The Market Is Entering a Capital Scarcity Era - This Royalty Stock Is Built for It

As an equity and macro strategist, I am often assessing the market differently from most investors, especially as I use a Big Picture approach before I put a single dollar to work. Right now, there are a lot of fascinating (and important!) developments going on.  For example, on one side, we have massive infrastructure demand, as AI hyperscalers are expected to spend close to $700 billion (and rising) per year on CapEx. They get this capital from their massive operating cash flows and the bond market, as even Google just issued a 100-year bond. On the other side, we have what one might call an economic reality, as inflation is sticky, capital is becoming scarcer(even Google is borrowing more capital), and cash flows are becoming “forced,” as investing in AI capabilities is about survival. [Inline image] Source: Zerohedge There are obviously many ways to play this.  Personally, in an environment where traditional equity valuations will be severely tested by their capital expenditure requirements, my favorite business model is essentially a cheat code, as I focus on the mineral and royalty model.  In this article, I’ll explain what that is, why that is, and one of my favorite picks in this industry.  So, let’s get right to it! There’s High-Margin Businesses. And There’s Royalty Business Models Imagine you own a big house with a huge yard (maybe you do). As it turns out, you’re sitting on oil. Now, assuming you own the mineral rights (and not only the surface rights), odds are that you will be approached by oil companies. They will ask you if they can put a drilling rig in your backyard to produce oil and gas. I’m simply imagining a highly unlikely situation, but you’ll see what I’m trying to do here.  In exchange for using your mineral rights and land, you get 25% of the oil and gas output. Even better, they take care of everything. You simply hold your hand open and collect income.  Now, you benefit from oil production without having to touch any equipment or incur any costs. Sure, your backyard is now industrialized, but you are in oil and gas without having to deal with any of the CapEx, labor costs, production risks, and other headaches.  While you will obviously cheer for higher prices, you are profitable regardless of whether oil is at $40 or $100. After all, you have no production costs. You don’t pay for the steel pipes, the chemicals, and all these other expensive input costs that oil and gas companies are exposed to.  Zooming out a bit, here’s what the benefits look like in the energy industry: [Inline image] Source: Leo Nelissen Needless to say, these companies exist in other industries as well, including in mining. What all of them have in common is that they either provide land/mineral rights and/or capital for expensive mining operations. They let others handle the operations.  Hence, the beauty of mineral ownership is that it provides the surest form of security in the commodity space. As my silly example just showed, royalty assets offer organic growth without any capital costs or operating expenses, which permanently limits exposure to cost inflation. In other words, not only do they benefit from potential inflation through commodity exposure, but they also shield themselves against the negative influence of higher inflation. They have double inflation protection, so to speak.  Essentially, they sit at the top of the capital structure, collecting a percentage of revenues while the operators shoulder the burdens of drilling costs, labor shortages, and rising material expenses. In light of the bigger picture we just discussed, that’s a great place to be.  Viper Energy (VNOM): The Permian Compounder When we apply this philosophy to the energy sector, Viper Energy stands out as a top-tier vehicle for sustainable free cash flow and durable returns of capital, as it’s tied to the most economically attractive shale play in the world: the