Title: Cole Smead: The Market Is Dead Wrong on Canadian Oil Stocks | In the Money with Amber Kanwar Show: In the Money with Amber Kanwar (YouTube podcast) Guest: Cole Smead — CEO & portfolio manager, Smead Capital Management Date: 2025-06-12 URL: https://youtu.be/X7ZfeRB5Jsg Length: 1:01:11 Note: YouTube auto-transcript as pasted; (mm:ss)/(h:mm:ss) cues verbatim. Recorded weeks after Strathcona's end-of-April 2025 hostile offer for MEG. Garbles: "Cole Smeap/Sme"=Cole Smead, "Senovas/SNOVAs/sovis"=Cenovus, "Streth Kona/Strath Kona"=Strathcona, "Wattress/Watus"=Waterous, "Meg/MAG"=MEG Energy, "Lushing/Leashing's entities"=Li Ka-shing's entities, "Murray Edwards"=Murray Edwards (CNQ), "KICO/kico Phillips"=ConocoPhillips, "Chris Wright"=US Energy Secretary, "polyf"=Poilievre, "Tim"=Tim Hodgson (energy minister, ex-Goldman, ex-MEG director), "Montne/Monty"=Montney, "Mike Rose of Termoline"=Tourmaline, "Aabaska"=Athabasca Oil, "Bayex/beex/BTEX"=Baytex, "White Cap"=Whitecap, "Von/Veron"=Veren, "Vermillion"=Vermilion, "Glen Core"=Glencore, "White Haven"=Whitehaven Coal, "EVR from tech"=Elk Valley Resources from Teck, "Rich Krueger"=Rich Kruger (Suncor), "Elliot"=Elliott Management, "Doug Terrison"=Doug Terreson, "Ivy School of Business"=Ivey Business School, "Prem Watza"=Prem Watsa, "Hussein Aladina"=(TD commodities head, name garbled).
00:00 Hey everyone, welcome to a brand new episode of In the Money with Amber Canoir. First, I want to say what a success our swag month has been. Thank you to everybody who commented and subscribed. And congratulations to Ken, David, Kevin, and Tim for winning swag in the recent weeks. We're going to do it again in September.
00:20 Don't worry, we're busy collecting that fun finance meme. But in the meantime, don't stop commenting. Keep subscribing because we've got great content for you, especially in this latest episode of In the Money with Amber Canoir. Today I interviewed Cole Smeap. He's a US investor who loves Canadian energy stocks and he returned to the podcast after correctly suggesting that Meg could be a takeout candidate.
00:44 Well, guess what? He names another large cap company that he thinks is ripe for a takeout. and he also just talks about what's going on in the space that seems to have a little bit of momentum despite negative headlines. Let's get into it. [Music] The information provided in this podcast is forformational purposes only and does not constitute financial, investment or professional advice.
01:14 The views expressed by the host and the guest are their own and do not necessarily reflect the opinions of any organization or company. The host and guest may maintain positions in any securities discussed on the podcast. Always consult a qualified financial adviser or professional before making any investment decisions. This episode is sponsored by Beimo Investor Line.
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01:56 Take control of your options trade and explore their potential with Beimo Investorline. Start investing today at beimmo.com/investorline. Coleme, thank you so much for joining us in studio. Thanks for having me today. So, normally you're based in the US and you made a lot of waves when you came on the podcast a couple of months ago as this US investor who loves Canadian energy stocks and I assume that still holds true for you.
02:22 It does and I don't think people totally understand what's going on here. So, that's kind of the fun part is uh not even Canadians understand what's going on in Canada. Well, help us understand what's going on in Canada because I'm looking at a crude oil price that is moving higher but is still not a great price. um and an energy sector that seems a little lethargic. Yeah.
02:42 Well, and also just lack of interest, small indexes, things of that nature. So, um if you go back, um I think what's really different than say looking into the abyss of 2020, if you will, is that you had to have a hell of a lot of faith back then, right? You had to look through a negative price uh on oil.
03:01 You had to pray that people or an industry that had misallocated capital for years um would suddenly get religion and start doing the right thing. And you also had to pray that really bad balance sheets uh had to get a lot better. Um that's a lot of faith. Okay. The difference is that that faith is not required today. Um if you go back and look uh and I I'll use like Senovas as an example.
03:25 Um, you know, if you look back at a company like them, and they're very representative of the industry, it was not uncommon to find businesses like them trading for 5 to seven times Evida. Um, you know, in terms of net debt to Ebida, I should say. Um, that's just not true today. Um, the industry is greatly delevered as a whole.
03:40 And what that's produced is an environment that you can't take away the volatility as you're pointing out with the oil price. You can't get rid of that. But your existential crisis of solvency is just not present. And I think that's what's really bizarre about this. Um, as an investor, we all know that if your leverage is lower, people normally pay higher multiples for you, whether that be book multiples or price to earnings or price to free cash flow multiples.
04:04 Um, the funny part is people are trying to use kind of like the old multiples on these energy businesses when in reality is they just carry less financial risk. I guess the question becomes is not disappearing enough of a catalyst for the sector you know like again we're going to talk about SNOVAs and a lot of stocks but let's use it again as a poster child fine there are things they can do to mitigate the downside but they're also limited and many others on what they can do to get going unless oil prices get going. Yeah. This is not a
04:38 game of it's them versus the world or something like that. It's really them versus themselves, okay? Um, you can only be you and you can only be the best that you can be. And I think that's what's really going on right now. Who wants to be an outstanding oil and gas business in say Canada or in the United States? Um, not everybody does.
04:56 Some people might say, "I'm a professional manager. I run this public company. I'm just going to clip my coupon. I don't mind hopping on a couple PJs a few days a week to go out and check out sites with my team." And that's really great. My kids are going to graduate from college someday and I'm going to go on with life.
05:11 Um, there are people like that in the space. Um, really what we're interested in is is who understands the predicament that the industry is in, which is, um, I jokingly call this the low tea era. Okay? Low tea being testosterone. Um, this is a pretty male-dominant business, so it's not like crazy for me to say that. Um, and again, it's not a sex thing.
05:28 It's you could be a man or woman doing this, but my point is this. These are folks that are really oil and gas operators historically speaking. They like drilling. They like pulling crap out of the ground. And the issue is when they're not drilling and and using the capital allocation to go do that in kind of what I'll call a traditional growth equity business.
05:46 It's like they've lost lost their machismo and their ability to kind of feel impassionate about the future and optimistic. Um when in reality is like someone who's a financeier investor like me, this couldn't be better because when they did that stuff, they were wasting a lot of money. And so I find it interesting as you go from the operator to the investor.
06:07 That's a really tough shift for the industry. Um I I'll I'll just categorically what you'll see in a lot of these businesses is one second they're like, "Oh, we better pay down debt." And agree like there was people that needed to marginally pay down debt. Now some of that debt was coming um at rates that they were paying off that they can't get back today, right? So like if you had 5% debt or 6% debt, guess what? You that's gone.
06:25 That's that's to the clouds now. Um and then they said, "Okay, we got that done. Let's go buy back stock." And what happened is like they don't feel very pleased about that because look what the energy stocks have done the last two years. And so they're like well nothing works. Okay. And the reality is um that's pretty rudderless in our opinion.
06:41 Um we think people that know where the future of their business is going uh you know they can't predict the future but they have a plan and they have a vision of what they want to do with that and they're going out and exacting that and being aggressive in that and telling the stock market we don't care what you think.
06:56 It's what we think that matters and how we take advantage of you. I think that's really the different picture. But again, that's an investor picture. That's a finance airier picture. Um, you know, I I think I think bankers should be really taking notice of this. But again, um, there's not a ton of banks in Canada. Well, you that focus on energy, um, that might be a good point.
07:15 One of our sponsors does, uh, ATB, but you're right. Over the course of, you know, the last 10 years, a lot of these bankers did retrench from Alberta because it was so painful at certain points. Um, so that is an interesting point and it you're kind of echoing the way you spoke in March when you spoke like a banker about doing the math around M&A on a stock like Mega Energy which proved to be pretty precient because then you had Streth Kona ride in um in a deal that people are like oh wow maybe it undervalues Mega Energy and maybe there's going to
07:47 be somebody else that comes in. When you talk about not being ruerless anymore, going out and being aggressive, are you talking about doing deals like that? It's just a great example of it. Um, let me give you a little bit different theory though in Canadian oil for the for the majors.
08:04 My my theory I've been talking about with people is um who's your daddy? Okay, everyone's got a daddy. So, for example, Strath Kona, who's their daddy? Adam Watress. Um, that might be Meg's daddy soon as you're as you're mentioning. Um if you look at say Senovas um their daddy whether they choose to admit or not is Lushing's entities who is a major holder in that um if you go out and look at when they did their deal Leashing's entity as a standstill agreement I think ends later this year.
08:29 So in other words they can go out and negotiate with any party they'd like as board and large shareholders of that company but again that's their daddy. Um CNQ who's their daddy? It's Murray Edwards. Um you kind of go through this Imperial Oil who's their daddy? Exon Mobile. Okay. Um so when you kind of go through the roster of this if there's not a strong capital allocator um decisive decision maker at the beginning the top of these organizations you know congratulations you're almost a no one relatively speaking and also who's going to be driving that agenda
08:59 forward so I think I think that's an interesting thing to look at is like who's really doing that at each of these issuers who's is that a management team that's heavily incented um do they have a good capital allocation framework are they kind of unknown there could be some like that out there but generally speaking I think we're going to roll up is to say four to five Canadian majors and that's this whole game and the question is if you're not those four or five majors what are you doing to become more attractive to them for their
09:23 eventual consolidation of your business? That's so if you're not one of those that have say brand name management or brand name backing, you better be looking to get your house in order to to get bought. That's the only way. Well, and I wouldn't say, you know, you don't have to.
09:40 It's just that that's likely where the natural the market's going to go. And use use this transaction that that you just mentioned a second ago. It's all stock with the exception of a small cash component. Most of this will be either all stock or mostly stock deals. And so I say that because it doesn't mean that if you have the right assets and you've had good capital allocation and your business is valuable to someone else that they're not going to pay up. They will.
10:01 The question is how much and why. Okay. So the valuation is attractive in Canada. you it sounds like you're saying consolidation is a conclusion. Um we're going to get to it and I promise I promise everyone I'm going to ask about the details of Strath Kona and me but I feel like we got into the weeds a lot quicker than I wanted to.
10:20 I wanted I want to just take a step back because there's a lot Yes, we can talk about Canada but there's a lot happening in the global oil markets right now. A lot of reasons to maybe be bearish. You have OPEC increasing production but at the same time the oil prices keep moving higher not lower. Um the the US president says drill baby drill and in fact drilling activity is moving lower not higher.
10:50 So a lot of headlines versus market action. Right? The headlines say one thing but then the market action is the other. How are you making sense of the market action? And do you try to spend much time thinking about where oil prices should be versus dealing with where they are? Yeah. So, and I'll add another component you didn't mention off that, but let's just kind of touch on a couple things.
11:09 So, um, to your point, the current presidential administration, United States, they very much believe that with low oil prices, you get more production. That would break all of economic theory first off. I mean, that that's we learned in our Econ 101, at lower prices, suppliers provide less to the market. Rocket science, I tell you.
11:27 It's crazy. Um, that's just foolish. Um, I would throw out the idea that, you know, Chris Wright, who's the energy secretary for the United States, um, for this administration, he came from an energy company. And so people thought, "Oh, this is great. We got a, you know, an industry person there.
11:45 " And many of the people in the oil patch, this is not any shock to anyone in the podcast, they voted for Trump. Okay. Um, they feel snake bitten, plain and simple. Now, they don't want to say it because it's like you don't want to go out and criticize, you know, the president that you generally agree with a lot of things on, but the reality is they feel snake bitten.
12:03 I think the real test of whether their theories are right or wrong will be whether Chris Wright ever gets a job in the industry business again. I mean, I don't think it's going to happen. That's how angry people are. Well, I just I I I think they look and say he's saying things that that are really uneconomic or antithetical to what they see going on in the industry.
12:19 And therefore, yeah, he might get a job in a renewables business or maybe like a utility company, but like an oil and gas business, they're going to be like, "Listen, you kissed the ring. Um, you weren't very honest with people about the current economic situation." Um, as you pivot out to like the OP OPEC situation, I think I think there's a couple things, and this is like super complex, but if you look at the low of oil prices and the low of the energy stocks, they're not connected to each other.
12:45 um the energy stocks hit their lowest prices when economic fears were the highest right after liberation day. In other words, what are we doing to the economy? What are we doing to economic growth? Things like that. That's what caused the lowest expectations, the energy stocks, and caused people to really in many cases dump out of those and and sell off.
13:04 And I, you know, no one's no one's really came out and said this, but I think there were some pods that out outright got blown up in the hedge fund space where either their risk was taken completely off the table. So there they still might be have a job, but they're not managing the same amount of money.
13:18 Um, uh, now the reason why I think economic fear is the most interesting thing is because a couple things that no one has really said is the United States government is spending money like a drunken sailor on leave in their fiscal budgets. Okay. So, um I find it interesting that investors and economists have been spending all this time um playing this game called recession hunting, right? They're like looking for this creature called a recession.
13:40 And you know what's weird? We can't find one. Um now, why? Well, if I spent 7% of my GDP in deficit, we normally spend that in deep recessions or in recessions to come out of recessions. And if you do that and you're not in a recession, guess what? You'll probably never find one. Um governments globally are spending a lot of money.
13:57 What does that tend to put the pressure on? economic growth being better than expected but coming at the cost of long-term inflation. The question is not if, it's more so when. And so I say that because, you know, if you think about that, what could be going on? And I, again, this is really tough to know because this is the toughest thing to predict.
14:14 Supply is a lot easier to study over time. Okay, demand's very tough to predict. And so one theory someone could throw out is, well, demand's actually picking up to be better than people expect. Also, if you go out and look at OPEC and say, are they pretty good at telling you what they're going to do and then doing it the following month? The answer is no.
14:29 The data tends to be that they proclimate and then whether they get there or not is a different question. You mentioned there was one other factor that I was missing. Um, yes. In Canada particularly, the WTI WCS spread has come down quite a bit. This is the spread between US pricing and Canadian pricing, meaning Canadian crude oil is not as cheap as it was. Yeah.
14:50 So, it's not as cheap as it was. And someone could say, well, why? Um, I think the best theory I've heard on this, and I think I agree with this the most, is that, um, pipeline access is going to be different the next, call it 5 years. Um, Carney came in and, you know, he had to get elected and he said certain things to get elected, which may not hold to be true, like emissions caps, for example, but, um, you know, he's coming from his role at Brookfield.
15:19 That's an infrastructure business. Pipelines are an infrastructure business. Again, this isn't just sympatico stuff in many ways. And so it looks like it looks pretty obvious that we're going to see a growth of pipelines in Canada, east and west, not just south like they've been in the past.
15:36 And so what the what the WTI WCS spread is is arguing is that the pipeline uh what they collect to get oil on pipelines, it's going to be less than the past because they're going to be more competition for pipelines. If you're a producer, why do you like that? you can kind of pick which way you're going to send it and therefore your pricing is not oh am I going to get on a pipeline we're going to put it on a railroad car and send it south that still feels like a huge debate whether we're going to get another it is but the but the market seeming to price in a
16:00 much more optimistic future for getting oil out of Canada you know you mentioned the election and when I spoke to you in March the election had not yet happened and I you know just like you said US energy investors voted for Trump I imagine that and I don't actually have to imagine we know that people that are more exposed to energy economies in Canada voted for polyf. Yeah.
16:24 And so you're watching this as a foreign investor in Canadian stocks. What did the Carneman what did the Carney win mean for you as an investor? And now as you're seeing some of these platforms roll out, are you incrementally more bearish? Is it neutral? How are you making sense of it? Yeah, my read is that Carney seems to be more pragmatic than I think people would expected pre-election.
16:45 Um, in other words, there's two ways to think about politics. There's what you say to get elected, and there's what you do and and how you govern. Okay? Um, I'll just use this as an example. He went to go see Adam Wattress. Okay? Why is he going to see Adam Wattress? Well, you know, I would say he's going to see the King of Calgary for for better, for worse.
17:06 Um, you know, I I don't expect someone that hates the oil and gas business to go see Adam Wattress. And so I just think it's a much more pragmatic tone because again he wants to come out and say look how great a leader I was. Um not the Conservative party. Um so I think he's got something to prove in some respects is that he's not Justin Trudeau either.
17:22 And if you're going to do that you're going to be much more pragmatic. Um the new energy minister coming in uh Tim um you know former me you know yeah former Goldman person former MEG uh director um again an industry person sitting in that role under under a liberal government. Um that seems pretty pragmatic.
17:40 Um that's different than what we saw. So um that leads us beautifully. We we're going to talk about Megan Strath Kona here. I think it makes total sense. Um Streth Kona you madam you mentioned Adam Wattress is controlled by um by Adam Wattress. They go out um when was it? Just at the end of April. Yeah. and announced they're going to buy Meg or a hostile offer for Meg that is barely it's a pathetic little premium um that they're offering and Meg shares as I'm looking at it right now are trading above that offer price about 12% I think
18:15 has been pretty normal but but guess what also owns a bit of Meg um and so he gets the company great if not maybe somebody else comes along and and he benefits as a shareholder how do you think this situation plays out. Yeah, I think you have to look at what he did right prior because it really tells us something on the industry right now.
18:40 Um, so he sold his Montne gas assets and the Monty basin is a is a big gas basin. Um, why is he doing that? I mean, when I run into investors, they feel very confident on the future of AI and the electricity we're going to need for that and the natural gas that's going to be the primary conduit for getting that electricity.
18:58 Um, so why is he selling these gas assets when the industry is very confident about that? Because there in lies a great arbitrage right now in the oil and gas businesses in that if you can sell gas assets and buy oil, the sentiment on oil was just terribly negative. No one wanted to touch oil because OPEC plus and all these headwinds and all this kind of stuff.
19:16 Um, he, you know, the arbitrage was to do that because um, at that time now everyone's like, "Oh gosh, Meg's worth more." Well, they didn't think so. I mean, he I think he bought his average shares in MAG at $24, I think, is what I saw in some of the uh information that we saw.
19:31 And so, I point that out because here is he he's making this great capital allocation. Sell gas, buy heavy oil. And um I just don't think anybody was ready for that first. And then secondly, if you look at who he sold to, um the undisclosed party was CNQ based on what everybody knows. Um you know, he sold part to ARC and then he sold part to uh Mike Rose of Termoline.
19:51 Well, Mike Rose didn't buy it for cash. he used stock. Now, if I'm Mike Rose and I'm using stock to buy that, why? Because I think that the gas assets are relatively expensive and so I'm going to use my stock rather than use cash on cash returns. Um, I think they're telling people something and I don't hear a lot of people saying that.
20:10 Now, if you go out to a lot of the professionals in the industry, they're like, "Yeah, I'm n gas fine. We're totally good there. AI is going to be great." And you go ask oil break. Oh, man. It looks really bad. I mean, it doesn't matter who I ask on either side of the border, north or south.
20:23 like what's your outlook on oil? They're all bearish and they love natural gas right now. They love natural gas. The issue is that is what the market's priced in. Therefore, if everyone goes out and acts upon that, what it creates in security markets is a way to make money, which is no one agrees with you, which tends to be how you get good pricing in assets historically. So, that's interesting.
20:42 Does that mean you're not following that trend that you're not you're more inclined to be long oil versus natural gas? Yeah, we don't own any direct gas assets. So like and again I'm not criticizing Micros. I think the world of micros I've never owned termine. He's done such a good job. I again I just could not applaud him enough for that.
20:58 Um that being said we really like the oil business. We think time and time again everyone's like oh we know we're going to use electricity in the future. Therefore nat gas is going to be awesome. Um, the problem is that I always tend to have withn net gas markets is at the bottom of the nat gas market, the idiot is producing and the idiot is the oil company who happens to get gas off their oil assets because they don't really care about the nat gas. They care about the oil.
21:24 Therefore, they produce nat gas. And so I jokingly think about there's a negative convexity to the pricing at lows versus if oil people don't get the right price, what do they do? Well, it's exactly what we're seeing right now. They, you know, I'll use the US data. You're seeing rig counts come down.
21:37 You're seeing frack crew shut down. You're going to see investment and production declines at low prices. Um that's how rational they are with oil. But those same producers aren't very rational when it comes to nat gas. I wish I could te teleport um nine points Eric Nuttle here because the last time he was on the podcast he was talking actually pretty optimistically about natural gas.
21:58 When and here's what I say, you know, I'm not saying that gas is going to do bad. I'm just saying on a relative arbitrage as investor um what you saw Wattress do I think is the right thing. I think he's looking and saying how do I take advantage of you know as Warren Buffett used to call it Mr. Market.
22:13 How do I take advantage of the market because the market's not here to instruct you? Everyone's like oh look nat gas is a better investment because the market's telling me that's not the stock market was formed for. It's there to serve you and how do you take advantage of other people's folly and so I think I think that's a dynamic at play.
22:29 Um commodities in general I would just say this as a precursor. I think commodities and I'll use since I'm an American I'll use the S&P 500. Commodities are going to beat stocks. That's a done deal in my mind. Um and I and I and I say over the next 10 years they will beat stocks over the next 10 years. They have a history doing that about every 30 years.
22:44 And most investors are just go off for stocks and get wiped out by commodities and they all love falling in love with commodities at the wrong part of the cycle. And that's just kind of the nature of this beast. um we're we're just the folks that didn't spend we spent years not touching the commodity markets at all and of any form and when everyone gave up on them like they did you know here over the last you know five seven years congratulations were brighteyed bushy tailed happy to be involved and I want to underline that point because you're not an energy
23:08 investor just an energy investor your fund is not mandated to be in energy you could be anywhere you could we could be anywhere you have home builders for goodness sake we yeah on the US side we own home builders we obviously own US uh energy stocks I mean, but we own like one of the names we've been buying this year is like Burberry, okay? And it's like I don't have my Burberry tie on.
23:27 I apologize. I thought about it. Um, but I just say that because again, we just go where we find attractive returns and good opportunities. And it just so happens that a lot of those hit in Canada and the oil patch today. So, give me a nice uh clip on what kind of upside you see in the energy sector broadly in the next 5 years. Yeah.
23:45 So, I the the the word I really hate is rerating. It just it just it sounds so cringy to hear people oh you know and then it'll get rerated or that's when the rerating will happen. We don't invest like that. That's not how we think about this. So um what we like about the space broadly speaking is when we can find attractive returns on invested capital.
24:04 Returns on invested capital being not only the book value plus the long-term debt minus any cash. Okay. Um I say that because what are we really playing for? Well, we want to be able to buy those return streams attractively. And if the return streams are good, and let's just say we're at a lower point in the commodity cycle for oil, um, and it ends up getting tighter as we go forward, um, we might not make that return on invested capital could be higher than that.
24:31 And so, we're really playing a game of how do we compound money over 10 years, seeking out attractive returns, and not praying on dear god, will someone buy this from me at a higher multiple, aka rerating. Um, what if you bought a business that produced good returns for you and there's good allocators, capital allocators of that business and therefore you wake up later and you own more shares as a percentage of the company and it's produced good returns.
24:55 And if Mr. Market chooses to price that more attractively at some point, great. But you don't have to have that make to make good long-term money. It's very common right now that you can buy the energy businesses at low to mid- teens returns on invested capital and you don't pay invested capital for the businesses right now.
25:12 Which means that if they just pay off their debts normally over 10 years as they come do maturing um you could produce double digit returns in this industry and not have to pray for a rerating above say a book multiple or just their invested capital base or higher oil prices. Well, you get that for free. I mean if you that happens your returns go up.
25:30 So I just like it's icing on the cake. Do you need to have that based on how efficient these businesss are getting? No, I don't think so. Okay, let's see if we can find some of these opportunities and dip into the mailbag. [Music] Okay, it is time now for a few questions in our mailbag. We actually got a bunch of them, so let's motor through.
25:52 Um, a lot of insider buying at White Cap. Thoughts on the stock at this price, this one coming from Blam97 on Instagram. Yeah, so we used to own White Cap back when they did their XTO deal. Um, we liked the aggression of that deal. They borrowed money for that. Um, it looked pretty accreative to us. I think what's kept us at a massive pause and we don't own it any longer is that white cap loves handing out dividends and what we're seeing in the current situation like if you go look at the sell side and some of the investors and
26:20 say you go on X and you want to be degenerate like me occasionally and go out and read what people are saying is that um the dividend people are starting to question the dividend really. Now, here's what's important to think about. Um, in this situation, when you increase your dividend, and it's a regular dividend, you are increasing your future liabilities to your equity owners.
26:38 Now, the question is, do you want to do that? In White Cap's case, that's been their primary way to uh bring capital back to their shareholders. Now, one other thing, and I know we talked about this before, but the government is in the dividend business. You know, here in Canada, if you're in taxable accounts, part of that goes to, you know, obviously the federal government and your provincial government more than likely.
26:57 And so I I I just point that out because they're in a situation where they've done this merger, they want to maintain this high dividend, and the market's starting to ask the question of can they? The merger with Von, correct? And the dividend yield is 8.4%. Yeah. Which, think about it like this. Would you pay 8.4% on bonds? No. And we're not.
27:17 And you're paying that to your equity class owners, which are just the people at the furthest back point in the bankruptcy line. Okay? versus your bond holders are higher, which means if they get more security, you'd probably pay them less than that. And so I just point that out because again, if these stocks are cheap, kind of like we talked about just a second ago.
27:35 Um, why hand out cash, buy back stock? Cuz the government's not in the buyback business in the same way they are in the dividend business. It it just says something different about they're willing to put long-term liabilities out there and put a lot more pressure on the cash flows of the business. Um, I don't understand why.
27:50 Usually when you find dividends like that, you are walking into a business that at some point will cut that dividend. Okay? And I'm not saying it's going to happen in this case. I'm just saying it tends to be a red flag because that 8.4% is a is a cost of your equity issue. We um there was a report by Dejard Den Chris McCulla who follows the space closely who said we view a right sizing of the 8.
28:12 4% dividend yield as a painful but necessary step for white cap. And honestly, what are they getting for paying that dividend? The stock is still underperforming over the last year of the energy sector. Yeah. Um I I can show you a lot of examples where people increased their dividend. And you know, to your point, the the deal would have given them a great reset to say, "Okay, I know we've been paying you nice dividends, but under this transformational deal or whatever superfluous words they like to use in the banking world, um, under this
28:40 transformational deal, um, you know, we would like to reset our capital allocation policy because there's no time like the present." Um, that's not what happened. They pretty much wanted to make sure white cap shareholders, you know, felt like they were getting the same deal they did the whole time. The difference though is if you look at the deal terms, white cap shareholders are not the current shareholders as a majority.
29:02 Veron shareholders were the majority owners. So what better reason to reset it? Because it's not like Veron was getting those same dividends. So if they cut the dividend, would you take a look at it? Just outside of this issue and whether they're going to list in the US, which I know is a big debate as well.
29:15 Yeah, I I think you whether they cut the dividend or not. I mean I they could, they couldn't. I I don't know. Like we I haven't paid a whole lot of attention to it other than just kind of seeing what other people have been talking about. Here's what I would say. If it was like, hey, we're cutting the dividend. Oh, by the way, our our buybacks is going to be a main focus and we can't see any any way around that.
29:30 That's that's would be really interesting to us. We'd have to really dive back into it. Okay, we got two questions. I feel like this Meg Streth Kona deal made everybody see look at losers in their portfolio and say, "Hey, is this a takeout target?" Um, so one of those is Bayex. Um, any thoughts on Bayex as an acquisition target? Yeah.
29:49 Uh um yes, I can see that because Bayex kind of falls into the camp of not producing very good returns on invested capital. Um they've tried to do everything. It seems like they bought back stock. They borrowed money. Um or they they paid off debt, I should say. Um all that and now they said they're going to stop the buybacks in a low price environment.
30:08 They're going to focus on debt. That's and that's and that's the inherent issue. All focusing on debt does is just brings down your invested capital, right? Because you're just paying off that. Therefore, it adds back to book. And so, like your invested capital um your book value would go higher, but your invested capital uh really would stay the same.
30:25 And what you need to do is increase returns, aka free cash. And that other than the interest cost that you're paying on those bonds, it doesn't really do that. Um and so I say that because like do I think someone could take out Bay at some point? Yes. Um but it's where they're really wiping a lot of costs.
30:41 You know, they don't need a management team anymore. They don't need a separate public listing. There's a lot of that in Canada. And I'm not picking on BTEX particularly. I just see that commonly, especially as you go down market cap. The sub call it four billion Canadian market cap world is littered with stuff like that.
30:57 Which is why, again, back to our earlier discussion, an aggressor that has an interest in taking advantage of stocks like that, you know, they can arise. You know, where's the PE rollup? Like where's the PE rollup strategy that could come in, raise some capital and LP, and start rolling folks up like this? That has got to come at some point in the cycle, too.
31:16 Do you think we haven't seen that in Canada in years? Private equity coming in. It's it's all been made in Canada solutions. It's CNQ going out and doing deals. Correct. And I I I just pointed out because it would be another person competing for some of the deals that the majors will in the long run.
31:31 So, um I'm not saying that's going to happen. I I could argue at some level Wattress is doing that. Yeah. Right. Cuz look at his LPs. Um we know that Prem Watza of Fairfax Financial is one of his LPs. Um I just think other people might look and say, "Hey, what if he can do that? Maybe we can do that too.
31:48 So, not looking at BEX, not one of those stocks. So, what about Athabaska? Question from Mark G on X. Is Athabaska the next takeover candidate? Yeah. Um I I I'll just say this because I haven't said it publicly yet, but um if I was going to use Adam Wattress's underwriting, he uses two factors. And by this is all public. Great great uh great talk he gave at the Ivy School of Business.
32:11 It's out on YouTube if your listeners haven't checked it out where he talks about this. And this is what he's always talked about. He uses two things. He uses break evens. And so low break evens is what he's looking for. And then secondly is reserve life, high reserve life. Okay? And so it's kind of the component if you get high reserve life and low break evens, that's kind of what you want.
32:28 Um Aabaska sits out there as a business that's got high reserve life. Okay. Um and so it just looks like a natural place for him to go. In full disclosure, we don't own any of the stock. Um, but I just look at that as like that kind of looks obvious in my mind because the reserve life if you go if once you go past Strath Kona and you go past um, Meg, Aabaska has got reserve life like very few do.
32:52 And so I I think that sits out there. Now the when, why, how, I don't have a clue. I don't care to know that. Um, but I just think that's that's a keen feature of their business. So, you think if Meg doesn't work out for whatever reason that Aabaska could be a good candidate for Strath Kona? I don't I don't I think I think um I think Aabaska has been priced differently than Meg and that's why they're being opportunistic on Meg.
33:16 Um I just say that because you know if Aabaska for one reason another had investors fall out of love with it. Um do I think that could be a potential all stock deal that Adam can go run off after? I I do but again I'm just using his own underwriting criteria to look at that. Um, and again, I highly recommend that video because the the weird part to this is like what he said.
33:33 I mean, he said this publicly like everybody knows this and it's like the idea that like we have some crazy edge in sitting in Phoenix, Arizona, in the middle of the desert, you know, what 1,200 miles away or no, actually more than that, say 1500 miles away from Calgary. We don't have any edge. This is all public information.
33:50 We can just read based on the mosaic of what's out there in markets when people say things publicly and we say, "Well, if that's their way of looking at this, how should we look at this as Do you feel like he's the next Marie Edwards? Um, I think he's better than that. Um, I I think I think Adams would be kind of This is an industry that doesn't produce a lot of billionaires.
34:08 Um, you know, Mike Rose is unique. Murray's unique. I think of people like Harold Ham on the US side. They're unique. Um, because ultimately most people don't deal with the volatility well. Um, and I think I think Adam's going to do something that you'll rarely see in your career in an industry. Um, I just think it's something incredible.
34:24 I think people might have a lot of disdain for him because they're like, "Who does this guy think he is?" And the answer is he's the king of Calgary. You just need to respect that and deal with it. And whether you like it or not, he doesn't care. And by the way, I don't care either. I think he has a bold vision. I don't think many people have that, but I think he's going to stand as an outlier in this story.
34:42 Um, I fully expect that that Adam will wake up being one of the Canadian majors at the end of the day. We're going to take a quick break and talk about one of the Canadian majors of somebody who probably thinks he's the king of Calgary. Yeah. For over 25 years, Raymond James has been helping Canadians achieve their financial goals.
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35:28 Visit raymondjames.ca today to discover how you can live a life well planned. Okay, so you called Adam Watus the new king of Calgary. I think many people would still call Murray Edwards the king of Calgary and firmly in control. you know, to use your who's your daddy um uh allegory. That's for CNQ. Totally.
35:48 And we've got a question. Um will CNQ ever get a bid? It doesn't seem that they get rewarded for great assets and great management. Yeah. I mean, I I think CNQ kind of fits into the traditional like high quality. If you're the generalist, you finally dip your toe into the Canadian space, you buy CNQ. You buy CNQ.
36:09 If you don't buy that, you're probably buying IMO. um you know it wasn't that long ago that it might have been Suncor and then things looked a little tough there and Elliot shows up and so but those are the three most likely names you're talking IMO um you're talking CNQ and you're obviously you're talking about Suncor um that's where most people go um more often than not they're not the highest return producers um but again if you want liquidity they're a dominant way to get liquidity um I take nothing away from what Murray has done you know they've
36:39 obviously done really well but a much more diversified business. Um I also think a lot about um one other concept and I think this is important is that upstream, midstream and downstream have no business being together. Okay. Um I know that might sound weird, spicy take, but it's just right. Okay.
36:56 Um you don't do you never own integrated? Well, so I don't think integrated are the highest return for the shareholders of those businesses. And let me explain the the investment cycle of say upstream is different than midstream and it's different than downstream. So, let's just say we're the board of, you know, you you sit here on, you know, Avenue Road.
37:13 So, like we're we're Avenue Avenue Oil Company, okay? And we own upstream and let's just say we own downstream as well. And we got our gas stations and we got our refineries and things like that. And we're like, gosh, you know, um it see we seem to be at a low point in the upstream cycle. Um but we actually have um you know, some reason to do something else in the downstream part of our business.
37:34 How do you deal with those two questions at the same time? And the answer is you don't deal with them. Well, that's been the history of this. So, um I I'll throw out a book. I'm a big book junkie as you probably know, but um Doug Terrison's got a book out there called Can't Deny It. Doug's the old Morgan Stanley oil analyst and um he points this out in his book.
37:49 I'm literally stealing what he said. Um because plagiarism is legal in our business. Um so he points that out. He's on the board of Philip 66. So, and he's got currently obviously Elliot involved in the stock. And so um you know I think he does a really good job in his book in discussing the wise of that and he uses you know to give a good example of this Konico Phillips we own Kico Phillips on our US portfolio they are a major but they're ENP only they're purely an upstream business and what you've seen is they just produce better returns
38:19 compared to other upstream dominant businesses except CNQ has done exceptionally well over the long term and the argument for integration is that when one side of your business is doing poorly, you can lean on the other side and it reduces the volatility, the downside. That's diversification is what you're talking about.
38:38 And diversification is for people who don't want to care. Okay. Um and I say that's I think that's true in investing. And I think that's true in running a business. So, um to your point, it's like, oh, if the upstream part does poorly, we'll catch it that spread back in the refineries because the spreads opened up and all that kind of stuff.
38:54 Um you want to be as highly focused and produce the highest returns for each part of those businesses. I think that is the ultimate framework and I think that's where we're going to go in the long run. I think it's going to take time to do that. Um I won't say it now, but I think that could lead to some interesting stuff in the deal space too too though.
39:10 Um and I'm sure that'll come up with a name that we'll talk about. Okay, that's a bit of that's a bit of a tease. Little breadcrumb. Little breadcrumb. You got to stay tuned. Um you mentioned Imperial. Uh do you like Imperial? We got a question on that. Yes, we bought it last summer. Um, you know, again, I mentioned they're in the who's your daddy theory. Um, Exxon is their daddy.
39:30 Exxon provides them their capital structure. So, they actually have the cost of financing that Exxon does. And so, I I I know this is a weird way of looking at it, but I think of um I I told someone it's like having a private business in Regina, Saskatchewan. Okay? And it just so happens that, you know, your uncle aka Exxon Mobile is the large shareholder.
39:48 And what he was doing at the time was um the banks love him, so he gives you the good cost of capital through your uncle's balance sheet in effect. Um but the weird part is your uncle at that point was you know being willing to participate in this you know company uh their buyback. Why is a 70% shareholder allowing everyone to use their capital structure and buying back stock from them too? Like why why not just consolidate the business? Well, one of the theories is they'll never do that because since the beginning of time they've always feared
40:17 that the Canadian government would would maybe nationalize their business some point. I don't think that would ever happen. I'm not saying a carney government would ever do that or any conservative government would either, but I just say because that's always been the fear and it's always kind of the precedent they've had.
40:29 Um, because of that, they participate in this buyback and it's like, so we looked and and we they So, you've just got always got a buyer for the stock. You always have a seller in the 70% owner, but they give you all the benefits of their ownership in the capital structure of the business. Um, they run very low leverage, too, so you don't have to worry about this ever getting overlevered.
40:48 They also are not an inquisitive business. And you know it's like in my mind they haven't bought something for 100 years. So therefore they're never going to be they will not be a consolidator ultimately. But I point this all out because when we were buying it last summer we could find these mid- teens returns at the valuation the book multiples we got to buy it at.
41:03 We thought it looked an attractive return on capital for for our shareholders. Fast forward to today it's been one of the best performing names since last summer. And then they get to their investor day and what do they say? Our top idea is dividend growth. And it's like look at the wasteland around us. like dividend growth.
41:19 That's the most attractive thing. I I'm really critical of that idea. I think that's just really foolish because as the person sitting on the outside that, you know, we're not on the board, we're just minority investors. We do not agree with that. And so, you know, we're What should they do instead? I mean, I I just continue to do your buyback.
41:37 Um or, you know, again, they're not inquisitive. They're never going to be inquisitive. So, you know, if someone got a pulse there and said, "I got a really excited idea." They got to go to their daddy and get that approved. That's not going to happen again. So, um I just look at it as like the buyback is the easiest way for them to show aggression.
41:51 Um if they're not going to do that, if we have more attractive opportunity costs come our way, um that could be a source of funds. Would you buy here? Other like aside from the whole dividend thing, you know, a lot of people knock the stock just cuz it's so expensive. You mentioned you entered when the multiple was lower. Yeah.
42:08 Um could you get such an attractive return given how expensive the stock looks? We you got to remember um and it's a weird it's a a great question to ask but just overarchingly all these are buys. That's the weird part to this. Now our job is to try to figure out how do we produce the highest returns? Um but the space in general is a buy.
42:27 I mean you know someone says hey is this space going to beat the you know like uh the TSX index? Yeah it's going to beat the TSX index. It's going to beat the S&P 500. Yes it's going to be in my mind these are our opinions but we think it will. So, it's really a question of not like how do you beat, you know, these boring, you know, kind of doofus-l like indexes in the long run.
42:43 The question is how do you go out and produce the highest returns for all the the risk you're taking in the space? And so, again, it's like, is it attractive? Yes. Is do I think it's going to produce the highest returns based on how they're allocating capital? And I think that capital allocation piece is going to really differentiate stock returns over the next decade.
42:59 Let's uh round out here with some um more gas exposure. You already mentioned relatively you prefer oil. Um, but let's answer Fred's question. Are natural gas stocks a buy right now like New Vista or Arc Resources? Um, you know, again, I'm I like commodities for the future. Uh, it's just not for us.
43:20 I mean, like that's not where we see the opportunity. Um, if we wake up at a time and people have decided, oh, look, oil stocks have done better. Let's overpric those relative to gas. I'm sure we could come back to those. again if if if someone said what's the number one stock I'd want to own in that space termine okay because you got a great capital allocator there um but we don't own that stock and I say that'd be the first place I'd go um you know it is it is a big liquid stock someone could say well cool that's highly liquid and I agree um
43:46 but just all things equal I think he's been the best capital in the space too is Micros all right well let's now get into your pro picks your highest conviction ideas in the Case [Music] RPIX is brought to you by ATB Financial. With 62 billion in assets, ATB Financial is powering possibilities for more than 820,000 financial services clients in Alberta and beyond.
44:14 ATB's Capital Markets arm is a full-ervice investment dealer that offers investment and corporate banking, sales and trading, institutional research, and risk management. Visit atb.com/inthemoney for more information. Okay. So, Cole, the last time you were on, you brought three ideas to us. Strath Kona, Meg, and Senovas.
44:34 And you're bringing back two of those ideas. Now, since you were on in March, Strath Kona has done the best. It's up about 12%. Um, Meg is up 6% since that time. And of course, we know Stretha is trying to buy Meg. And then, Senovas is basically flat. And the ones that you're kind of reiterating here again are Strath Kona and Senovas.
44:52 Let's chip away at that a little bit. First with Strath Kona. We talked about the why how this was all happening that you think Adam Wattress is arbitrageing selling some natural gas assets because prices are high and going in on oil because prices are low. But you didn't tell me how you think the deal is going to play out.
45:14 And I I don't know if that was on purpose, but I would I think that's what people want to know. How do you think about it? Yeah. So, the answer is that they'll close this deal. Like, that's very certain in my mind, which is like they'll get me. They'll get me. Um at a higher price or at the price on the table? Well, just just use what the market's pricing.
45:30 Stock market investors are effectively saying, "Hey, at a 12% premium to what you announced, I'll give up my stock." And you're starting, you know, we're in a world where you you you might not have the natural longs there anymore. you start to have the ARB community that might pick up and want to take some marginal risk on this.
45:44 So, I point that out because who the owners today might be different than the owners when the deal was initially announced. Um, you know, uh, you know, you had Eric on your show, he's a big holder. You know, he doesn't seem to be interested in the deal at the terms. Um, I I think you have to remember, you know, we're just very pragmatic people.
46:00 Um, in the stock market as a minority investor, you might run your private market valuation and we often do like we go out and say, "Well, what will we pay for this business? What do we think it's worth?" But in the stock market, we're not God. And we do not get to be the controlling investor like say, you know, someone like Adam does.
46:17 And so I point that out because you have to look and say, "Okay, here's what I think it's worth." But there's also the fact that I can't control the business. And therefore, because you don't get control, you might never get what you think it's worth at the end of the day. And so the reason why I point that out is because I'll hear people say like, "Oh, I think Magg's worth 30." Yeah, it plausibly is.
46:35 That's a total plausible theory except that you're not on the board and you don't own 50% of the stock to determine that. Um, you know, like the other daddies that we talked about do. But if you're saying your time horizon for 5 years is like all these stocks are going to do well, all these stocks are outperforming if Meg should just hold on.
46:56 Meg should even if no one else comes along, Meg should just hold on. Well, here's where I'll disagree. Um, and I you'll find this in in Adam's deck, and I agree with him on this, is that Adam's incentives are better for me than Meg's board and Meg's management is. Um, in other words, I'm not I'm not saying Meg's board or management has has done anything necessarily wrong.
47:12 They've been buying back stock. We've really liked that. They've used that as their primary policy tool for capital allocation. They have a small dividend. Um, if you go out, I I give them a lot of credit for this. I'll use Ryan Cubic, their CFO. he said this um where they're not really growing their dividend, but when they buy back stock and they pay the same amount of income out with fewer shares, it looks like the dividend's growing when reality is they're just killing shares off and paying the same amount of income. So, I think highly of them, um
47:36 but again, they don't have a daddy and everyone needs a daddy in the space. And so, um here's Adam walking in and one other thing I'll mention in founder-ledd businesses or family-led businesses, which I kind of put Strath Kona into that case, is there's two things that historically you'll find.
47:52 One is that in crisis situations, they tend to deal with their capital structure quicker. So they might draw lines of credits quicker because Adam, you know, says, "Hey, I think we should draw the lines of credit." He calls up his son, board meeting's over, they're drawing their lines of credit. Versus, if you're at another business where you're, you know, you're the executive team, you're not the board.
48:08 You got to get to the board, say, "Hey, are we cool to do this or we find it?" You got to okay it. That takes time. By the time the crisis is over, you might not have got done what you wanted. So there's more capital structure flexibility with a founder business like that. Secondly is because you don't pay Adam Wattress the same that you pay these other professional managers or executives.
48:26 Um you get a higher return on assets all things equal because their economic incentives is what drive them not their financial compensation. So you think at the end of the day Strath Kona comes away with Meg they increase their offer. Yeah. Do you see anyone else coming to the table? I don't. That's wild.
48:42 A lot of people are playing that game. I I I agree because I like the shoein would have been Soas this whole time and they kind of said and they're like, "Hey, we're interested in what we're doing already." Um, and again, you know, the weird part is Sova should have bought them 3 years ago because when the NOLs were higher, they could have realized those NOLs quicker and thus the premium they paid would have been realized out of effectively tax savings over the following 2 to 3 years.
49:07 I think in Meg's case, they have NOLs that exhaust sometime in 27 or 28 at this point. Um, by the way, go in and look at STRs. I mean, uh, they they have NOL sitting out there, too. Yeah. What's NOL for those that don't know? Net operating losses. So, just, you know, deferred tax ass. That's what they refer to if you go to the balance sheet of the business.
49:24 Um, what do I think this combined merger does, though? It's deal season. We're going to go hunting again. Okay. Um, being that if I have large NOL pools built up, if I find someone who's paying cash taxes, guess what I can do? I can pay a premium for those because I'm going to use their cash tax payments to fund my deal premium in part C part cash versus the rest being stock.
49:44 I think we could see that pick up again. Why? Because that's what I would do. And that's what you were saying about me. That's why you you thought me was dangling out there because it had those net operating losses. Correct. And but but again the combined business of SCR and MEG, that's a benefit they have together because they both are bringing bringing net operating losses to the table at the same time.
50:03 One thing I'll say, what's not being focused on enough, and this is why the incentives argue Adam's going to close this deal, Adam needs float. Adam's got super tight float right now. They released some shares. That's how everybody figured out that Prem wants as a shareholder is when, oh, look, Prem, you know, had to disclose he owned um the shares that were being dispersed. Um he needs float.
50:22 So, if I want float, Meg's a similar asset. Um that's where the incentives align. So aside from what you see is an ultimate conclusion that Strath Kona buys Meg, let's talk about Strath Kona in isolation because a name that kind of came out of nowhere um and is now a top 10 producer.
50:42 Are they top five? I say well top yeah top five barrel oil equivalent I don't know what it changed on the the assets they sold but again they're surely a top five player if this closes and or or close to it if not exactly and and so then and then what what what do you like about the company be you're obviously an Adam Wattress fanboy. Yeah.
51:00 Uh we got remember in what they sold let's just take out what they sold. I think what they sold gives them about 40% of their market cap in termoline stock small piece say $300 million and the rest in cash that settles and closes at a later date. Um they also have the financial power from their second fund that they raised in the last call it 12 to 18 months and that's what they're adding extra shareholder.
51:21 Um they want to keep control in that deal. So, what I think you'd see is they'd go out and say, "Okay, great. If we don't get that deal done, we're going to take this cash that settles at some date in, you know, in the next, you know, probably 100 150 days, something like that, and they're going to go out and be inquisitive. That's that's where we're going.
51:36 " Um, let me throw out some, you know, Vermillion just sold some assets. Okay. Um, I thought that was very interesting. Um, I think Vermillion has some assets sitting out there that could be bought, for example, that are I think if if I remember correctly in their case that they are uh they're it's a green field opportunity.
51:51 Um, if you go out and look at what's around the heavy oil world, you know, KICO's got holdings in the heavy oil space. Um, it, you know, they're currently producing there. I think we're going to see a lot more consolidation in heavy oil because that cash is going towards heavy oil. You mentioned Sova should have bought um, Meg.
52:07 We actually got a question on this and it's your you're reiterating it as a top idea. Um, Cole said he owns Senovas so he's aware of how abysmally the stock has performed um, its peers mainly due to upstream issues. Does he think the stock can be rerated? Your favorite word. Um, should the refineries be spun out um or just slow and steady upstream improvements to change the narrative? Yeah, so um the answer is yes on the refineries. They should be spun out.
52:32 Okay, but this gets me to my new theory. Um I said that you know their daddy Lee Kushing's entities has a standstill that ends later this year. Um I think when that standill ends I think so is in play. But sorry, do you think that leaking will take it out totally or take out? I I'm saying they'll go to a third party and they will the business will be sold um to someone in all stock deal to whom? Uh Suncor really and here's why I say it. Tell me.
53:03 Um so if you look at if you look at Sovice, uh Sovice has their US refinery assets. Okay. Um that's taking a lot of heavy oil in. For example, um Suncor has one asset in Denver. If you go to Denver, this complex is massive. If you've ever been to Denver, you've driven by it. Um, to my recollection, that's that's Suncor's only refinary asset in the US.
53:24 So, here's how they do this. Elliot comes in, says, "Great." Um, Leica Shing's entity goes off to Elliot, says, "Hey, we want to do a deal in combination with with um Suncor." Um, they come as a willing party ready to support the deal. Um, Elliot says, "Great. We think the best way to do this is we'll combine with Senovas.
53:41 We will take the refinery, US refinary assets and spin those out into a US listing. Elliot's doing all this. Elliot in combination with Suncor. Okay. Okay. Um, now this would be the largest deal ever for Suncor if they did this. Correct. But if you're like the the Carne government, you're going to be in the pipeline business.
53:58 You want really good partners in that pipeline business and you want really strong hands and low cost of capital to do that. So, I think that's where we're going. Again, consolidation is going to pick up. Um, is it crazy for me to say this? Yes. Um, how do I know this? I don't. It's a theory, but again, I'm just looking and saying, well, if you're leaking's entities, you're watching the performance of the downstream business not do that well in refineries.
54:17 Um, and and the stock's kind of languishing. Um, do I think that's because the upstream assets? No. I I I think they have good upstream assets. I think you get the the downstream assets are negatively priced right now. In other words, like there's zero or less than zero value ascribed to them.
54:33 Does Rich Krueger does he want to do that deal? Um, is it good if you're a Suncor shareholder to watch them do that deal? You know, let's go this way. At the price that Sovas has been sitting, I think that's what makes the deal interesting. I also think the fact that you could go negotiate with such a large party like the leaking entities, um that could hasten the process.
54:51 I think they have two board seats as well, so you have some board involvement with them. Um so again, you know, I think if you look at some incentives, you can say I can see the path. Um if you told me like, you know, what do I think the the likelihood of that path? I'd put it like I don't know 35% chance that that could happen.
55:07 Um, and I'm sitting here, minority investor from Phoenix, Arizona, sitting here with you in Toronto. Um, that's just a theory, just like I told you. Hey, I think there's a theory that Senovas could buy Meg. Um, the difference, I think, is things are speeding up right now. Um, love is in the air and, um, I think, you know, you mentioned you're going to be at the stampede. I'll be at the stampede.
55:26 I think, um, I think there's just going to be a lot more people cooing in each other's ears and and telling them, you know, roses are red, violets are blue. um let's get a merger and I love you too. Yeah. Um and so I think we're just going to see more of that because it argues for consolidation right now.
55:41 And do you want to necessarily go out and buy choice assets like a Senovas um when they're on a discount or do you want to go out to the other parts that have less liquidity and less size and less scale and go pick those up first? I don't know. Um but I just think that looks like it. Why would you have a stand still agreement that ends? Originally in that SNOVA deal, by the way, Husky shareholders got warrants.
56:01 those expired uh in January of one of this next year. Um so I think there was even a gap between when the warrants expired versus when the stand still ended. Um Lee Kushing's entities has sold their warrants off back to Senovas already. So that's not like where they have a warrant issue. But again, when that stand still ends, it's it's game on.
56:18 Fascinating. Look that you're dropping this in like the last few minutes of the podcast, so people better have paid attention. And you're right. Um, I will be at Stampede and I'm going to be interviewing Adam Waters um for that episode as well. Yeah, lucky me. So, we have lots to tell him, lots to ask him about.
56:36 Um, because clearly he's been busy. Okay, let's squeeze in your third idea, which is just a hard left from everything we've been talking about, which I like a little bit of diversity in the mix. Glen Core. Yeah. So, um, about I'll call about 30 to 40% of their business is really uh coal, like steel making and thermal coal.
56:53 Um, we've owned some of the thermal coal business. We own currently one called White Haven um in Australia as well. So um those are energy businesses in the case of the thermal coal and the in the steel making um steel making because of the views of China has been very negative. If you look at their other parts their metal and mining copper and zinc are big businesses for them.
57:12 Um people just hate commodities right now. How we look at their business is through the cycle they're going to produce 10% returns on invested capital. Again we need to get that as a as a minimum and these are long cycle assets. I mean to get these mines and built and whatnot it just takes a long time. Um we think with people really overpricing paper assets particularly in the United States this is a highly tangible asset really tough to produce really tough to recreate the assets they have and um M&A is in their DNA as they say at that business. So I
57:42 think we could see more consolidation. Could I see them taking over other coal businesses? Yes. Why coal? Why are you so excited about coal other than it's your name? Uh the paradigm that everyone's missed about the energy transition or whatever you want to say on that is that anytime we transition from one energy to another, the old form of energy gets pulled forward and used more in the future because the economic growth and the progress we see in society from the new energy causes economic growth and activity to explode.
58:09 So quickly wood to coal, how did that go? What caused an industrial revolution? We use way more coal and we end up using more wood too. We go then go from coal to natural gas. What did that cause? That caused us to use a lot of natural gas, but oh by the way, we use more coal in 2024 than any year in the history of the world.
58:27 So the idea that in any kind of transition, you're not going to use the old form. That's foolish. That's the same applies for oil, too. The same would apply for oil, too, if you transition. Okay. Um and again, like does it bother me to transition? No, because we're going to use more of it. But here's my point, too, is like in the Western world, we're so snobbish. We're all rich.
58:45 We're all wealthy relative to other people in the world. So, we're like, "Oh, well, here's how we like to use our energy. You should do that, too." And they're like, "Hey, I just want running water and electricity. Can you leave me alone?" And ultimately, if you want electricity, the primary way to do that is coal.
58:59 Um, the cash returns the coal business are very attractive. What I think we've tended to learn in that space is the capital allocation might not be what we want. And so therefore having this highly liquid player like Glen Core, I wouldn't be surprised if at some point they they spun out their coal business or you know the thermal and and metallurgical coal business.
59:17 You know they took out EVR from tech that was a kind of highly controversial almost hostile in a way deal. Elk Valley correct Elk Valley resources. Um when they were going to originally spin that out and kind of put this preferred payment stream on it that looked like a call option that tech was going to price. That was interesting to us.
59:33 So we've been kind of floating around the space for a while. Um, so why Glen Core over Tech Resources? Uh, well, because they're just big in the coal business. Yeah, it's just really big in the coal business. Um, you know, Tech's based up in Vancouver. Um, it's not far from where I grew up in Seattle.
59:47 Um, again, you know, do I think commodities are going to do well? Yeah. But I think the folks at Glenor, they're just wicked smart. If someone said, "Give me a uh give me something that you don't like about the business." They pay themselves really well. I mean, it's been punished. The stock is down like 50% from the 2023 low. Correct.
1:00:04 We just started getting involved in it. So, it's not like we had to watch it go from what was it six pounds down to, you know, two and change. Um, but it's a business that I've always wanted owned because when when commodities become a small G god, Glen Core becomes a small G god among generalists and portfolio managers. Cole, what an absolute pleasure.
1:00:22 Thank you so much for joining us in studio. Thanks for having me today. And I'll see you at the stampede. Yep, we will. All right. And on our next episode, we are talking tech stocks, not tech resources and dividends. We've got Peter Hofra on the show of CI Global Asset Management. Send us your questions now.
1:00:38 You can email us at questions@ininthemoneypod.com or find us anywhere on social media atinthemoneypod. And we'll see you on the next episode. [Music] It doesn't mean it doesn't