Energy Sector

[SharperDingaan]

16 hours ago, Ulti said:

SD,

 

How realistic that Europe can store 90% of its lng needs every year ?  Opec +\middles east\ seems to be in the driver seat but they are not cranking it out. I read somewhere that lng shipping form the US is like 5 o'clock traffic with all the tankers going to Europe ( at the expense of asia ).

https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1511

 

The required gas is already stored; in the ground, at the source fields.

Generally the shorter the supply chain, and the more above ground storage it has (storage tanks, floating, pipeline, etc.), the more in ground storage you can have. Hence to a Europe, supply from the ME or Scandinavia is preferable as it results in less stress on the infrastructure, and more underground storage.

 

Example: If your supply chain is reliable, your delivery time from well-head to local storage is 3 months, and you can secure enough above ground storage to comfortably cover  'emergencies' - you can store roughly 9 months of your annual need, less the above ground inventory, in the ground, for free, and at source. 

 

However the more/faster you can move to green energy, the less reliant you will be on that underground storage in whatever nation it may be. The reality is that European transition away from Russian gas, is not as difficult as Russia would like you to believe - 'cause if it were, Russia would not have recently sold the future long term supply to China 

 

SD

[cubsfan]

^^^ Quite an interesting post - and explains a lot about NG storage considerations. Good to have you around!

[Ulti]

Thanks SD for your patience and education.

 

A few more questions ... and realize I'm asking in self interest... I hold directly CTRA, SU and a comm. fund \about 10% of portfolio. I'm trying to figure out risk\reward and whether to add at an appropriate moment.

 

How reliable is the ME in supplying Europe and storing NG for them ? Europe trusted the Russians and.... It seems like you would want to directly hold as much Ng as possible on your own soil. And isn't the transition to Green going to take years and years?

 

It seems like from your comments that Asia ( ex china) is left holding the bag with a longer supply chain. Are they going to make this up from N. America ? Aren't Canadian pipelines being underbuilt\stopped at this time.. esp. to the coast for easier transport?

 

 

I know you have made comments in the past about being a very nimble Comm. investor. Is Pierre

Andurand correct and thinking this is a long term cycle? Maybe this is Mr. Buffet's thinking as well

with his recent increase in OXY. ( and I have a lot of BRK.b shares ).

 

And when I read the news should I be looking at everything thru an energy \comm lens ?

Israel does have NG.

https://www.jta.org/2022/03/09/global/israeli-president-visits-turkey-for-talks-with-erdogan-in-sign-of-renewed-relations

 

[Ulti]

https://www.reuters.com/business/energy/indias-oil-imports-us-rise-amid-criticism-russian-purchases-2022-03-19/

[SharperDingaan]

We have no idea how this plays out.

 

While the o/g risk/reward is attractive, it really depends upon your circle of competence and time horizon.

There are currently a great many CDN o/g firms of moderate risk, that will very likely both double < 18 months, and reinstate dividends to former levels. Example: In 18 months, most would expect an OBE currently trading at CDN 9.39, to trade at CDN 18-20 on an 20-25c dividend/quarter. Potentially a cash yield of 8.52% to 10.65%,  and a double; but obviously more risk than a SU

 

More inclined towards a new world order, and secular change versus long term cycle. It's pretty clear to me that 'big oil' is being asset stripped, and  proceeds redirected into green energy. Hard not to be long term supportive, and we invest accordingly; but it's very much the outlier position. 

 

It is highly likely that the Soviet, Iranian, and Chinese tanker fleets have been routinely engaged in at sea ship-to-ship cargo transfers. The oil is still getting to market, it's just the price being paid for it, and China/India have obviously being doing very well.

 

China isn't stupid, and neither is Biden. They both have very well connected advisors, and each team will be very aware of the relative risks, costs and benefits. Putin needs to exchange Yuan receipts for USD in volume, which really means China selling down its USD reserves ... for a transactional fee  Ultimately, it leads to a globally shared central bank reserve currency and everybody's benefit; again not a popular view! 

 

Green transition is already here, and alive and well. There are even west coast forestry companies concluding that their growing trees are worth more in carbon credits, than cut down as lumber. Green in Europe is pretty much everywhere, and accepted fact; whereas it is just starting in NA, but further ahead in Asia.

 

A number of Cdn o/g companies have long term warrants, 

look at those with big hedge positions rolling off this month 

 

SD

 

 

 

 

 

 

 

 

Edited March 19, 2022 by SharperDingaan

[Dinar]

5 hours ago, SharperDingaan said:

We have no idea how this plays out.

 

While the o/g risk/reward is attractive, it really depends upon your circle of competence and time horizon.

There are currently a great many CDN o/g firms of moderate risk, that will very likely both double < 18 months, and reinstate dividends to former levels. Example: In 18 months, most would expect an OBE currently trading at CDN 9.39, to trade at CDN 18-20 on an 20-25c dividend/quarter. Potentially a cash yield of 8.52% to 10.65%,  and a double; but obviously more risk than a SU

 

More inclined towards a new world order, and secular change versus long term cycle. It's pretty clear to me that 'big oil' is being asset stripped, and  proceeds redirected into green energy. Hard not to be long term supportive, and we invest accordingly; but it's very much the outlier position. 

 

It is highly likely that the Soviet, Iranian, and Chinese tanker fleets have been routinely engaged in at sea ship-to-ship cargo transfers. The oil is still getting to market, it's just the price being paid for it, and China/India have obviously being doing very well.

 

China isn't stupid, and neither is Biden. They both have very well connected advisors, and each team will be very aware of the relative risks, costs and benefits. Putin needs to exchange Yuan receipts for USD in volume, which really means China selling down its USD reserves ... for a transactional fee  Ultimately, it leads to a globally shared central bank reserve currency and everybody's benefit; again not a popular view! 

 

Green transition is already here, and alive and well. There are even west coast forestry companies concluding that their growing trees are worth more in carbon credits, than cut down as lumber. Green in Europe is pretty much everywhere, and accepted fact; whereas it is just starting in NA, but further ahead in Asia.

 

A number of Cdn o/g companies have long term warrants, 

look at those with big hedge positions rolling off this month 

 

SD

 

 

 

 

 

 

 

 

SD, I am admittedly a tourist in oil/gas.  May be I missed it, but is there any reason why you are not long Canadian Natural? Seems like a 25bn+ CAD fcf per annum on CAD 100bn EV?  or Suncor?  

[meiroy]

7 hours ago, SharperDingaan said:

We have no idea how this plays out.

 

While the o/g risk/reward is attractive, it really depends upon your circle of competence and time horizon.

There are currently a great many CDN o/g firms of moderate risk, that will very likely both double < 18 months, and reinstate dividends to former levels. Example: In 18 months, most would expect an OBE currently trading at CDN 9.39, to trade at CDN 18-20 on an 20-25c dividend/quarter. Potentially a cash yield of 8.52% to 10.65%,  and a double; but obviously more risk than a SU

 

More inclined towards a new world order, and secular change versus long term cycle. It's pretty clear to me that 'big oil' is being asset stripped, and  proceeds redirected into green energy. Hard not to be long term supportive, and we invest accordingly; but it's very much the outlier position. 

 

It is highly likely that the Soviet, Iranian, and Chinese tanker fleets have been routinely engaged in at sea ship-to-ship cargo transfers. The oil is still getting to market, it's just the price being paid for it, and China/India have obviously being doing very well.

 

China isn't stupid, and neither is Biden. They both have very well connected advisors, and each team will be very aware of the relative risks, costs and benefits. Putin needs to exchange Yuan receipts for USD in volume, which really means China selling down its USD reserves ... for a transactional fee  Ultimately, it leads to a globally shared central bank reserve currency and everybody's benefit; again not a popular view! 

 

Green transition is already here, and alive and well. There are even west coast forestry companies concluding that their growing trees are worth more in carbon credits, than cut down as lumber. Green in Europe is pretty much everywhere, and accepted fact; whereas it is just starting in NA, but further ahead in Asia.

 

A number of Cdn o/g companies have long term warrants, 

look at those with big hedge positions rolling off this month 

 

SD

 

 

 

 

 

 

 

 

 

A very interesting post, SD. Sadly I have to agree on the new world order.

 

I own some small Cdn names that have risen like options play in the past year...  Thanks for the warrants idea, needs a BAC-WT thread.

 

IMHO the big risk here is some form of forfeiture. Or an exchange ignoring whatever you own, as we have seen recently.

 

 

Edited March 20, 2022 by meiroy

[meiroy]

A fantastic thread on what's going on in the futures markets:

 

 

[Spekulatius]

LOL, I see also this odd conspiracy fellow INArtecarloDoss is involved and Kuppy who thought the financial systems would blow up, because we boycott the Russians. They could be right on direction, but it I am sure it will be for the wrong reasons.

 

Its not a surprise that violent changes in the future market in either direction blow up traders.

Edited March 20, 2022 by Spekulatius

[SharperDingaan]

10 hours ago, Dinar said:

SD, I am admittedly a tourist in oil/gas.  May be I missed it, but is there any reason why you are not long Canadian Natural? Seems like a 25bn+ CAD fcf per annum on CAD 100bn EV?  or Suncor?  

 

We own a lot of CVE (SU competitor) warrants at a very low cost base, a lot of OBE at a ridiculous cost base, and a lot of PD, ESI, CET that we have been steadily adding to. We are long tar sands via CVE/OBE (Peace River), long light oil/gas via OBE, and long the industry itself via the drillers. We take an investment versus trading view, and the WCSB is a strong circle of competence.

 

Drill rigs have been coming out of cold stack in a big way, demand/day rates are materially higher than they were, and spring breakup is temporarily freeing up some crews. Drillers spent their money on consolidation, and cashflow is rapidly paying down debt. Not hard to see what happens once target debt is reached.

 

Delusions of grandeur managed by redirecting wealth into London(UK) RE. Haircut at 40%, margin to get to target capital allocation, and buy the RE mortgage free. O/G goes tits up tomorrow; we walk away with a stub and fully paid up London RE. The longer the o/g party continues, the more RE we accumulate.

 

Why London RE? We have a strong circle of competence in it.

Commodities are known for their risk, and their ability to create wealth. If you hope to do well in this area, your risk management needs to be up to the game - we aren't playing for annual 10% returns, we're playing for 75%+  

 

Obviously, not for everyone.

 

SD

[thowed]

Always appreciate your thoughts on Energy, SD.

 

Good luck with the London RE - as you no doubt know, it has suddenly gone crazy again, at least partly it seems because of the particularly low supply on the market right now.  Friends have been struggling to find stuff, and then ferocious bidding wars with anything that appears.  Perhaps a Russian exodus will help! 

[Spekulatius]

London RE does not seem where I would put my money. Don’t they call London Londongrad because there is so much Russian money there? I also think the GBP looks overvalued and may be on its way down.

[thowed]

Sorry to continue off-topic, but you don't notice Russian money in London unless you only hang out in Knightsbridge/Mayfair/Belgravia & go to certain places.

London, for all its faults, is still one of a handful of blue-chip cities globally, & has the key benefits of:

 

1: Good rule of law (relatively at least)

2: Good private education

3: English-speaking

4: Located at a point where it is (again, relatively) well-placed time-zone-wise for being in touch with both the US, Middle East & Asia.

5: Many world-class restaurants, theatres, art galleries etc.

 

It's often infuriating, but I'd never count London RE out.

 

 

[SharperDingaan]

We come at London RE from the Quantity Surveyors viewpoint.

Agreed if you want out of the box, you are going to overpay. The flipside is that if you have the expertise/connection, a re-development can be fixed up/remodeled, and resold fairly easily. It just means partnering up with trusted entities, which we're OK with. Ultimately the long-term aim is a reliable rental machine, throwing off a few bob every week.

 

SD

 

Edited March 20, 2022 by SharperDingaan

[Dinar]

12 hours ago, SharperDingaan said:

 

We own a lot of CVE (SU competitor) warrants at a very low cost base, a lot of OBE at a ridiculous cost base, and a lot of PD, ESI, CET that we have been steadily adding to. We are long tar sands via CVE/OBE (Peace River), long light oil/gas via OBE, and long the industry itself via the drillers. We take an investment versus trading view, and the WCSB is a strong circle of competence.

 

Drill rigs have been coming out of cold stack in a big way, demand/day rates are materially higher than they were, and spring breakup is temporarily freeing up some crews. Drillers spent their money on consolidation, and cashflow is rapidly paying down debt. Not hard to see what happens once target debt is reached.

 

Delusions of grandeur managed by redirecting wealth into London(UK) RE. Haircut at 40%, margin to get to target capital allocation, and buy the RE mortgage free. O/G goes tits up tomorrow; we walk away with a stub and fully paid up London RE. The longer the o/g party continues, the more RE we accumulate.

 

Why London RE? We have a strong circle of competence in it.

Commodities are known for their risk, and their ability to create wealth. If you hope to do well in this area, your risk management needs to be up to the game - we aren't playing for annual 10% returns, we're playing for 75%+  

 

Obviously, not for everyone.

 

SD

SD, thank you very much, I really appreciate it.  I am long Cenovus, and have been doing the work on OBE.  I used to own London real estate via Daejan, but that got taken private at a very low valuation.  

[Ulti]

https://oilprice.com/Energy/Oil-Prices/100-Oil-Is-A-Wakeup-Call-For-Canadian-Producers.html

[Ulti]

https://www.reuters.com/business/canadas-cp-rail-shuts-down-railroad-workers-strike-2022-03-20/
 

Does this matter to oil sands?

[Xerxes]

I think this podcast is really worth listening too. Specially the part how it is the growth in the lower/middle class that really propel the commodity cycle in contrast to monetary inflation etc. 

[SharperDingaan]

This has been well known for many years, but most just haven't recognized its significance.

Many years ago I was reminded of what this meant by a very well travelled diplomat. To paraphrase ...An India, or an Asia, bats above its weight, because any kind of good governance in these geographies is really about 'safely' making millions of poor people wealthier. Millions of poor people able to spend a little more on better food/health/comfort quickly adds up to incremental massive demand on the underlying commodities enabling that better food/health/comfort.

 

The US has a large population, and a high average annual spend/person, but its getting old. China has a much larger population, but its average annual spend/person is relatively modest, and the population younger. However, economic activity is essentially population x average spend/person. Over time, as those foreign populations progress into their higher spending years, and US spend diminishes - the nexus of economic activity inevitably shifts away from the US. 

 

The diplomat has long since passed, but his observation is just as true today as it was back then.

 

SD

 

 

 

 

 

 

 

[Spekulatius]

1 minute ago, SharperDingaan said:

This has been well known for many years, but most just haven't recognized its significance.

Many years ago I was reminded of what this meant by a very well travelled diplomat. To paraphrase ...An India, or an Asia, bats above its weight, because any kind of good governance in these geographies is really about 'safely' making millions of poor people wealthier. Millions of poor people able to spend a little more on better food/health/comfort quickly adds up to incremental massive demand on the underlying commodities enabling that better food/health/comfort.

 

The US has a large population, and a high average annual spend/person, but its getting old. China has a much larger population, but its average annual spend/person is relatively modest, and the population younger. However, economic activity is essentially population x average spend/person. Over time, as those foreign populations progress into their higher spending years, and US spend diminishes - the nexus of economic activity inevitably shifts away from the US. 

 

The diplomat has long since passed, but his observation is just as true today as it was back then.

 

SD

So here comes the BRIC thesis again.

 

I think a wise investor also once said that one should never invest on demographics and other LT trends. Too many things will get in the way from here to nirvana and due to path dependence you can lose your money many times over.

 

I forgot who it was, but it does ring very true.

[SharperDingaan]

Where do you think the BRIC thesis originally came from? Somebody just puled it out of their ass??

Whether one gives it credence or not is irrelevant, but to ignore the linkage is to bury ones head in the sand. The process creates opportunities, as does disruption of the process. It is what one does with those opportunities .....

 

SD

 

[Spekulatius]

10 minutes ago, SharperDingaan said:

Where do you think the BRIC thesis originally came from? Somebody just puled it out of their ass??

Whether one gives it credence or not is irrelevant, but to ignore the linkage is to bury ones head in the sand. The process creates opportunities, as does disruption of the process. It is what one does with those opportunities .....

 

SD

 

The term BRIC came from Goldman Sachs. You would have lost your ass sticking with it. Great narrative though, just didn't work. I bet at least GS made money on it, their clients likely didn't; but what do I know, maybe they did tell them to get out at the top.

 

All these markets are way more cyclical  than they are secular, that's the problem.

Edited March 23, 2022 by Spekulatius

[Xerxes]

Well BRIC was a narrative as a portfolio of letters. As long as one letter (C) pull the rest of portfolio. The narrative worked well enough till ‘08. Now the new narrative de-carbonization etc. until it isn’t. 

 

for me it makes sense : the money distributed in the Covid era end up in the low/middle class who buy houses, more cars, dishwashers etc unlike ‘08-09 money printing that just inflated assets. 
 

 

[bizaro86]

On 3/19/2022 at 8:36 PM, Dinar said:

SD, I am admittedly a tourist in oil/gas.  May be I missed it, but is there any reason why you are not long Canadian Natural? Seems like a 25bn+ CAD fcf per annum on CAD 100bn EV?  or Suncor?  

 

CNRL has the best management in the basin, imo. I worked for a competitor for a long time, and the field I worked on was about 2/3 CNRL and 1/3 my firm. They had twice as much production/wells, but less staff at every relevant position (engineers, operators, geologists, etc). Their well results were comparable to ours holding geology/secondary recovery constant (part of my job was competitor tracking). They are also value investors in the "buy low and never sell" mold. I think they are the natural owners of most assets in the basin, and I keep their shares as my long term O&G exposure. 

 

I'm always amused that everyone calls them "Canadian Natural" which is their strongly stated preference. I actually had a regulator send me comments on a document I had submitted that referred to them saying, "They prefer to be called 'Canadian Natural'." I responded that I had used the legal name of their operating entity and since they weren't a party to the application their opinion wasn't relevant. Just shows the level of regulatory capture they have from being the biggest in the basin. I was pissed off at the time because they delayed my application over that and I had followed the rules correctly by using the full legal name of the operating entity in question (a subsidiary of CNRL). 

[mcliu]

@bizaro86 Thanks for the interesting insight! It certainly corroborates with CNQ's operating & financial results. What do you think they're doing differently? CNQ has been smart capital allocators too, using their size/balance sheet to acquire during downturns. Btw, do you have any thoughts on the teams at CVE/SU? Thanks!