Given your view on LT oil S/D have you considered Canadian oil sand producers with long reserve life? Seems like they would be well positioned, and have a decent jurisdiction. If considered / rejected - what made you reject?
I have looked at some of the Canadian oil companies, but there were a couple reasons that I bought (and will be sticking with) the South American producers, along with offshore stocks for their speculative upside. If you look back at 2020, there were chances to buy CNQ in the teens or Tourmaline in the single digits for example, so I feel like I missed the boat. When Petrobras and Ecopetrol were both selling off due to elections and political fears in 2022 into 2023, I bought both because I thought that the dividends would keep coming, and buying them in the single digits (I was over $10 for EC) would lock in a double digit yield with a price appreciation kicker.
I think the Canadian energy companies will participate in an oil bull market for sure, but I didn't have any extra dry powder to buy them last year, and I don't have much today, and what I do have right now is going towards RIG and other ideas that have sold off. So timing and a shortage of dry powder was part of it. I think that they will do fine moving forward, especially if we see a higher average oil price. Like offshore, I do think that oil sands will be another potential beneficiary if we do see shale production in the Permian start to roll over. Pipeline access does remain a bit of a question mark for me though.
The smaller companies would be a bit of a minefield for me, and the more speculative Canadian oil stocks would have to compete on risk/reward with the offshore services stocks like RIG, TDW, BORR, or VAL warrants. I think all of these offshore stocks do a 2-3x over the next 3 to 5 years depending on what oil and day rates do, so that's a pretty high bar, and I don't think I have the expertise to pick winners in the smaller Canadian companies.
Another thing that is not my area of expertise is the Canadian jurisdiction, but I'm not optimistic on where things could be headed in Canada. There are several things about operating an energy company in Canada that could create problems over the next decade that I don't think we will see in America (or Brazil or Colombia either). Globalist WEF agenda, climate change scam, etc. Don't know if you have nationalization risk, but taxes and other regulations could also prove to be an issue depending on what happens with elections and government policy.
Am I taking more jurisdictional risk with Ecopetrol and Petrobras vs. Canadian companies? Probably, but I think investors buying at dirt cheap valuations last spring during the pessimism surrounding the elections have been handsomely rewarded for taking that risk while other energy stocks were basically flat in 2023. Part of this is the valuation gap, which might not be as wide today, but I still think you would have a hard time finding cheaper energy companies with the size of PBR or EC, even after the outperformance in the second half of 23.
I think we are past peak pessimism on Petrobras and Ecopetrol, and I wouldn't be surprised to see their outperformance continue as sentiment continues to improve and oil potentially going higher. As a side note, you also could buy PBR.A preferreds (so no voting rights) at like a 10% discount to the common at the time, receive the same dividends, and have legal right to dividends on 25% of net income (as long as debt was below a certain level if I remember correctly). Not the only reason to buy PBR.A, but a nice cherry on top.
To summarize, I wouldn't be surprised to see Canadian oil sands companies outperform the S&P 500 over the next 3 to 5 years (assuming they are well run), but the timing didn't line up for me. The other thing was the relative valuation, where Petrobras and Ecopetrol were the cheapest major oil companies by a long shot, and I believe they probably still are today. If not the top 2, they are easily in the top 5. I don't think I have the expertise to choose wisely for those stocks, and while I don't think Canada will be a problematic jurisdiction, I think the odds are higher than most investors believe right now.
Really appreciate your thoughtful response, and agree with your points. Overall am on same page with your outlook and am invested in a lot of the and names, for whatever that is worth. Fellow ex-B4 auditor here so maybe I’m a contra, thanks again!
It all just depends on what risks you're willing to take. I think that oil and coal are going to be a relative safe haven compared to broader markets though, so while I'm sticking with Petrobras and Ecopetrol for producers for now, I think investors that are heavy on energy will do just fine over the next couple years.
Given your view on LT oil S/D have you considered Canadian oil sand producers with long reserve life? Seems like they would be well positioned, and have a decent jurisdiction. If considered / rejected - what made you reject?
I have looked at some of the Canadian oil companies, but there were a couple reasons that I bought (and will be sticking with) the South American producers, along with offshore stocks for their speculative upside. If you look back at 2020, there were chances to buy CNQ in the teens or Tourmaline in the single digits for example, so I feel like I missed the boat. When Petrobras and Ecopetrol were both selling off due to elections and political fears in 2022 into 2023, I bought both because I thought that the dividends would keep coming, and buying them in the single digits (I was over $10 for EC) would lock in a double digit yield with a price appreciation kicker.
I think the Canadian energy companies will participate in an oil bull market for sure, but I didn't have any extra dry powder to buy them last year, and I don't have much today, and what I do have right now is going towards RIG and other ideas that have sold off. So timing and a shortage of dry powder was part of it. I think that they will do fine moving forward, especially if we see a higher average oil price. Like offshore, I do think that oil sands will be another potential beneficiary if we do see shale production in the Permian start to roll over. Pipeline access does remain a bit of a question mark for me though.
The smaller companies would be a bit of a minefield for me, and the more speculative Canadian oil stocks would have to compete on risk/reward with the offshore services stocks like RIG, TDW, BORR, or VAL warrants. I think all of these offshore stocks do a 2-3x over the next 3 to 5 years depending on what oil and day rates do, so that's a pretty high bar, and I don't think I have the expertise to pick winners in the smaller Canadian companies.
Another thing that is not my area of expertise is the Canadian jurisdiction, but I'm not optimistic on where things could be headed in Canada. There are several things about operating an energy company in Canada that could create problems over the next decade that I don't think we will see in America (or Brazil or Colombia either). Globalist WEF agenda, climate change scam, etc. Don't know if you have nationalization risk, but taxes and other regulations could also prove to be an issue depending on what happens with elections and government policy.
Am I taking more jurisdictional risk with Ecopetrol and Petrobras vs. Canadian companies? Probably, but I think investors buying at dirt cheap valuations last spring during the pessimism surrounding the elections have been handsomely rewarded for taking that risk while other energy stocks were basically flat in 2023. Part of this is the valuation gap, which might not be as wide today, but I still think you would have a hard time finding cheaper energy companies with the size of PBR or EC, even after the outperformance in the second half of 23.
I think we are past peak pessimism on Petrobras and Ecopetrol, and I wouldn't be surprised to see their outperformance continue as sentiment continues to improve and oil potentially going higher. As a side note, you also could buy PBR.A preferreds (so no voting rights) at like a 10% discount to the common at the time, receive the same dividends, and have legal right to dividends on 25% of net income (as long as debt was below a certain level if I remember correctly). Not the only reason to buy PBR.A, but a nice cherry on top.
To summarize, I wouldn't be surprised to see Canadian oil sands companies outperform the S&P 500 over the next 3 to 5 years (assuming they are well run), but the timing didn't line up for me. The other thing was the relative valuation, where Petrobras and Ecopetrol were the cheapest major oil companies by a long shot, and I believe they probably still are today. If not the top 2, they are easily in the top 5. I don't think I have the expertise to choose wisely for those stocks, and while I don't think Canada will be a problematic jurisdiction, I think the odds are higher than most investors believe right now.
Really appreciate your thoughtful response, and agree with your points. Overall am on same page with your outlook and am invested in a lot of the and names, for whatever that is worth. Fellow ex-B4 auditor here so maybe I’m a contra, thanks again!
It all just depends on what risks you're willing to take. I think that oil and coal are going to be a relative safe haven compared to broader markets though, so while I'm sticking with Petrobras and Ecopetrol for producers for now, I think investors that are heavy on energy will do just fine over the next couple years.
Just started a position in PTALF , I'm going to be adding to PDS/ DRQ / NBR on pullbacks already have positions in TDW / BORR / DO / VAL/ for drillers
I think oil service sector could do as well , XOP / OIH/ XLE look good as well as XME