Cole Smead — Why an American Investor Loves Canadian Oil Stocks

1:58 The framework — bad businesses that adapted

• Oil & gas historically produced poor returns on the capital needed to run them, and were over-levered. "People and companies adapt over time — they just never adapt overnight."
• Since the pandemic: capex is hard to find, so there's excess free cash and the industry is arguably under-levered. The US was the swing producer for 20 years; that supply is now hard to grow.

5:27 Late-2019 — three signals: Zell, Lynch, Buffett-OXY

• Sam Zell ("the grave dancer") buying distressed private energy; Peter Lynch's late-2019 Barron's interview naming EOG/oil, not Google/Meta, as his best idea; Buffett's OXY preferred deal. Three great investors, same direction.
• Caveat: that doesn't guarantee your outcome (look at OXY's stock). But if you didn't get interested then, you couldn't act when 2020 ("Saudi Sunday") arrived.

8:12 "The second-best buying opportunity in 20 years"

• The low two weeks ago is the second-best after 2020 — but easier: no solvency question (balance sheets are clean), just near-term tumult over the next 6–12 months.
• Hedge funds dumping the space is a feature: "in any good era, numerous people give up all along the way." Smead is happy to "look like fools" and make money doing it.

10:50 Supply, not demand — capex at ~30% of cash flow

• North-American production isn't a straight-line "God-programmed" grower. At ~30% of operating cash flow going to capex, you can't maintain long-term flowing barrels (vs >100% in the growth years).
• Focus on supply — it's studyable. Demand is a fool's game to predict; it's growing, just at what rate. Sheffield: only ~4 years of tier-1 US inventory.

13:01 The "energy vigilantes"

• Like the 1980s bond vigilantes: raise capex guidance to grow barrels (cutting free cash back to owners) and the market sells your stock 5–10% that day. The free market is regulating how much capital producers can use to grow.
• Not anti-capex: capex is fine if it earns higher returns than the parent's own yield. But at spot prices, marginal projects rarely clear that bar — so buybacks and mergers win.

14:33 Dividends are liabilities — the withholding math

• Big regular dividends re-create the very liability the industry just shed (debt). As a US holder of MEG, Smead loses ~23.6% of the dividend (15% Canadian withholding + tax net of the foreign-tax credit). "The government is in the dividend business — not the buyback business."
• Buybacks aren't always right (destructive if the stock is expensive), but across this cheap space they are. "They're all buys" — the question is how to make the most money.

19:07 Dig for oil cheaper on Bay Street — Boone Pickens

• 1980s Boone Pickens "green-mailed" companies because you could dig for oil cheaper on the NYSE than in West Texas. Same today: "I can dig for oil cheaper on Bay Street and Wall Street than in Alberta or Texas."
• That's why marginal capex isn't attractive (stocks too cheap, oil too low) and why buybacks + share-mergers dominate — "I don't know why we don't have three or four issuers left in Canada."

21:24 Energy weight — from ~3% of the S&P back toward >10%

• Energy is 3–4% of the S&P (was 30% in 1980); ~17% of the TSX. Could revert toward >10% — partly energy doing well, partly the rest of the S&P doing poorly. "The secret to life is weak competition."
• Don't pray for the generalists to return — "buy back as much stock before all the idiots figure out what's going on." Rip-Van-Winkle math: mid-teens ROIC compounds even if you sleep 10 years.

24:24 Tariffs — the softwood-lumber precedent ("my hedge is I don't care")

• ~4M bbl/d cross the Canadian border daily. The 2016–17 softwood-lumber duty (Wilbur Ross, whose book Risks and Returns Smead had him on to discuss) is the analog: stocks fell fast (elastic), the commodity re-priced far above the tariff (inelastic — $300 → $1,000+/mbf).
• Tariffs create a scarcity of capital for future demand that enhances equity returns for whoever steps into the risk. West Fraser is up ~200% since 2016.

28:35 Carney & Canadian politics — and coming to Canada

• Non-voting view: Carney is "more pragmatic on the margin." Investing through the Trudeau era meant buying at a discount; "you can't get worse than where Canada's been." Alberta = lower tax, Chicago-school free markets; "if we're gonna have a 51st state, we'll take Alberta."
• Smead is forming an entity to provide investment services to Canadians (choosing a domicile/regulator) — first move into Canada after ~6 years owning Canadian businesses. Runs ~US$5.5B, mostly mutual funds.

31:04 Negative on the US dollar

• "I'm very negative on the dollar." History: when commodities do well the dollar does poorly, and it's also a function of US-stock-market peaks. Good for the Loonie.

32:29 Mailbag — the Whitecap/Veren deal (agent-owner problem)

• Owned Whitecap once (liked the levered XTO-Canada deal) but exited over the ever-rising dividend. On the merger: why does Veren own the majority yet Whitecap's team runs it? Because a >20% premium was paid so the executives could keep control — bad for Whitecap holders (the agent-owner problem).
• Not interested post-deal; better relative opportunities elsewhere. "Time is not on their side" for the sub-$5B names — little capital beyond retail can buy them.

39:12 Baytex & Tamarack — cheap, but not the highest return

• Both look cheap on free-cash yield, but ROIC is closer to ~10% and liquidity is thin at their market caps — "the chaff from the wheat." Baytex "won't be a company in 10 years — they'll get bought away."
• Prefers >US$3–5B liquid names; MEG is the exception he'll own below that.

42:06 Imperial Oil — the uncle-Exxon buyback squeeze

• Exxon (70%) lends Imperial its credit rating, then participates pro-rata in Imperial's ~5%/yr buyback — so the passive minority holder's ownership compounds while getting a super-cheap cost of capital. Low dividend enables it.
• Absurd, and therefore the opportunity: "absurd things like that happen all the time in the stock market."

49:44 Greenfire & the Waterous partners

• Interesting only because of the partners — the Waterous energy fund (~60%) + Fairfax (Prem Watsa). "Adam Waterous is the most successful Canadian oil investor ever" — a financier as much as an operator.
• Too illiquid for Smead's investors, and "if I won't do it for our investors, I won't do it for me personally."

55:39 Majors should be focused — the ConocoPhillips template

• Upstream, midstream and downstream "have no business being together." Refineries and pipelines are low-return vs pulling oil out of the ground. Suncor getting more focused (Elliott) is right.
• ConocoPhillips (owned, US) is the model — a pure E&P out of refining, producing the highest returns. That's what the Canadian majors should become.

57:28 Couche-Tard — a PE rollup in the public market

• Not the blue-chip everyone thinks — a Circle K PE-rollup that periodically over-pays, gets re-rated, repeats. Owns ~1%, in since the Carrefour attempt triggered insider buying + buybacks.
• The 7-Eleven / Seven & i pursuit will pressure the stock (no buybacks while cash is needed) — he'd buy more on continued tumult. Bought at ~16x free cash.

1:03:08 Pro pick — Strathcona (invest alongside Waterous)

• Depressed by a tiny float (Waterous fund LPs + Prem Watsa hold long-term; only ~20% trades after an 11% distribution). Investment-grade, long-life assets.
• A vehicle for all-stock acquisitions — but only once its own stock is valued enough. Expect deal activity to pick up over two years.

1:08:28 Pro pick — MEG (the NOL-takeout math)

• Single SAGD asset, mid-teens ROIC at ~book, small dividend, buying back stock cheaply. The prize: a large deferred-tax-asset (NOL) pool that a same-basin acquirer could realize faster, funding the takeout premium out of the tax savings over 2–3 years.
• "A banker's dream — a very likely takeout candidate." (No M&A edge claimed — "I just know the math works.")

1:12:22 Pro pick — Cenovus (spin the refineries)

• Long-life asset base at ~1.5x book, mid-teens ROIC. The US refineries are priced at zero-or-negative; recognizing that value means selling or tax-free-spinning them into a US listing (Cenovus now has 100% control after buying out BP's JV stakes).
• Late-Feb quarterly miss took it to a 3-year low; Smead still owns it and wants their existing long-reserve-life production.