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I haven’t made it a secret that I’m a bull on commodities, or which sectors I’m partial to, but I think there are several opportunities where the 2027 Options Chain is worth a look. I only have one of these trades on for now, but the rest of these ideas are things that have crossed my mind in recent weeks with the release (Grand opening? Premiere?) of the January 2027 Options chain. I prefer the OTM (out of the money) options, but there are different ways to express a trade with options. Don’t worry, I won’t be releasing an options trading course anytime soon, but I have seen a quote from one of the greats making the rounds on Fintwit, and I think it’s thought provoking for today’s post.

With the 2027 LEAPS (long-term equity anticipation securities), you get more than two years. You pay for the privilege of the additional time to expiration. Bid/ask spreads will also usually be wider, but if you want to add torque or a kicker to a position in common shares, the LEAPS are one way to do that. For baseball fans (my Mariners missed the playoffs again), using LEAPS (or any form of options really) is an exercise in slugging percentage versus batting average. I’ll apologize in advance to Yankees fans (it was either Damon and the Red Sox coming back from the 3-0 deficit or Lindor’s salami in 2017), but baseball provides a good way to visualize the potential outcomes from LEAPS.

With regular shares, you might have a great batting average (.600 or higher), but for investors, it’s a question of how much do you make when you’re right? Going 3/4 with three singles is a batting average of .750 and a slugging percentage of .750, while going 1/4 with a homer is a batting average of .250 but a slugging percentage of 1.000. I’m not going to get derailed talking about baseball statistics, but a home run has more potential to change a game (or in our case, an investor’s returns) than a bunch of singles. The point is that if you get the LEAPS right, even at a lower batting average, that math works out due to the potential for outsized returns.

I usually save the disclaimer for the end, but I’ll make an exception in this case. Options are more risky than owning common stock, and you are way more likely to lose your entire investment versus buying common stock. You need to be right on the direction of the move, the magnitude of the move, AND the timing of the move to get it right with options. I have said this a couple times in regard to sectors that have more risk in my opinion, but this applies to options as well: position sizing is your friend. With that said, let’s get into some of the situations where I think the 2027 LEAPS are interesting.

Sable Offshore

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Today I’ll be writing a bit on my outlook for different commodities, before breaking down a summary of my thoughts on each company in the portfolio. I’ll also talk briefly about some companies in sectors of interest that I don’t own, but might be interesting for readers.

The Precious Metals

I said in my post at the start of this year looking ahead at 2024 that I wouldn’t be surprised to see $2,500/oz gold. Since February, gold has been grinding higher and we’re sitting near all time highs at just over $2,600/oz today. I obviously should have been buying gold miners or royalties with that view on the commodity, but hindsight is 20/20. Silver has been more volatile, but it has followed a similar path since February. I still think we could see $35 by year end, but I think we could see a break to all time highs by the end of 2025.

When that happens, the chase is on, but we will have to wait and see how it plays out. Platinum isn’t exactly a precious metal, but I think it’s arguably the commodity with the most upside over the next 3 to 5 years. I talked about the setup for PGMs and the miners a couple weeks ago, but I think platinum is going to explode at some point. The timing is up for debate, I think two of the most interesting big picture ratios right now are platinum/gold and oil/gold, both of which are near all time lows.

Oil & Natural Gas

I don’t have a good way to pick bottoms in oil, especially with some of the stuff going on in paper markets right now, but I think we are probably going to be capped until the election. After that, I think oil could make a move much higher that might surprise a lot of investors. I have remained a stubborn oil bull, but I don’t think we are bumping around the $70 level by the end of 2025. Natural gas is interesting, but I just can’t find a way to get bullish on the commodity, and by extension, the producers. It has basically just ended up in the too hard pile because of the number of moving pieces, but I don’t really see the same upside in natural gas as I do with oil.

The Watchlist

There are a couple commodities and equity sectors that are on the watchlist for the next couple years. I think copper, the agricultural commodities, and the steel sector all look interesting for a variety of reasons. I haven’t found any stocks that popped off the page, but I think those are three areas that will be worth keeping on the radar.

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Portfolio Weights

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Navios Maritime Partners: A Borrowed Idea

Some people think R&D stands for research and development. Others think it stands for ripoff and duplicate. It’s a crude way to put it, but I’m always on the hunt for new ideas and this one from Judd Arnold (Lake Cornelia Research Management) caught my eye. His newest pick, Navios Maritime Partners, is how I have decided to dip my toe into the shipping sector, and I think it has a very interesting setup for the next couple years. Despite the name Navios Maritime Partners, the company issues a 1099 and not a K-1. I’m not going to put this part behind the paywall because it’s available to everyone on Twitter, and it’s not my research. I thought it was a thorough look at the company and worth sharing with you, and after doing some of my own digging, I decided to buy some shares.

He goes into Navios’ exposure to dry bulk and capesize and the huge discount to liquidation value as a discount to peers. The report also talks about fleet age, the order book for drybulk and capesize, and insider ownership. I have stayed on the sidelines for the shipping sector for various reasons, but the insider ownership was one of the things I found most interesting about Navios. The CEO owns 16.75% of the company after buying 317k shares in March. The other thing that’s interesting about Navios are the incentive distribution rights (IDRs), which get real interesting if we get a bull cycle for dry bulk and capesize. The IDRs come into effect above $24 per share per year. As always, do your own research and come to your own conclusions. I’ll just suggest that Judd’s work is a good place to start. Here’s a link to the writeup so you can read it for yourself. He also did a podcast on the company if you would rather hear him walk through the bullish thesis.

Calumet Specialty Products Partners & Enovix

I also wanted to write a quick update on a couple holdings for everyone. Calumet’s conversion to a C-Corp from an MLP was approved on Monday, and it will begin trading as a C-Corp today. That means no more K-1, and opens things up for potential new investors and flows into the stock. The stock was up more than 7% yesterday, and we will see how it reacts today. Hopefully the action yesterday was a preview of things to come. The other one I wanted to mention was Enovix . Shares have rallied hard over the last couple months and I figured I would share a video from the company. Fab 2 in Malaysia is set to open in August, and I think we will find out sooner rather than later if they can execute and scale production. I don’t bet on short squeezes, but if bulls are right on the company, we could see some fireworks with the 25% short interest.

Portfolio Weights & Other Trades

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Biden won the toss and elected to defer, picking the right side podium, giving Trump the final closing statement. Jokes aside, I think Americans should take the time to watch the debate. I expect it will be entertaining (with the potential to be a complete train wreck), and I think it might set the tone for the political circus that could be coming over the next couple months. Either way, it will be interesting to see what happens as the election approaches. I have also heard rumblings that we might find out who Trump’s VP pick will be. Anyway, I’ll get back to the main course with the news from the offshore sector and Transocean .

Transocean: A Contract Extension & A Rig Sale

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There was some interesting footage that leaked with some of her comments on January 6th around having the National Guard there, followed by an almost immediate appearance on MSNBC. I wouldn’t bother writing about that, except for the fact that Tuttle Capital piled on and announced that they are launching the Congressional Trading ETF with the ticker NPEL. It will be interesting to see if they can buy a bunch of conveniently timed calls like Pelosi has in the past, but a lot of congressmen with insider information have outperformed the S&P and hedge funds for years. If we were smart, trading on this information would be illegal for congressmen, but we are in the “loot the treasury” stage, so I guess it’s par for the course.

One a more serious note, I have been looking at the portfolio and thinking about making some changes. This post won’t exactly be a trade update, since I haven’t pulled the trigger on some of the sales I’m considering yet. I will be laying out what I’m thinking about selling, what I’m thinking about buying, and the direction I plan to move the portfolio in over the next couple months.

Holdings That I’m Looking To Sell

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• Sable Offshore: Lots of insider activity with a potential production restart fast approaching.

• Tidewater: The OSV king continues to roll, but we did get a wave of insider selling recently.

• Borr: The business continues to outperform the narrative around jackups, and the stock now yields 5.8%.

• Transocean: Insider buying, fundamentals improving, and the share price is flat over the last year.

• Valaris: I still think the warrants are still the most asymmetric bet in the sector.

We finally got the last Q1 report from the offshore companies I own with Borr Drilling reporting earnings and doubling their dividend. I think we have a lot of runway for the whole sector, but now is a good time for an update on each stock in the portfolio. Outside of the offshore space, it’s worth mentioning that ConocoPhilips is buying Marathon Oil for $22.5B in an all-stock deal. I find the offshore sector more attractive than onshore, but I think the consolidation will continue moving forward.

I know I’m starting to get repetitive at this point, but I have a hard time finding opportunities with a risk/reward profile that is even in the same ballpark as the offshore sector. I’m not adding to the sector here unless we get good news from Sable, but I think a rising tide will lift all boats when it comes to offshore. Whether it’s Tidewater with OSVs, Borr with jackups, Valaris with a mix of jackups and deepwater, or Transocean , the deepwater pure play, I’m very optimistic that the market will start to realize that fair value for these assets is a lot higher. Let’s start with one of the most interesting special situations in the energy sector, Sable Offshore .

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Sable Offshore: A Busy Week For Insiders

Sable is a binary outcome, but it’s a very interesting situation that looks like the catalyst is fast approaching. The COO sold 200,000 shares, while CEO Jim Flores has continued to add to his already large position. We also had one of the funds exercise 500,000 warrants ($11.50 strike price), so it’s been a busy week for insider activity. It’s up more than 40% in the last month, so I’m obviously regretting not buying more at least in the short term. At the same time, it’s hard for me to justify the risk/reward of a larger position until they get the green light from the California Fire Marshall to start production in my opinion. Once that happens, I will be buying a lot more shares until it’s a medium sized position. I’m sure that will be chasing the share price, but fair value is much higher if they start producing.

Tidewater: The OSV Machine

Tidewater reported blowout earnings in early May, sending the stock from the low-90s up above $110 before the recent pullback. I figured I would include a screenshot of the quarterly trend for Tidewater’s results below. It’s going to be real hard for me to sell any of my shares as long as the business continues to perform like it has, and as long as day rates look like they are going to continue to head higher. If I had to guess, we are bit further along in the OSV cycle versus jackups or deepwater, but I think we still have a long way to go from here.

There are a couple reasons for caution in the near term for anyone interested in buying Tidewater or adding to an existing position. The first (and probably most notable) is a wave of insider selling. This includes management and investment managers like Bob Robotti, but I can’t blame them for taking some chips off the table after the run the stock has had over the last couple years. The buybacks also slowed in Q1, as they only spent $3.5M for the quarter. I’m not a seller here cause I think we have years of runway left, but I’m curious to see how things develop for the business and the stock in the second half of 2024.

Borr Drilling: All Aboard The Dividend Train

What a difference a month makes. I said in my Year in Review post that Borr had the biggest disconnect between the share price and the fundamentals of the stocks that I own in the offshore oil services sector. Shares are up 18% since reporting earnings last week, and I think we still have a long runway ahead of us. The big piece of news was the doubling of the quarterly dividend to $0.10 per share. That puts the forward yield at 5.8% (with no increases in the next year), and I wouldn’t be surprised if we get more dividend hikes (and/or buybacks ramping up) by the end of 2025. I was hoping for buybacks during Q1, but I can’t complain about the dividend increase.

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Today is last post for the Year In Review, and I’ll be going over the miscellaneous holdings in the portfolio. Coal and offshore oil services are the bulk of my investments, but sometimes other situations are interesting enough to add to the portfolio. Vornado Realty Trust was the biggest winner, but Enterprise Products Partners and NewLake Capital Partners have provided decent returns as well. Enovix and Calumet Specialty Products Partners are two losers I’m still hanging onto, while Vertex Energy was one where I cut my losses after trying to catch falling knife. Sable Offshore and Patria Investments , which are two of my more recent investments, are basically flat so far.

As a reminder, the price of Kontrarian Korner will be going up this Sunday (May 12) to $50 a month or $500 a year. If you are already subscribed (or subscribe in the next couple days), you will be locked in at the current price. As long as you continue to renew your subscription, the price increase will have no impact on you.

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Vornado Realty Trust

This one in particular was a contrarian trade if I do say so myself. We had the Silicon Valley Bank blowup, worries about commercial real estate and the banking system, and sentiment on office real estate in particular was that the sky was falling. I bought my Vornado shares last March, and it was a medium sized position in the portfolio. I sold my shares in November, only to watch shares rip to $30 over the next six weeks. Poor timing on selling to be sure, but I can’t complain too much about the returns from Vornado in less than a year. It’s still on the watchlist if it gets cheaper, but I wanted to buy other things more than I wanted to hang onto my shares.

Average Cost Basis: $14.32

Sale Price: $22.77

Return: 59%

Enterprise Products Partners

This was a holdover from a time when I was more focused on income than contrarian opportunities or asymmetric setups, but it was cheap (still is) and paid a nice distribution with a long track record of growth. I was buying Enterprise in 2021, and I sold it to buy Warrior Met Coal last fall. You would have a hard time finding a better run MLP, but I didn’t find the long term upside to be in the same ballpark as Warrior, and that assessment has turned out to be correct so far.

Average Cost Basis: $22.86

Distributions received: $3.36

Sale Price: $27.36

Return: 34%

Enovix

This holding is one of the companies that is more speculative. Enovix is a battery company that is currently working to scale up their manufacturing operations in Malaysia. The stock is going to be driven by the short term news, but if they execute as planned over the next couple years, the stock isn’t going to be below $10 for long. If they don’t, shares will go a lot lower from here. They recently announced a development agreement with a top 5 smartphone maker and the stock went from $6.50 to above $10 before pulling back a bit this week. I’ll be writing a more detailed piece on the company next week, but I think now is an interesting time to look at the company, and I’m considering adding to my position.

Average Cost Basis: $13.20

Current Price (as of 5/5): $10.10

Return: -23%

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NewLake Capital Partners

This one is a holding that has quietly been one of the better performers over the last year as well as YTD. Part of this is recent news and changing sentiment on the sector, but NewLake Capital Partners is a small cannabis REIT that should benefit from regulatory changes. Unlike some of the operators in the sector, investors get paid to wait for those changes. I was buying this one near the end of 2022, but I’m hoping I’ll get a chance to sell somewhere closer to fair value in the next year or two. The balance sheet is still nearly debt free, the dividend keeps growing, and the valuation is cheap.

Average Cost Basis: $16.82

Current Price (as of 5/5): $19.90

Return: 18% (Dividends are included in cost basis since I have been reinvesting the payouts)

Vertex Energy

This was a holding that was very shortlived. I didn’t get around to doing a full writeup on the company, but Vertex Energy was a situation where I tried to catch a falling knife and I got cut. I was buying shares in December and it was a small position, but a large percentage loss. This was one of the avoidable mistakes I was talking about on Sunday. I should have just taken one look at the balance sheet and passed on it, but I got caught up in the asset value relative to the market cap. Eventually, I just decided it was better to cut my losses than to wait for a turnaround that might never come. In a roundabout way, it did lead me to the next holding on my list, Calumet.

Average Cost Basis: $3.47

Sale Price: $1.38

Return: -60%

Calumet Specialty Products Partners

This is another small position, but I think it is a very interesting company with several catalysts on the near term horizon. Calumet reports earnings tomorrow, and I’m planning on writing a more detailed update on the company next week. I bought a small slice of the January 2025 $20 calls to avoid the K-1 tax form, and if things play out as expected, I think I might be exercising these calls later this year after their upcoming C-corp conversion.

Average Cost Basis: $2.37

Current Price (as of 5/5): $1.83

Return: -23%

Sable Offshore

This one is a binary outcome, but something that is worth keeping on the watchlist. Sable Offshore is trying to restart production from the Santa Ynez field in California and if they get it done, shares are very cheap at the current price. If they can’t get regulatory approval, or the process drags on for too long, their balance sheet is going to be an issue. I bought this one about a month ago, but depending on how things play out, I might be adding shares to make it a real position in my portfolio. As a reminder, this is a minutely small position to track the company (I’m currently down two bucks on my position of ten shares).

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Patria Investments

This one is outside of my focus area of energy and commodities, but I think Patria has a long growth runway and a cheap valuation. It’s too early to judge on this one, but my opinion on the company hasn’t changed after Q1 earnings. I added some shares after the recent selloff, and depending on what happens with shares in coming months, I might keep adding. As long as AUM and the dividend continues to grow, Patria is a compelling risk/reward proposition at the current price.

Average Cost Basis: $13.44

Current Price (as of 5/5): $12.90

Return: -4%

Conclusion

Hopefully readers will get an idea of what my process looks like, and what’s in the portfolio from the Year In Review. I’m not going to claim to have a 100% hit rate but my returns have been pretty good so far. We will see what they look like over the next couple years, but I’m excited about the portfolio and the growth of Kontrarian Korner, which has been growing much faster than I expected. I appreciate all the readers, and I appreciate the support from the paid subscribers. If you find my work valuable, now might be a good time to consider upgrading to a paid subscription. I’ll be back to the regular posts next week to look at two stocks I talked about today, Enovix and Calumet.

Disclaimer

I own shares of Enovix, NewLake Capital Partners, Patria Investments, and Sable Offshore. I also own calls on Calumet. You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

We are getting towards the end of my Year In Review posts, and today’s will be focused on the offshore oil services sector. Tidewater has been the big winner so far and is up well over 100% from my purchase price. It has singlehandedly carried the rest of the offshore basket over the last year. Transocean has been volatile over the last year but it’s down a bit, while the Valaris warrants are up slightly. Borr Drilling has been the biggest loser so far, but in my opinion, it has the biggest disconnect between the share price and fundamentals of any stock in the offshore basket today.

Like the coal sector, I think we have a long way to go with this offshore cycle. Stocks in the sector are still trading at 30-50% of replacement cost (give or take), day rates across the sector continue to head in the right direction, and I think we are going to see meaningful capital returns from the sector in coming years. If I had to guess, I would say we’re in the third inning of this cycle, and I think the whole sector is going to deliver very good returns for investors over the next several years.

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Changing Opinion on OSVs, Deepwater & Jackups

One of the things that has changed for me is my opinion on the different offshore oil services subsectors. Last spring, I was most excited about deepwater and Transocean. I thought they had the best deepwater fleet, and strong management that avoided bankruptcy in a vicious down cycle. This left them with a levered balance sheet and a ton of torque for an offshore bull market. All that still applies to Transocean, but I wasn’t paying enough attention to OSVs and jackups.

I was more focused on the irreplaceable nature of the deepwater assets (at least at current day rates and new build costs), and should have put more weight on the shorter contract duration for OSVs when making my buy decision on companies in the sector. That’s why Tidewater has performed the way it has, with their contracts quickly rolling over to higher day rates, and I think it’s going to continue.

The other thing I should have paid more attention to was the cold-stacked spare capacity for deepwater. This put a lid on day rates for a while, but it looks like we are going to start grinding higher this year. Later in the year, I started looking at Borr Drilling as I started to warmup to the jackup sector. Jackups are typically somewhere in between OSVs and deepwater as far as contract duration, but I think we are going to see day rates higher over the next couple years even if recent events in the Middle East mean that day rates are stuck in neutral for the near term.

Transocean

Transocean has been frustrating, especially over the last six months, but it has pretty much been a volatile ride to nowhere. I started buying Transocean last March and April, added shares and Dec 2026 calls this January. Those calls are up 10%, while my older (and smaller) batch of 2025 calls are down 80%. Similar to Peabody Energy , my calls on Transocean are a very small portion of my investment in the company.

I still think they have the best fleet and management, and I think we start to see their business gain momentum over the next year or two. My biggest mistake on this one was not selling the calls when shares had run hard last summer. I left a decent chunk of money on the table by not selling the 2025 calls, and I will be selling those at some point this year. I don’t plan on repeating this mistake if we get another run, especially with the small slice of December 2026 calls I bought earlier this year.

Average Cost Basis: $5.87

Current Price (as of 5/5): $5.55

Total Return through 5/5: -5%

Tidewater

Like I said earlier, I didn’t put enough emphasis on the shorter contract duration leading to a faster increase in cashflows for Tidewater. Despite the massive run over the last year, I still think we have a long way to go and I don’t plan on selling my shares any time soon. I was buying my shares last March, and the biggest mistake with Tidewater is not buying enough.

Tidewater’s run has me wondering if I should take a closer look at Seacor Marine Holdings , which is a smaller operator of OSVs. I haven’t done enough digging to have an opinion one way or another, but I wouldn’t be surprised if it is along for the ride with Tidewater shares over the next couple years. As far as Tidewater, I think we are going to see more capital returns and a higher share price for long-term investors.

Average Cost Basis: $44.41

Current Price (as of 5/5): $106.90

Total Return through 5/5: 141%

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Valaris Warrants

I was buying the Valaris warrants in late 2023, but I increased my position meaningfully a couple months ago in March. While I think Valaris shares are in for good run over the next several years, I find the warrants to be a more attractive risk/reward proposition. A little bit more risk with the potential for a very outsized reward. The warrants have been good for a whopping 3% return so far, but it’s still priced like a forgotten security.

Valaris recently signed a jackup contract at $145,000 day rates (approximately $200,000 per day including the mobilization fee) for two years in Angola. I will get into my rant on Borr in a moment, but it’s another reason I’m not worried about the market for jackups. This feeds into why I think the near term concern over day rates for Borr is overblown. As far as Valaris, I find the warrants to be the equivalent of a very long dated call option on an offshore bull market.

Average Cost Basis: $12.15

Current Price (as of 5/5): $12.51

Total Return through 5/5: 3%

Borr Drilling

Borr has been one of the most frustrating stocks in the offshore basket, because I think the gap between the share price and the actual value of the business has been getting wider over the last six months. I was buying shares in September through December, and made it a larger position in March. When I started buying there were a couple checkpoints I was looking for, and management has taken care of all of them. They started paying dividends, announced a buyback (we will have to wait until Q1 earnings to see if they have been buying back shares), and refinanced the debt to extend their maturities.

We have seen insider buying in recent months, and despite all of that, shares are down more than 20% YTD. I have been wrong on Borr so far, but I think the market is overreacting to short-term news and missing the forest for the trees. There have been multiple headlines since the start of the year that have led to selloffs, while the market reaction to signing contracts for three jackups at an average day rate over $193,000 sent the stock up 10 cents. That second part is going to have a much larger impact on Borr’s results than any of the negative headlines, even the release of one of Borr’s jackups by Saudi Aramco (which had a sub-$100,000 day rate by the way).

Day rates might be weak in the near term in the Middle East, but I’m not too worried about Borr’s exposure to that part of the world. The two jackups set for delivery by year end is another thing to watch for, but I’ll be doing a closer look at Borr once they report earnings later this month. I also wanted to drop a screenshot of Borr’s quarterly results over the last couple years just so readers can visualize what the business has been doing even while the stock has sold off. Eventually the share price will notice that trend of revenue and income up and to the right.

Average Cost Basis: $6.51

Dividends received: $0.05 per share

Current Price (as of 5/5): $5.54

Total Return through 5/5: -14%

Conclusion

The offshore sector has been a mixed back for me so far. It’s tough to hurry up and wait, but that’s the position I’m in right now. I can’t complain about Tidewater, but I think the rest of the basket follows along, albeit in a delayed fashion. Transocean and Borr have torque with their levered balance sheets, while the Valaris warrants have the torque built in. It’s a long cycle for offshore oil services, and we have years of runway left in my opinion. I’ll be wrapping up tomorrow with a review of all the other trades and holdings in the portfolio.

Disclaimer

I own shares of Tidewater, Transocean, and Borr Drilling. I also own calls on Transocean and Valaris warrants. You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

Yesterday, I covered my picks in the South American energy sector and their performance. Today, I’ll be doing the same with my picks in the coal sector. I have enjoyed being a shareholder of Warrior Met Coal so far, with shares up more than 40% since buying. I think we have a long way to go on that one, and the Blue Creek Mine is a catalyst on the horizon, but I wish I had bought shares sooner. Peabody Energy has been a dog so far, but I think they will do just fine over the next couple years as well.

Looking forward, I think the coal sector is going to look similar to the tobacco industry from two decades ago. Cheap valuations, potential for huge capital returns, and poor sentiment around the sector are just a couple reasons that I think the sector is going provide very good returns for investors over the next several years.

A Couple Mistakes (Hindsight is 20/20)

My biggest mistake in allocating to the coal sector is not taking a basket approach to the sector right from the start. Last spring, I was looking at the coal sector as something that could take years to play out, and I thought that we are still in the early innings of a long game where it will be a very good time to own coal stocks. That view hasn’t changed. I wanted exposure to thermal and metallurgical coal, and that view hasn’t changed either. That’s why I bought Peabody, but I obviously should have spread that money around to other companies in the coal sector.

Peabody is down a bit over the last year, while Alpha Metallurgical Resources (86% over the last year) and Warrior (99% over the last year) have had monster runs in that period. Even if I had just went with a 50/50 split between Peabody and one of those two companies, the performance would have been better. Ideally, it would have been split into thirds, but I think all three stocks are going to deliver attractive returns to shareholders in coming years. If AMR continues to pullback after their earnings report yesterday, I might look to add that to the portfolio.

Over the second half of last year, I decided it was better late than never, and I wanted to tilt my exposure more towards met coal, which is why I added a large chunk of Warrior Met Coal to the portfolio. Again, hindsight is 20/20, but I should have been more focused on some of the met coal names right off the bat. The other mistake is passing on Natural Resource Partners , which I started looking at when units were around $45. I was considering selling Enterprise Products Partners at the time (which I eventually sold to buy Warrior), but I think Natural Resource Partners is still an interesting way for income focused investors to get exposure to the coal sector.

Peabody Energy

Peabody was one of the more frustrating stocks in my portfolio over the last year and it was basically a volatile ride to nowhere. I was buying shares in March, April, and May of last year. I also bought a much smaller slice of Jan 2026 calls in October and December, which are down about 50% (and still very mispriced in my opinion). That doesn’t feel great, but more than 95% of my Peabody position is in regular shares, so it’s not a huge hit.

For as much as people bag on Peabody’s management, I think they have actually done a pretty good job over the last year. They have bought back 19.3M shares for $430M and completed the acquisition of Wards Well, and they are moving towards bringing the Centurion mine online in the next couple years, which will shift the company more towards met coal. I still think we aren’t at fair value, but I don’t know if I will hold onto this one as long as plan to hold onto Warrior.

I’ll be doing a more thorough look at both coal stocks and their recent quarterly earnings when I get a chance, but I’ll be holding onto my Peabody shares and calls for now. We should also be hearing from Elliott Investment Management in the next couple weeks with their 13-F, and I wouldn’t be surprised if they have fully exited their position in Peabody, which would mean an end to the selling pressure they have put on the stock over the last year.

Average Cost Basis: $24.15

Dividends received: $0.30 per share

Current Price (as of 5/5): $22.15

Total Return through 5/5: -7%

Warrior Met Coal

Warrior hasn’t been nearly as frustrating as Peabody since I bought shares. I was buying this one in late September, and obviously I should have been buying sooner than that. It’s a large position and depending on what happens with the share price, I wouldn’t mind adding shares in coming months. I’m not adding now, but if we get any sort of selloff into the mid to low $50s range, I will be tempted to make Warrior my largest position.

The reason for that is Warrior’s Blue Creek mine, which is set to come online in a couple years. If that goes as planned, I think shares are going to be a lot higher than where they are today, and then management will basically have to decide if they want to do buybacks or dividends. I hoping they follow in AMR’s footsteps and do buybacks, but I think I might be holding onto my shares for a long time.

Average Cost Basis: $47.31

Dividends received: $0.65 per share

Current Price (as of 5/5): $66.23

Total Return through 5/5: 41%

Conclusion

We will see what happens with the coal sector over the next couple years, but I think we are still in the early innings for the sector. Peabody has been a dog, but I think that is going to change at some point. Warrior, despite the run in shares over the last years, is still attractive, and I think any material selloff is a buying opportunity for long term investors. Those two companies are the main focus for the coal sector in my portfolio, but I have been looking at other opportunities in the sector. One in particular I find interesting is Glencore, but we will have to see if they decide to spinoff the coal assets. Tomorrow, I’ll be doing a breakdown of my offshore oil services basket, another sector that I think will be a good place to invest for coming years.

Disclaimer

I own shares of Peabody Energy and Warrior Met Coal. I also own calls on Peabody. I don’t own Natural Resource Partners or Alpha Metallurgical Resources. You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

Yesterday, I talked about some changes coming in the near future for Kontrarian Korner. I’m excited about the way things have gone over the first year and I’m looking forward to year two. This week, I will be doing a breakdown of what happened with the portfolio and how each stock performed. Today, I will be leading off with a look at the South American energy basket.

Petrobras was the big winner in the basket, and a huge driver for the portfolio, with a total return approaching 100% since buying preferred shares last spring. Despite the huge run over the last year, I still think the risk/reward on Petrobras is skewed to the upside. Ecopetrol , which is no longer in the portfolio, was another winner, but not nearly to the same magnitude as Petrobras. Frontera Energy, which is a much smaller position in the portfolio, is the only loser in the basket. I’m waiting to see how their offshore block in Guyana plays out, but shares are still cheap based on their existing assets.

Petrobras

Because Petrobras is a large position in my portfolio, it has been one of the main drivers of the portfolio performance over the last year. I bought my position last March and April in the preferred shares (PBR.A or PBR/A), which were trading at a pretty wide discount to the common shares, despite the equal dividend payout. That gap has narrowed a bit since then. While the share price performance over the last year has been impressive, shares are still cheap and I think we have a long way to go to get to fair value.

I wasn’t sure how it would turn out, but the valuation was so cheap, and the dividend so large that I thought there was a pretty wide margin of safety. The uncertainty was why Petrobras was so cheap, and my assessment that the political risk was overblown has turned out to be correct so far. It’s certainly something I will be monitoring moving forward, but I will have a hard time selling if the dividends keep flowing.

We had some recent uncertainty around the dividend over the last couple months, but they have decided to payout 50% ($0.68 per share) of the special dividend with the upcoming regular dividend. From my understanding, they will pay out the remaining 50% of the special dividend over the rest of 2024, but we will have to wait and see to be sure. I think that as long as oil is in the $70 to $90 range, Petrobras’ regular quarterly payout will probably be in the $0.40 to $0.50 range.

If you told me a year ago that Petrobras shares would be up 65% while sending back more than 40% of cost basis by the middle of 2024, I would say sign me up. I don’t see a repeat of that over the next 12 months, but I would love to be proven wrong. I still think we are in a commodities cycle, and you would be hard pressed to find an oil major that fits in with the offshore thesis better than Petrobras. Owning Petrobras comes with some political risk, but if the government doesn’t try to kill the golden goose, I think Petrobras will be the best performing oil major over the next three to five years.

Average Cost Basis: $9.43

Dividends received: $2.98 per share

Dividends on the way: $1.11 per share

Current Price: $15.65

Total Return through 5/5 (does not include upcoming dividends): 98%

Ecopetrol

This was my other pick among larger South American energy producers. It was a winner, but not nearly on the same scale as Petrobras. I was buying my shares last year from March to April, and I sold my shares this year in February and March. I was very bullish on Ecopetrol last year, and it was a large position before selling. Over time, I changed my opinion on Ecopetrol. In hindsight, I should have just bought Petrobras (not just because the share price has done better), because it’s a better business with better assets in my opinion, and the valuation was similar.

Ecopetrol is still cheap and it still pays a double digit yield. I just found other opportunities more attractive. To be perfectly honest, I had pretty poor timing selling Ecopetrol to buy Borr Drilling . I still find the risk/reward to be much more attractive for Borr, which is why I made the trade. Next time I will try to be a bit slower when I’m making these trades (or any trades to be honest), but one of the things I still need to work on is finding better short-term buying and selling points.

The dividend this year isn’t as large as it was last year, and I didn’t think it made sense to hold onto shares this year with the smaller dividend and better risk/reward elsewhere. I still think shares are undervalued, but the decision to sell came down to opportunity cost. We will see how the decision to sell Ecopetrol and reinvest elsewhere plays out over the next couple years, but I can’t complain about the total return on the investment.

Average Cost Basis: $10.87

Dividends received: $2.81 per share

Average Sale Price: $10.84

Total Return: 26%

Frontera Energy

Frontera Energy is the only loser in the South American energy basket, at least for now. Like the other two stocks in the basket, I was buying in March and April of last year. It is more speculative than the other two stocks, which is why I made it a smaller position. Frontera is still dirt cheap even based on their existing assets, but the real reason I bought shares was the offshore block in Guyana. If it’s anything like Exxon’s neighboring Stabroek Block, shares are still very undervalued.

It has started to pay a small dividend and started buying back shares recently. If the dividend stays at the current level, the forward yield is 2.6%. They actually report earnings this week on Wednesday, so we should get an update on the capital returns program soon. It’s been a frustrating stock to own over the last year, but the Corentyne Block is a potential catalyst. I don’t know if/when that could come to fruition, but if we see a larger company buy a piece of the block, I expect shares to go much higher. I won’t wait around forever, but I’ll be giving Frontera more time as long as the valuation stays cheap and they continue to buy back shares and pay dividends.

Average Cost Basis: $9.01

Dividends received: $0.045 per share

Current Price: $6.84

Total Return through 5/5: -24%

Conclusion

Overall, the South American energy companies have been good to me over the last year. Petrobras is the main reason for that, but Ecopetrol was a decent trade as well. Petrobras shares probably won’t have a repeat performance of the last year unless oil shoots the moon, but I have no problem getting 4-5% of my cost basis back each quarter in dividends.

Based on the valuation, we still have a long way to go to get to fair value, and I’ll wait patiently as long as I’m getting paid to wait. Frontera has been a laggard, but I’m not going to cut my losses on that one just yet. Unless something better comes along, I want to see how their offshore block turns out and the valuation is still cheap. Tomorrow, I’ll be going through the same process with the coal basket, so keep an eye out for that post tomorrow morning.

Disclaimer

I own shares of Petrobras (PBR.A shares) and Frontera Energy. I no longer own Ecopetrol. You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

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I don’t need to do a full recap on Petrobras after the post from last week, but I figured I would mention an interesting article I saw today regarding the special dividend. Finance Minister Haddad has apparently changed his tune on the special dividend payout, so my fingers are crossed that we will get the cherry on top of the regular dividend. I’m not sure if they will make a decision before the annual meeting at the end of April, but if that headline is any indication, shareholders that held through the recent selloff could be getting some additional cash in 2024. Over the weekend, I’ll also be looking into a new idea that popped up on my radar. It’s an interesting situation, but I need to do some more research to get familiar with the company.

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Signs Of Life In The Offshore Sector

I have talked about the offshore sector for awhile, but I wanted to write a quick update on the stocks I own after their recent earnings releases. Like I have talked about before, I think the deepwater day rates might take longer to increase than OSVs and jackups. I wrote about the bombed out sentiment across the space in January, but if oil starts to perk up, I think stocks across the sector could be set for a nice run.

Tidewater

Tidewater has basically sidestepped the pullback from some of the other offshore names, and the market obviously liked their earnings report last week. Shares were up more than 10 bucks a share (more than 14%) on Friday, hitting all time highs. Any time you see a move like that, a short-term pullback is probably right around the corner, but I think the long-term bullish thesis still looks fantastic. OSV day rates continue to trend higher and Tidewater is well positioned for that trend.

The highlight from the earnings call was the buyback program in my opinion. They bought back $35M in November and December, which was the maximum amount allowed under their current debt covenants. They authorized a new buyback program of $48.6M this quarter (again the maximum amount allowed under current debt covenants). They will be updating the buyback program on a quarterly basis, but I’m looking forward to continued buybacks this year for Tidewater. If you look at the quarterly trend of revenue and income over the last couple years, it looks similar to the picture of Borr’s quarterly results below.

Transocean

I don’t have much to say about Transocean’s earnings call, except that it seems like they have a couple deals in the pipeline as far as new contracts. We will have to wait and see, but “stay tuned” shows up on the conference call transcript three times, so I wouldn’t be surprised if we see some new contracts in the next couple months. They still have the best deepwater fleet in my opinion, but they still have work to do as far as the leveraged balance sheet. RIG shares are notoriously volatile, but I think the underlying business is still headed in the right direction. Someone on Twitter pointed out that shares typically have larger moves in both directions than other stocks in the sector. When oil is heading higher and the offshore stocks are rallying, Transocean will usually outperform. When the opposite happens, Transocean typically sells off harder.

I like to think I’m more patient than a lot of investors, but I would be lying if I said I wasn’t a little bit frustrated with shares going from above 8 bucks last fall to where we are today. We recently had some insider buying show up, and the optimist in me is hoping that we have found a bottom. Shares were up more than 8% on Friday after news of a 1M share insider buy came out Thursday night. I was wondering if/when we would start seeing some insider buying on these stocks after the recent pullback, but I think shares are very cheap right now.

Borr Drilling

Borr Drilling shares got smoked about a month ago after news that the Saudis were halting plans to expand their production capacity. They have bounced back a bit since then, but I still think shares are absurdly cheap right now. If I was looking to add to any of my offshore positions, Borr would be my pick (unless you want to speculate on Valaris warrants). Jackup day rates continue to grind higher, and I think Borr is set to become a cash cow over the next couple years.

There was a lot to like from the earnings call, but as long as day rates continue to trend higher, revenue and profit is going to trend up and to the right. The other thing worth mentioning is that they announced they would be borrowing an additional $200M last week. I’m assuming most of that will go towards paying for the 2 new jackup deliveries, which should be sorted by the end of this year. They have another dividend of $0.05 on the way, and I’m curious to see how aggressive they are with their $100M buyback authorization. We will have to wait until the next quarterly report to see on that, but I think shares are an absolute bargain near $6.00.

Valaris

Like Tidewater, I’m expecting more buybacks from Valaris in 2024. They bought back $200M worth of shares in 2023, and boosted their existing buyback authorization from $300M to $600M. They are exposed to jackups as well as deepwater, and like Borr, shares got whacked on the news out of Saudi Arabia last month. Shares have bounced a bit since then, but I still think you can buy shares of Valaris for pennies on the dollar right now if you have a three to five year time horizon. For speculators, the Valaris warrants look very attractive to me, but I think the shares, like other stocks in the sector, are very cheap today.

South American Energy

I also wanted to spend some time on the South American energy stocks that I own, as they have been in the news over the last couple weeks. There have been some positives, like the announcement of a new dividend from Frontera Energy, and some negatives, like the news article about Petrobras potentially shifting towards renewables. We got earnings last week from Ecopetrol, with earnings on tap this week for Frontera and Petrobras.

Frontera Energy

Frontera Energy has been an eyesore in my portfolio for awhile (I should have just bought more Petrobras), but there have been a couple positive developments with one of their recent announcements. It’s a small speculative position, but they announced they would be paying out a small quarterly dividend ($0.0625 CAD per share, or 3.1% yield annualized) and have been buying back stock. They have repurchased 508,000 shares for approximately $3M as of 2/14. The buyback authorization is for just under 4M shares. They report earnings later this week, so I’m hoping for a positive update on their offshore block in Guyana, but I’ll be giving this one some more time as long as they continue to buy back shares and pay dividends.

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Petrobras

Petrobras has been the magic money tree over the last 12 months (knock on wood), and the dividends will continue to flow in my opinion. They also report earnings later this week, but shares dropped last week after the CEO discussed a shift towards renewables in a recent interview.

Latin America’s biggest oil company will be more cautious about issuing blockbuster dividends as it moves to become a renewable energy powerhouse, Petrobras Chief Executive Officer Jean Paul Prates said in an interview.

In 10 years about half of Petrobras’s revenue will come from wind, solar and renewable motor fuels — and the company is gearing up to make acquisitions as early as this year to propel the shift, Prates said in a wide-ranging interview. The Brazilian producer also needs to spend heavily on oil exploration at home and abroad to guarantee that it will continue pumping crude for decades.

“We need to be cautious. Shareholders will understand,” Prates said from Bloomberg’s office in Sao Paulo, when asked about an extraordinary dividend payment. “I would be more conservative than aggressive. We are in the middle of this great decision of becoming an oil company in transition.”

- Bloomberg News Article on Petrobras

Actually, shareholders will not understand why the company would shift that heavily towards so-called renewables. Investors don’t own Petrobras so they can get taken for a ride on solar or wind. We own it for the massive offshore reserves, potential for production growth, and a dividend that dwarfs the payouts of most energy companies based in the US. They will be spending a lot on Capex in coming years, but I’m expecting most of that will go towards the traditional energy side of the business. I think talk of a shift towards renewables is just that: talk. Until we see an actual strategy shift, I don’t see any reason to sell my shares now. That might change, but I’m sure we will get an update this week with earnings.

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A quick side note: Calumet is an MLP (for now), so buying units will require a K-1 tax form.

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Opportunity Cost

One of the main ways to evaluate a portfolio is through the lens of opportunity cost. Would I rather own X, or would I rather own Y? I talked last week about why I run a concentrated portfolio and having a longer time horizon, but one of the things that I’m always looking at is the opportunity cost of what is in the portfolio. Most of the time I’m not doing anything, because I like to think the risk/reward on what I already own is very attractive, but sometimes I find new opportunities in stocks outside of the portfolio that look more attractive than stocks that are in the portfolio. I talked about this briefly when I discussed cutting my losses on one of the stocks that was in the portfolio in the trade update last week.

Why would I hold this stock if I think the risk/reward is better on another stock? In that case, it was the Valaris warrants. This week, it was Calumet. I’m always looking for new opportunities, and most of the time, there are things that keep me away from investing in a new idea, or I don’t think they are as attractive as what I already own. Occasionally, new opportunities like Calumet pop up and the risk/reward seems more attractive than an existing holding. I don’t like buying and selling too much, because history shows that overtrading a portfolio generally leads to worse returns, but sometimes a fat pitch shows up and you have to swing. If you don’t have a ton of dry powder, that means selling something that you already own. I find the constant search for new opportunities mentally stimulating and an important part of being an active investor.

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Two Ideas

I’ll start with my two ideas before getting into some of the recent trades I have made. One is a cash cow in the coal sector, and the other is a speculation on the future of battery technology. I haven’t been adding to either in recent weeks, but they are on the watchlist for sure. I haven’t made it a secret that I’m bullish on the coal sector, and today we got another reason to be bullish on the red-headed stepchild of the coal sector, Peabody Energy .

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Peabody Energy

I haven’t been doing any buying on Peabody Energy recently, but I would be lying if I said I wasn’t tempted to buy some more of the January 2026 calls. You might be getting tired of me pounding the table on Peabody at this point, but I think it is a very attractive opportunity today. I wanted to mention Peabody because shares popped almost 5% after hours yesterday on news of their inclusion in the S&P 600 small cap index. I think these flows would at least offset any selling that Elliott Investment Management still has to do, and it could be a catalyst to get shares out of the trading range they have been stuck in for nearly two years.

For reference, Alpha Metallurgical Resources was added to the S&P 600 Small Cap Index on November 7, 2023. Shares were just over $207, and a little more than 2 months later, shares now trade for $377.43. I’m not predicting the same 82% move in a couple months for Peabody, but I think it’s just another reason to be bullish. I’m looking forward to seeing their financial statements for the full year, which should be out in the next month or so. We will see how the next couple years play out, but I think we could start to see Peabody generate some of the returns for investors that we have seen with other coal stocks in the last couple years.

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Borr Drilling

I won’t do a full breakdown on Borr Drilling, but there have been several new developments worth mentioning. I have been buying more shares, and I think we could see the train leave the station over the next couple years. From what I have seen, it looks like the day rates for jackups could potentially increase faster than the day rates for deepwater rigs. If that proves to be the case, Borr is set up beautifully for the next couple years as their existing contracts roll off.

The catalysts I predicted, which included debt refinancing and capital returns, have come to pass, and sooner than I thought. They refinanced the debt (which I talked about here) and more recently announced a $100M buyback program, along with a quarterly dividend of $0.05 (assuming it is approved at the upcoming special shareholder meeting). I thought it could take longer to see capital returns, but management looks like they are going to step on the gas as fast as possible. The market cap is at $1.76B, so $100M is a meaningful buyback program, and now investors also get paid to wait. If management keeps the payout the same for the next year, that puts us at a 2.8% forward dividend yield. Not huge compared to some of the other stuff I own, but I think the dividend growth could be impressive if we look forward a couple years.

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