Viking

"Greedy bastard day"... (Russell Crowe quote from A Good Year). Backed up the truck on CNQ. Stock is down almost 9% today ($CAN) and trading back where it was trading in mid January. Before $100 oil. And before Russian invasion was on anyones radar. Best managed/performing large cap oil stock in Canada the past 5 years. Always wanted to own... never traded a a price i was comfortable with (trades at a large premium to peers). Except today it is trading like a junior. Dividend yield is 4.6% and it paid its dividend throughout the covid lock down (rock solid).

Yes, happy belated birthday to Canadian and American board members… not many other places in the world i would rather live and raise a family. Yes, not perfect. But much to be thankful for.

@glider3834 thanks for the clarity. Pretty crazy how much they are earning on the pet insurance transaction. An under-appreciated part of Fairfax are these very large one time gains they are able to surface…

@StubbleJumper I have been thinking about the same things you discuss above. The challenge (to Fairfax shares selling off) is Fairfax shares have been trading pretty well all year (compared to the overall market). So it looks to me like someone is buying and I wonder if it is not Fairfax. So the stock could hold up better than expected even after earnings. And once the pet insurance deal closes Fairfax will have significant cash to buy back stock. But if we get a bad hurricane season, yes, Fairfax could get hit. And if we see top line slow (signs the hard market is ending) we could see all insurance stocks sell off. Having said all that I have been reducing my position (taking advantage of the recent run up) and shifting most of the proceeds into a basket of oil stocks - people are probably getting sick of all my oil posts in recent days. My cash balance is back up to 60% (I want to keep a high cash balance until i we are closer to a Fed pivot). Fairfax continues to be my third largest holding (after oil and BAC). I would likely be a buyer of Fairfax below US$500 and would likely get aggressive if it hit US$450.

Since my last update on June 5 equity markets have continued to sell off and Fairfax's equity portfolio, not surprisingly, will be hit hard. From March 31 to June 30 my guess is their equity portfolio is down a little over $2 billion. Please note, my estimate is incomplete (it is not able to capture all positions accurately or what Fairfax has been doing during the quarter). Please note, investors need to due their own due diligence (my spreadsheet could contain material errors). Please let me know if you see any errors. Largest changes (these 4 stocks = 65% of decline): - Atlas -$520 - Eurobank -$350 - Stelco -$220 - Blackberry -$210 Of the $2 billion total, my guess is about $725 million is mark to market. Given the strong move higher in interest rates in Q2 my guess is Fairfax will book about $275-$300 million in fixed income losses. So we could see $1 billion (pre-tax) in investment losses in Q2 = $42/share. In Q2 I do expect Fairfax to report very good underwriting results and increasing interest income. So these will help cushion losses from the investment portfolio. And the pet insurance sale will result in a significant increase in BV (not sure if this transaction will hit the financials in Q2 or when it is expected to close in Q3). Bottom line, I continue to think Fairfax will grow BV for the full year which, if it happens, would be quite the accomplishment given the carnage we are seeing in both bond and equity markets so far in 2022. Fairfax Equity Holdings June 30 2022.xlsx

Here is an interesting article reviewing Buffett’s investment history and oil. A picture is sometimes worth 1,000 words… Buffett Buys Oil & Gas Stocks - https://bisoninterests.com/content/f/buffett-buys-oil-gas-stocks Today, Chevron and Occidental are generating enormous free cash flow, have upside to higher commodity prices, offer inflation protection, and are returning part of their free cash flow to shareholders via buybacks and dividends. These companies generated strong cash flow in 2019 and 2020, when Buffett initially bought preferred shares of OXY and common stock of CVX. By the time Buffett added massively nearly 40B to these positions, making oil & gas one of the largest positions on the Berkshire book, their free cash flow yields had increased substantially. In the past, Buffett saw oil and gas businesses as beneficiaries of inflation, subject to attractive valuations, at times where he saw very few other similar opportunities in the market. Buffett appears to have the same approach this time around, buying inexpensively while embracing inflation protection from oil price exposure, stating that these purchases are “a bet on oil prices over the long term, more than anything else.” And in contrast to the prevailing green transition narrative, Buffett’s partner, Charlie Munger, made his view on oil clear in their most recent shareholder conference in Omaha: “I like having big reserves of oil. If I were running … the United States I would just leave most of the oil we have here and I would pay whatever the Arabs charge for their oil, and I’d pay it cheerfully and conserve my own. I think it’s going to be very precious stuff over the next 200 years.”

Oil averaged about $120 for about 7 years (2007-2015 or so). Adjust for inflation and you get something like $135 today. So not very long ago oil averaged around $135 for close to a decade. Today demand continues to grow at 1 million barrels/day every year like clock work (people in China, india, indonesia etc all want a better life and that is ONLY POSSIBLE with increased use of hydrocarbons = oil). The supply picture today is much worse than 15 years ago. So i think $150 oil is a pretty reasonable expectation. Not my base case. But it also would not surprise me. What is interesting is gas prices recently actually reflected $170 oil (if you normalize current $60 crack spreads) and consumption did not miss a beat (people complained but did not materially change their behaviour). I think the demand destruction argument is overplayed at oil under $150. $200 oil is also not my base case. But i would not rule it out. Especially given war in Europe and the high uncertainty what happens to energy prices in Europe as winter approaches. Putin is no dummy and he has Europe over a barrel. Saudi Arabia hates Biden/Democrats (and their calling out of Khashoggi affair etc) so they are going to do the US no favours. The third big producing region is US/Canada and ESG will ensure muted production growth there FOREVER. Clearly, the risk to oil prices is skewed big time to the upside. A mild recession will do little to slow demand. The only solution that i can see to high oil prices (in the near term) is a bad recession (like 2008). And i don’t think that is in the cards. Regardless, post recession we would likely be in the exact same demand/supply imbalance mess we are currently in. How governments are responding to to high inflation/oil prices is also very instructive. Populism is driving the political response: 1.) stimulate demand: lower gas taxes. Cut more checks to the poor. 2.) constrain supply: demonize producers. Tax producers (windfall tax). Double down on ESG practices (do nothing to incentivize oil companies to make necessary long term investment decisions to grow production). Bottom line, governments are doing nothing to either reduce oil demand or increase oil supply. Or accelerate the energy transition to renewables. In fact they are doing the opposite. This will result in higher oil prices in the future. Which of course is good for oil company profitability. ————— The really interesting thing is the stocks of most oil companies (and i am talking about the Canadian producers as they are the only ones i follow closely) are priced today for about $65-$70 oil. And as they aggressively de-lever they will all soon have fortress balance sheets (little debt). +$100 oil and they are making obscene amounts of money. $90 oil and they are making greedy bastard money. $80 oil they are making great money. $70 oil they are making very good money. $150 oil? They will be making King Midas money.

i discovered Buffett first and then i overlayed Lynch… The other person who was really influential way, way back was Burton Malkiel and A Rondom Walk Down Wall Street. I did not agree with Malkiel’s perscriptions but i absolutely ate up his academic vs real world discussions.

Both Buffett and Lynch were two people who got me started on my ‘successful investing’ journey… so i will be forever grateful to both men. I still read One Up On Wall Street pretty much every year (different chapters). And i am a Buffett junkie. Might as well ask a parent who their favourite kid is… not going there

I think the next inflection point for the Canadian producers will be when they have hit their net debt targets. Much of what they are earning right now is largely masked because it is going to debt reduction - and the real benefit to shareholders is seen over the long term. (The opposite of what happens to companies that take on a bunch of debt - which usually boosts short term results). It looks to me like the sweet spot will be Q2 of 2023. By that time most Canadian producers likely will have hit their final net debt targets. And at that time 100% of what they earn will likely be returned to shareholders. And it oil continues to trade +$100 the returns for shareholders will be crazy. If oil goes to +$150… well, we can all dream… ————— The fly in the ointment might by M&A. We are already seeing some of it. Cenovus recently purchased assets from BP; but so far these purchases look pretty rational and at fair prices (cheap if oil prices stay elevated). We know most non-Canadian publicly traded producers are desperate to exit their Canadian oil sands assets so there are lots of sellers. The problem for Canadian producers is they have been aggressively paying down debt over the past 18 months which has been delaying the big payback for shareholders. And if they now start making big acquisitions before shareholders get more fully rewarded it will create quite the optics problem (unless the price is low and/or the strategic fit is compelling).

@jfan i was just about to post the same video (just watched it). Lyn Alden pointed listeners to Josh Young in one of her recent video’s so she obviously follows him. Anyone who wants to understand the current state of the oil market would be well served to watch Josh’s presentation. It is a fantastic summary of the current state of the oil market with lots of good historical information. Logical. Fact based. Not promotional. For those wanting to understand why Warren Buffett just dropped tens of billions into oil companies, paying what look to be peak prices… watch the video. There is a structural imbalance today in the oil market (demand > supply) that cannot be addressed in the short term (absent a severe recession like 2008). So oil prices will remain higher for longer… And there is a very good chance oil prices will go much higher. $150 oil is not a crazy number. And expect crazy volatility (like we are currently seeing).

@backtothebeach you make a great point. And one that i struggle with. What is the proper way to look at historical data/information when trying to value assets today and into the future in a high inflation environment? Investors have been working in a falling/low inflation environment for +40 years so have not had to think much about this. I like to look at 5 year stock price charts to get a quick idea of how a cheap a stock is trading (i.e. i love it when i see profitable and well run companies trading at or near a 5 year low). Obviously doesn’t mean i buy them… but it often helps identify opportunities. And when buying real estate, looking at historical prices is important. Yes, there are lots of other important things to consider when buying assets. But how useful is historical information in a high inflation environment that runs for years? A real life example: i starting to look for a 2 bedroom unit in a popular part of Vancouver (Kits). These units average about 850 sq ft and cost about C$850,000. Now if inflation is running at 8% for a year and prices stay at $850,000 does this mean the unit a year later is now really worth about $780,000 (in inflation adjusted money)? And if inflation runs 6% in year 2 does this mean the units is now worth $735,000? Meanwhile i am waiting for a 10% correction in nominal prices… which might never come. Now if inflation was running at zero and 2 years later that $850,000 unit was selling for $735,000 i likely would be running to buy it. (For real estate in Vancouver WE KNOW cost to build is going up at least at the rate of inflation. We also know rent is going up at rate of inflation - especially in Kits). And if nominal prices actually come down 10 or 15% is that not a beautiful thing in a high inflation world for people looking to buy assets? (Falling nominal prices is NOT a good thing for asset owners in a high inflation world.)

Added to SU and re-established position in CVE (their refinery business should be printing money). My cash weighting is still around 55%; I sold some Fairfax to fund my move back into energy.

The current sweet spot for energy looks to be refining where margins are nuts and look like they may stay high for a while. Q2 earnings for anyone with refining in their mix will be huge. Time to learn more about refining. ————— Looking way, way out… like to the fall (4 whole months away…. an eternity away for Mr Market) what will Europe (entering winter) and the nat gas picture look like?

@Dinar the supply side of the equation is super interesting. The deficit today is very large: 1.) inventories are at historic lows (and they keep coming down) https://www.rigzone.com/news/oil_inventories_down_to_dangerously_low_point-24-may-2022-169095-article/ 2.) OPEC spare capacity is very limited 3.) Russian supply is constrained due to war 4.) to try and lower prices, governments are releasing massive amounts of oil from strategic reserves. This cannot go on forever and the barrels released will need to be replaced. - https://science.howstuffworks.com/environmental/energy/us-oil-reserves-last.htm Yes, new supply from Iran and Venezuela would help increase supply. This is something to monitor moving forward. Bottom line, we have a pretty severe supply problem today that is likely to get worse in the near term. And this supply problem is keeping oil prices over $100. ————— On the demand side, it is worth noting we have a severe demand/supply imbalance with China (and large parts of its economy) in lockdown as a result of its zero covid policy…

We are exactly 6 months into 2022. Oil was my top pick to make money in 2022. And oil has performed spectacularly well (especially when compared to the overall stock market which is down 20 to 30%). Russia’s invasion of Ukraine was gas on the fire. However, oil was a trade for me: i actually started exiting my very oversized position in late January and was largely out of oil in Feb/March. Since then i have bought oil a number of times on big sell offs and sold a short time later for a nice quick gain. Over the past week i have been doing a fair bit of reading on oil and gas. And today a light bulb went off for me: i think oil is poised to do well for YEARS. i am starting to drink the secular bull market Kool-Aid. So I was buying oil again today and now oil is 4% of my portfolio. And if oil continues to sell off i will likely buy more. Why do i like oil as a secular investment: 1.) global demand will continue to grow each year by about 1 million barrels per day for the next decade. Demand is doing what it has done for all eternity: grow. People want to live a better life. The best way to do that TODAY (and the next 5 years at least) is hydrocarbons. 2.) supply, already in a deficit, WILL NOT be able to increase production by anything close to 1 million barrels per day for the foreseeable future. The supply function has permanently changed in Western countries. Thank you ESG (oil is a hated and villified industry… who in their right mind wants to work for an oil company today. Good luck attracting young talent). Investors do not appreciate what this now means for oil prices. PERMANENTLY HIGHER PRICES. Yes i know… that is a crazy thing to say… but i think it might be true (at least for the next few years). This means oil companies are going to keep earning outsized profits. Right now profits are going mostly to pay down debt (that ESG thing… banks can’t lend to dirty oil)). Once the debt is paid down shareholders will get paid. By the middle of 2023 the payouts to shareholders could be absolutely NUTS (10-15% dividends based on todays stock prices). Here is an update from Amrita Sen… very smart lady:

Energy right now is looking like steel and lumber did a year ago. The energy companies are making obscene amounts of money. But unlike steel and lumber it looks to be like the profits for energy companies will likely remain higher for longer. If we get a further sell off of energy stocks (on recession fears) it might be time to increase exposure again. Energy has been my best ‘buy the dip’ trade the past 3 months (paid out every time)… My usual buy is Suncor. But i am starting to look at a few of the smaller producers. MEG is looking interesting but might not get much love until more debt is paid down. I like that they are unhedged. What smaller energy producers are board members big on right now?

Where this discussion gets really interesting is if we get a recession around Nov and oil goes back to $60. You could see inflation drop dramatically. The Fed would be able to pivot. Or we could get that same recession around Nov and oil could go to $150 (due to geopolitical situation). This would keep inflation high and likely prevent a Fed pivot. So the range out possible outcomes really are quite large. And the impact on financial markets will vary depending on how things play out. Keep the popcorn coming… the movie is not nearly over yet. ————— For most investors probably 70% of total returns is likely driven by successfully anticipating/negotiating Fed policy. Capitalism 2.0. This has been true since 2008.

I have been trying to better understand India’s posture on the war in Ukraine. The speaker in the video below succinctly explains one of the key factors driving India’s response: security. Go to the 35:40 mark of video (discussion of India starts at 32:30 mark). China is India’s primary external threat. India’s security/military is built around managing the Chinese threat. And pretty much all of India’s military equipment is supplied by Russia - including munitions and spare parts. (Vietnam is in the exact same situation). And it would be massively expensive for India to pivot away from Russia (the speaker said it would not be like a consumer pivoting from Apple to Android when deciding to switch smartphone platforms which got a good laugh from the audience). ————— Viking’s additional comments: There are also significant economic benefits to India of supporting Russia: cheap oil, cheap fertilizer and first in line for grain shipments. All important for a country looking to raise much of its population out of poverty. And also wanting to avoid an all too possible political crisis (driven by high energy prices and lack of food). —————

I voted yes, inflation will start to come down. Why? I expect global economic growth will continue to slow in 2H (it is already happening). Now my guess is also that we see inflation come down only a little - from +8% to 6%. So still a big problem. And where inflation goes from there will depend on the Fed. My guess is they capitulate (and pivot). And that, of course, will likely result in inflation picking up again later in 2023. Bottom line, i think inflation likely remains uncomfortably high for years (with low interest rates). Financial repression like the late 1940’s - that is how you solve a too much debt problem. Which might actually be the Feds end game.

The biggest challenge for Berkshire post Buffett will be the scrutiny of every decision AND THE FREE PASS BUFFETT GETS WILL BE GONE (decisions, corporate structure, governance etc). Sub par returns for a decade? With Buffett around you tolerate it (even celebrate it)… because it is managed by Buffett. Sub par return for a decade post Buffett? Why would a rational investor hold it any more? ————— For years now Buffett has been primarily focussed on preserving the wealth of existing shareholders (the ones who bought in early). This is very different from how most companies are managed today.

The rental market in Vancouver is absolutely bonkers right now: super tight supply and spiking rents (for new rentals). +$1,500 for one bed and +$3,000 for two bed - if you can find them (and then beat out other applicants to secure the place). Prepandemic it was not unusual for landlords to get +30 applicants when listing units onto the market… and i think we are probably back to those market conditions. ————— In my neighbourhood (i rent a house) my guess is rents have increased 20% in the past 18 months (18 months ago supply for rentals was highest in many many years due to covid). Crazy thing here in Vancouver is we have rent control. My landlord was ‘allowed’ to increase my rent 1.5%. Nuts.

I am starting to buy into the thesis that we get an earnings recession in the coming quarters and perhaps not an actual economic recession (although growth is slowing). Why? We have a labour shortage. Still. High inflation and a strong labour market = higher than expected interest rates. Maybe we actually see interest rates close to 4% across the curve in the coming months. We will see Earnings recession + flattish growth + high inflation + solid labour market

Yes, recessions are not good for banks. With BAC selling off close to 40% i think its current share price already discounts a slowing economy. If we get a mild recession it will probably sell off another 5-10%. If we get a severe recession perhaps it sells off another 15-20%. Or maybe the narrative shifts and stock pops 10-15% higher. Maybe the stock at $31 already discounts a mild recession? We just don’t really know. I would love to bottom tick all my purchases… but i don’t think that is a realistic objective.

Care to share your top 3 holdings (highest conviction ideas as of todays prices)?