By: Jon Costello

It has been a while since I wrote an update on Cheniere Energy (LNG), which we’ve held in the HFIR Energy Income Portfolio since January 2021. The company recently reached an important milestone and has begun a new phase of growth. How it executes this next phase, as well as prevailing macro natural gas market conditions over the coming years, will have a significant bearing on its stock’s performance.

Cheniere’s track record of execution and strong financial position make it the conservative way to obtain exposure to LNG over the coming years. More than 95% of the company’s production volumes through the mid-2030s are under long-duration sale-and-purchase agreements (SPAs) with a 15-year weighted-average remaining life. Those contracts alone are expected to deliver more than $20 per share of run-rate distributable cash flow (DCF) regardless of where global LNG prices settle. Share repurchases and production growth are set to increase DCF from $20 per share to $30 per share.

Cheniere shares exceeded our published $180 price target in November 2023. DCF growth going forward places fair value at approximately $330.

With Cheniere shares trading at $272, investors who own the name should stay put as management’s execution builds value. They should consider trimming once the shares reach $300, at which point the stock would trade at roughly 90% of fair value.

Investors looking to buy or add to the name should wait for a pullback after the shares’ run from $190 to $272 over the past four months.

20/20 Vision Now Complete

On February 26, 2026, Cheniere completed its 20/20 Vision capital allocation plan. The plan had been announced in September 2022 and served as a framework for allocating the $20 billion in DCF management expected to be generated over the next five years.

Due to consistently outstanding execution, the company completed the plan ahead of schedule. Its forecasted $20 billion in DCF had been generated and allocated to debt repayment, share repurchases, dividends, and growth. It also achieved its targeted DCF run rate of $20 per share.

True to form, Cheniere didn’t rest on its laurels after completing its plan. It immediately launched a new five-year plan that featured an upsized repurchase authorization of $10 billion and a $30-per-share run-rate DCF target on a 175 million share count, implying a 17% lower share count due to repurchases.

I expect this new plan to be completed, and for its completion to drive Cheniere shares to my fair value estimate, which is 21.3% above the current share price.

The 2026-2030 Plan has Begun

Cheniere’s recent financial and operating performance speaks to its ability to achieve its 2030 plan, as it continued to execute superbly on all fronts.

In 2025 alone, the company repaid $652 million of consolidated long-term indebtedness. It repurchased 12.1 million shares for $2.7 billion, including 4.8 million at lower prices in the fourth quarter for $1.0 billion. During the year, it allocated 52% of DCF to share repurchases. Quarterly dividends of $0.555 per share—$2.22 per share annualized—came to $451 million, and growth capex reached $2.6 billion for CCL Stage 3 commissioning.

Looking ahead, the company’s 2026-2030 framework features more of the same capital allocation execution. The board’s $10 billion share repurchase authorization, which is comprised of the $1.2 billion remaining under the previous June 2024 authorization plus an additional $9 billion, represents a more than doubling of potential repurchases, with $9 billion of new capacity versus the prior $4 billion program.

Assuming an average share price of $280, $10 billion of repurchases will retire roughly 36 million shares, bringing the share count from approximately 210 million today to approximately 174 million by 2030. The repurchases increase DCF per share by 21%. Growth projects, namely Sabine Pass Liquefaction (SPL) Expansion and Corpus Christi Liquefaction (CCL) Expansion, would represent DCF upside if they proceed. I expect the repurchases, along with the cash flow generated by the growth projects, to enable the company to achieve its $30-per-share target.

SPAs Provide Cash Flow Stability

Cheniere’s contracted SPAs form the backbone of its investment thesis. According to the company’s latest investment presentation, approximately 95% of total anticipated production from the SPL and CCL projects is contracted through the mid-2030s.

These agreements lock in cash flow through the next decade. The contracted cash flow floor they create is set to deliver more than $20 per share of annual DCF today. The integrity of cash flow is underpinned by creditworthy counterparties, which include investment-grade global buyers such as Shell (SHEL), BP (BP), TotalEnergies (TTE), KOGAS, CPC Corporation, and others. These buyers pay Cheniere fixed take-or-pay fees regardless of whether they lift the cargo.

Meanwhile, non-contracted cargoes capture spot price spreads between global JKM and TTF LNG pricing and domestic U.S. Henry Hub natural gas pricing. Spot exposure adds upside in tight LNG markets and removes upside in weaker markets, but it doesn’t impact the cash flow floor provided by long-term SPAs. If macro conditions in the LNG market push prices higher, spot exposure could accelerate Cheniere’s path toward its $30-per-share DCF target.

Balance Sheet Strength Adds Safety

Liquidity at year-end 2025 was ample, totaling $8.8 billion, including $1.1 billion in cash, $485 million in restricted cash, and $7.2 billion in credit facility availability. Long-term debt stood at $22.5 billion. Sabine Pass Liquefaction retired the full $500 million of its 5.875% 2026 Senior Notes between December 2025 and February 2026.

Net debt increased by roughly $1.5 billion in 2025 as Cheniere drew down cash to fund $2.7 billion in buybacks and $2.6 billion of growth capex. Leverage remained conservative throughout the year. With full-year 2025 Adjusted EBITDA at $6.9 billion versus $6.2 billion in 2024, its net-debt to EBITDA ratio fell modestly, from 3.1x in 2024 to 3.0x in 2025.

The credit rating agencies have a favorable view of Cheniere’s balance sheet. S&P Global Ratings upgraded Cheniere Energy, Inc. and Cheniere Energy Partners (CQP) from BBB to BBB+ with stable outlooks in November 2025. Cheniere Corpus Christi Holdings was upgraded from BBB to BBB+ with a positive outlook in October 2025. The upgrades reflect the company’s enhanced operating quality following the commissioning of CCL Stage 3 and improved cash flow visibility.

Three DCF Scenarios

Cheniere’s 2026-2030 capital plan has clear implications for its stock. The following three scenarios illustrate the potential upside and downside. Each features assumptions pertaining to management’s execution, the macro backdrop, and the company’s financial performance.

The contracted long-term SPAs provide a cash flow base. Changes from the base depend to a significant degree on marketing activities conducted by Cheniere Marketing International (CMI), Cheniere’s in-house marketing and trading arm. CMI sells uncontracted LNG volumes into the spot and short-term markets, capturing the spread between Henry Hub feedstock prices and international LNG prices.

My base scenario follows management’s guidance, with CMI’s margin at $2.50 per MMBtu, both SPL and CCL Expansion final investment decisions (FIDs) by 2027, and full deployment of $10 billion. The bear scenario shrinks CMI’s margin to $1.50 per MMBtu, defers both Expansion FIDs past 2030, and deploys only $5 billion of the $10 billion buyback. The bull scenario maintains the same FID assumption, increases CMI’s margin to $3.00 per MMBtu, and accelerates repurchases to 2028.

The base scenario, at an 11x DCF multiple, supports a share price of $330. I expect such a scenario to provide long-term holders of the name an opportunity to exit at a higher price.

The bull scenario at an 11x DCF multiple implies a price of $363, for 33.5% upside. A more conservative bull scenario using a 9x multiple implies a price of $297, 9.2% above the current price and just below my planned trim level.

A bear scenario at an 11x DCF multiple supports $264, 3% below the current price. However, a more severe bear scenario using a 9x multiple supports a $216 share price, representing 20.6% downside. The stock price declines in this scenario due to multiple compression, as DCF per share is roughly flat with 2026.

The table below walks through the bear scenario math, the most adverse of the three scenarios.

Risk-reward at $272 features 21.3% upside, with downside ranging from negligible at flat multiple to material at full margin compression.

Applying analogous bridges for the base and bull scenarios produces the DCF per-share figures shown in the scenario table below.

At $272, the call is to hold. My base scenario puts fair value at $330, implying roughly 21% of upside that share buybacks should help deliver over the next 18 to 24 months. Current holders of the shares should consider trimming at $300, or at roughly 90% of fair value, taking, say, 20% to 30% of their position off the table, and accelerate trimming above $325, where the stock would already reflect near-perfect operational and financial performance. However, I wouldn’t be likely to exit the shares completely at any level, as Cheniere’s contracted cash flows and ongoing buybacks should continue to grow per-share value over a five-year period, and perhaps beyond.

For investors looking to add to their position, consider entering around $240. At that level, Cheniere trades at approximately 11x current run-rate DCF and 8x the $30 DCF target. This multiple would be at the low end of the historical range for high-quality contracted midstream operators. The $216 price in the bear scenario at a 9x multiple is 10% below $240, while the $330 price in the base scenario is 37% above. That 4-to-1 upside-to-downside is the kind of setup that I believe justifies adding in size rather than nibbling.

Downside Risk

Given all the operational and macro-level risks in the outlook, it is important to consider the various ways my fair value estimate can fall short. Four bearish variables, in particular, could cause Cheniere shares to undershoot my estimates in the scenarios above.

The first variable is multiple compression. At $272 per share, Cheniere trades at roughly 12.5x its full-year 2026 guidance midpoint DCF of approximately $21.90 per share ($4.6 billion ÷ 210 million shares). High-quality, contract-protected midstream peers trade at DCF and EBITDA multiples in the 8x to 11x range. Cheniere’s 15-year weighted-average remaining life on its SPAs and its relatively high return on capital support a multiple at the high end of the range. Still, company-specific or sector-wide multiple compression would provide a headwind for the share price.

The second bearish variable relates to Cheniere’s post-2030 SPA roll-off schedule. The company does not disclose details other than the 15-year weighted-average life of its contracts. However, this statistic suggests the company is exposed to repricing risk as contracts renew after 2030. If contracts roll off in a softer global LNG market, both fixed-fee renewals and CMI margins are at risk of repricing downward.

A subtle disclosure trend in the 2025 10-K reinforces roll-off risk. Cheniere states in its 2025 10-K that approximately 90% of total anticipated production from the SPL and CCL projects is contracted through the mid-2030s. This is down from 95% in the 2024 10-K. The likely explanation for the decline is that the 10-K denominator reflects in-construction CCL Stage 3 capacity for which long-term SPAs have not yet been signed. As growth capex delivers new production volumes, this percentage could drift lower until expansion-related SPAs catch up. The bull scenario on Cheniere therefore depends in part on management’s ability to commercialize SPL Expansion and CCL Expansion volumes ahead of the early-2030s roll-off, execution that has been strong but cannot be guaranteed.

However, I’m not overly concerned about roll-offs in Cheniere’s case. For one, recent contract signings point to upside, not downside, on the pricing front. Cheniere’s long-term deals with Galp (GLPEY), Equinor (EQNR), Foran Energy, and others, signed between 2022 and 2025, locked in higher fixed fees than the older contracts they replaced. As a result, the portfolio’s average pricing is increasing, not declining. The bearish premise assumes a deterioration that these contract wins appear to contradict.

Furthermore, Cheniere’s main competitor is potentially in trouble. Venture Global (VG) is in arbitration with BP, Shell, and other major customers over cargoes VG diverted to spot markets instead of delivering to its customers under contract. The damages claimed run into the billions, and the situation poses financial risks for VG while also diminishing its standing as a reliable supplier. After VG’s actions, I suspect LNG buyers looking to lock in post-2030 volumes will be willing to pay a premium for proven operating and delivery records. Cheniere has an impeccable track record in both areas, which should result in higher fixed fees in new SPAs.

Lastly, the math holds in the moderate bear scenario. Even after applying the bear adjustments shown in the bridge above—CMI margin compression, spot-pricing weakness, and a fixed-fee discount on early-vintage SPA renewals—DCF lands at $24 per share. At a 9x multiple, which is low for contracted infrastructure operators, the shares would trade at $216, or 21% below today’s $272. Meanwhile, the base scenario produces $330 at 11x, or 21% above the current price.

That said, Cheniere investors should know that the moderate bear scenario detailed above isn’t the potentially deepest downside. An extremely bearish scenario, in which the CMI margin declines to $1.00 per MMBtu in a structurally oversupplied 2027-2028 market, $5 to $7 billion of repurchase capacity is redirected to growth capex, the CCL Stage 3 ramp is delayed by six to nine months, and SPAs are renegotiated at, say, 15% below current fees, reduces DCF to $18 to $20 per share. At an 8x multiple, the implied price is $144 to $160, or a 41% to 47% decline.

While I think it’s highly unlikely that all these stressors occur simultaneously, it’s not entirely implausible, particularly amid severe global economic deterioration. Still, the moderate bear remains my central downside scenario and is part of the reason why I’ll consider trimming above $300.

The third variable that would cause Cheniere shares to undershoot my fair value estimate is the timing of the SPL Expansion FID. The project’s FERC application and DOE non-FTA application remain pending. A 12- to 24-month completion slip puts $4 to $6 per share of DCF at risk, which is the mid-decade catalyst for a bullish outcome.

A fourth bearish variable is a sustained rise in U.S. natural gas prices. Cheniere is largely insulated on its long-term contracts because customers pay the gas cost as a pass-through, but sustainably higher Henry Hub prices, which natural gas bulls believe will be driven by data center demand, home heating recovery, and LNG export growth, could reduce earnings on spot-market sales by $50 to $150 million annually and, more importantly, make new U.S. LNG contracts less competitive against lower-cost global supply, such as that produced by Qatar. Those new contracts are what the bull case depends on to fund expansion.

Beyond the four bearish variables above, four specific developments would cause me to consider trimming or selling Cheniere shares more aggressively. If the company were to repurchase less than $2 billion of stock in 2026, the path to a 175-million-share count would extend longer, and management’s commitment to its buyback pace would come into question. If Cheniere signs a new long-term SPA at $2.00 per MMBtu or below—which would be roughly 25% below current pricing—it would signal that the prices the company can lock in for contracts rolling off after 2030 are lower than the bull case assumes. If the completion date of CCL Stage 3 Trains 5-7 slips past March 2027, the company’s 2027 EBITDA would be at risk of declining below my estimate. And if regulators delay an authorization of the next major expansion past year-end 2027, 20 MTPA of growth gets pushed into the early-to-mid 2030s. Any one of these outcomes alone would dim my view of the company’s prospects. Two or more would prompt me to consider selling.

Conclusion

Cheniere is the conservative way to own LNG. The contracted floor delivers more than $20 per share of run-rate DCF today, and the buyback math drives DCF per share to roughly $30 by 2030. At $272, investors should consider holding and potentially trimming above $300.

We entered Cheniere on January 25, 2021, at $63.82 in our HFIR Energy Income Portfolio. Our position has generated a 334.6% total return and now stands at a 6.0% weighting in the portfolio. Outstanding execution in operations, deleveraging, distributing capital to shareholders, and a strong contracted cash flow floor drove our gains. I expect the same factors to continue sending the shares to $300. At that point, depending on the macro backdrop, I’ll consider trimming my position and holding the rest as the framework continues to work.

Link to HFIR Energy Income Portfolio on RunPlutus.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of LNG either through stock ownership, options, or other derivatives.

By: Jon Costello

Venture Global is one of three large publicly-traded U.S. LNG companies. Its peers are Cheniere Energy , the operator of Sabine Pass and Corpus Christi export facilities, and NextDecade , a development-phase company set to begin exports in 2027 from its Rio Grande LNG facility. Among U.S. LNG exporters, only Cheniere and VG currently produce at commercial scale.

VG owns two liquefaction facilities on the Louisiana Gulf Coast: Calcasieu Pass, which declared commercial operations in April 2025, and Plaquemines, which is currently in commissioning. Plaquemines Phase 1 is expected to reach commercial operations in the fourth quarter of 2026 and Phase 2 in mid-2027. The company has a third facility, CP2, a $33 billion greenfield project that received final investment decision (FID) in July 2025, is under construction, and expected to commence LNG production in late 2027. Beyond these, VG has expansion projects at both Plaquemines and CP2, as well as a separate greenfield project, CP3, in early development.

VG’s competitive edge is its construction speed and modular cost discipline. Rather than using two or three large liquefaction trains as older U.S. projects did, VG uses dozens of smaller, factory-built mid-scale trains that can be installed sequentially. Its first facility, Calcasieu Pass (CP1), went from FID to first cargo in roughly 30 months, a timeline the company bills as the fastest FID-to-first-cargo for a greenfield U.S. LNG project.

VG also owns a fleet of seven LNG tankers with two more on order, bringing the total fleet to nine. This lets the company ship its own cargoes to wherever in the world LNG prices are highest. Most of its U.S. peers sell at the Gulf Coast dock and let the buyer profit from shipping the LNG overseas. To the extent VG’s facilities produce more LNG than their contracted nameplate capacity, the company can use its own tanker fleet to capture spot prices on those excess volumes.

CP1 is currently producing at roughly 11.2 million tons per annum (mtpa), about 12% above its 10 mtpa nameplate capacity, thanks to the same modular design that enabled fast construction. As Plaquemines completes commissioning, VG’s consolidated output will climb to approximately 40 mtpa by the time both of its phases reach commercial operations. The table below summarizes VG’s full project portfolio.

Investors should avoid VG shares at the current price. My concerns center on three areas: the company’s deteriorating margin economics, its slow-to-deleverage balance sheet, and management practices that, in my view, put minority shareholders at risk. The sections that follow walk through each in turn.

From an economics perspective, revenue tied to spot pricing will wind down as contracted SPAs replace it, compressing margins even as total LNG production volumes rise. The balance sheet is an issue because leverage peaks in 2026, and only the bull-case EBITDA scenario fully deleverages the company back toward 2025 levels by 2028. And management’s conduct toward VG’s contracted counterparties and IPO disclosure practices raises questions about how this team is likely to treat minority shareholders when their interests diverge from its own.

Read more

By: Jon Costello

• The HFIR Energy Income strategy, now managed on the Plutus platform, has delivered a gross return of +278% since December 2020.

• The strategy applies the investment approach I have practiced and published publicly since December 2020.

• Portfolio construction emphasizes free cash flow growth, low turnover, and disciplined position sizing across the energy value chain, prioritizing long-term free cash flow growth and compounding over headline yield.

Energy income is still cheap. Midstream multiples sit in the high single digits to low double digits on EV/EBITDA, dividend yields across the income complex exceed 5%, dividend payouts are growing, and sector balance sheets are in the strongest shape they have been in fifteen years. That combination is rare in today’s U.S. equity market.

Given the opportunities we see and our track record of outperformance, we are now publishing our portfolio on the Plutus platform. Plutus connects individual investors with curated and thematic model portfolios from independent professional investment research managers. Its system allows an investor to replicate the researcher’s portfolio in their own investment account.

Through Plutus, investors can now access the HFIR Energy Income strategy. I will apply the same investment approach that I have practiced and published since we launched the strategy in December 2020. The portfolio structure, selection criteria, and emphasis on free cash flow growth carry over directly from what I have done on Seeking Alpha for more than five years. The approach has not changed.

Plutus Applies a Philosophy I Have Practiced Publicly for Five Years

My energy income investment philosophy has been public since the inception of the Energy Income portfolio. It is spelled out in this article, which was published when we launched the portfolio. Neither the article nor my approach to managing the portfolio has changed since then, which is borne out by the portfolio’s metrics. My approach is to buy equity in understandable businesses at discounts to conservative estimates of intrinsic value and hold for two to five years. I hold 10 to 20 names, concentrated around three or four ballast positions bought cheaply. I benchmark against the S&P 500 and treat outperformance as the best gauge of a manager’s skill, and I consider risk to stem from permanent capital loss, not paper drawdowns.

Outside of my five-year history with the HFIR Energy Income public tracking portfolio, my career spans 19 years. I have managed money independently and full-time since 2007, beginning as a generalist value investor across multiple sectors. Since 2016, I’ve been concentrated in energy, which has been my primary focus area since. Across both periods, I have managed portfolios for income and capital appreciation on my own platforms outside of HFIR. The HFIR Energy Income portfolio was launched at the end of 2020.

Returns

The HFIR Energy Income portfolio is a hypothetical model portfolio. Every buy, sell, add, and trim has been published on Seeking Alpha in real time since the portfolio’s inception on December 14, 2020. The tracker calculates what a subscriber would have earned by executing those decisions at published prices, gross of fees and taxes.

The HFIR Energy Income strategy has outperformed by a wide margin. The table below compares the gross record against two standard benchmarks.

Source: Internal analysis of HFIR Energy Income trade ledger, December 14, 2020, through April 7, 2026. Benchmark return series derived from Yahoo Finance adjusted close (total-return-equivalent).

The aggregate number hides year-to-year dispersion. The table below shows calendar-year total returns since inception.

Source: Internal analysis of HFIR trade ledger. 2020 return spans December 14 through December 31, 2020 (17 days). 2026 YTD return spans January 1 through April 7, 2026 (partial year). All other years are full calendar years. Returns are gross total return (price appreciation plus distributions received).

No full calendar year has produced a loss. The only negative figure is the 17-day partial in December 2020. Dispersion across full years runs from +14.18% in 2025 to +35.98% in 2022, with 2024 adding a second-best +33.94% to the record. In 2023 and 2025, returns were in the low-to-mid teens, above the S&P 500’s long-run average, but worth noting as the periods when the strategy did not outperform the benchmark.

Cumulative dividends and distributions received total approximately $526,000 against a $1 million starting capital base.

The past hypothetical performance of the HFIR Energy Income portfolio is not predictive of future actual results. Also, the gross-of-fees performance figures overstate what a real-money investor would have earned. The numbers are directional evidence of a philosophy at work, not a guarantee of what our Plutus portfolio will deliver.

Free Cash Flow Growth Is the Real Guarantor of Income Safety

Most energy income portfolios optimize for a headline income yield in the here-and-now. However, I’d argue that the sustainability of an income stream is determined not by its current yield but by the underlying business’s ability to generate free cash flow and to grow and distribute that cash flow over time.

Consider the mechanics. A business with flat or declining free cash flow that pays out most of what it produces will eventually cut its dividend or weaken its balance sheet to maintain it. A business with growing free cash flow can safely raise its dividend and fund reinvestment, while protecting its balance sheet. Income safety is therefore a byproduct of operational and financial strength, not simply a product of payout ratios or yield levels.

Over time, growing free cash flow drives higher dividends. Higher dividends, in turn, lead to a higher stock price as the price increases to maintain the stock’s yield. Meanwhile, free cash flow growth can lead to a multiple re-rating.

The upshot of the HFIR Energy Income strategy of prioritizing free cash flow growth is that the portfolio has generated roughly four times more return from capital appreciation (+226%) than from income received (+53%). That ratio surprises investors who assume an income portfolio should be primarily an income story. It is not. It is a quality-compounding story that pays a dividend along the way.

One implication of this strategy is that our Plutus portfolio will likely have a lower current yield than peer energy-income portfolios that optimize for present-day cash generation. This is partly a result of our portfolio having purchased equities at lower prices when their dividend yields were significantly lower and holding them as their dividends and market prices increase. I would rather hold a position yielding 5% today whose distributable cash flow grows 10% annually than one yielding 8% today whose distributable cash flow is flat or falling. Over a full cycle, the former position benefits from receiving both income and attractive total returns.

Plutus Spans the Entire Energy Value Chain

In the energy sector, relative value rotates across sub-sectors. Across the HFIR Energy Income portfolio’s 77 trades to date, it has owned names in upstream E&P, gathering and long-haul pipelines, refining and specialty chemicals, LNG export, and royalty and mineral streams, in both U.S. and Canadian operators. Restricting the mandate to any single sub-sector would cost performance over a full cycle.

Our Plutus portfolio is built on the same principle. As of April 1, 2026, the equity book broke down as follows.

Source: Plutus portfolio weightings as of April 1, 2026; percentages expressed as share of the 90.3% equity component (excludes 9.7% SGOV allocation).

The portfolio has 15 equity positions. A small cluster of top names serve as ballast; the remainder are rotating conviction positions. The structure matches my longstanding concentrated value investment philosophy.

Low Turnover Boosts Returns

Patience pays over the long term. The HFIR Energy Income portfolio has executed 77 trades over approximately 5.3 years, or roughly 14.5 trades per year, across a portfolio that typically runs ten to twenty names. The annualized turnover ratio sits at 16.9%, and the cost-weighted average holding period is 2.18 years. That falls within my stated two-to-five-year target and demonstrates that I am holding positions long enough for the thesis to work without being married to them.

The table below summarizes the turnover profile.

Metric

Source: Internal analysis of HFIR trade ledger, December 14, 2020, through April 7, 2026. Annualized turnover ratio = the lesser of buy/sell volume per year, divided by average portfolio value.

Low turnover matters for three reasons. It keeps transaction costs down across a full cycle. It signals that position sizing was conviction-led, not reactive. And it reduces the churn that degrades after-tax returns in taxable accounts. The Plutus portfolio will be run with the same discipline.

The Treasury Bill Component Reflects Discipline, Not a Hedge

The portfolio holds a 9.7% position in Treasury bills through SGOV, a short-duration U.S. Treasury ETF. This holding is deliberate but does not reflect a market-timing posture. Energy is structurally volatile, and volatility creates the entry points that drive a value investor’s returns. Maintaining a liquid, low-risk component of the portfolio will allow me to deploy into dislocations as they appear, without being forced to sell existing positions at the wrong time.

The HFIR Energy Income portfolio has been building an opportunistic cash position since 2025 by retaining income from dividends and distributions. In an environment of elevated sector volatility and with a selective pipeline of opportunities, the buffer is the right posture. I expect to deploy all of the portfolio’s cash when opportunities become sufficiently attractive.

Risks

• Commodity prices. A sustained collapse in oil and gas prices reduces free cash flow for several of the portfolio’s holdings. Midstream and LNG exposure provides a buffer, but does not eliminate this risk.

• Dividend or distribution cuts at specific holdings. The concentrated nature of the portfolio’s holdings means a dividend cut at a top position would affect the portfolio’s yield and/or dividend growth.

• Policy risk. U.S. energy policy has become more volatile in 2025 and 2026. Permit delays, pipeline cancellations, and LNG export restrictions could affect specific names.

• Tax implications. Each investor must manage their income investments according to their own tax situation. Income-producing securities generate ordinary income, qualified dividends, K-1 pass-through income, and return-of-capital distributions, each of which is taxed differently. MLPs held in retirement accounts can trigger UBTI; Canadian holdings are subject to withholding. Mismatched account placement can lead to unwanted tax consequences.

• Canadian exposure. Whitecap Resources, Cenovus Energy, Suncor Energy, Strathcona Resources, and ARC Resources carry Canadian-dollar exposure and WCS-WTI differential risk. Historically a source of alpha, it can turn into a drag if differentials widen.

Disclosures and Terms

Our Plutus Energy Income model portfolio carries a 1% annual management fee and no performance fee. The HFIR Energy Income portfolio’s returns cited above do not reflect any management fee. Applying a 1% annual fee would reduce the compounded return. Prospective investors in Plutus should evaluate net-of-fee projections.

We have a compensated relationship with Plutus. This article is published under our Seeking Alpha byline as an educational piece on investment philosophy and portfolio construction. It is not an offer to sell or a solicitation of an offer to buy any security. Investment decisions regarding Plutus should be made based on the fund’s official offering documents and after consultation with qualified legal, tax, and financial advisors. MLP investments carry specific tax considerations, including Schedule K-1 filings and potential UBTI implications in retirement accounts, which may affect suitability for individual investors.

Conclusion

The investment thesis that underpins our energy income portfolio is durable. Energy income securities still offer yields in excess of most other cash-flowing assets in U.S. public markets, the underlying businesses are financially stronger than they have been over the last fifteen years, and LNG, gas, and midstream demand continue to expand. The philosophy I have practiced for the past five years has produced a hypothetical return of 278% against the S&P 500’s 95% over the same period. Plutus applies that discipline to real capital.

I believe the strategy will continue to compound. I am using Plutus to provide access to investors who cannot or prefer not to manage a 15-name energy portfolio themselves. Investors interested in modeling the HFIR Energy Income approach should visit the Plutus site for more information.

Analyst’s Disclosure: Jon Costello has a beneficial long position in the shares of the HFIR Energy Income Portfolio and the HFIR Energy Income Plutus Portfolio either through stock ownership, options, or other derivatives.

By: Jon Costello

Please see the previous write-up on Genesis Energy.

Genesis Energy, LP has quietly transformed itself over the past 18 months. The company sold its soda ash business for $1.425 billion, used the proceeds to dramatically clean up its balance sheet, and is now a focused Gulf of America pipeline company with two transformational deepwater projects ramping into full production. At $17.60 per unit, GEL trades on a 4.1% yield with trailing EBITDA of $544 million and 15–20% guided growth into 2026. Distribution coverage sits at 2.77x. The market is still pricing GEL units as a leveraged turnaround, but the inflection has already happened, as I have discussed in previous articles.

GEL is one of the more attractive risk-reward setups in midstream today. The company controls critical infrastructure that every deepwater Gulf of America producer depends on, and the market is still anchored to an old narrative regarding leverage and complexity that no longer applies. While the unit price is up 37% over the past twelve months, it remains well below its pre-pandemic levels, implying the re-rating is underway but far from complete. Analysts target $19.33. I think intrinsic value is meaningfully higher.

GEL’s High-Quality Assets

Post-divestiture, GEL operates three segments: Offshore Pipeline Transportation, Marine Transportation, and Onshore Transportation Services. The offshore network spans roughly 1,400 miles of crude oil pipeline and 764 miles of natural gas pipeline in the Gulf of America. Key assets include its 64% owned Cameron Highway Oil Pipeline System, or “CHOPS,” which spans some 400 miles with more than 700,000 barrels per day (bpd) of design capacity, its 64% owned Poseidon system in the central and western Gulf, its 29% owned Odyssey system in the eastern Gulf, and its 100% owned SYNC system, which spans 105 miles and is dedicated to the Walker Ridge area and Shenandoah. GEL’s revenue is tariff-based on life-of-lease dedications with long-term contracts. Less than 5% of its gross margin is derived from take-or-pay minimums, as its customers actively use its pipelines, indicating its assets are competitively positioned.

What makes GEL special is that it’s the only independent crude oil pipeline operator in the Gulf of America. Shell (SHEL) and BP (BP), the two largest producers in the Gulf, are integrated operators, which creates inherent conflicts. For instance, when Shell owns a pipeline and also produces the crude that flows through it, the third-party producer shipping on that same system knows they’re not the priority customer. Since GEL has no upstream production, its incentive is purely commercial, namely, to maximize throughput at competitive tariff rates. That independence serves as a structural moat, which becomes more valuable in exactly the kind of tight supply environment we’re in now.

The Balance Sheet Transformation

In February 2025, GEL closed the sale of its soda ash operations to WE Soda for $1.43 billion gross and $1.01 billion net. The company immediately paid down its $800 million revolver, redeemed $406 million of 8.0% senior notes due 2027, and repurchased $250 million of preferred units. Annual capital cost reduction: over $120 million. This was GEL trading a cyclical commodity business for balance sheet freedom at exactly the right time.

Since then, GEL has continued cleaning house. It issued $750 million of 6.75% notes due 2034, replacing 7.75% notes due 2028 and saving $12 million in cash interest per year while extending the maturity wall by 6 years. The credit facility was extended to 2031 and expanded to $900 million.

In March 2026, the company repurchased another $110 million of its preferred units at 102% of par. The upshot is that the company has no material debt maturities until early 2029, a minimal revolver balance, and bank leverage of 5.12x, which is poised to compress as EBITDA grows. At a 15% to 20% EBITDA growth rate, the math gets GEL to sub-4.5x leverage by late 2026 without any additional asset sales. That is an investment-grade trajectory.

Shenandoah And Salamanca Change Everything

The core of GEL’s bull case is that the Shenandoah oil production platform, a 120,000 bpd deepwater platform expandable to 140,000 bpd, delivered first oil in July 2025 and reached 100,000 bpd within 75 days from just four Phase 1 wells. It accomplished this feat more quickly than industry consensus expected. Shenandoah’s output connects directly into GEL’s 100%-owned SYNC pipeline. Meanwhile, the Salamanca oil production platform adds another 50,000 bpd of nameplate capacity, with first oil in September 2025 and three wells currently ramping toward 40,000 bpd. Together, these projects are expected to generate approximately $150M in incremental annual segment margin once at full production, representing a 27% uplift to the company’s baseline EBITDA. This is not a projection. It is occurring right now.

Read more

I’ve been thinking a lot about how to position and when—or even if—to sell oil-related holdings after their surge in response to the conflict in Iran. Aside from investing a portion of the distributions received, the HFIR Energy Income Portfolio has had no trading activity over the past 15 months. But its daily performance looks like this:

I’d be crazy not to consider trimming after such a rapid surge in the portfolio. The trick, as always, lies in the timing.

Physical Fundamentals Justify the Premium

Since the U.S.-Israeli strikes on Iranian nuclear and military infrastructure began on February 28, Brent crude has surged from roughly $80 per barrel to over $112, or more than 50% in a single month. On Monday, March 30, WTI settled above $100 for the first time since July 2022. The IEA and other experts have characterized the disruption to flows through the Strait of Hormuz as the largest supply disruption in the history of the global oil market.

The risk premium on crude oil is no longer based mostly on market anticipation. Iran’s Islamic Revolutionary Guard Corps closed the Strait to most commercial shipping on March 4. A selective reopening on March 26 now permits transit for ships flagged to five nations, namely China, Russia, India, Iraq, and Pakistan, but the net reduction in flows is estimated at roughly 11 million barrels per day. For context, that strait normally handles approximately 21 million barrels per day, or about 20% of global petroleum liquids consumption.

Energy equities have followed the surge in oil. The XLE is up approximately 40% year-to-date through March, outperforming the S&P 500 by over 32 percentage points. This is the widest gap ever recorded in a single quarter. Fourteen of the 22 XLE constituents rallied more than 10% in March alone.

The instinctive conclusion is straightforward: higher oil prices justify higher equity valuations, and the disruption is real this time. But looking at history, I’m more inclined to believe that some de-risking may be in order.

The Pattern That Repeats: War Premiums Collapse

The risk, as I see it, for holders of energy equities arises due to the historical pattern of collapsing risk premiums once supply risks fade. The pattern is for oil prices to peak at maximum uncertainty, not necessarily maximum disruption. Prices then collapse once markets realize the worst-case scenario either will not materialize or has already been priced in.

Historical analogs follow a similar pattern.

Gulf War, from 1990 to 1991. Iraq’s invasion of Kuwait drove oil prices sharply higher as markets priced in a prolonged supply shock. Once it became clear that a U.S.-led coalition would restore flows, oil collapsed before the conflict itself had fully resolved. The peak occurred when fear was highest, not when fundamentals were most impaired.

Libya in 2011. The civil war removed roughly 1.5 million barrels per day from global supply. This was an actual, physical disruption, and prices spiked accordingly. Yet Saudi spare capacity and global supply adjustments filled the gap faster than expected, and the rally faded.

Russia-Ukraine in 2022. This is perhaps the most relevant recent analog prior to today. Oil surged above $120 per barrel amid fears of massive, sustained supply losses from one of the world’s largest exporters. Those fears proved to be dramatically overstated. Russian barrels were rerouted, demand adjusted, and oil prices declined even as the war continued. Markets consistently overestimated the persistence of disruption.

These episodes reflect a structural feature of the oil market. Markets tend to discount probabilities. The oil market has tended to embed worst-case scenarios into prices early on, leaving limited room for further upside. Historically, supply has generally been more flexible than assumed, adjusting to disruptions through spare capacity, inventory drawdowns, and rerouting. Meanwhile, higher prices reduce consumption, particularly in emerging markets, while speculative positioning amplifies both the rally and the inevitable unwind.

In all these previous episodes, the geopolitical risk premium was not a stable component of oil prices. It was a temporary overlay that disappeared abruptly once uncertainty abated.

This Episode Breaks the Historical Mold

Today’s disruption differs from previous episodes in important ways, with important implications for portfolio positioning.

First, this is a chokepoint disruption, not a producer outage. Past disruptions, such as those involving supply losses in Libya, Iraq, and even Russia, also led to production losses. In those situations, the global system had enough spare capacity to offset the production losses.

By contrast, the Strait of Hormuz is a transit artery. Disruption here affects flow, not just supply, and rerouting is far more complex. There is no pipeline bypass for 21 million barrels per day of seaborne crude, condensate, and refined products.

Second, the disruption has actually materialized. In previous episodes, markets priced for a disruption that never fully occurred. Here, the Strait was physically closed for weeks, and the selective reopening excludes most Western-allied shipping. The 11 million barrels per day net reduction dwarfs the scale of previous disruptions. This is not a risk premium on a theoretical anticipated threat, but a premium on an ongoing event.

Third, the system’s shock absorbers are weaker. Before this disruption, OPEC’s deployable spare capacity stood at 1.5 to 2.5 million barrels per day. This spare capacity was concentrated almost entirely in Saudi Arabia and the UAE. This spare capacity represents a fraction of the volumes currently disrupted. More importantly, the strategic value of this spare capacity is diminished when low-cost drones can credibly threaten the infrastructure that produces it. The vulnerability of concentrated spare capacity in the Middle East to military threats is a structural shift the market has not fully priced in.

Consider further that U.S. shale production has plateaued at roughly 12.7 million barrels per day over the past several months. Capital discipline, depleting Tier-1 acreage, and muted drilling response mean the U.S. is no longer the swing supplier it was in the 2014 to 2019 timeframe. In fact, the EIA is forecasting a slight decline in U.S. output in 2026.

Fourth, escalation risk is nonlinear. Previous conflicts were localized events. By contrast, today’s situation involves direct military strikes on a major regional power, the killing of its leadership, and retaliatory missile and drone strikes on U.S. bases and allied Gulf states. Diplomatic efforts have thus far failed, with Iran rejecting a U.S. 15-point proposal on March 25 and its parliament stating it will not negotiate under coercion. The pathway from here includes infrastructure targeting, further shipping disruptions, and broader regional spillover.

Fifth, normalization takes longer than the market assumes. Even in a peace scenario, the physical process of restoring transit through the Hormuz Strait will be measured in months, not days. Empty vessels need to be repositioned into the Strait and then routed back to destination points. Safety buffers, such as unsanctioned oil-on-water and SPR draws, are being exhausted. Cumulative Middle Eastern production losses are projected to reach as much as 1 billion barrels even under an optimistic mid-April normalization, effectively killing the surplus narrative that had characterized pre-crisis balances. And restarting production from shut-in fields takes months. For instance, Kuwait has publicly stated that it expects its own fields to take 3 to 4 months to fully resume operations. Restarting production from less technologically sophisticated fields carries the risk of damaging reservoirs after a prolonged shutdown. Clearly, this massive global system of mindboggling complexity will not straighten itself out overnight.

Resolving the Tension: What the Outcomes Look Like

This is where I think investors risk making the wrong call. In moments of fear and uncertainty, there is a temptation to focus on binary outcomes and make binary trading decisions. Investors may opt to either stay fully invested, betting on continued escalation, or exit entirely, betting on historical precedent. Both approaches ignore the wider distribution of potential outcomes.

At the moment, several such outcomes strike me as likely.

Scenario A: Negotiated de-escalation within 60 to 90 days (40% to 50% probability). A diplomatic resolution or a sustained ceasefire leads to the reopening of the Strait. In this scenario, I would expect oil to decline, but not to pre-crisis levels. Even during de-escalation, the normalization of physical flows will take months, cumulative supply losses will have reset global balances, and an enduring political risk premium of $10 to $20 per barrel will likely persist in light of the Strait’s demonstrated vulnerability. Given all the factors at play to date, I expect Brent in the $80 to $90 per barrel range. At those prices, energy equities would give back a portion of their first-quarter gains but would find support above pre-crisis levels. This remains the most likely single outcome, but I’ve reduced its probability from my initial estimate because the normalization timeline alone, which includes months of vessel repositioning, field restarts, and stock rebuilding, will make a clean, rapid unwind unrealistic.

Scenario B: Prolonged partial disruption (35% to 45% probability). The selective reopening of the Strait persists. Some barrels flow, but at a higher cost and with insurance premiums. Oil stabilizes above $100 per barrel and at times heads toward $120 for several quarters. In this scenario, the likelihood of broader economic damage from the outage increases. Markets and stock prices would discount a weakening economy. Energy equities would likely hold their gains and trade sideways. This is the scenario markets are increasingly pricing in, and the one whose probability I’ve revised upward. The structural factors in play all support a more persistent disruption than historical analogs would suggest.

Scenario C: Full escalation and sustained closure (10% to 20% probability). The conflict widens, infrastructure is targeted, and the Strait returns to full closure. Oil is sustained above $130, which is the price at which I estimate demand curtailment will begin on a broader scale in more developed economies, which consume most of the world’s oil. Energy equities re-rate further before the global economy buckles under the strain of higher energy prices, at which point they would decline from their highs. This scenario represents the tail risk.

What to Do: Reduce Position Size, Not Exposure

The appropriate response is not to exit all energy investments in full. It is to de-risk while maintaining meaningful exposure. The key point is that, despite the structural arguments for a higher floor, current prices still reflect a premium that is at risk of rapidly diminishing. The historical pattern of overshoot remains intact, even if the downside in the current situation is less extreme.

I would recommend trimming overall energy equity exposure by approximately 10% to 15% at current levels. This is not a defensive retreat, but a recognition that the market is pricing a sustained disruption with limited margin for error. The objective is to reduce exposure to a potential normalization of the risk premium while retaining long-term participation in a structurally tighter market.

For energy specialists, holding cash seems prudent. I have already raised the HFIR Energy Income Portfolio’s cash position to 4%, and I’m considering increasing it to the 15% to 20% range. This cash can be deployed back into the energy sector in the event commodity and/or stock prices decline. Alternatively, it can be deployed more widely into other sectors if oil prices run away to the upside and the rest of the market declines.

What to Trim First

After deciding to de-risk, an investor must determine what to sell first. I would focus on names with the highest beta to spot oil prices. These stocks have rallied most aggressively and carry the most downside if oil corrects.

The first candidates for trimming are lower-quality E&Ps with high oil torque. Devon Energy (DVN) and APA Corporation (APA) are two such examples that come to mind. These are widely held stocks that have led the XLE, with a 44% gain in March alone. They are currently among the E&Ps most exposed to a risk premium unwind. These stocks have re-rated on pricing that may not persist.

Second, I would consider lightening up on integrated majors that have benefited from multiple expansion. Exxon Mobil (XOM) and Chevron (CVX) are more defensive but have still moved meaningfully. Investors should consider trimming these, though less so than high-beta independent E&Ps. The integrated majors offer dividend support on the downside, but the margin of safety has narrowed.

What to Hold More Confidently

Of course, not all energy equity segments carry the same risk profile. Some segments are better positioned regardless of how the conflict resolves.

Midstream companies remain well-positioned for long-term holding, given their recent price gains. Pipeline operators and MLPs, including my longtime favorite Enterprise Products Partners (EPD), Energy Transfer (ET), and MPLX (MPLX), have lower direct commodity price sensitivity. Their revenue is primarily fee-based and contract-driven. Midstream has outperformed through the conflict but with less volatility, and its relatively high yield provides a floor. These names form the core of income-oriented energy portfolios because they earn their profits through volume rather than price.

Natural gas-levered equities. I increasingly suspect the LNG angle in the current situation is underappreciated. Qatar’s LNG exports transit the Strait of Hormuz, and disruption to those flows has tightened global LNG markets. North American natural gas producers and LNG exporters operate entirely outside the disruption zone. Cheniere Energy (LNG) is one such example. These companies benefit from the crisis without bearing the risk of its resolution.

Canadian producers are another longstanding favorite of mine, and the structural case for holding them has strengthened beyond the geographic argument I would have made a month ago. Names like Canadian Natural Resources (CNQ), Suncor (SU), and Cenovus (CVE) are geographically insulated from Hormuz risk while benefiting from the combination of sustained higher oil prices and long-lived reserves. The demonstrated vulnerability of Middle Eastern supply infrastructure to military threats permanently increases the strategic value of reserves in politically stable countries with pipeline egress. Canada is the most obvious beneficiary. The market has not fully absorbed this structural shift. Furthermore, pipeline capacity out of Western Canada has improved in recent years and could improve further if political momentum for increased exports builds.

Signals to Trim More or Reverse Course

Historically, it has been prudent to exit energy stocks not when the war ends, but earlier, when the market decides the worst case is off the table. I would watch for these signposts:

Brent sustains below $100 per barrel. If Brent falls below $100 per barrel and fails to reclaim that level within a week, the risk premium is likely to deflate over time. This may be the market’s way of signaling that de-escalation is being priced in. It may be a cue to trim further.

Full Strait reopening or a credible diplomatic framework. Any formal agreement or a credible ceasefire with multinational guarantees would remove the core thesis for elevated prices. In this scenario, I would expect oil to gap down $15 to $20 in a matter of days.

Physical flow normalization. This requires tracking tanker traffic through the Strait. If Western-flagged vessels resume transiting, the supply picture will change materially before official announcements. However, even after a political resolution, the physical normalization of flows will lag by weeks to months. Vessel repositioning, insurance repricing, and cautious operator behavior will create a prolonged tail.

Narrative saturation. Investors should be on guard for moments of maximum complacency. This will be when the consensus shifts to the view that oil will remain far above $100 per barrel indefinitely and that the world has entered a new pricing regime. This will also be when the historical pattern of collapse becomes most likely. It is when the downside risk to E&P stocks is at its highest.

Brent breaks above $130 per barrel and holds. In this scenario, oil prices enter the region of demand curtailment. The market is likely pricing in a full escalation, or Scenario C above. At that point, I would sell my E&P holdings more aggressively, as oil and E&P stock prices will eventually retreat as demand is increasingly curtailed. However, depending on prices at the time, I may add to midstream and LNG names that would benefit from a longer-term dislocation.

Conversely, strategic hoarding is a leading indicator for reversing course, and not trimming. Watch for countries announcing export bans on refined products or accelerated SPR building programs. This behavior, which is already emerging, signals that governments expect a prolonged disruption and are competing for physical barrels. It is bullish for both crude oil and refining margins, and it extends the timeline for any normalization of global balances.

Conclusion

History is clear that war-driven oil rallies are unstable and tend to unwind as uncertainty declines. This episode is different in degree: the disruption is real, the chokepoint is critical, and the system’s capacity to absorb the shock is limited. These factors raise the pricing floor, but they do not eliminate the well-worn historical pattern.

Current prices already reflect a prolonged disruption. The upside from here is incremental, while the downside—though less severe than in past episodes—remains meaningful. That is sufficient to justify reducing exposure at the margin.

I intend to trim high-beta oil exposure by 10% to 15%. I will favor high-quality midstream positions, LNG, and Canadian producers, and I will adjust further as market signals indicate whether the risk premium is beginning to unwind or being reinforced.

Analyst’s Disclosure: Jon Costello has a beneficial long position in the shares of EPD, MPLX, ET, LNG, CVE, SU either through stock ownership, options, or other derivatives.

By: Jon Costello

There is clearly no shortage of Hormuz commentary right now. In making my own contribution, I feel a bit like the author of a self-help book who has to justify his addition to an already oversaturated genre. What I can offer is an article focused on supply math. Most commentary focuses on the geopolitics, such as who said what, which side might blink first, or what an off-ramp might look like. Many fall into the trap of estimating resolution timelines and then pricing backward from that assumption. In this article, I examine the physical market disruptions and their implications for oil and refined product prices.

What becomes obvious is that the market is too complacent about the Strait of Hormuz.

This is not a geopolitical call; rather, it’s implied by the supply math. Regardless of the diplomatic signaling of the moment, the physical supply deficit and logistical realities dictate that this disruption extends through April at minimum, with the likelihood of refined product shortages the longer it persists. Such shortages increase the risk of price spikes, which in turn reduce end-user demand.

At present, I believe the contrarian move is to exercise caution amid what I view as heightened risk. This appears to me to be the best course. Investors should consider adopting a more defensive posture with at least a portion of their portfolio in the event that conditions deteriorate from here. They should be careful not to concentrate too heavily in stocks that require economic growth or low interest rates to support their prices. Defensive positioning can help mitigate the adverse financial and psychological impact of a prolonged energy crisis.

The Supply Deficit Is Larger Than the Headlines Suggest

Before the current disruption, the Strait of Hormuz carried approximately 20 million barrels per day of total petroleum liquids, equivalent to roughly 20% of global petroleum liquids consumption, according to the EIA. Real-time physical market tracking by commodities and shipping trackers puts the supply outage figure at 12.5 to 13.0 million barrels per day (bpd). I am using 12 million bpd as my anchor for this analysis.

Going country by country, the damage is severe. The key question relates to how much of the crude that cannot pass through the Strait has other outlets. From there, it is possible to estimate the net supply outages.

Saudi Arabia cannot export oil through the Strait, so it activated its East-West Pipeline, which carries a 7 million bpd nameplate capacity. However, the headline 7 million bpd figure overstates the amount that actually reaches the export market. Consider that approximately 1.5 million bpd of the 7 million bpd had already been flowing to feed two refineries that serve domestic Saudi consumption. Another 500,000 bpd of capacity is dedicated to LPG, a product stream with more limited uses as a refinery feedstock than crude oil. This implies a ceiling of incremental crude oil supply from the East-West pipeline of not 7 million bpd, but 5 million bpd. And the figure falls even further upon closer inspection. The East-West pipeline feeds the Yanbu Port on the Red Sea, where nominal loading capacity is 4.5 million bpd but tested capacity is closer to 4 million bpd. In wartime, throughput falls due to loading constraints. During wartime, Very Large Crude Carrier (VLCC) tankers loading crude at the Yanbu Port are required to sail during the day to avoid the hazards of nighttime travel and attacks by the Houthis. This travel constraint limits the number of vessels that can load crude at a given time, reducing export capacity from 4 million bpd to 3 to 3.5 million bpd. As a result, the headline of 7 million bpd of Saudi exports falls by half to 3.5 million bpd. Saudi Arabia is therefore capable of offsetting roughly 29% of the 12 million bpd of supply outages.

Iraq, the second-largest exporter through the Strait of Hormuz, has been devastated. Basra oil output has fallen by 76% to just 800,000 bpd from a pre-crisis level of 3.3 million bpd in exports. More production cuts are expected over the coming days if the Strait remains closed to Iraqi exports. The country declared force majeure on all foreign-operated fields on March 20 and is working to revive the Kirkuk-Ceyhan pipeline to Turkey, but the volumes are insignificant in the context of total Iraqi production losses. The pipeline is currently flowing approximately 250,000 bpd and will presumably reach full capacity of 500,000 bpd, at which point it will add 250,000 bpd of additional production, equivalent to 7% of Iraq’s total supply outages. Years of disrepair and underinvestment suggest the pipeline isn’t likely to achieve its 1.6 million bpd design capacity for several years. Certain Iraqi fields face the additional challenge that extended shutdowns increase the risk of geological and well damage. And to top it off, Iraq derives 90% of its government’s revenue from oil, so it faces a financial crisis on top of an energy crisis that will likely compound the supply disruption.

Kuwait is the most vulnerable Gulf producer. It has no bypass pipelines whatsoever. Every barrel of Kuwait’s 2.6 million bpd of production must transit Hormuz. The country has reportedly cut its production from 2.6 million bpd to just 500,000 bpd. The CEO of Kuwait Petroleum Corp. recently stated that it will take 3 to 4 months to fully restore the bulk of Kuwait’s production.

The UAE has the only other bypass pipeline outside Saudi Arabia. However, its ADCOP line from Habshan to Fujairah has only 440,000 bpd of spare capacity, a rounding error against the ongoing 12 million bpd supply deficit. Physical infrastructure damage at Fujairah and the Ruwais refinery, which was shut after a drone strike on March 10, further constrains even this limited workaround.

Altogether, Saudi Arabia, Kuwait, and the UAE have alternative pipeline capacity amounting to roughly 4 million bpd, representing one-third of the 12 million bpd of total supply outage. The remaining 8 million bpd must be sourced from Atlantic basin alternatives with 20-to-40-day sailing times. That represents roughly two-thirds of the total disruption with no near-term fix.

Recall that oil prices surged past $140 per barrel after Russia invaded Ukraine. At the time, the oil market expected the loss of 3 million bpd, which never actually materialized. Today, the market has been running an 8 million unresolved supply deficit for weeks. I find it amazing that Brent sits only slightly above $100 per barrel.

The SPR Is a Bandage, Not a Fix

Each successive SPR headline has had less market impact, and the math explains why. The entire coordinated global release of 400 million barrels across 32 nations amounts to roughly 4 days of global oil consumption. The U.S. contribution of 172 million barrels over 120 days implies a flow rate of 1.43 million bpd, covering just 12% of the approximately 12 million bpd that has been shut in. The U.S. SPR was at 415 million barrels before the release, roughly 58% to 60% of its 714-million-barrel capacity and not far above the 347-million-barrel historical low reached in 2023.

Note that by the fifth SPR announcement, oil prices didn’t react and then moved higher. The market has learned to discount SPR headlines because the volumes don’t move the needle against a disruption of this magnitude.

Crack Spreads Point to Physical Market Tightness

The refined product picture is also characterized by severe supply outages. The recent surge in crack spreads—the difference between the price of a refined product and the price of the crude used to produce it—puts them in reach of highs last seen after Russia invaded Ukraine.

Source: RBN Energy, March 26, 2026.

The gasoline crack is approximately $28 per barrel. The diesel crack has widened to $0.84 per gallon, 61% above 2024 levels. Jet fuel in Singapore has hit $227 per barrel. These margins provide refineries with a strong incentive to buy crude and run it. They imply that refining can remain profitable up to roughly $130 per barrel Brent. As long as that’s the case, crude demand from the refining sector stays firm even at elevated prices, which puts a floor under the physical market.

Refined Products: The Amplifier

The crude oil deficit is being compounded by a refined product squeeze that many investors fail to appreciate. On March 4, China banned all exports of gasoline, diesel, and aviation fuel via an order from the NDRC. Most of the world’s spare refining capacity resides in China. Its more than 19 million bpd of capacity versus its approximately 15 million bpd of refinery throughput, giving it significant excess production capacity and making its role in refined products analogous to Saudi Arabia’s role as the largest source of crude oil spare production capacity. By banning exports, China removed the single largest buffer for Asia-Pacific refined product supply. This has arguably been the most consequential policy decision of the crisis after the closure of the Strait itself.

After China’s move, South Korea has capped fuel exports, mandating that 90% of prior-year domestic volumes must be maintained before any exports are permitted.

Now, Australia is the canary in the coal mine. The days of remaining fuel supply have collapsed from 30 to 38 days before the crisis, to the point that more than 600 gas stations have run dry on at least one fuel type. In March, Australia imported 240,000 metric tons of U.S. fuel, the most in more than 30 years.

The situation is growing more acute elsewhere in Asia. Jet fuel in Singapore has surged to $227 per barrel from a pre-war baseline of $80 to $90 per barrel, while naphtha prices have jumped approximately 50% over the past month. VietJet has cancelled large-scale international routes, Air India has imposed surcharges, the Philippines has declared a state of national energy emergency, and Myanmar has imposed alternating driving days. These are not speculative outcomes. They are happening now.

The hoarding dynamic represents the tail risk that could push prices much higher. If more countries follow China and South Korea in restricting exports, or if the U.S. imposes any form of export restriction ahead of driving season, a 1970s-style panic-buying dynamic may take hold.

Timing Works Against a Quick Resolution

Read more

By: Jon Costello

Without a doubt, the war in Iran is impacting the titanium dioxide market. Notwithstanding today’s news regarding prospects for U.S.-Iran talks, a prolonged war and/or outage in the Strait of Hormuz is still very much on the table. The situation begs the question of how an investor in titanium dioxide stocks should be positioned if the war continues for weeks or months.

As subscribers know, I have been long the titanium dioxide producers Chemours (CC), Tronox (TROX), and Kronos Worldwide (KRO) since late last year, when their stocks were significantly lower than today. I published my recovery thesis in an article published in November. The article made the case that a titanium dioxide recovery was imminent, driven by 1.1 million tons of production curtailments, anti-dumping measures across the EU, Brazil, India, and the U.S., and market-share consolidation among the big three Western titanium dioxide producers.

That thesis remains intact, with evidence now being reported more widely. This is the main reason why the titanium dioxide producer stocks have held up well despite the broader market turmoil, which has hit economically sensitive names particularly hard. Supply and demand are more closely balanced than they have been in years, allowing prices to inch upward. Tronox guided to sequential pricing gains of 2% to 4% in the first quarter of 2026, and Chemours confirmed that its December price increase took hold in the market, with buyers accepting the higher price rather than pushing back or switching suppliers.

So far, all signs suggest that price increases are holding, indicating that the market is in the early stages of a recovery. However, because the recovery is still in its early phase, it remains vulnerable to negative macroeconomic forces. A demand shock from the war in Iran and/or a prolonged outage in the Strait of Hormuz could cause such a setback, which raises the risk for investors in titanium dioxide stocks.

The Sulfur Shock Hits Sulfate Producers Hardest

The war’s most direct impact on titanium dioxide comes through sulfur. Sulfur is a byproduct of oil refining and natural gas processing. The Gulf states account for roughly 45% of global supply. The near-total halt of tanker traffic through the Strait has severely disrupted that supply, sending U.S. sulfur prices up by more than 150% year-over-year to around $500 per metric ton. Prices in Asia have surged by a similar magnitude.

This matters because the sulfate manufacturing process requires approximately 4.0 to 4.5 metric tons of concentrated sulfuric acid per ton of ilmenite concentrate. Approximately 80% of China’s titanium dioxide output uses the sulfate route, and China produces more than 60% the world’s titanium dioxide. The sulfur crisis, therefore, imposes a direct and significant cost shock on roughly half of global titanium dioxide capacity.

The Western majors, namely Chemours, Tronox, and Kronos, use the chloride process, which does not rely on sulfuric acid. As such, they are largely insulated from higher sulfur and sulfuric acid prices. This widens the cost gap between Chinese sulfate producers and Western chloride producers at a time when anti-dumping tariffs of 14% to more than 40% are already squeezing Chinese export volumes.

North America’s Demand is Advantaged

Read more

By: Jon Costello

Most commentary on the Iran war has focused on oil. This is understandable due to the oil market’s central role in the global economy and its direct impact on consumers. WTI’s spike from the low-$60s per barrel before the war to $113 shortly after it began, and other events, like the strategic petroleum reserve release, immediately captured public attention.

But an often overlooked trade involves a commodity that gets far less attention: LNG. I’ve followed this market closely as a holder of Cheniere Energy (LNG) since January 25, 2021. Cheniere’s ability to sell cargoes at spot pricing through its marketing of uncontracted production makes it an obvious direct beneficiary of today’s high LNG prices.

Direct LNG plays have been bid up to prices that I believe make them unattractive for long-term holding. But there are secondary plays that benefit from the fact that LNG has no substitutes available at scale, barely any strategic reserves, and no spare global capacity. The most obvious is thermal coal, the only realistic backup fuel for LNG in power generation.

Energy expert Dr. Anas Alhajji recently commented on the bullish prospects for thermal coal, noting its use as a substitute for LNG.

Source: Anas Alhajji, X, March 15, 2026.

The thermal coal market was already tightening before the war. The Iran conflict has accelerated a recovery that was underway. Due to the war’s impact on LNG and the prospect for sustained higher coal prices, thermal coal names are worth considering for investors who expect a prolonged disruption in the Strait of Hormuz and/or continued LNG supply outages.

Impacts on LNG From the War In Iran

The closure of the Strait of Hormuz to commercial shipping in early March shut off roughly 20% of the world’s LNG supply. The world’s largest LNG exporter, Qatar, declared force majeure on its contracts after Iranian drone attacks damaged gas facilities. The attacks also forced QatarEnergy to halt all gas production. A full restart of LNG production will take at least a month, and likely longer.

Whereas oil supply has partial mitigants amid a sustained disruption, such as SPR releases, Saudi and UAE pipeline rerouting, and demand destruction, LNG has none. In fact, U.S. export terminals are already running at or near maximum capacity.

More recent developments further support coal as an LNG substitute. For one, yesterday’s Iranian missile strike on Qatar’s Ras Laffan Industrial City has materially worsened the outlook for LNG supply. QatarEnergy confirmed that the attack damaged two of its 14 LNG trains and a gas-to-liquids facility, taking 17% of Qatar’s LNG export capacity offline for more than three years. The offline capacity represents approximately 12.8 million tons per year. The loss of this capacity would put a severe dent in the looming LNG oversupply that kept me away from other LNG investments. Damage to the Qatar facility is the first sign that the war in Iran has caused more than just a temporary disruption that takes a few weeks to restart. If QatarEnergy’s reports of the damage and repair times are accurate, it represents a structural removal of supply from the global LNG market.

This event has significant implications for thermal coal. Long-lasting damage to Qatar’s LNG supply means that the gas-to-coal substitution trade, which was previously contingent on the duration of the Strait of Hormuz closure, now has a multi-year floor underneath it regardless of whether the Strait reopens. Asian and European utilities that were hedging against a short-term LNG outage may now be forced to secure baseload fuel alternatives for 2027 and beyond, and seaborne thermal coal is the only commodity available at the necessary scale. Newcastle thermal coal prices will likely trade higher after this event.

Coal Substitution

When natural gas becomes unavailable or prohibitively expensive, power generators switch to coal. We saw this in 2022 during the Ukraine crisis, when Russian pipeline gas to Europe was curtailed, and Newcastle thermal coal prices spiked to nearly $400 per ton.

The current disruption is different in several ways. The 2022 ordeal disrupted Russian coal supply, creating a dual shock to both natural gas and coal markets. The war in Iran has not directly disrupted coal supply; it has only removed LNG from the market. This means the coal price increase should be more moderate than in 2022, absent a dramatic escalation. At the moment, Newcastle thermal coal is trading around $132 per ton, up more than 30% year-over-year but far below the 2022 peak.

However, the LNG disruption is arguably more acute. Qatar accounted for approximately 20% of global LNG, and there is zero spare capacity anywhere in the world to replace it. Before the strike on Qatar’s LNG facilities, Morgan Stanley estimated that Japan, South Korea, and Taiwan alone could require an additional 1.5 to 2 million tons of thermal coal imports per month if the Qatari outage persists, an 8% to 10% jump in import demand from those three countries alone. Yesterday’s disruption will further increase their import demand.

Europe is also vulnerable. European gas storage levels started 2026 at just 50 billion cubic meters, or roughly 46% full, versus 63 Bcm in 2025 and 77 Bcm in 2024.

Source: CEEnergy News, March 13, 2026.

European natural gas prices nearly doubled following Qatar’s declaration of force majeure. A UBS report noted that the market has not yet fully priced the gas-to-coal substitution trade into coal equities.

My Top U.S. Thermal Coal Plays

Read more

By: Jon Costello

Please see our previous public write-up on .

Mach Natural Resources LP (MNR) exited 2025 as a fundamentally different company than it was when it entered the year. The company’s growth, its improved prospects amid higher oil prices, and its enhanced exposure to natural gas—all while its units sold at an undeserved discount—led me to buy the units in January of this year at an average cost of $10.83 per unit. I detailed my reasoning here.

Mach’s fourth-quarter results showcase the company’s improving prospects, which support our long-term investment thesis.

Fourth Quarter Results: The First Post-Acquisition Quarter

Mach’s IKAV and Sabinal acquisitions, which closed on September 16, transformed the company from an 84 Mboe/d Anadarko Basin operator into a 154 Mboe/d multi-basin E&P with significant natural gas exposure across the San Juan Basin. The fourth quarter was Mach’s first full quarter of consolidated operations following the September acquisitions.

During the quarter, production averaged approximately 154 Mboe/d, up from roughly 84 Mboe/d in Q2 2025 prior to the deals’ closing. Mach’s product mix shifted meaningfully toward natural gas, which now dominates the production profile, a direct result of the San Juan Basin assets acquired from IKAV.

The pivot toward natural gas was evident in Mach’s quarterly financial performance. Nevertheless, the company still generated 42% of its revenue from crude oil sales.

The fourth-quarter distribution of $0.53 per unit reflects the post-acquisition unit count of 168.2 million and the low average commodity prices prevailing during the fourth quarter.

The company refrained from debt reduction during the fourth quarter but will likely pay down significant debt with the increased cash flow generated at current commodity prices.

Full-Year 2025: Setting the Stage for Distribution Growth

For the full year 2026, Mach produced 21.1 Mboe/d of oil, 369.9 MMcf/d of natural gas, and 20.5 Mboe/d of NGLs at average realized prices of $63.72/bbl, $2.76/Mcf, and $23.00/bbl, respectively. Fourth-quarter production results are in line with management’s full-year 2026 guidance, so they provide a good baseline for estimating future performance.

Revenue hit $1.18 billion with operating cash flow of $507.0 million, capex of $262.2 million, and free cash flow before acquisitions of $244.8 million.

Revenue included $81.3 million in realized derivative gains, attributable to oil prices declining throughout the year against Mach’s hedge book. Operating cash flow reached $507.0 million, while capital expenditures for oil and gas development totaled $262.2 million. Free cash flow before acquisitions came to $244.8 million. In the third quarter, Mach recorded a $90.4 million non-cash ceiling-test impairment, driven by a 12-month trailing price decline following the acquisitions. Net income for the year was $143 million, or $1.09 per diluted unit on a weighted average of 131.5 million units.

Fourth quarter’s $0.53/unit was declared on February 12, 2026, payable against 168.2 million units outstanding, 77% more units than a year earlier. The per-unit figure reflects the impact of Mach’s February 2025 public offering, in which 14.8 million new units were offered at $15.50, and its 49.6 million units issued as consideration for IKAV and Sabinal. Despite the unit issuance, per-unit results remained positive amid volatility in commodity prices throughout the year.

Total cash distributions for 2025 were $244.5 million, nearly equal to free cash flow. The high payout percentage demonstrates management’s consistent execution of Mach’s income-focused model. The variable distribution model works as designed. The amount of cash distributed to unitholders fluctuates in proportion to commodity prices and the company’s capital program.

Acquisition Discipline: Buying When Others Won’t

Read more

Latin America hasn’t been near and dear to the hearts of most energy investors in recent years. The region’s volatile political backdrop has heightened the risk of permanent loss for investors while introducing significant volatility into its E&P stocks.

In Argentina, years of capital controls, currency instability, and interventionist economic policy kept foreign investment out of the Vaca Muerta shale play despite its world-class resource potential.

In Colombia, President Gustavo Petro’s administration actively discouraged hydrocarbon development, banning fracking and suspending new exploration rounds.

And in Venezuela, two decades of mismanagement under Hugo Chavez and Nicolas Maduro collapsed what was once the largest oil producer in the hemisphere.

What makes the current moment interesting is that all three countries are moving in a more constructive direction simultaneously. A combination of favorable political shifts, world-class geology, and compelling valuations makes this corner of the energy market worth a closer look.

Production Regions and Their Prospects

The headline Latin American oil production growth story is Argentina’s Vaca Muerta shale formation. In late 2025, Argentina hit record crude oil production of over 860,000 bbl/d, driven primarily by the Vaca Muerta, where output surged roughly 26% year-over-year. Argentina exported an average of 180,000 barrels per day in the first half of the year and posted its largest energy trade surplus in over three decades. The Vaca Muerta Oil Sur pipeline, led by YPF, is expected to begin operations in 2026 and reach full capacity of 380,000 barrels per day by mid-2027. Argentina’s Chamber of Hydrocarbons Exploration and Production expects the country’s total output to approach 1.5 million barrels per day by 2030.

Colombia remains the other major basin for independent E&P operators. The Llanos and Putumayo basins host the majority of non-state production, though the regulatory environment has been challenging under President Petro’s administration. Production from independents has been steady but stagnant, and the near-term outlook hinges on the May 2026 election.

Colombia’s upstream potential extends beyond what current production levels and trends suggest. The country’s proven reserves stand at 2 billion barrels. They have been declining largely because the Petro administration froze new exploration licensing, shutting down the pipeline of future discoveries. However, the geology is not the problem. The Llanos basin remains underexplored in its deeper formations, while the Middle Magdalena Valley holds meaningful shale potential that has been locked up by the fracking ban. Furthermore, Colombia’s offshore Caribbean blocks have attracted early-stage interest from majors but have never been properly developed. A post-Petro administration that reopens exploration rounds and lifts the fracking moratorium would not just stabilize production, it would reopen a country that was, until recently, one of the most attractive independent E&P markets in the hemisphere.

An Opening in Venezuela

Venezuela is the wild card. Following Nicolas Maduro’s removal in January 2026, the country’s oil sector is in the earliest stages of what could be a multi-decade recovery. Production currently sits around 900,000 to one million barrels per day, a fraction of the 3.5 million barrels per day Venezuela produced in the late 1990s. The Trump administration has begun to selectively roll back sanctions to enable oilfield equipment imports and authorized commodity traders to resume Venezuelan crude exports. Analysts estimate production could reach 1.2 million barrels per day by the end of 2026 if the sanctions rollback continues, but restoring output beyond that level would require sustained investment of approximately $8.5 billion per year over the next decade. The opportunity is enormous, but so is the execution risk. That said, the direction of travel is clear: for the first time since the early 2000s, Venezuela is moving toward a framework that could accommodate meaningful foreign participation in its upstream sector.

The bull case for Venezuela centers on acting President Delcy Rodriguez. Rodriguez served as Maduro’s executive vice president and was one of the most powerful loyalists in his inner circle. This makes her pivot toward market-friendly oil reform all the more striking, because it signals a pragmatism on the part of the regime’s establishment that was absent under Maduro.

For weeks after Maduro’s removal, Rodrigues pushed back on Washington’s demands. More recently, however, she has moved to align with the Trump administration on Venezuela’s energy policy. In late January 2026, Rodriguez signed into law a sweeping oil industry overhaul that ends PDVSA’s monopoly over production and sales. The law also allows private companies to assume full operational control of projects, caps royalties at 30%, and provides the executive with flexibility to adjust rates based on capital needs. It also permits independent international arbitration of disputes, thereby removing the previous requirement that all disagreements be settled in Venezuelan courts.

U.S. Energy Secretary Chris Wright toured Chevron-PDVSA joint venture facilities in the Orinoco Belt in February, and Interior Secretary Doug Burgum visited Caracas in early March to discuss expanding oil and mineral production. Trump has publicly called the relationship “extraordinary.” If Rodriguez continues on this trajectory, Venezuela could become the most significant new upstream opportunity in the Western Hemisphere, a country that claims 300 billion barrels of proven reserves and produces under a million barrels per day, with a legal framework now designed to attract the foreign capital and expertise it needs to resuscitate production growth. For LatAm-focused E&Ps with operational expertise in heavy oil and complex political environments, the window is opening.

The bear case for Venezuela is that Rodriguez remains deeply unpopular among the Venezuelan public. Polling from January 2026 shows Rodriguez with a favorable image of only about 13%, and 94% of Venezuelans say they don’t believe anyone from the Maduro regime should lead the post-Maduro transition. The opposition leader, María Corina Machado, polls at roughly 50% vote intention in a hypothetical election and dominates the field.

This is the hazard that confronts investors who enter Venezuela. Rodriguez is doing what foreign investors want—signing oil reform laws, welcoming U.S. officials, opening PDVSA to private operators—but she has little domestic legitimacy. Ultimately, she’s an insider from the Chavez era governing without a popular mandate, and Washington has shown no urgency to push for elections. The Venezuelan opposition has called for a democratic transition and elections as a precondition for long-term investment stability. Perhaps Rodriguez can win public support by reviving the domestic economy and introducing reforms that weaken the corrupt Chavez-Maduro regime’s grip over the society and its institutions. If so, she stands a chance at the polls come election time. If not, she can refuse to step down or yield to a more popular candidate, which at the moment would be Machado. I don’t have any insight into which way it will go. I mention it because any investor pursuing ownership stakes in Venezuelan assets should proceed with a clear-eyed view of political risk, which will remain heightened until a stable and functioning democracy is established.

Political Tailwinds

Despite the regional risks, the political backdrop across Latin America has turned more constructive than it has been in years.

In Argentina, President Milei’s pro-market reforms have been transformative for the energy sector. Deregulation, macroeconomic stabilization, and the active courtship of foreign capital have directly translated into rising production and surging exports.

In Colombia, President Petro, who banned fracking, halted new exploration rounds, and openly discouraged hydrocarbon investment, is constitutionally barred from re-election. The presidential election is scheduled for May 31, 2026, and the leading candidates from the center and right have signaled a return to more conventional energy policies. A new administration that resumes exploration licensing would be a meaningful catalyst for Colombian-focused E&Ps.

In Venezuela, the post-Maduro transition has opened a window that had been closed for years. The U.S. has signaled its intent to rebuild Venezuela’s oil infrastructure and has authorized the import of oilfield equipment and services. Chevron has maintained operations throughout the sanctions era and is positioned to expand. For smaller operators with Latin American expertise, the question is not whether Venezuela represents an opportunity — it clearly does — but when the regulatory and contractual framework will be stable enough to commit capital. That process is underway but far from complete. JPMorgan estimates Venezuelan production could reach 1.4 million barrels per day within two years and potentially 2.5 million barrels per day over the next decade, but that assumes sustained capital commitment and political stability that cannot yet be taken for granted. The companies best positioned to participate are those already operating in the region with established relationships, local expertise, and the operational flexibility to move quickly when the framework solidifies.

Latin American E&Ps

Read more

By: Jon Costello

In November, I wrote that a recovery in the titanium dioxide market appeared imminent. With fourth-quarter results now in for Tronox , Chemours , and Kronos Worldwide , it is clear that the fourth quarter was the most painful of the current downcycle, which has dragged on for more than four years.

Results were ugly all around. Kronos’ EBITDA collapsed 94% year over year. Tronox posted negative free cash flow of $281 million, and Chemours’ titanium dioxide segment saw its weakest results since becoming a public company.

As bad as the results were, the investment case for these companies is stronger today than it was just four months ago. More than 1.1 million tons of capacity—approximately 11% of the global market—has been removed through plant idling, shutdowns, and business liquidations. The large-scale inventory liquidation that persisted throughout much of 2025 has run its course.

The Supply Side Will Drive the Recovery

Read more

By: Jon Costello

The HFIR Coverage Universe spreadsheet has been revised and updated. The spreadsheet ranks 46 E&Ps covered in our articles over the past few years and can be found at the bottom of this article.

Each E&P has data as of Q4 2025 or full-year 2025. Full-year 2026 guidance has been incorporated when available. Nine names have yet to report fourth-quarter results. Results from these companies are as of September 30, 2025.

The spreadsheet data provides important information on investment opportunities among the stocks in our E&P coverage universe, including their potential upside and downside from current prices.

Read more

Previous write-ups on CLMT 4.64%↑:

Special Situation: Calumet

(Idea) Calumet - The Next Special Situation Idea

(Idea) An Important Update On Calumet

By: Jon Costello

The market reacted negatively to Calumet’s (CLMT) fourth-quarter earnings. The magnitude of the selloff is puzzling given the company’s increasingly bullish near-term outlook. Still, longtime holders of the shares are no strangers to these head-scratching selloffs that have occurred consistently for many years.

The initial sell-off was likely a reaction to the company’s poor results, brought about by the worst operating environment for biofuel in the industry’s history. Fortunately, those results are now squarely in the rearview mirror, and the company’s future looks considerably brighter.

The fact is that biofuel economics have improved in recent months and are expected to continue to improve after the EPA announces the renewable volume obligation (RVO) for buyers of Calumet’s biomass-based diesel. The RVO is the government-mandated volume of biomass-based diesel that refiners are required to blend into the petroleum supply. The EPA’s announcement is expected to arrive in mid-to-late March. A bullish RVO in the mid-five-billion-gallon range is likely to cause a scramble for renewable diesel among refineries that will push biomass-based diesel prices higher. Of course, higher prices will significantly boost Calumet’s margins, EBITDA, and free cash flow.

The stock’s recent run-up reflects investor expectations that the looming RVO will drive a bullish inflection in Calumet’s end markets over the next few months.

As detailed in articles published last year, I expect the announcement to be bullish due to its political ramifications for President Trump’s voter base. A bullish RVO can drive Calumet shares toward $40 over the latter half of the year. Risk-seeking long-term accounts should hold onto their shares in anticipation of this event. However, risk-averse accounts should consider lightening up, as a light RVO could spark a selloff.

Read more

On Jan 3rd, the US successfully captured Venezuelan President Nicolás Maduro and took him into custody. At the time, we gave our general thoughts about the regime change and its impact on the oil market. But a lot has changed since then. Our initial belief that the procedural changes would take time has been proven inaccurate. Instead, what we are seeing is a rapid change from both the US and the Venezuelan side to expedite investment and the restart of the oil industry.

In this article, I will give you a breakdown of the following:

• All the changes that have taken place.

• The impact on the global oil market.

• Potential investment opportunities.

What Changed?

The Trump administration has moved aggressively to reopen the Venezuelan petroleum sector to the US and allied commercial interests. Between the end of January to mid-February, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a series of General Licenses that systematically unraveled the sectoral embargoes imposed under Executive Orders 13850 and 13884.

• General License 46A: Authorizes established U.S. entities to engage in the lifting, exportation, sale, and transportation of Venezuelan-origin oil. Contracts must be governed by U.S. law. Reporting to the State Department is required every 90 days.

• General License 47: Permits the export, supply, and delivery of U.S.-origin diluents to Venezuela, critical for blending extra-heavy crude. Prohibits transactions with persons in Russia, Iran, North Korea, Cuba, or the PRC.

• General License 48: Authorizes the provision of goods, technology, and software for the exploration and production of oil and gas. Expressly prohibits the immediate formation of new joint ventures without separate licensing.

• General License 49: Allows for the negotiation and entry into “contingent contracts” for new capital investments in the energy sector. Actual execution and performance of these contracts remain contingent upon future specific OFAC authorization.

• General License 50A: Provides targeted authorizations for specific major U.S. and European energy companies to resume designated operations. Excludes the use of debt-for-oil swaps, gold payments, or Venezuelan digital currencies like the petro.

With these general licenses in place, US and foreign oil companies can now invest in Venezuela.

The other big change was to the payment mechanism. One of the main concerns for capital flows to Venezuela was the billions in international arbitration awards held by multinational companies. To prevent legacy creditors from immediately seizing new oil revenues through international courts, President Trump promulgated Executive Order 14373 on January 9.

Here’s how the new payment structure works:

• Under the new General Licenses (GL 46A and GL 48) issued by OFAC, foreign oil companies are prohibited from paying the Venezuelan government or PDVSA, the state-owned oil company, directly.

• Any royalties, federal taxes, or production levies owed to Venezuela must be deposited into US-controlled accounts known as “Foreign Government Deposit Funds.” This was established under Executive Order 14373.

• Companies are only allowed to make direct payments to Venezuelan authorities for routine local taxes, permits, and fees. This avoids any potential mishandling of funds from the oil revenue.

• To access the oil revenues held in the US accounts, the Venezuelan acting government must submit a “budget request” to Washington DC, which authorizes the release of funds for approved purposes, such as importing medicines and medical equipment. This mechanism effectively chokes off any potential disruptions to the oil industry and gives the US effective control of all of Venezuela’s finances.

Note: It is incredible to think just how powerful the US is when you read the specific mechanisms.

The payment arrangement also explicitly prohibits the following (General License 50A):

• Debt-for-oil swaps, this effectively nullify all of the Chinese deals made in the past.

• Payments using gold.

• Venezuelan state-issued digital currencies.

Not only are drastic changes happening on the US side, but there were profound changes made on the Venezuelan side.

On January 29, the Venezuelan National Assembly enacted sweeping amendments to the Organic Hydrocarbons Law. Without these changes, the US General Licenses would not have been enough, and here’s why:

• Direct Private Participation and Contractual Freedom: The reform explicitly repeals the 2006 law that reserved upstream activities to the state. It also repeals the 2009 law reserving hydrocarbon-related assets and services to the state. Private companies in Venezuela can now hold direct upstream contracts for exploration, extraction, collection, transportation, and storage without the historically mandatory requirement of majority state ownership (this is a big deal, more on this later). In addition, these upstream contracts are exempt from traditional Venezuela public procurement laws, which dramatically streamlines their negotiation and execution.

• Minority Shareholder Empowerment: In existing “Mixed Companies” (join ventures with PDVSA), minority foreign partners are now legally permitted to exercise direct technical and operational management (another big deal, more on this later). This bypasses PDVSA’s notorious bureaucratic inefficiencies and technical deficiencies. Furthermore, minority partners can now directly market their share of the production and independently open and manage bank accounts in any currency and jurisdiction offshore, thus drastically mitigating local currency devaluation risks and capital repatriation risks.

• Arbitration and Dispute Resolution (arguably, the most important change implemented by Venezuela): A major impediment in the past on energy investment has been Venezuela’s insistence on local judicial jurisdiction. The new reform permits the state to relinquish its absolute sovereign immunity in contract disputes allowing for international arbitration clauses. This was a major mandatory prerequisite for oil majors to even contemplate the first step.

• Fiscal Flexibility and Taxation: The reform caps baseline royalties at a competitive 30% and introduced a streamlined 15% Integrated Hydrocarbons Tax. In addition, it actively exempts operators from a raft of punitive legacy taxes and completely repeals the 2013 windfall tax law. The changes also exempt entities from large wealth tax, localized social contributions for science, technology, sports, and pensions (crazy, I know).

The changes on the Venezuelan side were what came as a surprise to me. When we wrote up our piece on Jan 3, we thought a regime change was required to enact a lot of the changes here, but it appears Delcy Rodríguez, the current sitting Venezuelan President, got the message quickly. With these changes in place, energy companies have lined up to review the potential investment opportunities in Venezuela.

Oil Market Implication

Venezuela is currently exporting ~1 million b/d of crude. With the General Licenses issued, Venezuela will no longer need to secretly import Iranian condensate and wait for the tankers to return from China. The US will be able to provide the critical diluent Venezuela needs to mix with the heavy sour crude it produces.

Reduced shipping time, coupled with less friction on oil transactions, should see Venezuela’s crude export average ~1.1 to ~1.2 million b/d for 2026. From a production standpoint, we won’t see any meaningful uptick this year as oil companies are still evaluating investment opportunities. But given the expedited timeline of the legal framework, we see Venezuelan crude oil production inching to ~1.4 to ~1.6 million b/d by the end of 2027 to early 2028. This represents an increase of ~400k to 600k b/d from the current production level.

By our estimate, global oil supply & demand will need the extra Venezuelan crude. Q4 2027 oil market deficit is estimated at -0.7 million b/d and non-OPEC supply growth will have all but disappeared by then.

After 2028, we see Venezuela gradually increasing to ~2 million b/d by early 2030s. This level of production will require 1) a stable political landscape and 2) a supportive government like the one we’ve seen thus far.

Given that the US controls the finances, I believe that the foundation for stability in energy investment is sound. Oil majors, however, will remain reluctant to dive headfirst into the Venezuelan oil sector.

Rystad estimates that it would take $183 billion in capex just to push Venezuela’s oil production higher. This is achievable if you look out to 2040, but that’s a long road from today.

Investment Opportunities

Read more

Editor’s Note: Please also read the original Chemours write-up.

Ideas from HFI Research

(Public) Chemours - Jon's Favorite Capital Cycle Investment Idea

Editor’s Note: This article was first published to paid subscribers on Nov 15. The thesis for remains intact…

Read more

3 months ago · 5 likes · HFI Research

By: Jon Costello

Chemours CC 2.19%↑ reported fourth-quarter 2025 results last Thursday, February 19. The results fell short of consensus expectations and caused the shares to decline by 25% from peak to trough over two days. After bottoming at $16.15, the shares have since recovered to $18.41, still shy of their recent high before earnings of $21.85.

While the fourth-quarter results were weak, management’s forward-looking expectations were considerably more optimistic. Overall, I expect results to improve over the course of 2026. A sustained recovery in the titanium dioxide market should support further gains in 2027. My Chemours investment thesis remains intact, and the shares remain attractive at their current price for a three-year or longer holding period.

The Cause of the Selloff

Without a doubt, the fourth quarter results were ugly on a GAAP basis, as the ongoing downturn in its Advanced Performance Materials (APM) and Titanium Technologies (TT) operating segments weighed on corporate profitability.

The consolidated quarterly results comparison is shown below.

Source: Chemours Q4 2025 Earnings Conference Call Presentation, Feb. 20, 2026.

As the table shows, cash flow results during the quarter were better. Operating cash flow was flat year over year, and capex was down significantly.

Management cited the impact of adverse “cost absorption,” or negative operating leverage, which occurs when sales volumes fall faster than unit costs and lower Adjusted EBITDA. Management also attributed the poor results to an unfavorable sales mix in the APM segment and higher taxes.

The reason why the shares sold off so sharply after earnings was that they ran so hard into earnings.

When the optimistic sentiment was met with a “meh” earnings report and near-term outlook, it’s no wonder that some investors decided to take profits rather than wait for clear signs of a more robust and sustainable recovery. If fundamentals continue to improve over the coming quarters—driving Adjusted EBITDA higher—I expect the shares to perform well from the current price.

Why the Selloff was Overdone

Read more

Please be sure to read our primer on the chemical sector and the titanium dioxide market.

Ideas from HFI Research

(Public) Primer On Investing In The Cyclical Chemical Sector

Editor’s Note: The piece below is a compilation of all of the chemical sector write-ups we published since October 2025. We hope readers will find this helpful in navigating what we think is the trough in the special chemical space…

Read more

3 months ago · 11 likes · HFI Research

By: Jon Costello

Tronox Holdings’ (TROX) fourth-quarter 2025 results point to a recovery in its earliest stages, with volumes clearly inflecting higher and prices lagging.

The company’s fourth-quarter revenue came in at $730 million, up 8% year over year and 4% from the previous quarter. The performance was driven almost entirely by higher sales volumes, which increased by 13% from the previous quarter. The result was ahead of management’s expectation of a 3% to 5% improvement. Meanwhile, Zircon volumes were up 27% year-over-year and 95 from the previous quarter.

The volume outperformance was driven by activity in India, Latin America, and the Middle East, where antidumping duties against Chinese imports have created opportunities for non-Chinese producers to gain lasting market share.

While the fourth-quarter volume recovery was real, it was met with continued pricing deterioration. Titanium dioxide prices declined roughly 8% from the fourth quarter of 2024, while Zircon prices declined by 23% over the same period.

The result of the higher volumes and lower price was Adjusted EBITDA of $57 million on a 7.8% margin, down 56% from $129 million in the year-ago quarter. Full year 2025 EBITDA was $336 million, down 40% from $564 million in 2024, on revenue that declined by only 6%. Quarterly results are shown in the table below.

The table shows that Adjusted EBITDA margins deteriorated in each quarter of 2025, even as volumes recovered in the second half of the year. Pricing was the culprit, compounded by cost headwinds from lower mining and upgrading rates, resulting in a collapse in fixed-cost absorption. The company also reported $233 million in restructuring charges for the closures of its Botlek facility in the Netherlands and its Fuzhou facility in China, though these were excluded from the adjusted figures.

The 2016-2017 Precedent

Read more

By: Jon Costello

Enterprise Products Partners, LP (EPD) recently completed one of the largest capex sprees in its history, investing $17.6 billion over the past five years and $5.6 billion in 2025 alone. Among the investments was the massive buildout of the company’s Permian gathering and processing capacity, as well as the construction of:

• The 600 Mbpd Bahia NGL pipeline,

• The Neches River ethane export terminal,

• Frac 14 fractionator, and

• An LPG export infrastructure expansion on the Houston Ship Channel.

EPD completed these projects while maintaining its ongoing streak of 27 consecutive years of distribution growth and an investment-grade balance sheet, an unprecedented achievement for a midstream operator.

In a pattern seen time and again in the midstream space, the market has treated EPD’s investment period as a headwind for its unit price. During a period of heavy capex, free cash flow declines, leverage rises above management’s targets, and discretionary cash flow dips into negative territory, as it did for EPD in 2025.

The depressed unit price makes sense if the company is consistently allocating capex to low-returning projects. This isn’t the case for EPD. Its period of heavy capex spending did not lower its return on capital employed or diminish its overall business quality. I expect its investments in low-capex infrastructure projects to generate substantial—and growing—fee-based income for decades. This is one of the reasons why I considered its units a top buy while they were depressed.

Free Cash Flow Inflection

Read more

By: Jon Costello

As a capital-cycle investor, the chemical sector piqued my interest in the second half of last year. We began investing in the space late last year.

Since then, chemical stocks have started to recover, with further gains likely if the recovery continues. What were potential three- or four-baggers a few months ago can still double or more from their current prices.

As we made our investments, I published a series of articles outlining my views on the sector, its cyclical properties, and my favorite investment prospects. This article provides a review of my macro and micro theses for the cyclical chemical sector.

Part I: The Chemical Sector: Olefins and the Rest

The chemical sector is in its longest downturn in recent history. For many chemical companies, earnings have been on a downward path since 2021. As demand remains tepid amid abundant supply, the industry faces several headwinds, both cyclical and structural. However, opportunities are there for investors who understand the risks and potential upside.

After reviewing the industry, I have found a few crucial points for investors navigating the sector in search of bargain opportunities.

One is that opportunities are absolutely there for the taking. Anyone who looks at the past earning power of the typical industrial or commodity chemical company and compares it to today’s market cap and enterprise value can appreciate that most of the sector is cheap. Many chemical stocks trade at obscenely low multiples of mid-cycle earnings. Interestingly, this isn’t the case in the energy sector, where most stocks discount a sustained recovery. But even using extremely conservative valuation assumptions, I believe multi-baggers exist in chemicals for investors who can identify opportunities, size their positions appropriately, buy on weakness, and stomach the inevitable volatility that arises in cyclical downturns.

A second crucial point is that cyclical forces will bring about a recovery. No one can precisely time when this will occur, though I believe a recovery is underway for some chemical sub-sectors.

For example, some particularly cyclical chemical sub-sectors are experiencing low prices that will likely lead to supply curtailments. Eventually, inventories will get worked down, prices will increase, and margins will grow. Meanwhile, in areas that may remain weaker for longer, low-cost producers are available. These are the companies that are most likely to survive the downturn and thrive in the ensuing upcycle. These are the kinds of opportunities investors should try to identify.

Such low prevailing prices raise the question of whether the sector’s low valuations are justified. This is another crucial point worth fleshing out, namely, that olefin producers are cheap for good reason. This is a large segment of the sector by market cap, and it often tops the buying lists of many generalist bargain hunters. Companies such as Dow (DOW), LyondellBasell (LYB), and Westlake (WLK) are at risk of a far more brutal downturn than their non-olefin peers. Their stocks are right to be low and will likely remain so, as their profits are at risk of moving even lower for years. Any recovery is likely to be fleeting.

This isn’t necessarily the case for non-olefin producers, though I suspect that many have been tarred too negatively with the olefin brush. Investors can therefore divide the chemical sector into olefins and “everything else.” The former are to be avoided altogether, and I discuss why below. The latter is where mispricings can be found.

The Factors Driving the Olefin Glut

Olefins are hydrocarbons that contain at least one carbon-to-carbon double bond. The main olefins are ethylene, propylene, and butenes. They’re made by steam-cracking ethane, propane, naphtha, and other hydrocarbons. Olefins serve as the building blocks for polyethylene, polypropylene, and various intermediaries. Polyethylene and polypropylene are the building blocks of plastics.

Investors in chemical companies should be aware that overinvestment has severely diminished the prospects for returns in the olefins market.

The culprit behind the oversupply is investment by the integrated oil majors to expand their downstream chemical operations. Their investments have been focused mainly on expanding production of ethylene, polyethylene, polypropylene, and aromatics. The onslaught of new supply threatens to lower the margins and returns on capital for olefin producers for years to come.

Since 2015, the annual production capacity of light olefins—ethylene and polyethylene—has increased by more than 50%, from approximately 230 million tons to 430 million tons. The growth outpaced real global GDP, which grew by roughly 25% over the same period.

Source: Oilchem, GlobalData, ICIS, and Wood Mackenzie.

The surge in investment came as the narrative about the future of gasoline and diesel demand turned negative. Virtually all the majors bought into the idea that demand for their biggest-selling refined products would peak and begin to decline in the 2030s. Oil and gas executives who knew this narrative was flawed were pressured to accept it through political and regulatory dictat, corporate governance, lawsuits, and shareholder pressure. Many industry participants grew concerned that EV penetration, fuel economy improvements, and biofuel blending mandates would slow gasoline and diesel demand over time. As a result, refining would no longer be a reliable growth engine. Sticking to these “sunsetting” products implicitly meant embracing excess supply and structurally low margins.

Petrochemical production, on the other hand, was expected to grow. Rising living standards and global urbanization would drive demand for plastics and other petrochemical products above the GDP growth rate. With demand expected to rise, global majors sought to convert their hydrocarbon feedstocks into chemicals rather than gasoline or diesel. In doing so, they figured they could create more value per barrel of crude oil feedstock. Adding to petrochemicals’ allure was surging production of light oil and NGLs in U.S. shale basins, which promised years of growing chemical feedstock at ultra-low prices. Structurally lower feedstock prices held the prospect of boosting margins relative to competitors on the global stage.

As usual in the oil industry, nearly all participants embraced the same strategy: favoring investment in chemicals over gasoline and diesel. Thus, a synchronized global petrochemical capacity buildout was unleashed. Polymer inventories bulged, prices fell, and petrochemical margins were destroyed.

The economics are plain to see. For example, Shell’s (SHEL) new polyethylene complex in the U.S. has missed its original return targets thanks to cost overruns and weak polyethylene pricing.

The Integrated Majors’ Petrochemical Buildout

The integrated oil majors’ expansion in petrochemicals over the past few years has been unprecedented.

ExxonMobil (XOM) expanded its Baytown, Texas, refinery by adding new chemical units that sourced Permian NGL feedstock. The expansion represented an investment of $2 billion and included a 350,000-ton-per-year olefin unit and a 400,000-ton-per-year performance polymer unit.

More concerning for the chemical market, ExxonMobil plans to continue its Gulf Coast petrochemical buildout to convert light crude oil and NGLs from U.S. shale into higher-value products. The company plans to spend $20 billion over ten years beginning in 2023.

Shell built its Pennsylvania Petrochemicals Complex outside Pittsburgh. The complex is a massive ethane and polyethylene production operation designed to use locally produced Marcellus and Utica ethane to produce plastic. Its capacity is 1.6 million tons of polyethylene per year. Shell estimates spending $14 billion on the project.

TotalEnergies (TTE) commissioned a one-million-ton-per-year ethane steam cracker for $2 billion. The facility is integrated with Total’s refinery platform. In 2023, the company added a new 625,000-ton-per-year polyethylene unit at its Bayport, Texas, platform for approximately $1.4 billion.

Chevron (CVX) and Phillips 66 (PSX) entered into a 50/50 joint venture to partner with QatarEnergy to build a 2.1 million-ton-per-year ethane cracker and two one-million-ton-per-year polyethylene units in Orange County, Texas. Both are set to start up in 2026. The estimated investment for the project is $14.5 billion.

Saudi Aramco has explicitly adopted a “liquids to chemicals” strategy to maximize the profitability of each barrel of oil it produces. Aramco aims to convert 4 million barrels of crude oil per day into petrochemical feedstocks by 2030. As of 2025, it is around halfway there.

Altogether, Aramco’s investments to date include large-scale crackers and mix-feed steam crackers, which are likely to add more than 10 million tons per year of petrochemical production capacity.

All these—and many other—projects around the world amount to a structural supply headwind that will keep global chemical margins depressed and prevent cycles from the swings they have undergone throughout their history.

China’s Petrochemical Buildout

Over the past few years, China has carried out the most extensive petrochemical buildout in history, amounting to roughly 20 million tons per year at a cost of tens of billions of dollars. Multiple “crude to chemicals” facilities were built on the coast with state support. The objectives in the capacity buildout were to replace plastic imports with domestic production, keep refineries profitable as domestic gasoline and diesel demand slowed due to increasing EV adoption, and bind foreign crude suppliers, such as Saudi Aramco, more closely to China through long-term feedstock deals.

China doesn’t have the benefit of low feedstock costs, but it does benefit from low electricity costs and a lax regulatory environment compared to most global manufacturing regions.

The buildout—which is still ongoing—has been driven by state-owned enterprises, domestic private companies, and foreign operators. The list includes ExxonMobil, CNOOC, Shell, PetroChina, Sinopec, and Aramco. It has led to China’s olefins capacity exploding from approximately 45 million tons per year in 2015 to 145 million tons per year in 2025. To make matters worse for the chemical industry, the country is planning an additional 40 million tons per year of supply through 2030.

China is now the price maker in olefins. However, the country is now beset by overcapacity. But the structural oversupply has increased pressure for exports. This is why low-cost Chinese olefins are flooding the market and may continue to do so for years. So far, the country has not exhibited restraint, even amid persistently low prices, despite calls to rein in “disorderly competition”. China’s continued growth in the sector threatens to put global chemical margins under pressure for years.

Conclusion

Olefin economics are set to be challenged for years. While overcapacity amid lower-than-expected demand has led to a global oversupply, supply is set to continue coming online. China’s production is set to grow steadily through 2030, as shown below.

Source: Reuters, Sept. 22, 2025.

If China’s demand fails to rise by the amount of added supply, excess supply will be exported.

Only plant closures can prevent a glutted market on a permanent basis. There are signs that the downturn has forced some closures, but nowhere near enough to alleviate the oversupply over the longer term.

The upshot is that investors must avoid olefins and stick to other chemical sub-sectors. To help sketch a lay of the land, the next section breaks down the chemical industry into its sub-sectors. Each sub-sector has its unique economics. I believe the brief descriptions can help an investor get their bearings as they attempt to scan the chemical sector for bargain opportunities.

Part II: Chemical Industry Sub-Sectors

There are plenty of chemical stocks to choose from outside the olefins. The chemical industry is comprised of a diverse array of companies that run the gamut in terms of cyclicality, returns on capital, competitive advantages, and other factors.

The sector can be broken into sub-sectors presented as follows. This list is not exhaustive, and some companies operate in multiple sub-sectors. I hope it helps a beginner in the sector find areas within their circle of competence where bargains can be found.

Petrochemical Feedstocks. These are the core building blocks of other compounds. They’re made from crude oil—specifically, the lightest grade, naphtha—and NGLs such as ethane and propane. These feedstocks are used to make the olefins ethylene and propylene, as well as the aromatics benzene, toluene, and xylene. Olefins and aromatics, in turn, are used to make various polymers and solvents. Methanol is another petrochemical building block. It makes formaldehyde and acetic acid, among other compounds.

The key drivers of production are feedstock-product spread, such as the spread between ethane and naphtha. As a global market, product flows are also influenced by changes in inventories and prices across different global trading hubs.

Petrochemicals are highly cyclical. Their prices tend to swing with those of crude oil and NGLs.

Polymers and Resins. These products are formed from petrochemical feedstocks. Polyethylene and polypropylene are plastics used in packaging and consumer goods. PVC is used in construction, while PET is used in beverages. Polystyrene is also used in packaging. Various resins are used in automobiles and electronics.

Like petrochemical feedstocks, profitability depends on spreads between feedstocks and products, as well as the state of global inventories. Recycling plays a role in supply, which reduces the need for petrochemical feedstocks in production. The U.S. Gulf Coast is advantaged due to the presence of large refineries and its proximity to production centers in the U.S. shale basins. Longtime HFIR Energy Income Portfolio holding, Enterprise Products Partners (EPD), is engaged in polypropylene through its downstream PDH units.

Public petrochemical, polymer, and resin manufacturers include Dow, Inc. (DOW), LyondellBasell (LYB), and Westlake Corp. (WLK).

Inorganics and Minerals. This group includes a broad spectrum of chemicals, including chlor-alkalis, chlorine, soda ash, titanium dioxide, and carbon black. Feedstocks for these chemicals are generally mined, so the economics underlying each product differ. Soda ash—previously known from our Genesis Energy (GEL) holding, which recently divested of its soda ash operation—is dependent on the prices of natural trona and other synthetic feedstocks. Titanium dioxide is a pigment used in coatings and plastics. Its economics are tied more closely to housing, construction, and automobile production activity. Carbon black tracks rubber demand as a crucial component in tire production.

Public companies include Tronox (TROX), Kronos Worldwide (KRO), Chemours (CC), and Olin (OLN).

Industrial Gases. Oxygen, nitrogen, hydrogen, helium, and specialty gases are included in this subset of chemicals. As gases, these products are advantaged by long-term take-or-pay contracts, high switching costs, and their mission-critical reliability across their various uses. Industrial gases tend to have more favorable economics than other chemical sub-segments. Their demand is driven by steel and chemical manufacturing, healthcare, and electronics—all of which depend on gases for their production. Capital intensity tends to be high, but contract structures lock in attractive returns.

Public companies include Linde (LIN), Air Products & Chemicals (APD), and Air Liquide.

Fertilizers and Crop Nutrients. Natural gas prices drive the economics of these products. Ammonia, urea, phosphate, and potash industries have generally consolidated into semi-oligopolistic supply sources. Demand is impacted by weather, planting acreage, inventory levels, and export restrictions. New projects tend to be large, so these products are also impacted by the start of capacity additions. Due to price volatility, a producer’s place on the cost curve, as well as its logistics, dictates profitability.

Public companies include: CF Industries (CF), Nutrien (NTR), Mosaic (MOS), and Yara.

Agrochemicals. These are synthesized from other chemicals and include herbicides, insecticides, fungicides, seed treatments, and emerging biological compounds. This sub-segment is heavy on intellectual property and devising new formulations of existing products. Product life cycles, patent cliffs, and regulatory regimes all play a part in product economics. Pricing power and high returns tend to rest with the innovators, while generics producers compete on cost and scale.

Public companies include: Corteva (CTVA) and FMC (FMC).

Specialty Chemicals. This is a broad, fragmented category of diverse chemicals that include performance additives, surfactants, catalysts, mining chemicals, and oilfield chemicals. Calumet’s (CLMT) legacy operations can be found here. Many specialty chemicals are involved in lubrication, corrosion resistance, foaming, and other uses. As such, they tend to add value to other processes and products. They also involve greater innovation and lower commodity-price dynamics. Some specialty chemicals possess significant pricing power. Producers differentiate their products through the cadence of innovation, management of products that make up a chemicals portfolio, technical service, and qualification standards.

Public companies include: Eastman Chemical (EMN), Celanese (CE), Huntsman (HUN), and DuPont (DD).

Coatings, Adhesives, Sealants, and Elastomers (CASE). Producers of these products use solvents, additives, and titanium dioxide to make paints, protective coatings, adhesives, and sealants. Demand is tied to construction, automobile manufacturing, aerospace, and industrial activity. Pricing depends on a company’s ability to pass through fluctuating feedstock costs, as well as regulatory and sustainability trends. Companies compete based on their scale and ability to adjust product applications.

Public companies include: Sherwin-Williams (SHW), PPG Industries (PPG), Axalta (AXTA), and RPM International (RPM).

Consumer and Personal Care Ingredients. This sub-segment includes companies in flavors, fragrances, and nutrition. They incorporate surfactants, preservatives, emollients, conditioning polymers, enzymes, and fragrance compounds into products involved in home goods, personal care, food and beverage products, and nutrition. This sub-sector benefits from relatively stable demand, long customer relationships, and technical formulations that increase switching costs. Scale and innovation enhance economics, and pricing discipline influences margins.

Public companies include: International Flavors & Fragrances (IFF), Symrise, Givaudan, and Croda.

Electronics and Semiconductor Chemicals. These are high-barrier-to-entry products with rigorous purity specifications and significant qualifications for their use. Demand is tied to wafer-fab equipment cycles and other technology cycles. The production process typically requires deep process know-how and the supply of ultra-pure inputs, both of which earn premium financial returns. Customers tend to be sticky, and cyclicality is relatively low. Intellectual property development supports competitive advantages.

Public companies include: Entegris (ENTG) and DuPont (DD).

Performance Materials and Advanced Materials. These are specialized engineering plastics, composites, and silicones. Nylons, PBT, and PC blends, epoxies, and carbon fiber matrices. They serve the automobile manufacturing, electronics, medical, construction, and energy industries. A product’s value depends on its weight, thermal and electrical performance, durability, and regulatory compliance. There is often a risk of supply chain constraints, but margins tend to be durable.

Public companies include: Hexcel (HXL), Huntsman (HUN), and Wacker Chemie.

Rubber and Tire Chemicals. Synthetic rubbers are the largest part of this sub-sector. They rely on the supply and price of butadiene and styrene feedstocks. Additives include antioxidants, accelerators, and process oils. Tire demand is the ultimate driver of price, which is influenced by automobile production, miles driven, and freight activity. A producer’s profitability depends on petrochemical feedstock prices and capacity additions.

Public companies include: Cabot (CBT), Orion S.A. (OEC), PCBL Chemical, and Lanxess (LNXSY).

Part III: The Current Downturn and Prospects for a Recovery

As the global chemical industry works through one of its worst downturns in decades, sales volumes have declined for several years, utilization rates have fallen below 80%, and margins across a broad swathe of producers are hovering around cash cost. For many producers, conditions are akin to a deep recession, even though broader GDP continues to grow.

The downturn has caused earnings of the more cyclical chemical companies to decline for three years in a row, with their stock prices following suit. Expectations of continued earnings weakness keep many of the stocks at multi-year lows.

This business and stock price performance begs the question of whether cyclical chemical companies represent an attractive buy at a low point of their cycle. And if so, how should an investor time an investment? Should they take the plunge now or wait for a macro recession to push chemical stocks even lower?

With full acknowledgement that the downturn has longer to go and chemical stocks are likely to remain weak, I believe equity valuations in a large part of the sector are sufficiently attractive to buy now for a multi-year holding period.

The fact of the matter is that downcycles end; this one will, too, like all the cycles that have preceded it. The inevitable upturn will deliver far higher stock prices and outsized returns for those who invest today, in the depths of the downturn.

Investors seeking to position for an upturn should understand the supply-and-demand factors that led to the current downturn, what will drive the transition to an upcycle, and where to look for opportunities throughout the sector.

Chemical Value Chains

When selecting stocks, investors should view the chemical sector not as a single entity but as a set of “value chains” with their own supply-and-demand dynamics.

Chemicals move across a manufacturing chain that adds value at each step. Starting from raw materials, the industry’s products are developed into base chemical building blocks, then intermediates, then polymers, and lastly, formulated and specialty products. Formulated/specialty products are then sold to end users. There are dozens of core platform value chains. The further down a chain you go, the more specialized and less commodity-like the companies tend to be, and the greater the number of companies that exist to add value from precursor chemicals.

The diversity of value chains makes the chemical sector unique among cyclical commodity sectors. For one, the moves of a single commodity do not determine sector-wide economics the way energy producer results are heavily influenced by oil and natural gas prices, and copper or gold mining results by metal prices.

A chemical operation’s economics are dictated first by the particular value chain in which the company resides and second, by where it stands on that chain.

The existence of multiple value chains means that industry economic cycles differ across chains, as each has distinct supply/demand dynamics, logistical requirements, customer behavior, return characteristics, and so forth.

This isn’t to say that GDP recessions don’t depress earnings in the chemical sector. Of course, recessions lower earnings, and as such, remain a risk. However, a macro recession is not necessary to trigger a downturn in a chemical value chain. Furthermore, a GDP upturn isn’t necessary to spur a recovery in a value chain. Chemical value chain downturns and recoveries can and do occur independently of macro recessions. So investors can sit on their hands waiting for a macro recession to arrive and completely miss out on participating in a full cycle that could deliver outsized returns by buying in the downturn and selling during the recovery.

Factors Driving the Downturn

Today’s downturn in the chemical sector is clearly not being driven by a classic GDP recession. Instead, it’s the result of a nasty combination of overbuilt global capacity, weak industrial end-markets in Europe and parts of Asia, and a long destocking cycle that has reduced orders below end-use demand. The result has been a prolonged downturn that feels like a recession within the industry, even though the broader economy continues to grow steadily.

Just as a GDP recession wasn’t necessary to cause the downturn, a GDP upswing won’t be necessary to drive a recovery. Historically, chemical downturns have ended when inventories in a value chain have normalized and high-cost capacity has been rationalized. Demand does not have to be strong; it simply has to tick higher from the depressed levels specific to a value chain during the downturn. In fact, in the early stages of a chemical recovery, demand is significantly below mid-cycle levels. One of the reasons timing a bottom is so difficult is that recoveries begin during times of still relatively weak demand while supply is still adjusting downward. There is no obvious “all clear” signal, such as a visible surge in demand.

Global Demand Weakness

Demand has been weak across various chemical value chains for various reasons. Tepid industrial demand in major economies has reduced activity in several demand-driving sectors, including construction, autos, electronics, packaging, and consumer durables. This demand weakness has affected various chemical value chains in different ways and to varying degrees. Still, most have seen their sales volumes decline significantly over the past two to three years.

European demand has been particularly bad. The contraction of Europe’s manufacturing base in recent years has reduced demand for polymers, intermediates, coatings, and engineering plastics. At the same time, European chemical producers have suffered an industrial crisis brought about by high energy costs, unfavorable policies, and weak manufacturing activity, all of which have eroded the industry’s competitiveness on the global stage.

In North America, where the macro backdrop is better relative to other regions, higher interest rates and slower housing activity have weighed on value chains for nylon, isocyanates, PVC, and packaging-linked products.

In China, a drawn-out property bust and weak heavy-industry activity have cooled demand for construction-related and freight-dependent value chains.

Another important cause of weak global chemical demand has been an unusually long restocking phase. During Covid and its immediate aftermath, chemical end users over-ordered and built excess inventories in response to supply-chain chaos and rising prices. However, once conditions normalized, buyers flipped to a hyper-conservative posture, drawing down inventories and ordering only what they needed. This behavior persisted much longer than the typical quarter or two seen in a typical recession. The result is that apparent demand has fallen below actual end-use demand for an extended period, amplifying the downturn in volumes and capacity utilization.

Persistent Oversupply

This downturn has been unusually stubborn because the global chemical industry massively overbuilt capacity during the last cycle, particularly in olefins, as covered above.

While olefins are likely to be mired in a downturn for years, other value chains face varying supply situations. In some, new production capacity continues to ramp, reinforcing pressure on trade flows and export prices. Even as demand stabilizes and destocking runs its course, the sheer amount of capacity, especially in Asia, caps pricing power and keeps margins low.

Until enough high-cost capacity exits the system—or demand grows long enough and fast enough to absorb it—the industry will remain in a low-return state. For example, the vinyl and polyester chains are in this group. In other chains, however, supply rationalization has been ongoing for years, and inventories are closer to normalizing.

What Will Spark an Upturn?

The industry’s own adjustment process will end this downturn.

First, inventories across the various chemical value chains need to be normalized. In many chains, this process is well underway. After several quarters of aggressive destocking, order patterns are gradually reverting to more normal behavior, even as demand remains weak.

Second, production capacity must be rationalized. Rationalization can occur in various ways. High-cost assets are shuttered, marginal projects are delayed or cancelled, balance-sheet-strained operators ratchet back on capex, high-growth companies shift to capital preservation, and the industry consolidates. The extent of supply rationalization varies across different value chains, but the process is clearly advanced, particularly among the most stressed commodity producers.

Third, end-user demand will have to grow modestly from a depressed base. Demand tends to grow along with GDP. It will receive an additional boost once destocking is complete. Even if global industrial activity muddles through with low-single-digit growth, chemical producer revenues and margins will stabilize. Any growth will result in positive operating leverage and higher earnings. Even a slight improvement in the volume environment, combined with a smaller base of production capacity and normalized customer inventories, is enough to lift capacity utilization and margins for the survivors. Once utilization and margins rise, a new upcycle can begin.

The Path Ahead

The recovery from this downturn is unlikely to be “V-shaped.” It will more closely resemble a long, uneven climb out of a trough, marked by gradual improvement with sharp divergence between winners and losers.

Global Volumes

On a global basis, volumes are likely to grow modestly over the next few years. A combination of lower interest rates, slowly improving housing and auto markets, and normalized inventory behavior should support low-single-digit demand growth in many chemical value chains.

Given the cyclically low conditions in which many value chains currently operate, modest growth should be enough to prevent conditions from deteriorating further. Even modest growth from today’s depressed capacity utilization levels is likely to translate into meaningful operating leverage, especially for companies that have structurally lowered their costs and rationalized their product portfolios during the downturn.

Pricing and Margins

A recovery in pricing and margins will lag the volume growth, particularly in commodity chemical products traded globally. Olefin chains are the poster child for this dynamic. With so much capacity in Asia, olefin margins will likely remain under pressure for years, while export prices will remain highly competitive.

Other overbuilt, trade-exposed chains will undergo a similar pattern. The initial phase of the recovery is therefore more about volume stabilization and cost absorption rather than a rapid snap-back in prices and margins. Over time, as capacity remains low and demand grinds higher, pricing power will slowly return. However, this is likely to be a multi-year process rather than a quick reset. Some value chains are better positioned to exercise pricing power than others, even among pure commodity producers.

Regional Divergence

There will be stark regional divergences among chemical producers. Producers in the U.S. and the Middle East benefit from structural feedstock advantages and access to global markets. Consequently, they are poised to emerge from the downturn stronger as high-cost European assets are closed or repurposed.

Asia will remain the swing region in many commodity chemicals. New capacity in China will continue to set the marginal barrel in olefins and several other bulk chemical value chains. Investors should expect trade flows and market shares to continue shifting in favor of low-cost regions.

Europe will continue to lose competitiveness in the global chemical market. High-cost European producers are structurally disadvantaged compared to their U.S. and Middle Eastern competitors, which benefit from lower-cost feedstock and less onerous regulations. Energy price spikes and policy uncertainty in Europe have forced several producers to cut utilization, idle production facilities, consider permanent closures, or relocate their operations to countries where they can regain competitiveness. European chemical producers will be forced to migrate toward specialty chemicals, formulations, and niche value chains where they can justify higher costs with innovation, service, and customer proximity. Falling European production is one of the main supply-side factors set to balance various chemical chains in the longer term.

Corporate Strategy

Corporate strategy among chemical producers will reflect the new reality. For one, the growth-at-scale era is probably over. Management teams now emphasize profitability, resilience, and selective growth rather than total volume growth.

Capex plans are being pruned, discretionary “green” projects are being pushed out or rephased, and capex decisions are being viewed through the lens of balance-sheet capacity rather than growth expectations.

Mergers and acquisitions will focus on portfolio upgrades instead of size. Companies will continue exiting structurally challenged commodity assets and add higher-returning specialties. The companies that execute this pivot with discipline are likely to compound value as the cycle turns.

Where to Invest in the Sector

The industry will emerge from this downturn leaner and meaner than it has been in many years. A new upcycle will bring improved margins and higher returns on capital. For several years, industry players are likely to remain disciplined before memories of the downturn fade and more aggressive producers start to build out capacity.

Investors should favor low-cost, feedstock-advantaged producers in supply chains that are regionally constrained, as well as formulation/specialty businesses with genuine pricing power. These franchises are most likely to emerge from their respective value chain recessions with greater market share, stronger balance sheets, and enhanced earning power.

An investor should also focus in areas where demand growth can fill capacity over time. As long as capacity utilization remains cyclically low—as is likely in olefins—returns to shareholders will remain depressed. Producers with high costs and weak balance sheets are higher risk than lower-cost, stronger competitors. However, the survivors among these producers also possess the greatest upside torque to a recovery.

Structurally higher supply may persist in many chemical value chains for some time. Others appear to be on the cusp of a recovery, where the volume and destocking shock has largely run its course. Despite divergent fundamentals across value chains, the prospect of structural oversupply in some chains has worsened investor sentiment toward the sector as a whole, including value chains with stronger recovery prospects. The indiscriminate selling of chemical stocks has created attractive opportunities. Investors should look to invest in low-cost, regionally advantaged, and niche franchises where mid-cycle earning power is being mispriced off trough conditions.

As for what investors should avoid, top of the list is any value chain characterized by structural oversupply. Investors should also avoid high-cost European commodity chemical operations unless they can demonstrate the ability to shift toward higher-margin products.

Lastly, a macro GDP recession is all but certain to reduce chemical demand. Lower demand will cause earnings and stock prices to fall across the sector. However, well-positioned companies in value chains that are already in advanced stages of their downcycle will experience less severe conditions during a recession and undergo more robust recoveries once economic growth returns. Given the risks posed by a recession, investors should favor companies with strong balance sheets that can survive further deterioration in end-market demand.

While recessions are always a risk, market valuations for many chemical producers are currently so depressed that I believe investors can still earn attractive returns over a three to five year holding period, even if a recession intervenes. The key will be to hold positions in the companies most likely to survive, and to avoid investing in the weaker names.

With the cycle mechanics in place, the most useful next step is to ground them in precedent—how prior downturns resolved, and what signaled the inflection.

Part IV: Lessons from Past Chemical Cycles Applied to Today’s Stocks

Many investors are waiting for the onset of a macro GDP recession before investing, even though prices are at bargain levels. They’re doing so to sidestep a selloff that may happen during a recession, or to time their investment at the bottom in anticipation of the subsequent upturn.

Although a recession may happen and likely push chemical stocks lower, investors should consider initiating a position in chemical stocks now.

Recessions are only clear in hindsight and are nearly impossible to predict accurately. Investors waiting for a recession before buying these stocks might miss out on the profits to be had in the eventual recovery.

Second, the industry has already experienced a brutal multi-year downcycle that has impacted the supply side in a macro recessionary manner.

Third, cyclical chemical stock prices are so low that even if they fall further during a recession, the long-term returns they will generate are likely to be satisfactory.

Fourth, and most importantly, the industry’s historical pattern has been to decline and recover in the absence of a macro recession. In fact, each value chain within the industry has its own unique cycles.

My previous article covered the key economic factors that cause downturns and recoveries. This article will present historical examples of chemical cycle downturns and recoveries, both of which occur on a timetable distinct from the broader GDP changes. Once investors realize how some of the harshest chemical downturns have been resolved within the value chains themselves—often while headline macro data is neutral or only slightly positive—they might consider taking the plunge into some beaten-down chemical stocks today.

Titanium Dioxide: Overbuild, Environmental Crackdown, and Forced Discipline

Titanium dioxide is a particularly volatile chemical value chain. The market’s cycles since 2011 show how bad conditions can get within the titanium dioxide chain, even as global macro GDP expands, and how an upturn can begin without a GDP increase.

In 2011, the titanium dioxide market experienced a spike in prices after severe supply rationalization in response to the 2008-2009 recession. The industry reacted predictably to higher prices: it expanded capacity. This time, China took the lead.

Also predictably, the capacity buildout went too far. While the global economy continued to grow, the excess capacity created in 2012 and 2013 caused a sharp drop in titanium dioxide prices in 2014.

The industry downturn worsened in 2015, with operating rates dropping to the mid-60%. Prices declined sharply, making 2015 one of the worst margin years in decades for titanium dioxide producers.

From the peak of the titanium dioxide cycle in 2011 through the lows of 2015, global GDP grew steadily. The industry’s downturn and eventual stabilization were part of an intra-sector adjustment process.

In this case, the adjustment process was triggered by a glut in major producing regions, which caused a decline in global titanium dioxide prices. In China, prices dropped below producer cash costs, forcing formerly expansionist producers to adopt supply discipline.

Adding to the Chinese industry’s woes were stricter environmental enforcement measures. These measures were implemented to address rising pollution levels resulting from the low-cost production process favored by Chinese titanium dioxide producers.

Chinese producers aiming for rapid expansion in response to rising prices adopted a cheaper but problematic “sulfate” production process. This method is older, simpler, and relies on widely available technology.

The alternative method, the “chloride” process, is more expensive and technologically advanced. This process yields a higher-quality product that commands a premium price.

The problem with the rapid growth of the sulfate process is the pollution it causes. The process produces large amounts of acidic liquid waste and other harmful byproducts, including carbon dioxide. Global regulators have cracked down on sulfate plants that couldn’t afford upgrades to cut pollution. They have generally supported replacing the sulfate process with the chloride process. Today, about 55% of titanium dioxide is made using the sulfate process, mostly in China. Newbuild capacity, both inside and outside China, mainly uses the chloride process.

In 2015, about 98% of Chinese titanium dioxide was produced through the sulfate process. The pollution issue was addressed with regulations such as discharge permits, mandatory inspections, and pollutant tax systems for producers using the sulfate process.

Chinese authorities also stopped approving new sulfate plants and required older ones to relocate or shut down. These measures impacted the Chinese industry but had only a minor effect on overall Chinese titanium dioxide production. Consider that in 2015, China produced a total of 2.7 billion tons of titanium dioxide annually. Brokerage reports at the time estimated that only 112,000 tons of the country’s sulfate production was shut down.

Nevertheless, the reduction of capacity and the outlook for fewer newbuild projects helped pave the way for a market recovery.

While Chinese production retrenched during the 2014-2015 downturn, high-cost Western titanium dioxide production capacity was exiting the field. Older European and North American sulfate plants were curtailed or permanently closed. Weaker assets were shuttered, and producers redirected their focus toward selling higher-value titanium dioxide grades to enhance returns.

The supply adjustment process continued through 2016 while demand remained steady. Demand from coatings and plastics end-users didn’t boom, but the supply reduction amid stable demand helped global inventories normalize, and Chinese exports slowed from manic levels during the boom.

The market’s recovery began in earnest in 2017. That year, titanium dioxide prices and producer margins increased to mid-cycle levels. Not the levels seen during the 2011 euphoria, but levels at which the surviving assets could earn their cost of capital.

Throughout the entire cycle, titanium dioxide producer stocks mirrored the market’s progress. Over the 2014 to 2017 cycle, Tronox Holdings shares plunged by 90% before staging a full recovery, as shown below.

Meanwhile, Kronos shares fell 75% before rebounding and then surged 474% from their lows during the 2017 upcycle.

The lesson from the titanium dioxide cycle is clear: the cycle turned not because of an acceleration in global economic growth, but because enough capacity had exited the market while modest volume growth quietly absorbed the remainder. Economic growth in the major global demand centers over this period remained steady, as shown below.

Source: Our World in Data.

Investors who sat on their hands due to concerns about a looming recession missed out on the opportunity to earn outsized returns over a multi-year holding period. The key was to hold, focus on intrinsic value over price, and avoid getting too emotionally involved in the dramatic short-term swings to which titanium dioxide stocks are prone.

Nitrogen Fertilizers: The Export Retrenchment Playbook

The nitrogen fertilizer value chain experienced a similarly unique cycle. In the mid-2010s, the global nitrogen supply complex expanded capacity across ammonia, urea, and UAN. New projects came online, and U.S. producers increased their investments in both brownfield and greenfield projects to displace imports.

By 2016, the outcome was familiar. Spot prices for key nitrogen products plummeted, marginal producers couldn’t cover their cash costs, and nitrogen-related stocks behaved as if the farm economy had fallen off a cliff, even though the demand backdrop was nowhere near a 2008-style collapse. The 2016-2017 dip in U.S. nitrogen fertilizer prices is shown below.

Source: Elaine Kub, “High Fertilizer Prices: History and Future,” Progressive Farmer. Dec. 15, 2021. Red-dotted circle added by author.

AdvanSix (ASIX) made its debut as a standalone public company into this storm, with its October 2016 spinoff from Honeywell (HON). The company has significant exposure to nitrogen through its production of ammonium sulfate, a widely used nitrogen-based fertilizer.,

Like the titanium dioxide market, the nitrogen market did not need an official macro recession to be stabilized. Its adjustment mechanism was a retrenchment in global exports. As nitrogen prices in China fell below marginal cash cost, Chinese urea exports declined. Higher-cost Chinese producers were forced to reduce exports because their economics no longer supported pushing volumes into the seaborne market.

The recovery that ensued provided a tailwind for ASIX’s business results and stock price in its debut as a public entity.

Once again, the nitrogen market recovery was not driven by a significant demand surge or a massive agricultural boom. It was driven by steady, unexciting demand, combined with fewer tons dumped onto the market by the swing exporters. These exporters removed uneconomic capacity from the export pool.

Meanwhile, in the U.S., domestic capacity ramped up as imports fell and global trade flows reshuffled to reflect the new cost curve. ASIX’s stock price rebounded as its ammonium phosphate business improved amid market adjustments.

The situation highlights that when low-cost production along a chemical value chain is concentrated in a specific region, such as China or the Middle East, the key signals for the cycle are not GDP but export volumes, netbacks for marginal producers, and the willingness of swing producers to flood the market despite poor economics. This was true in past examples, and it is still true today.

Nylon and Engineered Resins: Demand Shock Plus Overbuild

ASIX’s other main business segment, its nylon 6 production, has experienced its own unique cycles since the company came public.

When oil prices plunged in 2015 and into 2016, the prices of key nylon feedstocks also collapsed. Meanwhile, weak textile demand caused a margin squeeze for many producers. The pricing and demand downturn for nylon 6—also known as “polyamide 6” or “PA6”—is shown in the chart below.

Source: Wood Mackenzie, Domo Chemicals, “The past, future and present of the polyamide industry.” Jan. 4, 2019.

Heading into 2017, nylon 6 demand firmed amid rising automotive demand. The market grew tighter, and prices shot higher.

Then in 2019, two adverse shocks hit the market in succession. First, regulatory changes to emissions testing in Europe disrupted auto production and supplier ordering patterns. Second, expansion projects already underway in key intermediates did not stop as demand wobbled.

The third shock was delivered by the Covid downturn in 2020. This was the most severe. Global auto production fell off a cliff, freezing nylon-6 demand.

The outcome was a deep sector-specific recession characterized by awful spreads between products and their feedstocks, aggressive price cuts, and producers forced to reconsider what “mid-cycle” prices and margins could realistically be. Not surprisingly, the downturn pummeled ASIX’s financial results. Its stock price followed suit.

A marked pickup in auto demand did not drive the recovery that began at the mid-2020 lows. Instead, the adjustment process involved normalizing automobile build rates from low levels, digesting the projects already in the pipeline, and adopting a much more cautious approach to future capacity expansion. The industry realized that its former growth assumptions were too optimistic and that its capital intensity had to come down.

Tying Historical Precedents to Current Conditions

Today, chemicals are in a deep profit recession driven by persistent oversupply and weak pricing power, not a collapse in volumes. China is playing the familiar role of serial overbuilder and exporter across titanium dioxide, intermediates, nylon, olefins, and other products. Europe is being forced to rationalize as the high-cost producer, as high energy and carbon costs shove plants off the cost curve. End-market demand in housing, autos, and consumer durables is soft but hardly apocalyptic.

History shows that the cure for the current downturn is already embedded in the system: the destruction of marginal capacity, the cancellation of growth projects, and a gradual rebalancing of trade flows. The bad news is that this process is painful. The good news is that a macro shock is not required to start the healing.

Titanium dioxide and similar intermediates are experiencing classic titanium dioxide dynamics, characterized by heavy overbuilding, concentrated Chinese capacity, and significant environmental and regulatory pressure. The path out will look like the last titanium dioxide cycle, featuring closures of smaller Chinese producers, supply rationalization among high-cost Western assets, and modest demand growth playing its usual role. This time, the market will benefit from broad tariffs on Chinese products. Reduced Chinese supply to major importers will bolster the competitive position of the three non-Chinese producers that dominate half the market. The key will be to watch where enforcement tightens and where capacity that was assumed to be permanent starts to disappear.

The parallels between the previous nylon 6 cycle and the current one are obvious. At present, the auto and construction end markets are soft but not collapsing. Chinese capacity and exports have added incremental supply pressure to the market’s softness. The fix will be a combination of demand normalization, the selective exiting of capacity, and underutilization outside China. The pain is already visible in spreads and nylon 6 producer earnings. Notably, a formal recession did not trigger this downturn. Producers simply must reduce capex and remove marginal assets from operation. As they do, the market will rebalance.

A nylon 6 recovery will depend on demand returning to normal in autos and construction, as well as selective capacity shutdowns outside China. It will also require pricing discipline among U.S. producers. A new boom won’t be necessary to trigger a recovery, just a rebound from low activity levels and more cautious capital spending.

What to Watch on Supply

Investors in the chemical sector should monitor changes in capacity and capacity utilization, as well as capex plans among global producers. It will be important to determine whether announced closures in Europe and marginal Asian regions are actually occurring and whether they’re not mere talking points on quarterly earnings conference calls.

Investors will also want to make sure new projects are being outright canceled rather than pushed back a year. They should track whether management teams are truly pivoting from growth narratives to balance sheet repair and cash preservation. When management teams and boards of directors stop emphasizing their secular growth stories and start behaving as if capital is scarce, the likelihood increases that the cycle will resolve on its own.

Investors in chemical producers in the midst of a cyclical downturn should also monitor export volumes and exporter netbacks. The core issue will be whether the volume of Chinese exports flowing into key demand regions is tracking higher, beginning to roll over, or in decline. Additionally, they should determine whether netbacks for Western exporters are stabilizing and improving, or whether these market participants continue to fight for low-margin orders in competitive markets.

Any signs of tariffs, anti-dumping cases, or other trade barriers that alter the economics of dumping are also relevant. For titanium dioxide and nitrogen 6, the implementation of tariffs will signal whether a more typical industry retrenchment is underway in the chemical chains where swing exporters dominate the marginal barrel or ton.

Regarding demand, investors should not simply label it as “weak” or “strong.” Instead, they need to assess whether a chemical value chain cycle is deteriorating or stabilizing. Have order books stopped getting worse? Are signs of restocking replacing hand-to-mouth purchasing behavior? Is there any evidence that customers are accepting price increases in parts of the value chain? All these factors are more important to a cycle’s progress than the latest macro GDP print.

Importantly, chemical stock prices will turn higher before the fundamental upswing is evident in the data. The market will begin to price in the cyclical inflection from downcycle to upcycle when it believes growth capex is effectively dead, enough capacity has been removed, and most of the earnings damage is behind the sector.

Conclusion

Investors waiting for a macro GDP downturn before buying well-positioned chemical stocks at their current bargain prices are ignoring the mechanics that drive the chemical value chain cycles. Many need more pain for the marginal producers, more canceled projects, and more discipline from management teams that spent the last cycle believing their own growth decks. The key for investors is to determine how advanced a value chain is in its adjustment process.

Investors should identify chains where the adjustment process is in later stages, but stock prices don’t reflect this reality. They should invest in the companies best positioned to survive the downturn and thrive in the subsequent upturn. They should also have a grasp on these companies’ normalized earning power during recovery. Everything else is noise—even the stock price. The focus should be on securing a bargain purchase price, not precisely timing a recovery.

We’ve made our picks over the past few weeks and covered some of our new holdings in our articles. We remain on the hunt for attractive prospects. Investors seeking to play a potentially highly profitable capital cycle should consider joining us in initiating positions in their favorite chemical names now. For those interested in going deeper, Chemours, AdvanSix, and the Titanium Dioxide pure-plays are discussed below.

Part V: Chemours: A Capital Cycle Play with Big Upside

Chemours (CC) was formed on July 1, 2015, as a spinoff of DuPont’s (DD) more cyclical businesses. Chemours operates in three businesses: Thermal & Specialized Solutions (TSS), Titanium Technologies (TT), and Advanced Performance Materials (APM). In 2024, the company generated $5.8 billion in sales and $786 million in Adjusted EBITDA. This year, it is on track to earn approximately $750 in Adjusted EBITDA. It has an enterprise value of $5.6 billion. Its Adjusted EBITDA run-

Chemours Overview

Chemours shares have been on a steady decline since 2023, as shown below. The shares are currently priced at a discounted valuation characteristic of a cyclical trough.

The selloff has coincided with the decline in Adjusted EBITDA. This year’s estimated $750 million is down nearly half from the $1.4 billion generated in 2021.

The decline was driven by the ongoing three-and-a-half-year downturn in Chemours’ two cyclical operating segments. These segments have been hit by weak domestic housing and construction markets, Chinese overcapacity, and, most recently, tariffs. The three segments’ annual Adjusted EBITDA contribution since 2014 is shown in the chart below.

When combined, Chemours’ cyclicality is evident.

Given the strong likelihood of a recovery in Chemours’ fundamentals over the next three years and the significant upside potential in its shares amid such a recovery, the time is right for aggressive investors to consider Chemours’ stock for long-term purchase.

Long-term investors in the company must be familiar with its operating segments, their EBITDA generation potential, and their challenges.

Thermal & Specialized Solutions (TSS)

This segment represents Chemours’ refrigerants and thermal-management portfolio. Its core brands are Opteon refrigerants and foam blowing agents, as well as legacy Freon hydrofluorocarbon (HFC) and chlorofluorocarbon (CFC) products. TTS’s end markets are air-conditioning and refrigeration for automobiles and buildings, foam insulation for buildings, and aerosol propellants for niche applications.

The TSS segment is currently Chemours’ profit engine, with strong margins that I believe are both insulated from cyclical forces and are sustainable. The segment’s demand drivers are climate change regulations coming into effect, air conditioning replacement cycles, and new construction.

This segment is a leading beneficiary of a movement by governments to force a refrigerant technology transition away from HFCs and to refrigerants with low global warming potential. In the U.S., the AIM Act is phasing down the production and consumption of HFCs. The leading replacement has been hydrofluoroolefins (HFOs), and Chemours, along with Honeywell, holds a patented duopoly with its Opteon HFO product.

In the third quarter, TTS generated $560 million in sales, a 20% year-over-year increase. The increase was driven by 8% higher volumes and 11% higher prices. The Adjusted EBITDA margin came in at a historically healthy 35%. An 80% increase in Opteon sales drove the performance. Sales of the product now account for more than 75% of TSS segment sales. The impact of Opteon’s growth is illustrated in the table below, which depicts TTS’s third-quarter results.

Source: Chemours’ Q3 2025 Earnings Press Release, Nov. 6, 2025.

Clearly, Opteon’s growth is more than offsetting the shrinkage in Chemours’ legacy Freon and foam volumes, as expected.

Titanium Technologies (TT)

Chemours’ Titanium Technologies segment houses its Ti-Pure titanium dioxide pigment business. Titanium dioxide is a whitening agent and opacifier in paints, cosmetics, and other goods. Chemours is the second-largest producer of titanium dioxide in the global market, which is dominated by four firms. This segment is extremely cyclical, and its downcycle has been responsible for crushing Chemours’ Adjusted EBITDA. However, I believe the titanium dioxide market is near its cyclical trough, and drill more deeply into the topic in a later section below. As the cycle turns upward, it will drive most of Chemours’ Adjusted EBITDA recovery over the coming years.

The TT segment’s demand drivers include pigment demand from the paints and coatings, plastic, paper, automotive, architectural, and construction industries.

In the third quarter, TT generated sales of $612 million but only $25 million in Adjusted EBITDA, representing a 4% margin, due to an 8% decline in global titanium dioxide prices and a 2% decline in the segment’s sales volumes.

Advanced Performance Materials (APM)

This segment is Chemours’ high-end fluoromaterials portfolio. Its main products are Teflon fluoropolymers and coatings, Viton fluoroelastomers, Krytox specialty lubricants, and Nafion ion-exchange membranes.

Its products are used in semiconductors and advanced electronics, automotive applications, and energy transition applications such as hydrogen electrolysis and fuel cells.

APM is less cyclical and enjoys sustained higher margins. However, it is Chemours’ smallest Adjusted EBITDA contributor and is currently being negatively impacted by sluggish industrial end-user demand.

In the third quarter, the segment generated $311 million of sales and $14 million of Adjusted EBITDA. Volumes were down 15% year-over-year.

Investment Thesis

Chemours is a basic long-term capital-cycle play. Its investment thesis is comprised of three main parts, discussed in turn below.

Part 1: HFO Demand Growth

The first part of Chemours’ investment thesis pertains to its TSS segment. The U.S. is undergoing a large-scale transition from HFCs to HFOs. HVAC regulations began requiring the use of HFOs on January 1, 2025. Light automobiles are also already mandated to use HFOs. Medium and heavy-duty automobiles are required to switch by 2028, and industrial HFO uses are being phased in through 2028.

The switch to HFOs will boost TTS Adjusted EBITDA for years. Chemours’ HFOs are priced multiple times higher than its legacy Freon product. For example, auto makers pay $75 to $80 per kilogram of HFO versus $15 to $35 per kilogram of the legacy product. Royal Refrigerants, an online retailer, lists a 25-pound tank of Opteon for automotive use at $890, or $35.60 per pound. It lists a 30-pound tank of automotive Freon at $338, or $11.27 per pound. The improved pricing on HFO translates into more than a 20% increase in Adjusted EBITDA margin for the TTS segment.

As HFOs are more widely adopted and/or as macro demand for the product increases, Chemours will benefit from the additional Adjusted EBITDA. Chemours should be able to grow its TSS revenue at a high single-digit percentage rate. The segment’s Adjusted EBITDA is likely to grow at a rate more than twice that.

Also notable is that as Chemours’ Freon sales have declined, the company has been left with an inventory oversupply of lower-priced product. This has created a temporary drag on the company’s financial results. That drag is dissipating, which will help improve comparable quarterly results going forward.

I estimate that Adjusted EBITDA margins from Opteon sales are in the low-40s%, which is high for the chemical industry. Adjusted EBITDA will therefore receive a significant boost as sales volumes increase.

Assuming a conservative 5.0% annual sales growth from the TTS segment over the next two years, and that the segment generates a 36% Adjusted EBITDA margin, its EBITDA contribution in 2028 would be $830 million.

Part 2: Titanium Dioxide Recovery

As I discuss below, I believe the titanium dioxide market is poised for a cyclical recovery. The TT segment’s Adjusted EBITDA contraction is responsible for the lion’s share of Chemours’ Adjusted EBITDA decline over recent years, so a recovery will likely drive Chemours’ combined Adjusted EBITDA significantly higher.

The TT segment also experienced unexpected downtime due to production outages in the U.S. and Mexico. These outages have been resolved.

The TT segment is working through internal cost reductions that management has billed as structurally reducing costs by $125 million. However, cost savings will likely exceed that amount by a significant margin. Management expects that these initiatives, combined with Chemours’ technological advantages in titanium dioxide production, will make the company one of the lowest-cost producers globally, based on production cost per ton.

Chemours needs only a modest swing in the titanium dioxide cycle to realize a significant boost in the TT segment’s Adjusted EBITDA. Assuming TT revenues revert to a mid-cycle level of $2.5 billion and the company achieves its 10-year average Adjusted EBITDA margin of 20%, the segment will generate $500 million in Adjusted EBITDA. As the cycle inflects higher, Adjusted EBITDA will increase further. In fact, Adjusted EBITDA increases can exceed TT’s historical recovery trends if the segment’s cost-reduction initiatives prove successful.

Part 3: “Other” (An APM Recovery & Data Center Cooling Technology)

A cyclical recovery in Chemours’ APM segment’s end markets will also contribute materially to Chemours’ Adjusted EBITDA recovery over the coming years.

In the third quarter, APM generated $311 million in sales and earned $14 million of Adjusted EBITDA, for a 5% margin. Volumes fell 15% from the previous year. Since 2014, APM’s Adjusted EBITDA margin has averaged 12%, so an improvement in volumes and Adjusted EBITDA stands to add more than $100 million to Adjusted EBITDA annually, for a total normalized segment Adjusted EBITDA contribution of approximately $200 million.

Data center cooling technology is more of a wild card in Chemours’ investment thesis. Nevertheless, it is important because of the significant value it would represent for the company if widely adopted.

For decades, Chemours has demonstrated its ability to innovate, roll out the innovations at scale, and profit as they are commercialized. The company’s newest focal point for innovation is its data center cooling technology.

Chemours has developed a proprietary fluid for two-phase immersion cooling in data centers. Since data center processing speed is directly correlated with heat levels, continued advances in processing will drive increased needs for data centers to dissipate heat. In fact, rising costs for heat reduction will become a major limiting factor on data center growth. Immersion cooling is a promising cooling technology in which data center hardware is submerged in a non-conductive fluid that absorbs heat more efficiently than air.

Chemours is a leader in developing these fluids through its expertise in HFOs. Only it and Honeywell control the patents needed to scale up this immersion cooling technology.

The issue with this technology stems not from its viability, which is proven, but rather from the timing of its implementation. Data centers must be specifically designed to accommodate the technology, so the challenge for a wide-scale rollout will be to partner early with data center owners and developers. At the moment, it appears that a rollout isn’t likely until 2028. As a result, the technology’s economics and long-term potential remain a mystery. Still, Chemours has partnered with digital infrastructure providers and manufacturers to prepare for a rollout.

I won’t take a stab at rendering an Adjusted EBITDA estimate for Chemours’ data center cooling business due to all the unknowns. Instead, I’ll regard the business as a valuable call option to the company’s intrinsic value. What is clear, however, is that the effort has considerable upside potential for Chemours, with minimal downside.

PFAS Liabilities and Other Risks

The ugly part of Chemours is its “per- and polyfluoroalkyl substances,” or “PFAS” liability. This should be front and center for any investor in the company.

PFAS is a class of chemicals known as “forever chemicals” because they don’t break down easily. DuPont began using PFAS in the production of Teflon in 1946. By the 1960s, DuPont knew the chemical was toxic to animals and accumulated in human blood. DuPont’s West Virginia manufacturing plant discharged PFAS into the air and water in the Ohio River Valley, the source of drinking water for more than 70,000 people.

Chemours was saddled with part of DuPont’s PFAS legal and financial burden when it was spun off from DuPont. As such, it is responsible for shouldering a portion of the remediation and other costs.

In 2021, Chemours, DuPont, and DuPont’s agriscience spinoff, Corteva (CTVA), entered into a settlement to resolve legal disputes and established a cost-sharing arrangement to support future PFAS liabilities. The terms of the settlement are spelled out in this press release, a key part of which is excerpted below:

Source: Chemours Press Release, Jan. 22, 2021.

The most recent PFAS development occurred in August, when Chemours, DuPont, and Corteva agreed to an $875 million settlement with the State of New Jersey over PFAS and other environmental claims. Chemours will pay 50% of the approximately $500 million present value of the settlement over 25 years.

In a separate case, a federal judge ordered Chemours to stop unlawful PFAS discharges from its Washington Works facility into the Ohio River, highlighting ongoing reputational and compliance risk.

The greatest uncertainty regarding PFAS litigation stems from personal injury and landfill-related claims if regulators pursue waste operators and manufacturers. There is no reliable way to estimate this potential liability at the moment.

PFAS is therefore an overhang on Chemours’ stock price, and potentially also on its capital allocation. Its most recent financial statements estimate a PFAS environmental remediation liability of $607 million and an accrued litigation liability of $207 million, for a total liability of $814 million as of September 30. In my analysis, I have assumed an obligation of $1.4 billion, which I believe is conservative.

Another risk to Chemours stems from the lapse of its refrigerant patents. Most of the patents that protect its Opteon business will remain in force into the early 2030s. The company is working on new formulations to extend its protection, but there is no guarantee of success.

Chemours also faces execution risk if it continues to add HFO production capacity as planned and demand fails to pan out as the company expects.

Valuation

The Chemours investment thesis hinges on the company’s Adjusted EBITDA margins inflecting upwards over the coming years, as illustrated in the chart.

The TTS segment margins should increase from additional high-margin HFO sales, while the TT and APM segment Adjusted EBITDA should increase more significantly as their respective cycles turn.

I don’t know when APM and TT’s cycles will turn with any precision, but I’m highly confident that, first, they will turn, and second, that Chemours’ stock will move higher well in advance of the upturn. The return upside from Chemours’ current depressed stock price is simply too large for the shares not to move aggressively upon the first glimmer of a sustained recovery.

Chemours is currently trading at an EV/Adjusted EBITDA valuation of approximately 7.5-times, at the high end of its historical range.

Using the Adjusted EBITDA estimates for 2028 for each operating segment, as discussed in my investment thesis above, I expect Chemours to earn roughly $1.5 billion in Adjusted EBITDA before corporate expenses. Applying a 7.0-times EV/Adjusted EBITDA ratio and assuming $3.5 billion of net long-term debt, a PFAS obligation net present value of $1.4 billion, $250 million of corporate overhead, and 150 million shares outstanding, Chemours shares are worth $27 per share, which implies 125% upside from their current price of $12.

In a bull scenario that assumes robust growth of the TTS segment and cyclical-high Adjusted EBITDA from the APM and TT segments (specifically, TTS’s Adjusted EBITDA reaches $925 million, TT reaches $800 million, and APM reaches $250 million), corporate overhead of $250 million, net long-term debt of $3.5 billion, and a PFAS liability of $1.4 billion, Chemours’ Adjusted EBITDA would be $1.7 billion. At a slightly lower EV/Adjusted EBITDA valuation of 6.0-times to account for a cycle-high discount, Chemours’ stock would be valued at $36, for 200% upside.

In a downside scenario that assumes 2028 Adjusted EBITDA of $1.2 billion, a 6.5-times EV/EBITDA multiple, $3.5 billion in net long-term debt, and a $2.5 billion PFAS obligation, the shares would trade at $14, still above today’s price of $12. The margin of safety between price and value that exists in an adverse scenario is one of the reasons I like the shares below $14.

Chemours investors should also keep in mind that the shares have further upside if the immersion-cooling initiative pans out. For perspective, an additional $200 million of Adjusted EBITDA would increase Chemours’ valuation to $35 per share, and $44 per share in the bull scenario sketched above.

Conclusion

The Chemours thesis has some “hair,” to be sure. Shareholders must gauge the PFAS risk and its impact on the company’s valuation. However, the issue has weighed on Chemours’ market valuation in the past. It continues to do so, and even if it persists, it’s unlikely to prevent the shares from rallying amid a cyclical recovery. Consider, for example, that in the 2017-2018 timeframe, Chemours shares traded above $50 at a 6.5-times EV/EBITDA valuation on $1.4 billion of Adjusted EBITDA.

This time around, I believe a price above $30 is achievable in the next three years, for a compound annual total return of 37% for investors buying today at $12. Such a return should be more than satisfactory for aggressive investors who have the patience to hold through the inevitable volatility in the share price. Given these returns, I believe investors should consider buying Chemours shares today.

Part VI: AdvanSix: An Opportunity to Buy at Cyclical Lows

AdvanSix (ASIX) was spun off from Honeywell on October 1, 2016, to create a company that could focus on pursuing its unique growth strategy. ASIX occupies a low-cost position in several niche chemical products. The company’s products face an oversupply and weak demand, which is removing capacity. Prices are currently unsustainable, and ASIX is positioned to thrive once conditions improve.

The stock has trended lower since hitting its last cyclical peak in 2022.

Stocks like ASIX generate the highest returns when they’re bought at cyclical lows, when industry conditions and investor sentiment are in the dumps. That’s where ASIX is today, which makes its stock an attractive long-term buy.

ASIX Overview

ASIX operates an integrated chemical manufacturing chain with five production sites across the U.S. The company converts cumene, ammonia, sulfur, and other feedstocks into nylon 6 resin, caprolactam, ammonium sulfate, and various phenol and acetone-based intermediates. Through its vertical integration, it captures value at each step of the production chain, lowering unit costs and improving margins.

Nylon 6 & Caprolactam

Nylon 6 and caprolactam account for approximately 41% of ASIX’s revenue. The split is 23%/18% between nylon and caprolactam. Plant nutrients account for 30% of revenue, while various chemical intermediates account for the remaining 29%.

Approximately 90% of ASIX’s sales take place in the U.S. Its customers operate across U.S. industry in construction, fertilizer, agrochemicals, plastics, solvents, packaging, adhesives, and electronics. Its U.S.-centered operations provide an additional competitive advantage from lower transportation costs and logistical advantages relative to global competitors selling in the U.S. ASIX’s U.S. weighting renders it exempt from the reciprocal tariffs that have negatively impacted its domestic competitors, most of which are large, diversified chemical companies.

ASIX’s products are derived from the chemical chains illustrated in the graphic below.

Source: AdvanSix 2024 10-K.

Nylon 6 is used to make fibers for textiles, automotive parts, carpets, clothing, and engineering plastics such as gears and bearings. Its strength and heat resistance make it an effective electrical insulator, while its durability makes it suitable for packaging.

Caprolactam is the key feedstock to nylon 6. ASIX is the global low-cost caprolactam producer, which confers a durable competitive advantage as long as end markets are not glutted, as they are today. The caprolactam market is consolidated, with the top three producers, Fibrant, BASF, and Sinopec, holding more than 30% market share.

As in other chemical segments, global supply capacity for nylon 6 and caprolactam has expanded significantly in recent years, with China leading the charge. At the same time, global demand has been weak. The combination of rising supply and tepid demand led to price declines. Low prices for both caprolactam and nylon 6 have driven margins and capacity utilization lower since 2023. ASIX provided the following data on the nylon market in its third-quarter earnings call presentation.

Source: AdvanSix Q3 2025 Earnings Presentation, Nov. 7, 2025.

The removal of high-cost supply will drive an initial recovery. The recovery will progress as capacity utilization rates increase.

The outlook is more constructive over the longer term. Nylon 6 and caprolactam are expected to grow at a mid-single-digit rate through the early 2030s, driven by higher demand for auto parts, plastics, electronics, and textiles.

Ammonium Sulfate

The Raschig process by which ASIX produces nylon 6 throws off significant volumes of ammonium sulfate, which the company sells as fertilizer. Ammonium sulfate is nitrogen-rich, providing plants with the nitrogen and sulfur they need to grow.

Ammonium sulfate’s near-term outlook is brighter than nylon’s, as end markets are not glutted. Ammonium sulfate is also expected to grow in the mid-single-digit percentage range over the coming years, driven by higher demand from agriculture. Agricultural demand from year to year depends on crop prices and planting intensity.

Sulfate demand has remained robust even in recent quarters. ASIX is currently transitioning its product toward “granular ammonium sulfate,” which is easier to spread, slower-releasing, and has higher sulfur content than common substitutes. Due to its various benefits, the granular product is sold at a premium.

By the end of 2025, ASIX will have transitioned 72% of its ammonium sulfate production into higher-margin granular form. The company has dubbed the transition to granular its “SUSTAIN” program. The program is aimed at increasing the company’s granular ammonium sulfate capacity by 200,000 tons, which fetches a premium of $75 per ton. The premium stands to increase ASIX’s mid-cycle Adjusted EBITDA by more than $15 million annually.

ASIX’s SUSTAIN program has consumed most of its growth capex in recent years. The project is slated for completion in 2026, and capex should decline in 2027 and beyond.

Chemical Intermediates

In addition to ammonium sulfate, ASIX’s nylon 6 manufacturing process throws off various chemical intermediates that the company also sells. These products include phenol, acetone, and other co-products. Growth from these chemical intermediates is expected to track in the low single digits over the coming years.

ASIX benefits from structurally higher acetone prices and margins attributable to U.S. antidumping tariffs. Imports have declined from 230,000 tons in 2018 to 64,000 tons in 2024, driving acetone-propylene spreads from $0.10 per pound to a sustainable range of $0.15 to $0.20 per pound. The larger spread stands to add approximately $30 million to ASIX’s mid-cycle Adjusted EBITDA.

Undergoing a Cyclical Downturn

To appreciate the extent of the downturn in which ASIX finds itself, consider that in 2022—which can be used as a benchmark for a high-margin year—ASIX generated $1.9 billion in revenue and $308 million in Adjusted EBITDA, for a margin of 15.9%.

Conditions deteriorated dramatically beginning in 2023. That year, a 22% decline in selling prices amid flat volumes sent revenues down to $1.53 billion. Adjusted EBITDA fell to $154 million, for a 10% margin. In 2024, revenue was flat while Adjusted EBITDA declined to $142 million, resulting in a 9.4% margin.

The downturn has persisted in 2025. In the first nine months of the year, ASIX reported $1.16 billion in revenue—down 2% from the 2024—and $132 million in Adjusted EBITDA, for a margin of 8.8%. Moreover, margins have trended lower. In the third quarter, ASIX’s Adjusted EBITDA margin declined further, to 6.6%. The culprit of the margin decline was lower nylon 6 volumes. Looking ahead, the fourth quarter is the company’s seasonally weakest. Prices remain low, so margins will remain weak.

ASIX’s capex has been high in recent years to fund its SUSTAIN program investments. Capex is slated to remain high in 2026, then decline in 2027 and presumably thereafter, as shown in the slide below.

Source: AdvanSix Q3 2025 Earnings Presentation, Nov. 7, 2025.

Once ASIX completes its growth projects, it will benefit from increased operating cash flow and lower capex, boosting free cash flow. The higher profit margins, returns on capital, and free cash flow resulting from ASIX’s recent capex hold the prospect of pushing the company’s profitability above previous cyclical highs over the coming years.

Despite the higher capex, ASIX has remained free cash flow positive in 2025. The $32.3 million in free cash flow it has generated year-to-date, after adjusting for working capital changes, is equivalent to $1.20 per share.

ASIX’s balance sheet is strong, with $250 million drawn on its revolving line of credit and equity of $824 million.

Attractive Investment Characteristics

ASIX shares trade at a 4.5% dividend yield at their current price of $14.40. The dividend is sustainable even at today’s market conditions, which are characteristic of a cyclical low. At its current trailing-twelve-month Adjusted EBITDA of $142 million, the company should be roughly cash flow neutral in 2026, assuming the $110 million of capex indicated in management’s guidance. The company’s $0.16-per-share quarterly dividend should be safe barring a further deterioration in end-market conditions.

The company’s competitive position is superb, albeit in a pure commodity market. ASIX benefits from its position as the leading global low-cost producer of caprolactam and Nylon 6. It derives its competitive advantage from its integration of the entire nylon 6 chemical production chain. ASIX’s competitive advantage is durable because its foreign competitors are unable to replicate its production configuration, logistics, and cost advantages. The upshot is that ASIX occupies a dominant position with BASF in U.S. caprolactam and nylon 6 production. The company’s status as a low-cost producer enables it to remain profitable at lower prices than its competitors while also running at higher capacity utilization rates.

ASIX is also competitively advantaged as a low-cost ammonium sulfate producer. It owns and operates the largest production facility in the U.S.

The company derives another competitive advantage from low natural gas supply costs. Natural gas is a raw material in the production of caprolactam and ammonium sulfate, as well as a source of energy for the company’s production facilities.

At the moment, the ammonium sulfate market is relatively healthy. The segment will serve as ASIX’s profit center as the domestic nylon 6 market works off its oversupply.

ASIX’s relatively small size in its industry and its attractive, sustainable, low-cost position in niche chemical markets in which producers earn attractive full-cycle returns on capital make it an attractive acquisition candidate. If the stock stays at its current price, I believe an acquisition at a significant premium is likely.

Valuation

Given ASIX’s trailing-twelve-month Adjusted EBITDA of $142 million and an enterprise value of $770 million, its shares currently trade at 5.5-times EV/Adjusted EBITDA—at a low point in the nylon 6 cycle. This low multiple fails to discount any improvement in the company’s financial results going forward, despite the likelihood of a cyclical recovery.

On a normalized mid-cycle Adjusted EBITDA of $200 million, ASIX trades at an EV/Adjusted EBITDA multiple of 3.9-times. A proper valuation at that point would apply a 6-to-8-times multiple, for a stock price of $30 to $45 per share. The lower bound of this value range is equal to the company’s book value per share and stands more than 100% above the current stock price.

I estimate that ASIX can generate cycle-high Adjusted EBITDA in the $250 to $300 million range. On that figure, the stock trades at a 2.8-times EV/Adjusted EBITDA.

Cycle-high Adjusted EBITDA is also consistent with earnings per share of $4.70 and free cash flow per share of $5.10. Applying a ten-times multiple puts the cycle-high share price at around $50. Such a price is consistent with ASIX’s previous cyclical high price achieved in 2022. That year, the company earned Adjusted EBITDA of $308 million and diluted earnings per share of $5.92.

At five-times cycle peak Adjusted EBITDA, ASIX shares would trade at approximately $40, versus the current price of $14.30.

Another way to look at ASIX’s equity value is that the company’s book value per share stands at $30.45. Assuming it can earn a mid-teen return on capital—as it has in the past—then earnings per share would be approximately $4.50, which is also consistent with a mid-$40s share price at a ten-times P/E.

Risks

ASIX investors risk having to sustain a prolonged downturn in nylon 6. They should therefore be ready to endure lower prices as the nylon 6 cycle bottoms out. Importantly, the company’s heavy weighting in the domestic market, its products’ low-cost positions on their respective cost curves, and its strong balance sheet mean that it will survive the ongoing downturn and benefit disproportionately when the upcycle arrives.

The cycle will eventually turn. High-cost nylon 6 supply is currently operating at a significant loss. As such, it will have to be rationalized through facility closures, idling, and consolidation. Prices are so low that even low-cost producers—including ASIX itself—are moderating volumes and lowering their capacity utilization. Clearly, the current market dynamics are unsustainable for the industry, which makes an upturn all the more probable.

Among the other risks for ASIX investors would be an unexpected falloff in fertilizer demand and significantly higher-than-expected capex, which would reduce free cash flow.

Conclusion

ASIX shares will turn higher well before the recovery in its end markets is clear. Nearly every investor has AI at their fingertips, so the ability to detect a turn in the macro is more widely available than it’s ever been. The only reliable edge an investor can have is time arbitrage over the course of a capital cycle. Since the duration of the downturn is not knowable—its turn is only discernible in hindsight—owning shares in low-cost producers is paramount to a successful investment outcome. This is what an investor obtains with ASIX.

In capital cycle investing, the best times to buy are when the outlook is bleak. ASIX investors should adopt a three-year investment horizon and be prepared to hold until the recovery takes effect. Short-term paper losses are part of the process. But the massive returns on offer for those who can buy make them well worth the temporary inconvenience.

Now is a good time to buy beaten-down cyclical chemical names, and ASIX is one of the best.

Nylon is one expression of the cycle. Titanium dioxide is another—often more volatile, and often faster to reprice once supply finally tightens.

Part VII: A Titanium Dioxide Market Recovery Appears Imminent

The titanium dioxide market is in a historic downturn that has gone on for three-and-a-half years. Over that period, the negative cyclical forces have gone a long way toward reducing supply to today’s tepid demand conditions. In the process, they’ve set the stage for a recovery.

The titanium dioxide market’s brutal downcycle has forced significant changes, improving its macro outlook. The downcycle flushed out weak industry players, forced larger players to operate in a more disciplined manner, reduced producers’ inventories, brought about anti-dumping regimes in key importing regions, and curtailed production capacity to a point where even a slight demand uptick will drive titanium dioxide prices higher.

These and other market changes have laid the groundwork for a cyclical recovery over the next few quarters, assuming demand remains flat or improves. If the worst of the downturn truly is in the rearview mirror, the industry should enter the 2026 contract season with tighter supply and better pricing prospects than many headlines suggest. If prices or volumes show any indication of ticking higher, their stocks are likely to surge in anticipation of a recovery.

Temporary Factors Drove Third-quarter Weakness

Third-quarter results are in for the major titanium producers, Tronox, Kronos Worldwide, and Chemours. The results show that market conditions during the quarter were far weaker than these companies had expected earlier in the year. Notably, several of the most significant factors contributing to the weakness were temporary in nature.

For one, Venator’s insolvency caused it to liquidate its titanium dioxide at below-market prices. The surge in supply amid tepid demand led to prices declining more than expected. The situation was particularly acute in Europe, where Venator and Kronos have a significant presence. In their third-quarter earnings conference calls, the management of the major titanium dioxide producers alluded to the fact that this inventory liquidation will persist through the end of the year. Once it has run its course, however, the supply-demand picture will tighten, and prices are likely to rise.

Aside from Venator, other distressed global producers have dumped their titanium dioxide inventory onto the market regardless of price. Prices can recover once this excess supply is absorbed.

Each of the major market participants has slimmed down its inventory levels, consistent with late-cycle behavior in commodity cycles. Lower inventories tend to shorten the remaining duration of the downturn. Any uptick in demand in these conditions can cause prices to surge.

Another temporary negative factor that depressed the market in the third quarter was India’s stay of anti-dumping tariffs on titanium dioxide. The stay allowed low-priced Chinese producers to surge their exports to India. The supply surge weakened Asian titanium dioxide prices, with negative knock-on effects on the global market.

Fortunately, India’s stay was imposed by a court on procedural grounds. As such, it’s likely to be reversed over the coming weeks. India is the second-largest importer of titanium dioxide, so import tariffs will strengthen supply and benefit producers outside China.

Another temporary negative during the quarter was the downstream destocking by customers in the coatings industry. These customers cut their titanium dioxide orders deeper and earlier than usual. However, Tronox management indicated that order patterns have already begun to normalize in the fourth quarter. Once the working capital adjustment among downstream customers is complete, demand for titanium dioxide feedstock can improve.

The Supply Side Will Drive the Recovery

Commodity market recoveries begin when supply has fallen in line with or below demand. The titanium dioxide market appears to have reached this point.

The main factor behind the market’s recovery potential is the unprecedented amount of global production curtailments. Literally every producer of size has either permanently shut down or idled capacity. Furthermore, the production facilities in operation today have cut back on volumes.

All in all, several management teams have cited 1.1 million tons of production curtailments in a global market that stands at approximately 10.0 million tons per year. The supply adjustment bodes well for prices going forward. It gives me the confidence to state that a recovery isn’t a matter of “if,” but of “when.”

The second most important factor driving a recovery in the titanium dioxide market is the imposition of anti-dumping measures. These measures have been enacted in the U.S., the European Union, Brazil, Saudi Arabia, and elsewhere. The measures are intended to increase the industry’s competitiveness relative to Chinese competitors, which benefit from low coal-based electricity costs, lower labor costs, and more lax environmental regulations. Chinese producers also receive government subsidies that make them even more price-competitive on the global stage.

The anti-dumping measures are having a significant impact. In the U.S., Section 301 tariffs have reduced titanium dioxide imports to 90,000 tons per year in a market that consumes one million tons per year. Meanwhile, anti-dumping measures imposed by the EU, Brazil, and Saudi Arabia are set to protect a market that consumes a combined 1.2 million tons per year.

Anti-dumping measures put in place to date have eliminated approximately 800,000 tons per year of low-cost titanium dioxide from the global market. To illustrate their impact, Tronox included this slide in its investor presentation. While the measures don’t eliminate Chinese imports, they do significantly reduce them.

Source: Tronox Q3 2025 Earnings Presentation, Nov. 6, 2025.

Since the anti-dumping measures are all being applied at the same time, they’re putting a major dent into Chinese dumping. This will be a major factor in a titanium dioxide price recovery.

With fewer export channels, titanium dioxide inventories are piling up in China. Higher inventories are depressing domestic prices and forcing a supply rationalization that includes permanent closures of production facilities and consolidation among weaker producers. The reduction of low-cost supply will benefit the titanium dioxide market for years.

Another positive development that will hasten a recovery is Venator’s insolvency. Venator, which declared insolvency in May, had been the fifth-largest global titanium dioxide producer in a market where the top five producers accounted for more than 50% of global output. Venator’s exit whittles down the number of dominant producers to four. The removal of the fifth-largest producer will allow the remaining four to gain share. Kronos is particularly well-positioned. It is the best positioned to win market share from Venator’s exit from Europe and has acquired Venator’s 50% interest in the U.S. Louisiana Pigment Company.

Venator’s exit will reduce the urgency among the remaining major producers to undercut each other based on price. In effect, it’s a step toward oligopoly in the industry, just as trade measures are removing a large share of the lowest-cost supply. The market can enter 2026 with far more favorable competitive dynamics for producers than it entered 2025.

Another positive outcome from the downcycle has been that large titanium dioxide buyers increasingly favor larger producers as suppliers. After more than three years of reliability issues, insolvencies, and supplier plant shutdowns, buyers are committing to the “Big Three” outside of China, namely, Chemours, Tronox, and Kronos. These dominant producers are insulated against broader market turbulence through their partial or full vertical integration. They operate in multiple regions, can better meet customers’ product specifications, and can swing volumes across their various plants.

The shift toward the larger producers will enable them to emerge from the current downturn with greater market share and better line of sight regarding contract volumes and duration.

Altogether, these factors are likely to drive titanium dioxide prices higher. Even a low-to-mid-single-digit price increase will push the major producers’ operations into positive free cash flow territory. At that point, their survival will no longer be in question, and their stock prices should trade significantly higher.

Risks

These are among the most volatile stocks in the market, so investors should expect significant price swings. Positions should be sized to withstand the inevitable large selloffs, which I expect to be severe, yet temporary, before a market recovery carries the entire group much higher.

For Kronos and Tronox, dividends are at risk if the market doesn’t turn higher over the coming quarters. Buyers of these stocks should not count on the continuation of dividends.

From a fundamentals perspective, the largest risk is a decline in titanium dioxide demand from today’s already weak level. Several demand variables could cause volumes to decline and force further retrenchment among global titanium dioxide producers. Foremost among these risks are a falloff in U.S. housing activity and a deepening European economic contraction.

Lastly, a recovery could be put at risk if policies in importing nations dilute the impact of anti-dumping measures.

Conclusion

Titanium dioxide is a cyclical market that is possibly probing its cyclical trough. Investors looking to play a recovery from a deep cyclical downturn should consider the titanium dioxide producers. In order of risk, from lowest to highest, investors should consider Chemours, Kronos, and Tronox. The list is reversed in terms of upside potential from current prices. A basket approach, in which an investor holds all three at whatever weighting makes sense, is also worth considering.

The cyclical trough is the time when sentiment among market participants and observers is at its lowest, and headlines about the industry are the scariest. It’s also the hardest time to step up and buy. Nevertheless, I’m confident that it is only a matter of time before the titanium dioxide cycle inflects. When it does, long-term investors who can hold through the selloffs and make it to the other side will be amply rewarded with multi-bagger returns.

With the market backdrop set, we can move to a higher-beta expression of the same cycle, where company-specific actions can magnify the recovery.

Part VIII: Tronox: Improving Prospects in 2026 and Beyond to Drive Shares Higher

Tronox is a recovery play on the titanium dioxide market with added kickers from company-specific developments. I’ve followed the company’s ups and downs since 2012, and I believe this is a good time to initiate a long position.

Today, finds itself in one of its industry’s most protracted downturns. The downturn’s length is attributable to aggressive new Chinese competitors and tepid global demand. Tronox’s revenues have trended lower since 2021, tracking the downturn in the titanium dioxide market.

Historically, the company has exhibited some of the most extreme cyclical price swings of any company I know. The chart below illustrates how closely its share price follows the ups and downs of titanium dioxide prices. It depicts the market’s swings that occurred from 2010 to 2021.

Sources: Venator May 2023 Investor Presentation, Yahoo! Finance Oct. 28, 2025. Black-dotted lines and highlights added by author.

Today, I believe Tronox is in another cyclical trough. While the duration of the trough can’t be known with any degree of precision, improvements within the company are set to boost EBITDA and cash flow in 2026, which, in turn, should support its stock price. By the time the titanium dioxide market shows signs of a recovery, I expect Tronox shares to be bid far above their current price.

Investment Thesis

Tronox’s investment thesis has three parts.

First, protectionist anti-dumping measures are likely to benefit titanium dioxide producers outside of China in 2026.

Second, Tronox’s cost reduction initiatives will boost EBITDA and cash flow in 2026. Third, the titanium dioxide market will recover once inventories are depleted and demand returns, driven by increased construction spending and growing GDP.

Third, after the company’s EBITDA and cash flow improve in 2026, I expect the titanium dioxide market to recover in 2027. Even a mild recovery will turbocharge the stock’s upside move.

I expect these factors to send Tronox shares more than 100% above their current price over the next two years, and even higher over subsequent years. Tronox is most appropriate for long-term holding, and investors must be prepared to stomach the inevitable volatility during their holding period.

Titanium Dioxide Market and Protectionist Measures

Titanium dioxide is the primary pigment used to whiten paints, coatings, and plastics. Its demand is tied to activity in construction, housing, automobile manufacturing, and to broader GDP.

The titanium dioxide market is dominated by four firms, which combined account for around 50% of the global market. These are the China-based LB Group, Chemours, Tronox, and Kronos. Smaller operators based in China and Europe account for most of the remainder of the market. Chinese production accounts for approximately 60% of total global production.

The titanium dioxide market is expected to grow significantly through 2030, as shown in the chart below.

Source: Grand View Research.

LB Group, based in China, is the world’s largest producer of titanium dioxide. It has grown market share at the expense of its three Western competitors. Its low-cost electricity and labor, coupled with relatively lax regulatory requirements, give it a competitive advantage. However, increasing trade protection measures in the EU, Brazil, Saudi Arabia, and the EAEU (comprised of Russia, Kazakhstan, Belarus, Armenia, and Kyrgyzstan) have sought to level the playing field between the Chinese producers and their global peers. In the U.S., while titanium dioxide imports haven’t been targeted directly, they are subject to the 25% “Section 301” tariff overseen by the U.S. Trade Representative.

Most titanium dioxide tariffs have been enacted throughout 2025. The measures have already been effective. By May 2025, China’s titanium dioxide exports had already fallen by approximately 20%.

Additionally, titanium dioxide markets in consuming countries are set to improve, with lower supply amid stable demand set to increase prices. Before protectionist measures are implemented, major titanium dioxide buyers tend to front-load their purchases from low-cost producers that will be subject to tariffs. These purchase orders dampen demand after the protectionist measures are enacted. Eventually, however, they are likely to boost prices for producers outside of China. I expect the market to benefit from the measures in 2026 and beyond. If Chinese product has fewer export destinations, LB Group’s margins could come under pressure at home, further weakening its competitive position in the global market.

Cyclical Forces Will Facilitate a Recovery

Excess production amid international tariffs has caused excess titanium dioxide product to flow to the U.S and Japan. Even with tariffs, these countries’ producers can be undercut by Chinese imports, particularly in the standard rutile titanium dioxide grades. However, domestic producers of premium and specialty grades tend to face far less competition from foreign sources. Higher inventories have pushed prices lower. Tronox

The titanium dioxide market will recover in time. Cyclical forces are already at work. Most producers have idled their high-cost plants. Tronox idled its Botlek pigment site in the Netherlands, which accounts for approximately 8% of its production. Chinese producers have idled some capacity amid weak market conditions.

I don’t have any special insight into when this cycle will turn, but I am certain of two things. First, these stocks are best bought for long-term holding when the outlook is at its most grim. Second, the first indication that the market is improving will send these stocks surging, as investors jump on the “all clear” bandwagon.

When the cycle turns and titanium dioxide prices rise, Tronox benefits from being one of the few vertically integrated titanium dioxide producers. It sources approximately 85% of its raw materials used in titanium dioxide production internally.

Vertical integration has advantages and disadvantages in titanium dioxide production. The biggest disadvantage is that mining tends to be a low-return business. But the advantages are considerable. When titanium dioxide prices are high, the prices of the product’s feedstock, ilmenite and rutile, also increase. Raw material price increases put downward pressure on margins for non-integrated producers at the time when their margins should be approaching cyclical highs. Due to Tronox’s vertical integration, its margins and fee cash flow are poised to increase significantly more than those of its competitors during upcycles, facilitating debt reduction and dividend increases.

EBITDA Growth Likely Ahead

Tronox shares are typically valued in the market based on EV/EBITDA multiples. At its cyclically low EBITDA, it trades at 8.5-times EV/EBITDA. EBITDA guidance was revised lower in the company’s second-quarter conference call.

Tronox’s EBITDA is set to increase in 2026. In late 2024, management launched a cost-savings program intended to reduce operating costs by $125 to $175 million in 2025. As of Tronox’s second-quarter earnings conference call on July 31, management was confident it would meet the goal. The cost savings should translate into higher EBITDA in 2026, assuming titanium dioxide pricing doesn’t fall significantly from current levels.

Other factors are likely to boost 2026 EBITDA. Tronox is upgrading its mining operation by moving feedstock production from lower-quality to higher-quality mines in 2026. The switch will increase EBITDA by $50 million and reduce capex by approximately $100 million. Meanwhile, the Botlek plant idling will further reduce operating costs and capex by more than $20 million.

Source: Tronox May 2025 Investor Presentation.

Altogether, I expect Tronox to generate EBITDA of $600 million in 2026, a 38% increase from the $435 million in management’s 2025 guidance. At $600 million in EBITDA, Tronox’s current valuation would represent a 6.2-times EV/EBITDA, which is very low for a company with cyclically low EBITDA. Over the coming years, Tronox shares can benefit from significantly higher EBITDA and margin expansion.

Another way to view the stock’s current valuation is that virtually no improvement in the titanium dioxide market is priced into Tronox’s shares. This makes it even more likely that when the market turns, the shares will surge higher.

Risks

Tronox shares have significant risk. As such, they should be sized at a small level relative to a portfolio. The most significant risk stems from leverage.

The company’s net long-term debt stands at 4.8-times management’s guided full-year 2025 Adjusted EBITDA. This is high, though the EBITDA figure reflects a depressed titanium dioxide market. I expect it to recover beginning in 2026.

Source: Tronox Q2 2025 10-Q.

Tronox faces a maturity wall in 2029. If the titanium dioxide market hasn’t recovered by then, it could face difficulty refinancing its debt.

On September 15, Tronox priced a $400 million offering of 9.125% Senior Secured Notes due 2030. The notes were offered at par.

The main risk to Tronox shareholders stems from a global recession that sends titanium dioxide prices significantly lower. Tronox could be forced into bankruptcy. There is precedent for such an outcome, as the company declared bankruptcy in 2009.

Conclusion

Tronox has also seen some insider buying this year, which adds support to a recovery thesis. The company has already cut its dividend once this year, reducing the quarterly dividend from $0.125 to $0.05. I don’t expect additional cuts given the improving EBITDA outlook in 2026.

With a lot of bad in the rearview mirror—and priced into the stock—and a little good about to come in 2026, I believe Tronox shares are poised to outperform significantly. Looking beyond 2027, a recovery in its end markets could deliver multi-bagger returns. Investors should consider initiating a position now and adding to it on weakness.

Part IX: Kronos Worldwide: Set to Rebound from a Cyclical Trough

Kronos Worldwide (KRO) is experiencing a brutal downturn in the titanium dioxide industry. Lower sales prices and volumes have caused its earnings and cash flow to go negative for multiple quarters over the past few years, including the recently reported third quarter.

The downturn began in 2022, when higher feedstock costs for titanium dioxide producers coincided with weakening demand from major customers. Since then, Kronos and its peers have experienced declining and weak free cash flow.

The weakness was caused by excess supply amid tepid demand. In this environment, KRO’s sales prices struggled to keep pace with rising per-ton costs.

Operating conditions have intensified recently for the entire titanium dioxide industry, prompting additional retrenchment among producers during the third quarter. However, the clear takeaway is that current margins are unsustainable. It is only a matter of time until the market recovers.

Low prices have already led to unprecedented curtailments in global production volumes. The industry’s production capacity has declined. Titanium dioxide inventories are low. Anti-dumping tariffs have removed the primary source of low-cost supply. These and other factors are likely to usher in higher prices. Eventually, producers will have to increase their production volumes, at which point operating leverage will inflect higher.

I expect cyclical factors to usher in a cyclical recovery in 2026. Kronos is likely to enter that period with a strengthened competitive position and enhanced profitability potential relative to its peers. Recovering profits and cash flow will send its shares higher.

Third-Quarter Results Illustrate Trough-Like Operating Conditions

Third-quarter results illustrated the ugly effects of negative operating leverage. The company’s lower sales volumes and lower prices, amid its high fixed-cost structure, squeezed gross margins and cash flow.

EBITDA declined to close to zero. Year over year, it declined from $123 million to $0.6 million. The decline was mostly due to a large one-time gain in the third quarter of 2024 not being repeated, as well as an inventory cost drag unlikely to recur in future quarters.

Unabsorbed fixed costs were the largest non-temporary factor. These are the variable and fixed costs included in the cost of producing titanium dioxide, which grow larger as production capacity declines and less production is spread across a still-high fixed cost base. The breakdown of year-over-year EBITDA changes is illustrated below.

Large unabsorbed fixed costs will reverse from an EBITDA headwind to a tailwind as the company cuts fixed costs and increases capacity utilization. A lower fixed cost base and higher capacity utilization spread lower costs over more units.

Management attributed the company’s poor third-quarter results to significant excess supply in Europe and weak demand from the North American housing sector. These macro factors caused titanium dioxide buyers to hold off on building inventory. The inventory remained at the industry level, pushing down prices. In response to the weak demand and prices, Kronos idled production.

Titanium dioxide prices declined further over the subsequent months, partly due to one-time events such as Venator’s post-insolvency inventory liquidation. Consider that at the beginning of 2025, KRO’s average titanium dioxide selling prices were 2% higher than the year-ago level. After the tariff disruptions in April, conditions turned for the worse. Prices fell as titanium dioxide buyers postponed purchases until tariff uncertainty cleared. In the first nine months of 2025, weak demand led to a 6% year-over-year decline in titanium dioxide prices.

In the third quarter, lower prices and production volumes caused KRO’s operating cash flow, adjusted for changes in working capital, to fall to negative $3.5 million. After $9.5 million in capital expenditures during the quarter, free cash flow was negative $13.0 million. This ugly performance is typical for an industry approaching its cyclical trough.

I expect the company’s cash flow picture to improve over the coming quarters. Lower costs attributable to idled plants and reduced SG&A, coupled with a modest price improvement, will likely enable the company to generate flat to higher free cash flow in early 2026.

Buying Amid the Cyclical Trough

All it takes is a glance at KRO’s stock chart to determine where we are in the titanium dioxide cycle.

The three-and-a-half-year downturn begs the question of whether conditions will inflect from bearish to bullish. And if so, when?

I remain confident that the titanium dioxide cycle will inflect positively, just as it has for nearly a century. I don’t know precisely when, but the preponderance of data on the state of the industry in the third quarter points to an imminent recovery. I discussed the potential for recovery in the titanium dioxide market in my previous article.

Historically, KRO’s shares have rebounded off their cyclical trough after the company reversed its production capacity curtailments.

Kronos may be close to that moment today. In the third quarter, the company operated at 80% of capacity, significantly below its historical normal rate. For example, in the 2015 downturn, KRO’s capacity utilization bottomed out at 86% before the market recovered, and the stock quintupled over the next two years. During the next downturn, in 2020, KRO’s capacity utilization once again bottomed at 86%. In the more recent 2023 downturn, its capacity utilization bottomed at 65%.

The 2023 downturn is instructive. KRO’s stock turned higher once the company announced an increase in capacity utilization. In fact, the third-quarter earnings announcement was the catalyst that sent the shares surging higher.

The chart below shows KRO’s stock price right before the third-quarter earnings announcement hit. Notice the rally that ensued afterward.

The same dynamic was at play in all past recoveries in Kronos’ stock, and I expect the next one to play out in a similar fashion.

In each case, recovering capacity utilization triggered a strong rebound in the stock price, as investors anticipated the implications of the operating leverage inflection on earnings and cash flow during a titanium dioxide market recovery. I expect a similar dynamic to play out again with Kronos at some point over the next few quarters.

Risks

Kronos shares are at risk from continued weakness in the titanium dioxide market. The company could cut its dividend if conditions don’t improve, so the shares should not be bought for their yield. Offsetting this risk is the fact that the entire titanium dioxide industry is under severe strain. Production is dominated by large players, all of whom are curtailing output.

Due to the risks, aggressive investors should consider a small investment in KRO. The shares clearly have multi-bagger potential, so even a small investment can have an outsized impact on a portfolio’s returns over the coming years.

Conclusion

Kronos and its peers in the titanium dioxide market are probing the troughs of the market cycle. These are the most difficult times to buy, but they can also be the most lucrative. Investors interested in a depressed cyclical play with big upside potential should consider Kronos shares. If conditions improve over the coming quarters, as I expect, the shares offer some of the greatest upside in the stock market.

Part X: Conclusion

The cyclical chemical sector is cheap today for reasons that are real. Many are still experiencing conditions of overcapacity, weak demand, and prolonged destocking. But the cure for cyclical pain is already underway. Inventories are normalizing, high-cost supply is exiting, capital spending is being cut, and operating leverage is beginning to reassert itself. These conditions typically mark the very early stages of an upswing.

Ultimately, success in cyclical chemical investing requires appreciation for the sector’s nuances. The chemical sector is not a single trade, but a collection of distinct value chains governed by cost curves and capital cycles. Understanding where each chain sits in its cyclical adjustment process helps clarify when a recovery is likely to begin, how durable it may be, and when to exit as margins peak. Investors who remain disciplined, focus on fundamentals, and endure the inevitable volatility can position themselves for substantial gains as the cycle turns.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ASIX, CC, KRO, TROX, EPD, GEL, CLMT, HON either through stock ownership, options, or other derivatives.

Editor’s Note: We first covered VAL 9.48%↑ in a write-up back in March 2025. We have made it public to all readers.

Ideas from HFI Research

(Idea) Buy Valaris

Read more

a year ago · 6 likes · HFI Research

By: Jon Costello

Earlier today, Transocean (RIG) announced it will acquire Valaris (VAL) in an all-stock deal valued at approximately $5.8 billion. Under the deal, Valaris shareholders will receive 15.235 Transocean shares for each Valaris share they owned as of February 6, before the announcement. This equals about $82.12 per Valaris share, reflecting a 31.6% premium over Valaris’s $62.41 pre-deal closing price.

Both stocks gained steadily throughout the day. Valaris closed at $83.82, and Transocean closed at $5.71, up 6.1% on the day.

Upon closing, Transocean will have an enterprise value of over $17 billion. Its shareholders will own 53% of the combined company, while Valaris shareholders will own the remaining 47%.

The deal marks a win for investors who purchased Valaris shares in the past eighteen months.

Since Transocean’s offer is for all stock, Valaris shares will swing around with Transocean’s share price until the deal closes. For investors seeking to maintain exposure to a recovering offshore market, it makes sense to hold onto the shares for the long term. I plan to hold all of my Valaris shares and exchange them for Transocean shares, which I expect to hold onto afterward.

The deal is also a win for Transocean shareholders in the near term, primarily because it supports the company’s efforts to delever its balance sheet. The additional operating cash flow from this deal reduces the combined entity’s interest burden relative to the legacy Transocean. Its shareholders will face less financial risk if dayrates were to turn down.

Management expects to realize $200 million in annual cost savings and aims for a leverage ratio of 1.5x Adjusted EBITDA 24 months after closing. The pro forma balance sheet based on the latest financial information shows $5.38 billion in net long-term debt, with $1.37 billion due within one year. Liquidity is strong, with $1.50 billion in pro-forma unrestricted cash and $859 million of pro-forma revolver availability, for total pro-forma of approximately $2.35 billion.

Once the deal closes, I expect management to begin considering reinitiating a dividend and/or share repurchases as the need to reduce debt diminishes.

The main negative for Transocean shareholders is the dilution from this deal. Transocean shareholders will own 51% of the combined entity on a fully diluted basis, resulting in nearly 100% dilution. Still, considering the reasonable price paid for Valaris—assuming the offshore market continues its recovery to new all-time highs—the enhanced earning power, improved market position, and lower risk effectuated by this deal make the dilution worthwhile.

This deal caught me by surprise, as I had agreed with the consensus view among many industry watchers that Valaris would be more likely to combine with Noble Corp. (NE) than with Transocean. Valaris and Noble have more similar fleets, which would yield greater relative competitive improvements and cost savings. However, as a shareholder of both Transocean and Valaris, I like this deal.

Late last year, I soured somewhat on Valaris’ management, particularly its weak capital-allocation performance. Share repurchases were a key part of my Valaris investment thesis, but the company failed to repurchase any shares during the first three quarters of the year, even though it had ample cash that was building over time, a conservative balance sheet, and shares trading at depressed levels. Repurchases made sense and would have been highly accretive. When no repurchases had been made, I was concerned that if management could botch capital allocation, it might botch other important areas of this business, which offers many opportunities for mistakes. I’m pleased that Transocean management will lead the combined entity.

Long-Term Benefits for Transocean

Read more

In the second half of 2025, much of the chemical sector was valued as if it would never recover, with stock prices so low that any sign of a cyclical rebound would trigger a rally. The situation provided investors seeking large long-term returns with an attractive opportunity.

Since we invested in the space in the second half of 2025, chemical stocks have started to recover.

Further gains are likely if the recovery continues. What were potential three- or four-baggers a few months ago can still double or more from their current prices.

For investors seeking to understand the cyclical chemical sector, this article reviews several of my macroeconomic and company-specific investment theses.

A cyclical recovery is likely in the chemicals sector, as each subsector undergoes its own adjustments between supply, demand, and prices. Although the timing of a recovery is uncertain, chemical stock prices had declined to levels that made prospects for doubling in the next two or three years promising.

I published four articles on the chemical sector and why I believe it is undervalued in these three articles:

A Titanium Dioxide Market Recovery Appears Imminent

The Chemical Sector Overview: Olefins And The Rest

Chemical Sector Macro 2: The Current Downturn And Prospects For A Recovery

Chemical Sector Macro 3: Lessons From Past Cycles Applied To Today’s Stocks

Characteristics of the Current Downturn

For much of the chemical industry, the downturn started in 2021. Many companies saw utilization drop below 80%, and margins hover around cash costs. Within the industry, it felt like a recession, even though overall GDP kept growing. Meanwhile, investors who had faced years of losses abandoned the sector and sold their stakes.

This unique circumstance—where the overall economy grew but chemical subsectors were stuck in a cyclical downturn—created an opportunity. Many investors and sell-side analysts were waiting for a recession to hit before purchasing the more cyclical chemical stocks. A recession would lower prices, but it would also speed up the sector’s recovery by forcing a supply adjustment. If, on the other hand, a recession failed to materialize, a strong rally could be in the cards.

The chemical sector’s downturn had three overlapping drivers:

1. A global capacity buildout. This was most pronounced in olefins.

2. Weak industrial end markets in key regions. Europe’s high energy costs, restrictive regulations, and shrinking manufacturing base have hurt global chemical demand. Weakness in China’s property and heavy industry. A downturn in North America’s housing and construction markets. These factors all contribute to weak end-user demand.

3. An abnormally long destocking phase. During the post-Covid supply chain chaos, buyers over-ordered. The resulting inventory excess caused buyers to become more cautious, ordering just enough to manage their bloated inventories. This pattern lasted longer than the typical one or two quarters usually seen in the industry’s inventory cycles. As apparent demand dropped below actual end demand, the weakness in volume and utilization became even more apparent.

These factors led many investors to abandon the entire sector of cyclical chemical stocks. What I believe many overlooked was that, although all stock prices were low, the outlook for individual companies and their stocks was more complex.

For one, downturns and recoveries in the sector occur across distinct value chains, each with its own capital cycle, specific supply-and-demand dynamics, logistical constraints, customer inventory practices, and pricing strategies. As a result, investors who can determine which subsectors or value chains are poised for a recovery can identify high-return candidates.

Next, the sector had to be divided into two groups: value chains that were structurally challenged, and those that were cyclically depressed.

Structurally challenged value chains were parts of the chemical sector where capacity was overbuilt but was politically, strategically, or economically difficult to reverse. The overcapacity keeps prices too low, putting many producers at risk of bankruptcy.

Olefins are the poster child. The subsector saw massive investment from international oil and gas majors in large-scale cracker and polymer units. Overbuilding was most severe in China and North America. Structural overcapacity means that recoveries can be fleeting because new foreign supply keeps arriving once regional prices rise to levels that make imports profitable. Getting a handle on “mid-cycle earnings” for companies stuck in such an environment can be impossible, rendering appraisals of intrinsic value suspect.

I consider companies operating in structurally challenged niches to be uninvestable.

Outside the more structurally challenged subsectors were the areas of potential opportunity. In many cases, the negativity toward structurally challenged sectors led investors to sell across all chemical subsectors, including those that are structurally viable but cyclically depressed.

Cyclically depressed value chains can adjust supply to long-term demand in a way that leads to a sustainable cyclical upturn. These chains experience bankruptcies, production shutdowns, consolidation, and capital starvation, which bring supply into line with reduced demand. The eventual price recovery drives the next upturn.

Given the bargain prices on offer, this subset of chemical names was ripe for long-term investment.

Finding the Best Mispriced Opportunities

Read more