Energy and Materials can be simply thought of as the stuff you need to build other stuff. The products themselves - oil, natural gas, rock, aggregate, and others – are boring and generally thought of as commodities. But you can’t build much without them. And while the product itself is interchangeable, its availability is limited.
The world doesn’t have an endless supply of these resources, especially in locations close to areas of industrial production. Many companies in this sector have gotten better over time at understanding the scarcity value of what they produce and where they produce it, raising the prospects for potentially higher future shareholder returns earned by providing these essential inputs to growth.
Aggregate Supply
GMO Domestic Resilience ETF (DRES) owns positions in Martin Marietta and Vulcan Materials, two of America’s leading producers of aggregate. Aggregate is a critical component for key construction materials such as concrete, asphalt, and bases for everything from foundations to roads. It’s heavy (we’re talking crushed rock here) and needed in large quantities, which makes it a fairly local business since transport costs are so high.
Aggregate isn’t always easy to find, especially in the grades required for construction, and finding it near the heavily populated areas where it’s needed is even harder. As a result, major players like Vulcan and Martin Marietta typically operate in fairly concentrated markets with only a handful of competitors, creating strong economic moats and excellent historical long-term shareholder returns. Their attractive business fundamentals and must-have product put them in an excellent position as America reindustrializes.
Domestic Energy
While energy commodities like oil and natural gas are typically thought of indifferently when it comes to location, historical events suggest that the location of energy resources doesn’t matter much until it matters a great deal. For example, in reading Daniel Yergin’s excellent history of oil, “The Prize”, we were struck by the importance of energy at countless key junctures in World War II, from oil embargoes to attacks on refineries to its role in motivating Japan’s attack on Pearl Harbor.
While such memories may have receded in recent years, we observe that the location of key resources is a recurring factor that emerges repeatedly at key moments in world history. Recent events in Venezuela, which has a long history of nationalizing oil assets, highlight the importance of owning companies operating in friendly jurisdictions.
In Domestic Resilience, we own companies with heavily U.S.-based inventories. This focus comes amidst the backdrop of American energy abundance, thanks to the shale revolution, which made the U.S. energy-independent, thanks to the resulting boom in domestic production. While beneficial to America, increased production wasn’t great for energy companies, culminating in the collapse in oil prices during COVID when excess supply combined with a collapse in demand sent oil prices briefly negative.
It was a tough time across the energy industry, but companies like Domestic Resilience holdings ConocoPhillips and EOG Resources bounced back from the downturn stronger than ever, with lower debt and the resolve to end uneconomic ‘drill baby, drill!’ production policies. We believe the combination of improved management of these essential resources and low valuations offer the prospect of attractive future shareholder returns.
Invest in the Opportunity — DRES
The GMO Domestic Resilience ETF (NYSE: DRES) is an actively managed fund designed to provide focused exposure to American manufacturing and the structural forces reshaping the U.S. economy through a disciplined, bottom-up investment approach.
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