Everyone thinks they've seen this all before...
Energy prices rise. Companies spend like crazy to find more oil and gas... Then they pull it out of the ground as fast as possible. And guess what happens next? Prices crash.
That's the typical cycle in oil and gas. It has happened over and over again since fossil fuels re-imagined the global economy. There's a problem, though...
This boom is different...
These companies aren't acting like the maniacs we expect to see in an energy boom. They aren't drilling like crazy, as I've covered in our recent essays.
Instead, these companies have become disciplined. And a specific group of businesses – one that bled cash in the past – is now making money hand over fist.
Let me explain...
The last decade was a big one for energy in America. The shale revolution turned the once-vaunted idea of "peak oil" on its head.
Instead of running out of oil, we discovered incredible amounts of it – thanks to fracking technology. Companies invested hundreds of billions of dollars to discover and develop oil and gas fields. And guess what happened...
U.S oil production soared to all-time highs.
Few realize this today, but at the start of 2010, production was down nearly 50% from its 1970 high.
Here's the thing... Production went on to nearly double over the next decade. Take a look...
Drill baby, drill! That was the mantra of the oil and gas industry... And it helped push America to energy independence.
But the supply boom allowed everyone to ignore an unpleasant fact...
The fracking companies that drove the boom were losing tens of billions of dollars, year in and year out.
Anyone paying attention knew it was happening at the time. But no one cared. The directive from investors was simple... Grow reserves as fast as possible. Profits don't matter.
In total, the U.S. fracking industry lost $317 billion in free cash flow from 2010 to 2019, according to a report from consulting and research giant Deloitte. You can see the annual losses broken out below...
Those huge losses at the start of the decade were a result of massive capital investment. Again, companies were spending whatever it cost to find more oil and gas.
But then, oil prices crashed from 2014 to 2016. The total decline was roughly 75%. And many of those expensive, boom-time projects ended up completely underwater.
You'll notice that the losses turned to profits in 2016. And losses were small after that. That's because 2016 is when the new regime took over. Investment slowed dramatically. According to Deloitte, current spending on new projects is down 60% from 2014.
That set the stage for what has been happening since. In just three years, the U.S. fracking industry will have made back a decade of losses. Here's that graph again, but updated to the present...
Industry free cash flow was $16 billion in 2020. It soared to $104 billion last year. And it'll hit nearly $200 billion in 2022. That's a total of $319 billion of positive free cash flow... enough to completely erase the prior decade's losses.
This incredible reversal is thanks to two things... much higher energy prices, and much lower spending on future projects. This winning combination has turned fracking into a cash-gushing business.
The shift also ensures that high energy prices are here to stay. As I noted recently, not investing in the future means we won't have enough of the oil and gas we need in the coming years... And high demand paired with low supply is a recipe for high prices.
In the meantime, the energy industry will make more money than any other time in history.
This boom has legs. And for investors, it could be the most profitable energy boom of our lifetimes.
P.S. This energy boom is one of the most important investment themes playing out in the world today. And as investors, it gives us an incredible opportunity.
That's because the whole world has this story completely backward. It thinks the best days of the boom are behind us. That gives us a chance to make hundreds-of-percent returns... And it's why I recently put together a presentation explaining exactly what's happening, so you can take advantage of it. You can watch it for free, right here.
"We could very well see oil prices stay above $100 a barrel for a while – and even go higher," Brett says. The reason has to do with a key element of the boom-and-bust cycle for energy... Learn more here.
"Green energy has taken incredible leaps," Brett writes. "But as far as taking over... we're just not there yet." We'll still need oil and gas for decades to come. Yet Wall Street is getting this story completely wrong... Read more here.