When Oil Rigs Are Worth Less Than Their Parts

We don't live in the era of Ben Graham anymore. We live in the world of Michael Saylor.

Dear Fellow Traveler:

Now… here’s something that caught my attention…

One-third of all Russell 2000 energy stocks are trading for less than their liquidation value.

Yes. Energy companies with actual tangible assets that power our entire economy are trading below book value. In contrast, tech companies with business models that amount to "we'll figure it out later" enjoy stratospheric valuations.

Oh… and did I mention that those tech companies rely on a ton of energy to succeed?

If this entire story doesn't perfectly encapsulate our financially deranged era, I don't know what does. Let’s proceed with the right sort of whiskey.

In Case Anyone Still Cares About “Value”

I’m not sure if there are any people with old-school values left in the world. The last decade has destroyed so much of their morale.

But let’s return to the Danny DeVito definition from Other People’s Money…

When a stock trades below book value, the market says, "Your company is worth less than if we liquidated it and sold off the parts."

Seriously.

In any rational universe, that would trigger a feeding frenzy of value investors.

Yet here we are, with oil and gas companies sporting the financial equivalent of a "CLEARANCE: EVERYTHING MUST GO!" sign, and buyers are responding with a collective yawn.

Why?

Because we're living in the golden age of financialization.

Turning Real Assets into Market Pariahs

Financialization will eventually end poorly. Not just because it will have swallowed up everything that matters… but it will have left so many behind without a basic ability to farm or even wash their clothes (the skills are fleeting).

There was this crazy point in my early life when companies were valued based on producing things people needed.

Those days are dead.

Today's market runs on a simple formula:

Productive Capacity * 0.5 < Digital Growth Distortion * Infinity

The monetary spigots opened after 2008 and became a flood during COVID.

This behavior sent floods of capital not toward companies that build, extract, or manufacture.

Why would we need food, housing, and shipping? Why would we need energy?

No… we need a sexy growth narrative.

Capital now moves like a hormonal teenager infatuated with whatever is trendy, scalable, and requires minimal commitment to physical reality.

The MAG 7's Gravitational Pull

While energy companies languish, the "MAG 7" (Microsoft, Apple, Google/Alphabet, Amazon, Meta, Nvidia, and Tesla) have become black holes.

They can and will suck in every investment dollar in their vicinity.

These companies don't just get a seat at the table; they are the table, the chairs, and most of the dining room.

Thanks to passive investing's unstoppable rise, money flows into the market disproportionately into these already-swollen giants.

It's a financial perpetual motion machine that would make even the most shameless carnival barker blush.

Passive investing is an innovation that became the market’s version of Jabba the Hutt.

Then, there are the financial virtue signals.

ESG investing keeps money away from fossil fuel companies, raising the economic costs of doing business and powering America.

Never mind that we still need their products for modern civilization.

Instead, institutional investors are busy congratulating themselves on divesting while booking private jets for climate conferences.

But that’s not all…

What are energy companies doing about this undervaluation?

These days, every corporate America does the same thing: frantically buys back shares.

Exxon keeps steady with repurchases, while Chevron cuts back due to cash constraints. These are different approaches to the same existential crisis.

They don’t want to buy up small producers on the cheap… because the incentives to return money to shareholders are greater than to expand their production capacity.

What This Distortion Means

The fact that you can buy a dollar of tangible energy assets for 90 cents tells you everything about our financially distorted reality.

We're living in a market that:

1. Values narrative over substance

2. Prioritizes growth “potential” over actual cash flow

3. Would rather bet on algorithms than oil rigs

4. Has more capital than sense

For value investors, this should create the ultimate "cigar butt" opportunity that would make Warren Buffett salivate.

The problem is that these distortions have gone on for much longer than patient investors are willing to be.

Markets eventually correct distortions, though they can stay irrational longer than you can stay solvent (as Keynes would remind us).

America has to run loose monetary policy as part of its responsibilities to the reserve currency status… and stave off the deflationary impact of technology flows and much lower wages worldwide.

Instead, seismic moves that drive growth narratives to collapse under their own weight would be needed. Only then might we see a renaissance for companies that… actually produce things.

I’m not holding my breath right now.

Not in this world driven by financial distortion.

Until then, we'll continue living in this upside-down financial world, where the businesses we literally can't live without are valued less than the sum of their parts.

If that doesn't strike you as absurd, congratulations…

You're now part of the circus.

Your red nose is down the hall, by the basket of Zombie stocks.

Stay positive.

Garrett Baldwin