Warren Buffett, Carl Icahn, Jerry Jones and Sam Zell are just a few of the bargain-hunters flocking to the energy industry—the worst-performing sector of 2019.

The miserable year caps a grim decade, which has brought the oil and gas sector’s weighting in the S&P 500’s market capitalization to a record-low 4%. That is down dramatically from the 13% weighting of 2008, when oil was trading above $140 a barrel and the world was much less determined to wean itself off fossil fuels.

Valuations have plummeted along the way. In 2011 the energy sector was trading at about the same level as the broader market, as a multiple of book value. Now the gap is huge: 1.5 times for energy, 3.5 times for the S&P.

“The performance of the energy sector has made it difficult to own and has tried the patience of many investors,” said Mark Stoeckle, chief executive of Adams Funds and manager of the energy-heavy Adams Natural Resources closed-end fund.

But if Buffett and others are correct on their hunch—that companies have been oversold, and are now trading at prices that imply a calamity that will not come—then the energy sector could be one of the big winners in 2020 and in the years to come.

“There’s been a relatively quiet, strategic movement into energy by a group of billionaires,” said Thomas Hayes, chairman of New York-based hedge fund, Great Hill Capital.
Hayes said the energy sector is one of the top three sectors for expected earnings growth next year, at 23%—ahead of industrials at 17% and materials at 15%.

Meantime, he is focusing on opportunities among explorers and producers such as Occidental Petroleum, ConocoPhillips, EOG Resources, Pioneer Natural Resources and Concho Resources, which have dropped much more than the integrated supermajors such as ExxonMobil and Chevron.

“The E&P [companies] will have the most ‘juice’ because they have the most leverage to the price of oil,” said Hayes, who anticipates crude to remain around its current levels before rising over the longer-term. This week Saudi Arabia and its OPEC  allies contributed to that bullish outlook, moving towards deeper cuts in production to support the market.

Zell, for his part, is buying distressed assets outright.

The founder and chairman of Equity Group Investments, which normally focuses on real estate-related businesses in emerging markets, has been buying energy assets in California, Colorado and Texas at fire-sale prices, noting that some of them are running out of money to drill.

“We have a history of investing in arenas where previous capital flows have stopped,” said Zell. “The current environment in the oil sector creates opportunities where there is limited competition.” He declined to name any of the companies where he has invested.

Jones, the owner of the National Football League’s Dallas Cowboys, is reportedly in talks to buy gas assets in Louisiana from struggling Chesapeake of Oklahoma, through his vehicle, Comstock Resources.

Others are piling in, too.

In May,  Buffett’s Berkshire Hathaway committed to invest $10 billion to back Occidental Petroleum’s bid for Anadarko Petroleum. He said it was a bet on the Permian Basin, which stretches across Texas and New Mexico and holds more than 20 of the top 100 oilfields in the country.

And Icahn, the veteran activist, had $5.6 billion of his portfolio in energy stocks at the end of the third quarter, including big holdings in Occidental, CVR Energy and Cheniere Energy, according to public filings.

Even Bill Gross, the former Pimco star, said his favorite sector for 2020 was midstream energy stocks such as Energy Transfer, a Dallas-based pipeline operator, and MPLX, a vehicle formed by Marathon Petroleum. “They have yields of 10% to 15% and defensive prices, due to 20% to 30% losses this year,” he told the FT.

Stoeckle of Adams Funds favours Chevron, ConocoPhillips, BP and Total. “Unless global demand falls off” there will not be enough oil-and-gas supply to meet it, he said.

There are many reasons why portfolio managers are leaving energy stocks well alone. Industry figures cite environmental factors and strong political pressure on operators—as well as the recent poor run of performance.

Even so, Hayes and other managers say now is the moment to buy. “Investors have to think about the E&P subsector like a portfolio of high-yield junk bonds,” he said. “While 10-15 per cent may default and go bankrupt, the remaining 85% to 90% will dramatically outperform.”

The fund manager has been buoyed by recent contrarian bets, including going long on biotech stocks in September—when they were suffering due to aggressive campaign rhetoric from Elizabeth Warren, the Democratic candidate for president. Energy will reward the patient investor, he said.

“We’ve seen this movie before in the early 2000s, and it has a very happy ending.”