SharperDingaan

Quick comments on ESG. ESG does not come out of the box 'fully formed', it is an evolving process. Like it or not there will be carbon trading, plastics trading (disposables), and garbage trading (high vs low emission). Reason being that putting a price on pollution supports the business case for an investment in new equipment that removes carbon, plastics, high emissions garbage, etc. We will simply be paying the full cost of what we consume, which includes the pollution in its production/disposal. It means fundamental change for most industries, and recognition that not everyone sees ESG the same way. A long-short of ESG darlings vs ESG pariahs isn't going to outperform, simply because the ESG impact is not yet visible. Investors are not going to penalize an Exxon/BP/Shell until there is a line on the P&L recording carbon tax paid in the quarter; that can be compared against the total cost of SG&A. SG&A is wholly under company control, as is the carbon tax ... so when that carbon tax is perceived to be too high relative to SG&A ?? THAT's the time to be doing the long-short trade. The investment value of ESG, is primarily in the new industries it creates. Green industries would not exist unless there was a tax on carbon, plastic, and emissions. Everything from windmills, EV vehicles, recyclable plastic, agricultural energy co-generation, urban solar panels ... the list is endless. Piddling around in the 20% of change in existing industries, versus the 80% in new/growing industries, misses the point. Nobody likes change, hence all the vitriol. But if you're a young person, ESG is a your sustainable future, it is quite obvious, and you have been doing the 3 R's since you were born - to them, WTF is the problem! Old geezers who refuse to change All we have is direction, there is no playbook, and uncertainty is the norm. Everyday real world living does not come with guarantees. SD

Back in the day, today's 'transition point' was referred to as 'peak oil'. Only real difference is than In the current 're-brand', the focus is more on the tier-2 changes resulting from the tier-1 decline in overall production. Nobody likes large scale change, and ESG bears the brunt of the fear/frustration. However, the reality is that ESG is poorly understood, and still very early in its evolving roll out. Ultimately, ESG is about achieving globally sustainable business; the various carbon, plastic, health charges; and standardized triple bottom line financial reporting, are just vehicles by which to get there. Sustainability is simply net consumption equal to net contribution from recycle, reuse, repurpose. Net oil used coming from recycling, and not as virgin oil pulled out of the ground. Mindset thing. SD

How did you do it? I used to be utter sh1te at investing, and lost 2-3 fortunes before finally seeing the light. Today there have been quite a few changes, and I approach it with both a professionals credentials, and a professional risk managers mindset. Almost since day-1, I have long arbitraged country and FX differences, and an inception to date compound return of 12%+ is commonplace - inclusive of every one of all those early losses! Do you have a part-time gig that tops it up while waiting for investments to mature? 2-3! but primarily for the diversity, mental stimulation, and as a risk management tool. New ventures typically have partners, teaching is always an adventure, and a craft-brewery brings its own operating/financial challenges. No correlation with investment maturities. Do you go for some bold risk taking and make a fortune on some security each year? Yes, but we do it as a succession of vintages with a 6 yr time horizon. Sometimes more than one vintage/year, sometimes just one every two/three years, timing depending upon the market opportunity. Risk controlled by staying within our competencies, and systematically permanently pulling $ off the table. We have a optimum size, and stay within 5-10% of it - when times are good it forces sales, when times are bad it encourages reinvestment. Biggest take-away's? Be yourself. You call the shots for what is important to you, not somebody else; the resultant gain/loss is your scorecard. Process versus once/done. Investing is a life-time thing, that you get better at the more you practice. Humility. Wealth is a privilege that can be taken away from you at any time, while you have it, use it wisely. SD

Been semi-retired for a while now .... Most people will have 3 retirements; the go-go, the slow-go, and the no-go. Canadian actuarial tables, imply that a healthy non-smoking male, aged 67 - will live for another 19 years (Age 86); and that selecting for healthy/clean living, will extend your life. Most professionals will be packaged out in their late 50's, with each retirement being roughly a decade, and having its own requirements. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1310011401 Typically, retirement was feared. Often the forced retirement meant a loss of identity, inability to change, nothing else to do - and a resultant self induced grave < 12 months. Quite a bit different today, provided you have learnt how to do ongoing re-invention. Today's package will often pay off the mortgage/car loan, lock in benefits for life, give you some re-training dollars, put some money in your bank account, and a year plus of employment insurance payouts. When letting someone go, it has become increasingly common for the recipient to give you a hug .... Most people will defer pensions, and contract out part of the year/work part-time to fund their go-go retirement; as with no significant debt outstanding, there is little need for that big income. This is when you travel (differently, and often for months at a time), start new ventures, enjoy your 2nd youth, and do all those things you have long wanted to try. You have already made your stash, it has roughly a decade to compound, and it's more about family/you versus the size of your bank account. Zero draw unless it's part of some life-time tax minimizing strategy. Comes your 70's most people will have grandkids, and your life will become theirs; another round of reinvention! Comes your 80's life will change again as grandkids no longer want to know you, spouse die off, and widows/widowers hook up again for a last kick at the can! The antidote to an increasingly sedentary life, being ongoing community engagement (work/volunteer) and travel. Eventually disease/old age will catch up to you, and your quality of life decisions will decide the outcome. Draws at 3-4% in your second retirement, and 6-10% in your third retirement depending upon health and the home you go to. Depending on the source, continuing to work may no longer make financial sense after tax. If you live in Canada, this will typically be when RRSP's have to convert into annuities and begin paying out. Happy retirement. SD

If you get the opportunity, visit Pukaskwa National Park. If you choose to kayak, make sure that everyone can do an open water rescue, as the Lake can get very rough, very quickly! Paddling tandem double kayaks in 20-25 foot swells is only fun when every one knows exactly what they are doing. https://www.pc.gc.ca/en/pn-np/on/pukaskwa SD

The reality is that in live time, the market does not know when a a sell off is occurring. All that an investor really knows is the directional price of their individual holdings should things work out. If the market and commodity tides rise/fall as expected, company prospects work out as advertised, investor 'sentiment' remains largely unchanged, etc. Some components to this are rational, but a great many are not - hence the volatility. We take three approaches to this. Anticipate what we think might happen, change sizing, take $ off the table. We hedge by swing trading part of a position. If we sell 50% of our shares, we are 100% hedged at the price we sold at. If the price goes up, the unrealized gain on our remaining 50% exactly equals the unrealized loss on the 50% we need to buy back. However, if the swing trade is closed at a lower price that the shares were sold at, we have a realized short gain settled in cash. Cash that may be either withdrawn entirely or reinvested in additional shares to lower the cost base. We don't need an options market, and volatility is our friend. Every commodity goes through cycles; todays beauty will slowly lose her teeth and become the ugly crone. However, the young daughters of todays crone, will grow up to become tomorrow's beauties. It means continuous change, and not holding a company 'for ever and ever'. Or systematically taking $ off the table. Reinvest all those $ in another security, and you have simply changed tables in the casino. However, permanently remove some of those $ (pay off mortgages, buy houses, pay for school, start a new venture, etc.), and you can both materially and permanently change your life. It means having the maturity to know what is important to you, and dancing to your own tune. Markets/money exists to serve you. It's not the other way around. SD

Not directly related, but this will soon be impacting energy prices ... The UK has proclaimed a once in 50 yr drought, and crops have begun failing for lack of water. Hay (& a lot of other crops) are being harvested 4-6 weeks early, at well below 'normal' yields, while farmers can; so much so, that it's getting hard to book a combiner. Lot of watercourses are now dried up cracked clay pans, unable to absorb rain quickly; the farming community expect that there will shortly be flooding to add to the crop failures. Cant deliver petrol when roads, &/or processing facilities are underwater. SD

This is only valid if you are valuing company holdings in the same fields. You need to adjust for different volumes, gas/water cuts, and egress capacity. Great production and infrastructure is worth squat if you cannot get it to market. SD

An oil company can either drill for new production, buy someone else's, or buy their own via a share repurchase. When you cannot drill, the next best option is to either raise the share price via debt-repayment/dividends/acquisition, or buy back shares. No new capex beyond that to consolidate acquisitions. SD

Business Standard, Jul 26 article "US Fed on track for most aggressive rate hike cycle in 2022: Report" (Indian financial press) The US Federal Reserve has already hiked interest rates by 150 bps in 2022 and is expected to raise rates by another 200 bps during the remaining months of 2022. Cumulatively, this would be tantamount to about 350 bps rate hike during 2022, making it the most aggressive rate hike cycle, Acuite Ratings said in a report. https://www.business-standard.com/article/international/us-federal-reserve-on-track-for-most-aggressive-rate-hike-cycle-by-200-bps-122072600856_1.html The reality is that this forecast is no less accurate than anyone else's, but given that they are further away from the punch bowl - perhaps a little more objective? Point is, that if the hikes turn out smaller than expected - that's bullish. If the full year 2022 forecast is 325-350bp; and the 'revised' forecast is 150bp YTD +50+25+25, or 250bp. Shouldn't that 75-100bp forecast difference (350-250) have produced a significant rally? Most would think that either it hasn't happened yet, or it occurs after each of the next 3 rate settings - as/when actual turns out to be less than forecast. Yet everyone swallows CME Fedwatch as gospel. No possibility that the messaging is being 'massaged' to draw attention away from this forecast difference Gotta love s rigged system! SD

Keep in mind that Europe has both the gas shortage/winter coming up, and rising interest rates. There will not be a need to raise US rates as rapidly or as high as would otherwise have been necessary. There are 3 more federal reserve settings through 2022 calendar year-end, and a market expectation of a 200bp raise across the 3 settings, or 75+75+50 ?. What do you think happens if the expectation changes to 50+50+50 ? And it happens at the next rate setting ?? SD

It is worth listening to some of the smaller players, who actually know what they are doing. Add to that the smaller drillers at the PD and ESI levels, where there are deep benches. Comments are typically in-line, but quite a bit different to that of the majors. https://www.obsidianenergy.com/investor-centre/presentations-events/2021-corporate-update-presentation/ Governments set directional policy, media sells it. Talking points, data manipulation (EIA report), ignore what doesn't fit the narrative. Most wouldn't believe TASS or Xinhua, western propaganda mechanisms are little different. Time horizons of now, through to the next political event (US Mid-Terms). Industry executes. The majors via lobbying and dispensation, most everyone else by making it happen. Field consolidation, debt repayment, return of capital - but no new infrastructure builds. New capital to green energy or ESG improvements only. To most, it is quite obvious that oil prices must go higher, before policy is achieved. Of course, the result is dissonance ...... Opportunities everywhere, but only if you're willing to call the BS Happy hunting! SD

Currently, the discount on cash purchases of bulk goods leaving Russia is roughly 35%, plus another 15-20% for bribes and transportation. Cheaper still, if some of that cash can be paid anonymously outside the country. Lot of the 'roofs' are also the goods resellers in both the west and the east. Profiting on both the purchase and the resale of the goods. However nobody makes anything, unless those luxury goods can be resold, absent a deep discount. Easiest way to do that is to ensure that the various 'Russia' traders make some money, and spend it in the various Russian owned clubs. Opportunity ! SD

Cost/day is actually quite cheap, as there's typically nothing to spend on - it's just that all the cost is paid up-front. The rest is mostly time, as each leg is roughly 2-3 weeks - in our early days we used to straddle Xmas/New-Year's whenever possible, and use vacation time on both sides of year-end. These things also take roughly 5-10 years, net of working around the inevitable conflict disruptions. And the older you get - the more you can afford better accommodation in the connecting cities ! Those old Peter Ustinov adverts for Visa ...... "Don't leave home without it" SD

Semi-retired These days I work primarily for fun, mental health, and the funds/ability to travel. The pensions are family investments in Paris and Granada, each 5% ownership also requiring the owner to be managing 'on-site' two weeks/year. It's more work versus play, but its free room and board, and you get to enjoy the city in your off time. Mom/sister manage Paris, nephews/I manage Granada. Overland travel definitely isn't for everyone, but it is an incredible experience. Typically it's 2-3 weeks in a bumpy/dusty truck, over a section of rough wilderness route, then fly home. String all the sections together over a few years, and you've gone from London to Cape Town. Navigating conflict zones, famines, disease, etc. is pretty commonplace, and part of the charm. However, as my spouse prefers the creature comforts; it's usually just me in the truck, and we catch up at the end of each section - after I've had a good bath! I've seen the pyramids from a hot air balloon, sailed down the Nile (Agatha Christie style), sailed Lake Nasser in a Felucca, and crossed the Sahara in 4x4's. Been on safari in Botswana, canoed in the Okavango, seen Victoria Falls, Great Zimbabwe, and dived in Lake Malawi. Lots of nights camping in the bush under the stars. Going east, we've dived in the Aegean over submerged Roman ruins, sailed the Turkish/Greek islands, and made our way to Ankara via Istanbul (highly recommended). Swum over the top of a Parthenon, in a cloud of fish! High on the outstanding bucket list is a tour of Rajasthan, the Galapagos/Machu Picchu, and a circumnavigation of Australia. The rest is just apprenticing the nephews in the booze trade! SD

No vacation homes. We do the euro thing and have 5-10% participating equity stakes in small hotels/pensions instead. No repeat vacation spots, as the world is too big a place. Odd numbered years are in Canada, even numbered are abroad. Long bucket list of must see places. Working our way through both London to Cape Town overland, and London to Kathmandu overland. Big difference is that we stay at a lot better places than the hippies used to! Next adventure is a euro trip and disposal of liquor/caviar. Thereafter a stop over in the Azores for a week of hiking on the way to Xmas in the UK, and a stop over in Reykjavik over New Years Eve on the way home. The fireworks are spectacular, and every good Icelander takes it on as his/her personal responsibility to make as much noise as possible - starting at around 11:00 am when it's already dark !! SD

Most of the population increase is in the poorer countries. The incremental demand is for refined product (can't do anything with just crude oil), supplied from Asian refiners, and cracked from Russian and Iranian crude. 'Western' demand is essentially a declining 'wash' - inflation driven switching from gasoline to EV, plus ongoing aging (old folks don't drive), plus periodic Covid demand destruction washing out against population growth. Get inflation under control, and the worlds economies can recover. Recession to drive down demand and untwist supply chains, interest rates back to historic norms, labour market settling to historic norms, and market forces allowed to 'put down' the zombies (US Fed view). Resultant cumulative permanent demand destruction largely 'washing' out the subsequent material recovery in demand as the worlds economies come back. WTI in the USD 85-125 range for a very long time. Putin/China are playing the long game, and being smart about it - they own the poor, and their incremental demand for o/g as the poor progressively become wealthier over time. The west is playing the short game, using price to drive substitution to electric vs o/g, and rebuild infrastructure for a different age. Both are rational. To some extent, the US is also playing the long game. - the sour crude SPR is near empty and needs to be refilled. Mexico, and VZ can deliver via ship, Canadian heavy has to be delivered by rail. Hence if I'm a western o/g producer ? I'm asset stripping whatever I already have at 85-125/bbl, returning capital/reinvesting in green energies, and using M&A to consolidate fields and manufacture as efficiently as possible. Exactly what we see today. SD

With this degree of uncertainty, the smartest thing a o/g producer can do is to minimize their development exposure, and apply their FCF to debt and capital redistribution. Hold production flat, and focus purely on manufacturing - new production simply replacing depletion in the pipeline. Grow the share price via reverse splits/share buybacks, merge into bigger entities. The industry relies on a great many people doing shitty jobs, with no future, in return for high pay. The wide spread brain drain and labour shortages across the entire supply chain, are evidence that the compensation package is no longer big enough - or appropriate for the times. The US price at the pump is going to have to rise materially. Disruption. SD

WTI is at about the same inflation (US) adjusted price as it was in 2011 through 2013. Per the below source, USD 113.01, 110.09, and 114.38. Prices were highest during the Iranian Revolution of 1980, at USD 132.90. WTI closed yesterday at USD 102.60. Yesterday’s price is only high when compared to the many years when the world was calm; however, in the current times, the world clearly is not calm. If you think the current disruption is not that dissimilar to that of the Iranian Revolution, the current price is cheap, and the GS USD 140 projection not out of line. However, most would expect a spike through USD 140, and not a sustained period of USD 140 oil. Every large inflation adjusted price spike has been a black swan event, and unpredictable. Most have capped out at an inflation adjusted USD 110-115; to go much above that this, the disruption has to be severely disruptive and systemically wide spread. Most would argue that todays 'perfect storm' is such an event. The table tells us that price hikes are not permanent, and that the price of WTI has been progressively rising over the last 50 years. Components of todays 'perfect storm' have been building for a very long time. https://inflationdata.com/articles/inflation-adjusted-prices/historical-crude-oil-prices-table/ SD

Accounting Approach. Using only the asset side; book value EV = Net Working Capital + Fixed Assets + Goodwill. Convert to the efficient market approach (as above in the thread), by substituting market value for book value as much as possible. As goodwill will value at zero, and the assets at break-up price, this will throw off an approximation of the liquidation EV - or the minimum that you will have to pay to buy the enterprise. Deduct debt, preferred shares, and minority interest from this EV to arrive at the intrinsic value of the common shares. Make your assets worth more (by developing them), or lower your debt, to raise the intrinsic value of your common. If that intrinsic value is higher than the current market cap, the common share price rises. If it doesn't ... buy all the shares you can Financial Modeling, 4th Edition, Simon Benninga, Chapter 2 Valuation Overview. Heretical (to the market), but equally valid approach. SD

EV can be calculated from either the asset or liability side of the Balance Sheet. The problem is that most calculate only from the liability side, don't really know how to use it, and assume that the current market price of the preferred and common stock is correct. Of course, it isn't ..... We typically derive the value of a company, via the Gordon formula. Divide the Gordon value by the projected earnings to get the P/E multiple. Bet on earnings 'misses', and/or a sentiment change in the P/E multiple. Momentum approach. But what if you're an O/G company? Great rock, but lack the resources to develop it - therefore the rock is worth squat. Value of the rock - cash - debt - preferred shares divide by common share count gives a very low share value. But if I can drill the rock , prove up how much economic oil I have, and the area becomes 'popular' .... the value of that rock becomes very high, which produces a high share value. Sure, the market price/share may be less than the EV price/share - but if you want my rock, you're giving me at least the EV price. EV approach. OBE is one such company. Lots of very good rock, cash flooding in (from production) to produce it, and EV dividing over a very low share count. Then add to it that a dollar invested in new drilling, pays itself back in < 9 months. or less. EV torque. SD

The thing is with commodities, that in the short-term, the only potential incremental supply is unused egress capacity in the pipeline, and inventory. Sure, shale can be drilled quickly, throughput raised, valves opened a little wider, etc - but if there's no more capacity in the pipe/rail, that production is stranded. The medium term is typically 9 months through 3 years - whatever it takes to build the incremental infrastructure, to move the additional throughput. Thing is, that today that incremental build often no longer makes the business case (NPV<0), as there is a very real probability the build will no longer be required within a few years (no revenue). That incremental build either does not happen, or is only on a much smaller scale than would otherwise have occurred. Stranded for longer. Waving a magic wand, does not deliver additional supply today. And you need to delver at least an additional 5%+ just to offset the continuous field depletion - 10M bbl/day of demand, needs an additional 500K bbl/day of new production within 1 year - just to stay even, and it cannot be brought on line at the snap of a finger. This is what investors just don't get. Keeps coming back to the GS USD 140/bbl forecast. The only questions are for long, and how big the difference will be between actual and forecast. SD

To invest in oil is to 1) invest in the commodity cycle, and 2) in the efficiency of the operator. Accept the risk of being a price taker, and magnify it by the efficiency of operator. Control your risk, by knowing your players. The reality is that price doesn't stay < USD 90/bbl unless demand materially craters more than supply. Supply is depleting every month, and global reserves are in net run-off. If price is to materially fall, actual recessions have to be far more severe than what is already baked in. GS at a forecast USD 140, is just calling the BS. Producers do very at USD 60-70, amazing at 90-100, & 'effing awesome > 120. The reality is that a windfall tax on oil will be imposed, to fund energy price rebates - well before there is any meaningful increase in net production. SD

The BoC is independent. No political influence on the BoC. BoC policy doesn't influence the government of the day. Of course, interest rates (technology) impact economic activity, which impacts employment (social policy). In Canada, use of technology is not regulated, social policy is (democratic election process). The same approach used in the regulation of Canadian banking - a banks use of technology to trade is not regulated, only the trade itself is (KYC, trade/confirmation/settlement, etc.). Different approach. SD

The reality is that 'do nothing' is not an option. Like it or not, weather events are getting stronger and more frequent, drought/flood is much more common, and the everyday things that we all take for granted - are increasingly no longer a given. Extreme events x rising but still remote possibility of occurrence x catastrophic loss. Insurance solution. But private insurance only works if the risks are reasonably predictable, and the environment relatively stable. In the extreme events, we rely on self-insurance - the state &/or your own personal wealth. The insurance 'premium' being the additional costs we all pay every day to mitigate climate change. Hopefully, the more aggressive our collective mitigation, the lower the total insurance bill will be, and the lower the total loss as/when it occurs. Rational. We pay our money to the state, and the state spends it to mitigate against climate change. As/when the adverse events happen, the state gives us the money to start again. However, we're looking for certainty where there is only uncertainty, and the planning time horizon of a state is only until the next election. The state is our best, but imperfect solution. So why don't I get it ? My politician and his/her communication/propaganda mechanisms has been utter sh1te. There is a reason why the media is no longer trusted. SD