What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in recent months. Inflation concerns have been front and center among investors and they're, probably right to be concerned. The federal reserve has increased the m2 money supply by 26. The consumer price index has increased more than 5 year-over-year for the past three months in a row, and the national debt is expected to balloon to 89 trillion dollars by the end of the decade.

As input prices increase, many companies may see their profit margins diminish. Furthermore, inflation above the fed's 2 target may cause them to raise interest rates earlier than expected, which could crush growth socks like a souffle under a sledgehammer. Does this mean you should sell your stocks in fear of an inflationary crash, not necessarily when the fed is actively debasing the value of the dollar? The last thing you want to own is cash. Fortunately, many companies actually benefit from increasing inflation.

In our opinion, it's important for all investors to position their portfolios to hedge inflation risk in this video we'll go over what types of companies benefit from inflation and our favorite stock. That falls into this category. Keep in mind that we are not financial advisors and this video is, for entertainment purposes, only make sure to do your own research and consult with a professional before making any investment decision. I came across this interesting article from marketwatch about which stocks did well in the 1970s era.

Stagflation, the link to the article is in the description below, while the stock market did increase from 1971 to 1981. The real return was negative after adjusting for inflation, as expected. 10-Year treasury bonds were the worst investment. A bond is a promise to pay a fixed nominal dollar amount in the future, as the purchasing power of the dollar diminishes.

These fixed payments decline in real value. The two best performing sectors were real estate, investment trusts or reits and energy stocks. Oil was the best performing sector with a 73 return. Even after subtracting inflation, both real estate and oil are capital.

Intensive industries reits need to put up millions of dollars up front to acquire new properties. Similarly, oil companies spend billions of dollars to acquire new land and drill new wells. They typically borrow huge amounts of money to do this, and usually with fixed interest rates as inflation degrades the purchasing power of the dollar, their fixed debt service obligations decrease in real terms. Oil stocks and rates benefit from inflation for the same reason that bonds suffer.

Take. This example of an oil company say oil is 50 per barrel and it costs them 25 to extract and they have 10 dollars of fixed interest expense. This leaves them fifteen dollars of profit per barrel. Now suppose that inflation causes prices to double each barrel of oil.

Now costs one hundred dollars their labor costs, also inflate. So now it costs them fifty dollars to extract each barrel, but their interest, expense of ten dollars remains fixed. This leaves them with forty dollars of profit per barrel, so when prices doubled their profits more than doubled from fifteen dollars to forty dollars. This is a real increase in earnings.

The pandemic created an unprecedentedly difficult environment for the oil industry as stay at home. Orders destroyed demand, prices, tanked and oil futures even briefly turned negative, as global economies have reopened, prices have rebounded and now set at above pre-pandemic levels. During the pandemic, oil companies shut down drilling rigs and held off on capital expenditures to conserve cash they're, starting to bring some of these back online. But this takes many months: goldman sachs's, global head of commodity research.

Jeff curry thinks that oil prices can explode to the upside as the delta variant only had a small impact on demand and a lack of long-cycle investment by oil companies has caused supply to remain constrained, whether it's demand or supply, but there, but the ones that are Now, i think brewing in the background are oil and u.s natural gas, where the inventories are beginning to decline, particularly in oil with ida. Ida is already offset two and a half months of opec increases. The demand hit from delta was not nearly as large as anybody expected markets in a deficit. You've already exhausted the you know the pandemic inventory glass, so you're slowly getting to a point, you get any type of disruption as you go into the autumn.

You know the potential for oil crisis to explode to the upside is increasing, particularly if you don't get iran. We have not been making big investments in other types of long cycle activities around the world due to poor returns, lots of uncertainty about the forward. You know how what do you know to invest in when the uncertainty around climate change is this high? It is and what technologies are going to be used? The question is that what price do you see that investment flow? I'm not just there that oil is out there. We know the shale is there, but you got to get the rig counts up and right now we're at 73 we've seen 79 and that was insufficient to get the rig counts up.

Why you have esg issues that make it difficult for the drilling to actually occur? You have commitments by these companies for share buybacks uh variable dividends, all that's going to use the cash to do something other than drill. You know you look at the issuance of debt of high yield in the sector. It has been focused on paying back previous debt, not on drilling. So i agree with that.

Oil is in saudi that oil's in russia that oil is in the u.s shale patch, but you got to get money to it and that's the big question mark right now because even take saudi arabia, it's committed to the drilling. It's contracted the rigs, but the rigs are not in the field actively drilling right now, and so it was the same thing in russia. We got to see the actual money flow into activity and i don't know where that price level is. You know it's still a big question market.

Where is that new equilibrium price and then once they start doing it? What kind of inflationary pressures do you create within the industry and other types of bottlenecks? When you put stress on the system, when was the last time we ramped up drilling activity in this industry, it was third quarter of 2018. That was a long time ago, we'll find out with the ability for it to do it again. Oil prices are extremely volatile and when the supply demand dynamics are favorable, it can explode to the upside. It's not a stretch to think we could see oil reach 100 per barrel over the next year, or so we've seen above 100 oil in the early 2010s and the value of the purchasing power of the dollar was a lot higher back.

Then oil stocks have fallen out of favor as a shift to electric vehicles and other climate change initiatives will reduce demand for oil. Also, many institutional investors have divested from oil stocks over esg concerns, but the shift to evs will take many years and will be offset as countries like india and china develop in the u.s. There are 812 cars per 1000 people in india. This number is only 42., as these countries become richer, a greater share of the population will be able to afford cars.

The vast majority of these cars will have internal combustion engines as they are still cheaper than evs. The international energy agency predicts oil demand from developed countries will gradually decrease over the coming years, but this will be more than offset by increases in demand from developing countries, causing global demand to increase for years to come. Peak oil demand will happen eventually, but it's unlikely to happen in this decade. While this is a disaster for climate change, it's very good for oil stocks and as an investor, you have to view the world as it is not how you would like it to be.

Our favorite way to play the current inflationary environment and bullish outlook for oil prices is occidental petroleum, ticker, symbol, oxy. They engage in exploration and production of oil and natural gas they're a massive company producing about 1.2 million barrels of oil equivalents every single day. Their stock has massively underperformed the s, p, 500 and even other oil companies since the beginning of the pandemic, this can largely be attributed to their 35 billion debt load, which has forced them to suspend their quarterly dividend. But for the reasons we discussed earlier in this video, their high debt burden can cause them to have tremendous upside.

If inflation causes oil prices to surge, their operations are highly cash generative, and we believe that they can rapidly pay down their debt and bring back the dividend within a few years or even earlier. If commodity prices remain favorable. When this happens, we think the stock could re-rate to over 60 dollars per share to understand how cheap this stock is. They made 2.4 billion dollars of free cash flow in the first half of 2021., the price of oil and natural gas has increased.

Since then, and at current prices we estimate they can make 6.2 billion dollars of free cash flow for the full year of 2021.. With the current market cap at 25 billion dollars, this is just four times: free cash flow this table shows their free cash flow sensitivity to oil and natural gas prices in 2022, conservatively assuming 7.5 billion dollars of capital expenditures, as you can see, increases in commodity prices Can cause their cash flows to explode? Of course, if you want to invest in occidental or any oil company for that matter, you have to believe that oil prices will go up or at least remain stable at the current levels. As you can see from this chart, their cash flows have a very high correlation with the price of oil. If you want to learn more about occidental check out our free public access portfolio on patreon link in the description below, we used to have tesla as our top position in the portfolio, but we replaced it with oxnano in light of the increasingly inflationary environment.

Alright guys that wraps it up for this video, what do you think about occidental? Do you have any other place that will benefit from inflation? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always. Thank you so much for watching and we'll see you in the next one wall, street millennial signing out.