and Texas Pacific gives you some exposure to that.

Hall: Crazy stuff last week. I don't know if you saw this, you probably did. Zero barrels of oil came into the United States from Saudi Arabia.

Sciple: When is the last time that happened?

Hall: I can't remember. [laughs] That's happened in large part because of the Permian Basin and the Bakken, the development of a lot of these shale resources. The thing I like about this the most, Nick, is there is exposure to prices, because low oil prices mean lower royalties, because it can affect volumes that come out of these areas. If you believe, as I do, that oil and gas are going to continue to play a role, this is a great way to invest in the production without taking on the risk that every independent has, which is you can't get what it costs you just to get it out of the ground. This is the best. Own the royalties, own the real estate. [laughs] Let somebody else deal with producing it.

Sciple: Absolutely. I think we've talked about AerCap on the podcast in the past as a way to invest in an airline recovery. You own the airplanes. Even if the airlines go bankrupt, AerCap has these planes that will continue flying. There's still demand to fly, still demand for that value that airplanes represent. I think in a similar way, Texas Pacific is in a similar spot. Whether these E&Ps go bankrupt or not, that oil and gas in the ground has value, it has value for what what we can do with it and fuels, or fertilizer, or chemicals, or plastics, or all those things, that has value and will continue having value whether these companies, these producers, go bankrupt or not. Texas Pacific owned the option on that value. That's the scenario you're in with these companies. All right, Jason, those are our stocks ran through. We've got Texas Pacific Land Trust, soon to be Taxes Pacific Corporation, TPL, Berkshire Hathaway, ticker BRK.B, if you're a regular person, and if you're super-rich, you can do BRK.A. Then Jason, what were your two picks for us?

Hall: The second one was NV5 Global, ticker NVEE, and Brookfield Infrastructure. The Infrastructure Partners, ticker BIP, and then Brookfield Infrastructure Corporations, BIPC. I encourage people that it makes sense for to buy BIP at the current valuation.

Sciple: If you want to see more information on Texas Pacific, like I said, you can go back to our December 10th episode, I believe we've talked about the Brookfield companies over and over again. Look back anywhere in our history and you'll be able to track it down whenever we're talking about renewable yieldCo's or any of that sort of thing. Jason, always love having you on the podcasts to talk about some of our favorite stocks, and I'll look forward to having you on again next time.

Hall: Thanks, this is fun. Sure, we'll be talking soon.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, s So don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show, for Jason Hall. I'm Nick Sciple. Thanks for listening and Fool on.

Jason Hall owns shares of Brookfield Infrastructure, NV5 Global, and Starbucks. Nick Sciple owns shares of AerCap Holdings, Apple, Berkshire Hathaway (B shares), and PayPal Holdings. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Brookfield Asset Management, NV5 Global, PayPal Holdings, and Starbucks. The Motley Fool recommends AerCap Holdings, Brookfield Infrastructure, and Dominion Energy, Inc and recommends the following options: short January 2021 $100 calls on Starbucks, short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.


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