Ten Bagger: Gold is running hot, but John Forwood says it may be time to hedge with oil juniors
Gold is the market leader right now, but unloved energy stocks could provide a ‘natural hedge’ if oil bounces off its lows.
Gold prices are raging, while oil is trading at cyclical lows
If that reverses, a contrarian investment in energy companies could be a natural hedge for gold investors
Lowell Resources Fund's John Forwood says promising juniors are trading at "ridiculously low" mutiples
Investors looking for a contrarian play to hang over their pro-cyclical mates could begin to shift their eyes from the hot gold market to the unloved oil space.
That view has already received some air time, forming a major pillar of American fund managers Goehring and Rozencwajg's latest commodities thesis.
Australian fundie John Forwood, whose listed Lowell Resources Fund (ASX:LRT) is best known for its punts on ASX and international small cap explorers, is looking at the trade closely.
But he doesn't think it's about abandoning gold, with many analysts and macro observers still viewing the precious metals rally as having some way to run.
Rather, Forwood says a move into energy equities could be a hedge to protect against any downside in a portfolio weighted toward gold names.
The big factor here is just how far the gold:oil ratio has shifted. At times, when the gold market has been in a funk and demand for fuel has been high like the mid-2000s, the ratio has slid as low as 6:1. It's now ~70:1, levels only bested in the brief negative oil prices of the Covid pandemic five years ago.
"Now that we're seeing the gold price so high, investing in oil is a very good hedge," Forwood said.
"And a lot of these junior oil producers are trading on generational lows in terms of their their cash flow multiples, EBITDA (price to earnings) etc.
"There's a nice asymmetric investment opportunity there, that the downside is a lot less than the upside."
When the US dollar weakens, oil prices often lift because the currency debasement makes it more attractive to purchase a commodity largely traded in USD.
Forwood says in that scenario a rising tide could lift all boats.
The rationale
The logic is not just about whether commodities are under/overvalued. It's also about the delicate relationship between gold and oil.
Gold mines, which are largely remote, burn diesel to operate and even those which have shifted to renewables and gas for their plant and amenities still need the fuel to run trucks, drill rigs and machinery.
That makes diesel a major cost input, with the oil price among the main factors that flexes all in sustaining costs alongside labour and strip ratios. Forwood puts energy as typically 30% of a miner's cost base.
If oil prices rise, margins will be squeezed for gold miners at the same time as oil and other energy producers see their margins expand.
Therefore energy investments can provide a natural hedge in a balanced portfolio without thinking about tactics like shorting.
Rising energy costs would also stoke inflation, potentially bringing an end to US rate cuts if or when oil prices start to fly. Rate cuts are a key driver for higher gold prices, because they make cash less attractive to hold over non-yielding assets.
"If the oil price went from 60 bucks a barrel to a hundred bucks a barrel, that would push inflation up," Forwood said.
"It would also impact the margins of gold miners.
"So there'd be multiple pressure points on gold miners' share prices.
"You've got the possible hedge that investing in oil companies represents. That's the snapshot of the of the thesis."
Junior opportunities
The main energy opportunities on the ASX come in the form of large and mid-cap oil and gas producers like Woodside Energy Group (ASX:WDS), Santos (ASX:STO) and Beach Energy (ASX:BPT).
They've all traded sideways or down this year with the ASX 200 Energy index up a palry 0.54%, well shy of the ASX 200's broader 5.3% lift in 2025.
But smaller oil and gas companies offer far more leverage to the oil price and specific situations, Forwood says.
The fund enjoyed an eight-bagger (sadly just two digits short of validating our column's name) with its investment in Finder Energy Holdings (ASX:FDR), taking profits after securing a development pathway for its KTJ project in Timor-Leste.
But Forwood says other portfolio names have leverage to discovery success and commodity prices.
One is 3D Energi (ASX:TDO), which has made a gas discovery in a JV with ConocoPhillips at Essington in Victoria's Otway Basin.
"It's near existing offshore infrastructure (and) looks like it could be around 200Bcf," Forwood said.
"It's not huge, but they've got a number of other targets as well, and they're about to start drilling their second target.
"That first target had an 84% pre-drilled chance of success, which is almost unheard of.
"And now that they've had success with that first one, the other targets would be by correlation upgraded in terms of their chance of success as well."
That discovery has sent 20% JV holder TDO's shares 33% higher in a month, demonstrating the leverage small caps have to success.
The other on Lowell's radar is Brookside Energy (ASX:BRK), which has produced more than 3 million gross barrels of oil equivalent since 2020 from leases in the Oklahoma's Anadarko Basin, where its uncoventional SWISH play generated $13.6m in EBITDA and $5m in net profit after tax in the first half of 2025.
"They are trading on roughly 1x their 2024 EBITDA. So it's just a ridiculously low multiple," Forwood said.
"It's not conventional, they're drilling lateral wells and doing multiple fracs. There is a reasonable capex requirement.
"But they've got net 2P Reserves of twelve million barrels of oil equivalent and they're producing somewhere around 1800-2000boepd.
"They're well funded. They've got an undrawn US$25m credit facility and $8.3m in cash as of June ($8.2m at September 30).
"It's just an example of how cheap the sector is, they're not the only ones trading on that ridiculously low a multiple."
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
Originally published as Ten Bagger: Gold is running hot, but John Forwood says it may be time to hedge with oil juniors
