Title: Why American Investor Cole Smead Loves 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: 2025-03-18 URL: https://youtu.be/VkmX5ZHvM3c Length: 1:16:49 Note: YouTube auto-transcript as pasted (lowercase, lightly punctuated); (mm:ss)/(h:mm:ss) cues verbatim. Garbles: "sovis/snovas/Senovas"=Cenovus, "kico Phillips/Konico"=ConocoPhillips, "beex/Bayex/BTEX"=Baytex (BTE), "Eric nuttle"=Eric Nuttall, "Sam zel"=Sam Zell, "St Kona/Strath Kona/stth Kona/Streth Kona"=Strathcona (SCR.TO), "ven/veren/varen/Von"=Veren (VRN), "White Cap"=Whitecap (WCP.TO), "watus/waterous/Wattress"=Waterous, "Prem Watza"=Prem Watsa, "Boon Pickins"=Boone Pickens, "Mike milin"=Milken, "Sheffield"=Scott Sheffield, "Sarah week"=CERAWeek, "greenf fire/green fire"=Greenfire Resources, "Aabaska/Athabaska"=Athabasca Oil (ATH.TO), "Mike Rose of Termoline/termine/Micros"=Mike Rose of Tourmaline (TOU.TO), "New Vista"=NuVista (NVA.TO), "Arc"=ARC Resources (ARX.TO), "polyf"=Poilievre, "Darlene"=Darlene Gates (MEG CEO), "Ryan Cubic"=(MEG CFO), "Lushing/Leashing/leaking/Lee Kushing"=Li Ka-shing, "Rich Krueger"=Rich Kruger (Suncor CEO), "XTO"=XTO Energy Canada, "Vermillion"=Vermilion (VET), "KICO"=ConocoPhillips, "Tim (energy minister)"=Tim Hodgson, "termoline stock"=Tourmaline stock.
00:00 hey everybody we've got a brand new episode of in the money with Amber canr we've got Cole smeed on the show of smeed Capital Management he's an American investor who's been buying Canadian energy stocks he says you can buy oil right now cheaper on Bay Street than you can get it in the ground he'll explain his thinking on why he's more bullish on the Canadian energy sector so let's get into [Music] it the information provided in this podcast is for informational purposes only and does not constitute Financial
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01:27 com onlinein colme thank you so much for joining me thanks for having me so you are an American investor but in all the times I've spoken to you we end up talking about Canadian energy stocks yeah and I know that you own a bunch of American stocks but the Canadian ones that you own tend to be energy stocks talk to me about why that is yeah uh it's a great question so um just to teach a little bit about us uh we run two portfolios a US Equity portfolio and then what we call like as an American ha an international portfolio let's just
01:59 call it X us for lack of a better term and so we we own um our dominantly most of the names in the Canadian space in our xus portfolio but just so you know we also own sovis in our us portfolio and let me give you some framework for thinking about the Canadian energy space at large and just also framework for oil and gas businesses in general okay these are businesses that have a history of not producing good returns to call a spade a spade because they don't produce good returns and when I say returns really freak cash flow based on the
02:31 capital needed to run these businesses um historically speaking they've tend to be levered too okay now that's the history of this um I always tell people things uh you know people and or companies adapt over time they just never adapt overnight and I think people often forget that so that's the history looking back now as we fast forward to today the difference between then and now is that you'll it's really tough to find people doing a lot of capex and therefore there's a lot of excess free cash left over that's been true really
03:01 since the pandemic began and then the other thing to add to that is because they've Ran So Much free cash flow you're waking up in situations where they're not levered like the past in fact I could argue industry broadly is under levered okay and so we we look at the structural framework of that for the industry and then you could take a a broader backdrop and this is not the kind of thing this is not unique to us but you know if you had Eric natal on your show he would teach you all about the fundamentals of this but the basic
03:27 necessity is the American was the swing producer looking back 20 years American Producers were we do 10 million barrels a day that weren't there 30 40 years ago and that grew Global uh Supply the problem is if you look at capex in both Canada and the United States it's really going to be tough to grow supply in North America um because particularly the American assets are going to dwindle quicker uh Canadian assets T to be longer asset bases and so that is in a world where the economy can grows for the world American American government
03:58 as well as other government continue to spend and so you have this picture of a bright future with government spending and at the same time we all act like we're going to have an abundant supply of energy and it's very tough to see where 10 million barrels will come over the next 10 years and so yeah well I was just gonna let's unpack that it's so funny you brought up Eric nuttle because he was one of the first guests on the show when I started the the the podcast and actually one of the questions and we'll get to it later called you the
04:27 American Eric nuttle so I think that's a compliment um to you a lot better looking though he stays young that's for sure and I've been asking I've been asking his secret um but what I want to know so so you've got this framework where you're looking at a situation these have been historically bad Investments but you see the backdrop as favorable yeah I want to know when did it switch for you when did you start looking at this sector how involved have you been in talking to management about really the new ethos right which is you get a bunch
04:59 of cash flow instead of going and and spending it on whatever you're going to spend it on just give it right back to shareholders yeah it's a it's a it's funny I think about this a lot because I'll will occasionally get this question so um it's late 2019 okay U mid to late 2019 and I remember there's three people that stood out to us uh first off we knew that Commodities had done terrible relative to stocks if you're looking at the US Stock Market for example so we knew that it was from an investor sentiment perspective it was very low um
05:27 separately Sam zel who's obviously no longer alive at the time he was out buying existing energy production in distress so he's known as as as the grave dancer um was his uh you know reputation and so that was interesting to us why is Sam zel the grave dancer out buying distressed energy investments in the private Market secondly in I think it was November of 2019 um Peter Lynch who's like the greatest gross stock investor of all time is interviewed in Baron's magazine and I highly recommend your your uh listeners
06:00 go back and read his interview because here's one of the greatest growth stock investors of all time and what some would argue is the greatest growth stock era ever and he didn't come out saying you know buy Google buy meta they're all buys that's not what he said he his biggest idea was Ean PS and he said yeah he doesn't know if they're 10 Beggars but he sees triples and quadruples and that was in late 2019 Okay the third person to this that I thought was so seminal and I think it was a seminal moment um was when Warren Buffett did
06:31 his oxy deal where he took 10 billion in preferreds with warrants and um that deal went on so you have three really successful investors do something now very good lesson to learn as an investor does that guarantee your outcomes and your probabilities of success the answer is no that's why they call it investing not knowing yeah not if you look at ocidental Petroleum stock price corre correct so so but here's why I say it if you didn't have an interest in the space from those events as the tumult of 2020 that spring when the Saudis decided to
07:07 let the Americans have It ultimately and cut their knees off I call it Saudi Sunday is how I think about it that by that if if you weren't prepared for that you could not take advantage of what was going to transpire the following year okay um I do not run into investors today that made a bunch of money in the energy business by not losing money then you had to lose lose some form of money then to understand what a generational opportunity 2020 was okay now what did you have to do at that time even though those investors were going to be right
07:41 longer term you had to lose money you had to look in across the cliff and a precipice that was unknowable you didn't know how soon the business and the pricing of oil would recover um you also didn't know how quickly these balance sheets were going to delever which they did in in fantastic pace so there was a lot of unknowns that you had to look past now I say that um Amber because in my opinion in our opinion uh I would say sentimentally but I would say this because I don't want to throw my colleagues under the bus the low we saw
08:12 a little over two weeks ago on the energy business is the second best buying opportunity in the energy business of the last 20 years now it's different it's different because in 2020 you were looking at a oil price that you didn't know when when it was going to recover how it was going to recover and you didn't know like I said when they were going to delever today we sit here having this discussion and you don't have to wonder if they're going to deliver there's no need to they almost don't have any debt compared to any
08:41 point in the past and second we're just asking what is the near-term tumult what is the next six to 12 months going to look like how ugly could it be that's vastly different than wondering when will they make free cash flow and profits again okay and I think people looked and said you know what this could get pretty ugly and hairy I don't know if I want this and there's pretty good articles out this week uh last week on on Wall Street Journal talking about the the hot money and hedge funds just dumping the space broadly and I love
09:09 that going on because in any good ERA in investing in space you have to have numerous people give up all along the way because it ultimately the people that make great money in space are going to be few and lonely and we've just so chosen that we we we'll we'll look like fools in the space and we think we make a lot of money looking like fools in the space so there's a couple of takeaways from that one you're not a chronic energy bull no you could go anywhere you don't run an energy fund so you could go anywhere correct this this is a an area
09:40 of investment that is that has become particularly interesting to you in the last five years you say this is the second best time I guess the pandemic was was the first best time to invest in energy because things seem so bad so let's talk about why do things seem so bad right now and how do you get over that precipice they seem bad right now because oil is under $70 growth forecasts are being cut production potentially on the Saudi side could be going up at a time when growth is slowing yeah that all seems like a
10:16 recipe for oil prices remaining under $70 tell me how you see it differently yeah the the main issue is most people look at North American production just growing add infant item in other words they're they're using that as like a StraightLine function as though God has already pre-programmed North America to grow and the only problem is if you look back at the last two to three years of I'll give you a measure to look at if you look at Capital expenditures AKA how much is being invested into oil and gas assets say in North America relative to
10:50 the cash flow of those businesses it's been humming around about 30% of operating cash flow and the issue with that is you cannot maintain long-term flowing bar at that number now back when the Americans were growing a lot of production what kind of capex as a percentage of operating cash flow were they doing well over 100% so when we didn't make any money obviously we could grow a lot of production now that people call it shareholders are getting a lot of the excess capital of these businesses production isn't growing it's
11:22 slowing and if you go out um I'll use uh Sheffield's uh comments um you know a few weeks ago obviously X mobile uh you know bot Pioneer and Sheffield their their former CEO prior to the deal was saying oh we have about 16 years of uh you know assets out there and now that the deal's closed and by the way Sheffield is not on the board of Exxon um he's kind of telling the real and so he was at Sarah week uh you know in the last couple weeks and he said oh yeah we have four years of of tier one assets and four years of two tier 2 assets
11:57 which is about half as long as he explained when you're still running a business so the idea is that the Americans Allah my countrymen and our oil and gas assets are short of good inventory to go out and get barrels the next two to four years and I think it's just a matter of when does that Tipping Point reach where the market recognizes that there's a bigger scarcity going on than they thought because again to your point while we're tapering demand forecasts we're not taking demand backwards demand is growing it's just at
12:30 what rate and so you know very important thing for your listeners to know I think it's impossible to predict demand I think it's a Fool's game to predict demand I think it's much more important to focus on the supply is Supply growing if it is how is it growing and also can you see in the financials of these business that they can continue to grow and I think that's ultimately the Crux the Crux is it's very hard to see how the flowing barrels are going to grow because ultimately I'll give you another Paradigm to think about uh energy stocks
13:01 are dealing with something I call the energy Vigilantes the energy Vigilantes act like this it's kind of like the old Bond vigilantes of the of the early 1980s where If the Fed did something too torturous to the bond market the energy VI or the Bond vigilantes would kind of scream out oh you're hurting us as Bond investors we're not going to fund the market well that same thing is going on in energy if you greatly raise your capex guidance to go grow flowing barrels AKA reducing the free cash that goes back to your investors the energy
13:29 Vigilantes are going to scream bloody murder and they're going to come and sell your stock for 5 to 10% that day and so you see this function where the free market is regulating the amount of capital that these energy businesses can or can't use to grow production do I think it's fair yes because ultimately those businesses have to treat their shareholders well enough for them to stay around or to give you another lens to look at this in effect most of the history of this business has been dominated by by operators right people
14:00 that like Drilling and like getting production out of the ground but that is not The Sweet Spot of this era The Sweet Spot is people like me who I I don't know how to drill I don't know how to pull oil on the ground and you know what I don't want to okay I mean I can tell you some I know some about the technology but I am a finance year I am an investor and what most people lack in this space is the ability to think about these businesses as an investor and a finance Year let me kind side side note to this just to kind of give you a
14:33 picture one of the things I constantly get in Ties on X and other places with investors on is watching these companies hand out large dividends okay now here's why I say that um think about it as a finance year we've just taken an industry and greatly reduced their debt AKA we've reduced the liabilities the committed liabilities on the capital structure of the energy business so what if certain not all I'll give the industry credit not all but certain uh energy companies done they've come back and said great now is here's what we're
15:04 going to do we're going to pay you much larger regular dividends well here's the only problem Amber is that when you commit to to these large regular dividends that is a liability you're guaranteeing a payment due to your Equity owners so you're not giving it to a debt holder you're giving it to an equity owner and the only problem in my cognitive mind is going wait we reduced our liabilities so that we increase our liabilities I mean so you don't like the dividend payouts well Dividends are fine and appropriate if you think your stock
15:34 is highly valued okay we personally believe that across the space they're all buys they're all buys okay we think the space looks demonstrably cheap they're all buys now as an investor our question is how do we make the most money that's what we're trying to ascertain out of the space it's not like how do I pick a place that's going to beat say the S&P 500 I think energy is easily going to beat the S&P 100 as a sector the question is how do I make a lot of money relative to other people and therefore you're really
16:04 interested in what can I buy the future return stream and the capital allocation they do off that to take advantage of today's circumstances relative today's current price and I think that's where we disagree with people if if uh let let me use let's just use Meg Meg has a small dividend so when Meg hands me a dividend I pay 15% to the Canadian government as a US holder okay and then after the 15% I pay another 88.
16:34 6% because I get a foreign tax credit um and so I end up paying 23.6% total on Meg's dividend so when Meg says well we're just trying to return the capital to you I'd say yes but 76.4% goes to me and 23.6% goes to the sovereigns of the world and that's why we call them Sovereign they have that right my only problem is that means a quarter roughly speaking of the dividend was collected by someone else never forget that the government is in the dividend business they're not in the buyback business so do BuyBacks always make sense no if your stock is expensive
17:04 BuyBacks can be value destructive okay so a lot to unpack there um and it's so fascinating to hear you talk about so your Northern Light here is you don't really care about high dividend yields or dividend payments you don't want to see companies spending on capex Capital expenditures you would prefer to see that Capital used in BuyBacks and trust me folks we're going to go through all the stocks um and where're sees those opportunities but let me catch on one thing Amber real quick it's I want to make sure this is
17:34 understood we are not averse to capx if it produces higher returns than the underlying stock you in other words like pragmatically they they should be thinking about this as investor if they're sitting there today and they're saying okay based on a lot of the Canadian issuers have hedge differentials right so the WTI right West Texas intermediate versus WCS spread western Canada select which is the prices that are that are caught and I think it's at Edmonton for example um those prices a lot of them are are are
18:05 are currently hedged on the differential so um as WTI WCS moves around they don't care because they're hedge at like 134 typically right now so if they can sit down at WTI at you know call it what is it 68 today and at 68 on WTI say great I can go and invest in capex in a new project or a marginal expansion of existing project where I can earn Returns on Capital higher than our overall parent company is yielding then I would say if I was sitting you know I'm not on the board but like as a board member if I'm thinking about this like
18:38 the board would I'd say great if you can go out and produce I don't know 30% Returns on Capital great we want you to do that because that overall increases the return on capital for the parent company now that being said what I think I know and why I think this is a finance investor dominated Market is they can't at current spot and unless the Futures Market allowed them to sell at a lot higher prices which I know it doesn't um let's say they could get 80 in the Futures well then again it would incent them to go create future production I
19:07 think this is I'll give you another kind of historical example of this Boon Pickins was known in the 1980s for going out and and what did what they called Green mailing he'd get a highly confidential letter from Mike milin um and when you got that that was like as good as cash okay so he shows up says I have a highly confidential letter from Mike milin would like to take you out and and and uh buy you out okay now in some cases Boon Pickins was green mailed they'd pay him off to go away but I just say it because the the Paradigm then was
19:39 you wanted to dig for oil because you could do it cheaper on the New York Stock Exchange than you could in West Texas that applies right now I can dig for oil cheaper on Bay Street and Wall Street than I can in Alberta or I can in Texas and I think that's what everyone's missing the reason why marginal capex isn't that attractive is because the stocks are trading it so cheap and the oil price is low enough new cap X on new projects doesn't make a lot of sense unless the supply is tighter than we think and prices wake up at a higher
20:18 price shorter in the future then that would be smart but again as of today's information you can't know that and I think that's why BuyBacks and then secondly we can talk separately about this maybe we'll talk about some recent deals but it also argues for share transactions and mergers going on um we've seen some of that recently I mean I I don't know why we don't have three or four issuers left in Canada alone I think that's where we're going and we're going to pick up on that because we're definitely going to talk about deals um
20:46 you do expect m&a to heat up it sounds like or you think that would be the right thing to do I wonder if it's going to be just those made in Canada Solutions like we've been seeing or do you think we'll finally see a return of the foreign investor yeah it's it's it's a great I mean we don't see the investor in the energy space in America I I they're just missing and so I say that because like look at the index side of this I'll use the S&P 500 just since I not off the top of my head it's three to four per.
21:17 What's the highs of that it's High Teens is the last high in 1980 when oil was a small G God it was 30% of the S&P 500 so where could we see this going back to I could see it going back to over 10% because I think there's two things you got to think about one I think the energy business is going to do really well some of that is because of macro factors like we talked about some of that's just the Returns on Capital are so attractive the other inverse could be that stocks are going to do poorly in the S&P 500 and therefore your secret to
21:46 life is weak competition and so it's kind of like that inverse but I I just I point it out because we don't sit around I and this is foolish so I'm just going to call Spade Spade the foolishness is sitting around saying dear dear God please allow institutional investors to show back up to the space and I want all these generalists to please show up no no no no no no we want to buy back as much stock before all the idiots figure out what's going on I don't want them involved because again the Returns on Capital are so good that you could be
22:16 like Rip Van Winkle you could just go to bed and wake up in 10 years and you know what you're G to find you compounded money in the mid- teens on in many cases return on invested Capital it paid off your debt during that time For What Little you had left and you know what you end up making your return on Capital now what is the valuation of that that's for people to decide but I mean there's a lot of examples that these business are trading anywhere from say maybe as high as one and a half times book to to book value and the problem is the
22:47 returns are much higher relative to past histories of companies trading at those valuations and any marginally good Capital allocation that goes on during that just enhances the return of Rip Van Winkle and so we that's how we look at this so you mentioned that the energy component even in the US is a very small part of the S&P 500 it's larger on the TSX it's about 177% of the index so my question is you have a choice if you view this of the energy sector right now you can deploy those dollars in the US you can deploy them in Canada how do you
23:23 stack the opportunity us energy stocks versus Canadian right now yeah you know I I would have said that the Canadians were trading at a bigger discount and in the recent tumult the the US issuer is really pulled back at the same time you obviously had the whole tariff discussion that's also overhanging the Canadian stocks um but I just say it because I think people it was like uh oh those Canadian ones can be pretty problematic as oil prices and tariffs are are you know you looking kind of ugly and then with the scare a few weeks
23:54 ago I think even the US producers really you know Found Jesus pretty quickly a lot of those us producers are finding the lows that they hadn't seen for a while not the similar if anything in the last few weeks the Canadians have picked up relative because the Tariff discussion has kind of become yes it's still an issue but it's not Front Burner as hot as it was two weeks ago so you mentioned tariffs what is your tariff math is part of your bet that tariffs are not long lasting or can you see returns even if tariffs persist yeah so
24:24 uh as many of your listeners are aware there's about 4 million barrels every day that come across the Canadian border you know into the United States much of that will pass to the Gulf of of of Mexico or what you know can be called here in stat side is called the Gulf of America now um here's what I would say I have seen you know we have seen a donkey show like this before okay um it was called the softwood lumber dispute it happened back in 2016 2017 in you know Canada and the United States so we owned West Frasier Timber back then we still
24:57 own it today it's one of the you know non Oil and Gas issuers We own up there and here's what happened the they back then it wasn't a tariff it's what they call an a counterveiling duty and anti-dumping Duty okay how that was addressed was Wilbur Ross which if you're listeners want to go down the rabbit hole of this we had Wilbur Ross on our podcast to talk about his book risks and returns and and Wilbur was who obviously did that as the Commerce Secretary on the Canadian Lumber coming across now ironically um those companies that they were
25:31 tariffing the lumber on are the biggest producers in North America and own much of the trees in the southern us which or I should say process much of the trees in southern us what we call Southern yellow pine so West Frasier others like can4 in4 that are issuers in Canada um they own a lot of the Southern us uh production too warehouser would be the other big one so if you look at who was tariffing this ultimately it was warehouser coming to a trade group and saying let's tar off Canadian Lumber the idea and the argument at the time was
26:01 that that Lumber in Canada is being taken for what they call Crown lands you know government lands and they uh Wilbur argued that they were getting it at a reduced rate AKA a subsidized rate and so therefore that's coming across too cheap now the Canadian side said well look how much we have to pay our workers that's not what you pay your us workers so it's not that subsidize I don't really care I you know the whole dispute I don't really care my hedge to quote David from a few weeks ago is my hedge is I don't care because here's why the
26:32 if you look at the lumber market and the lumber futures back then what happened is that was you know these markets are inelastic commodity markets are always inelastic in the near- term stock markets are highly elastic so what happened is the stock market quickly adjusted to that took those stocks lower what happened longer term in the lumber Market was Prices rose far more than the Tariff amount and then you wake up in an era where you go from this oh man the world's going to end the tariffs suck at like $300 per thousand board feet of
27:04 lumber and then you wake up in a future era where there's a lot of demand for lumber coming out of the pandemic and what are people paying over a, per thousand board feet and another words the tariffs caused a scarcity of capital for future demand that enhanced the returns of the equity owners that were willing to step into the Tariff risk Allah my hedge is I don't care okay and so I I think that the confusion and and the obfuscation of what this is likely to cause is absolutely confounding Equity investors because most Equity investors are just
27:40 performance chasing idiots they want to buy a stock that goes up if it doesn't go up in the near term like Will Rogers says he said if your stock goes up buy it if a stock don't go up don't buy it and that's how most Equity investors are and so if you're the kind of person that says listen I don't care about the next six months and I can wake up in an era where either the underlying commodity compensates me for the risk I'm taking on which ultimately I think that's what markets do you get compensated for the
28:05 risks you take um or that to your point the tariffs maybe never come to pass like we we thought they would have and you just wake up with a situation where the uncertainty will gain you a premium in the underlying commodity and thus the prices Securities aren't reflecting that premium okay that's a great history lesson I also want my hedges I don't care as a bumper sticker so maybe I can I can do that uh after this show um so since 2016 to use your West Fraser Timber analogy from the lows of 2016 West Fraser Timber even though it's
28:35 pulled back recently is up 200% so that kind of validates your you know I don't care about that issue because I'm looking at the long term correct let's find out what else you don't care about do you care about our domestic politics here um particularly now as Mark Carney is prime minister and I think there's a conventional wisdom that he's not great for the energy sector and I would love to get your two cents on whether you think that's actually true uh so again full disclaimer disclosure I not Canadian I do not have a vote um so you
29:09 could say hey this is just his Monday morning quarterbacking it is um here's what I would say uh well you have a vote with your dollars right and that's kind of what it speaks to is if you believed he was negative then you would leave the Canadian energy stocks yeah but but here's the benefit I already have I got to do a lot of investing during the Trudeau era which means I got a discount because there's no question whether Canada hasn't succeeded economically relative to its past in in in in my opinion I'm again a non-voting opinion
29:38 um so so here's what I would say uh I I you know I I think Mark Carney is more pragmatic on the margin um I don't think there's any question whether I think Pierre would be better for Canada um let me just say this and I I you know we were talking about before Amber I have been up to the Calgary Stampede the last two years I have been to Alberta quite a bit including shout out to Lethbridge Alberta have been there before too when I was in college let me just say this we are actually looking at possibly coming
30:07 to Canada to provide Investment Services to Canadians and so we are going through the formation process and where would we want to domicile what regulator would you want to use and that kind of stuff and I think it should be no shock to anyone that your tax rate in Alberta is lower so if someone says for Canada if you're going to have someone lead the country where would I want want them to come from to create the cheapest cost of capital for Business and Entrepreneurship and risk-taking and ultimately I think it's going to be
30:34 someone from Alberta um I've joked on X before that like yeah if we're gonna have a 51st state we'll just take in Alberta because you know it's Alberta is more Chicago school like free markets Etc and so I think I have just very high views of of you know the thought process coming of Calgary because Calgary reminds me a lot of Phoenix Arizona California does not remind me a lot of Calgary um Calgary California does not remind me a lot of Phoenix but I think there's a lot of symbiosis between Calgary and Phoenix it's not shocked
31:04 that a lot of those energy Executives get second homes in my state because again there there's a meritocracy and I think you're just going to see a lot more meritocracy flow through Canada over the next five to 10 years do I think that will help the Looney yes I'm very negative on the dollar just so you know I think the dollar is going to do very poorly because the history is when Commodities do well the dollar does poorly also when US Stock markets Peak and fall off it's another function of those eras um so I would just say that
31:29 you can't get worse than where Canada's been from a political uh View and how it's affected the capital markets Andor taxations Andor regulation on the economy um in some respects I look at it kind of like it's coming out of the Obama Administration the United States economy was really freed up in a lot of ways um and again I'm saying this as someone that like if I was walking down the street and I ran into President Obama I would go say hi because you know what I I admire people for doing that and I have a lot of respect for anyone
32:01 doing that if I ran in Justin Trudeau I don't agree with his politics but I would go say hello and I'd be pleasant because I respect people for taking that risk it's a it's a miserable job to take um and as someone that likes to make money I I I know you can grift in that world but I just don't want to that's not how I want to make my money and so I just think about it as for Canadians it couldn't get much worse than what it had been the last couple years and again as an investor I know that was a discount margin to the stocks and companies we
32:29 got to invest in in the space because that was an overhang to the Securities markets in general all right how's that for an endorsement it can't be much worse I think we're making all kinds of bumper stickers here uh Cole let's get into the mailbag [Music] now okay now we can finally get into some of these stocks you talked about deals and of course the most recent one is varen and white cap yeah the question is very clear from Dave on X what is your view on the White Cap and ven merger um for background this was just
33:06 announced veren's going to own about 52% of the combined company but it's a white cap management and the White Cap name so on we actually owned White Cap uh at one point in the last three years it's and I'm pretty sure on this it's the only Canadian name since we've entered the space that we bought and got rid of okay why um we did not like these large dividends again like we're just losing our return to the Canadian and US government and what what we got involved in is when they bought uh XTO Canada they bought
33:39 those assets they levered up for it we looked and said great this could be a great way to you know build nice attractive net worth on a per share basis and then coming out of that they just started raising the dividend and we thought that the stock was attractive to buy back back then obviously stocks gone lower but I just say that from the perspective of building that worth we just didn't like the capital um you know I I we just didn't see the view of it that that made sense for us and we we don't have to make money on
34:05 every stock that's not our job our money is our job is to make great money on whatever we own and we just said you know what this is not our cup of tea it's not the capital location we like we wish you know Grant the team the best but we decided to exit it and we have since been using some of that Capital to add more to other names and we can talk about those later but on the deal shared deals like this should go on now let me comment ment on the structure of this deal because I think there's something that everyone should pay attention to
34:34 why is ven owning a majority of this business okay why and in my opinion it looks like the executive team from White Cap paid up to run the business okay in other words a deal like that why didn't it go off at a 10 or 20% premium because it was like a an a a merger of equals if you want okay ultimately because White Cap wanted the executives there wanted to run the business and so I think a premium greater than 20% was paid so that the executive team would be running the company now you can take that how you'd
35:12 like all I'm saying is if it was a 20% premium and the executive team was different I think that would have been better for White Cap shareholders okay um so I I think you need to you know I if you're reading between the lines what I'm saying read away you're right but I just don't think that made any sense um and I say that because if I was a shareholder of White Cap I would be incredibly disenfranchised by that and I think that gets back to the principle that I said earlier is the capital allocation best for the shareholders I
35:43 think in that case no I think it was best for the executive team so that's interesting um and and maybe a little backstory on how they got there ven um basically was engaging in these looking for for strategic Alternatives because last year um they had like a big execution issue right that that sort of Tanked the stock um and it sounds like even though you know White Cap moved in and maybe bought the bought the company well they didn't buy the company ven getting 52% but you know that that you don't think that they were being
36:16 terribly optim opportunistic and you might have preferred White Cap just continue on its own well or you know if Von's in trouble or considered to be in a bad spot why 40% in other words like time's your ally if you're at White Cap in that situation um and I I I think that's true for a lot of the names in the space um that that sit in that position where it's like gosh you know we feel like we've done the right thing and we're just not getting rewarded time is not on their side because ultimately you're dealing
36:47 in this there's I mean there's a dime a dozen stocks below5 billion doll market caps in in Canada the problem is back to our like who's going to come in and buy those there's just not a lot of capital outside of retail money that can come in and own those and I'm not saying that there's not ones that look attractive I I just say it from the perspective of what discerns one versus another and in the case of Von they you know uh Von was drifting to a discount you know everything was going down but Veron was drifting down quicker and so do I think
37:17 that people could have panicked out later or done something like that plausibly I just didn't get if you're white cap and you're trying to quote unquote take advantage of this for shareholders why such a premium and it looked like well at 30% or 20% you might not have the white cat people running the business and that might be like what they call the agent owner problem which is it's bad for the agent uh the O owner might not care though and so I you I we we think about incentive structures a lot and again the buyback is to the
37:47 interest of the owner and if your agent understands that that's a great agent um you know I I think in a lot of cases you can get that agent owner problem and I I just you know again I'm not saying Veron didn't wasn't worth the 40% premium but I find it very conspicuous that one company takes a majority stake in the business and yet the executive team of the 48% owner runs the business that doesn't smell right so you're not touching it even though you got out before you're still not interested post deal yeah there's other I think there's
38:19 other things that look more interesting than that because again if we kind of put together the pro form of the business um I you know to give you a way of looking at this we're really looking who runs high return on invested Capital relative to their price to invested Capital that's the that's the kind of multiple so it'd be taking the book value adding long-term debt that has to get paid off because again I said I'm Rip Van Winkle I could go to sleep for 10 years and if I pay off the debt who can I earn attractive Returns on
38:44 invested capital from and if if I can ear earn say mid- teens return on invested capital and I don't care about paying off debt then I don't care about the future okay and this is at you know to our discussion it's like at a65 to $70 WTI price again if I wake up at $80 WTI you know the world's my oyster which is why the space looks very attractive to us in general but again when I'm criticizing White Cap I'm not saying the stock can't go up that I'm not saying I'd be short it I'm just saying and we can't we don't short just so everybody
39:12 knows disclaimer I'm just saying on a relative attractiveness compared to what we can invest in it doesn't look like the best opportunity okay let's go to our second question this one coming from Joel on X has beex bottomed do you see a bounce or a recovery yeah I I would put beex into the category and again you know you know Eric's going to have a different view of this and I I do uh and and I I I think the world to Eric so I'm not criticizing him at all when I I make this comment but beex doesn't produce the kind of
39:43 returns that we can buy elsewhere okay and so again if someone bought beex today do I think they'll do well I think the commodity Market of oil is going to do well so I think yes it will do well but I think beex is a good picture of a company sitting out there that won't be a company in 10 years because they will get bought away um because if returns do pick up you're still going to see a dispersion in multiples because people are going to have the stigma of the prior era where it's like there wasn't enough liquidity I mean there is an
40:12 argument I can make where people will just ARB liquidity where higher liquidity stocks get higher multiples and so if you're a bigger player you could say hey you know what let's roll out and buy another one that produces similar returns to us but trades at a discount because there's less liquidity so I think we're going to this is a a textbook scenario of an industry that's old has old world returns but you know attractive relative to the Past um there's a little bit of an accounting audity that we can go into if you wanted
40:37 to but um but the Frank matter of the fact is you know we're going to see maybe four or five issuers at the end of the day across Canada in 10 or 15 years there's going to be very few companies in this industry so Eric actually told us on the podcast that even he had grown Fed Up um with beex and sold out of his Poss um even though he was constructive on sort of the long-term prospects and it sounds like you're putting this one in the same sort of bucket where yeah you might end up higher in the next couple of years but you find more compelling
41:08 opportunities elsewhere yeah and I would add you know I think the we've sat on calls with issuers uh in the industry where um you know here's what makes us different uh we're very bullish we run into a lot of issues who aren't very bullish and so again how does that affect their decision-making like they're paying down debt that can't borrow Amber at the same prices that they just paid it off I mean this is lunacy why would I pay off a 5 and a half% bond when I would be borrowing it seven and a half to eight% today um I
41:40 want to keep that Capital forever and that kind of thinking is what the bullish person would do so they paid off all this debt and and that you'd hear things like oh as soon as we get below this net debt to ebaada turn you know the skies are going to open up and miraculously the Red Sea is going to part and we're going to be Off to the Races and that never happened and I I think there's a lot of issuers that are in that circumstance that thought if we just do this and the answer is no um if you just did that and it was that simple
42:06 everyone would do it and and those arguments have been made and they haven't worked third question is on Imperial oil it's held up relatively well would you continue to hold here what kind of upside if oil prices move back up this one coming from Stuart in Toronto this one has a low dividend yield it recently boosted its dividend by 20% and I'm curious if that fits nicely into the Wheelhouse of stocks you like to look at it it it is um so I have been pretty negative on the majors I we own sovis but they're a put together
42:36 major in my my view um we bought we started buying imperal Imperial oil last summer okay and here's why and I'll give you kind of a scenario on this so um attractive returns and it just looks like the overhang of their large parent was sitting out on the stock NOW some Dynamics if if you guys aren't aware so 70% of the business is owned by Exxon Mobile okay now because they're Consolidated by Exxon Mobile they also get exxon's credit rating okay um which is odd so think about it like this it's like it's like you own a business
43:13 alongside it's a family business let's just say my theoretical town so let's say we are in Regina Saskatchewan we own a family business and it happens to be that we have this large Uncle who owns 70% of the business now because the uncle owns owns the business um all the banks in Regina are like dude your uncle he's totally creditworthy we'll give him great rates because we know he's good for the money and that's what Exxon provides to the minority shareholders of Imperial oil is this incredible super attractive financing rate from a
43:44 structural perspective now if your if your uncle gave you that kind of credibility you'd you would assume he' extract some pound of flesh out of the other family members and the irony is in imperial's case they don't imperial's been buying about 5% of their stock back per year and what's been going on is Exxon is participating on a prata basis in the stock BuyBacks now why does that not make any sense well because if I'm just the idiot minority investor on the other 30% of the cap table and I sit there and I don't do
44:18 anything and everyone else including Exxon participates in that stock buyback I could wake up in 10 years if they continue to do that and my ownership could double relative to everyone else and yet I'm getting this super attractive low cost of financing because my uncle's dumb enough to participate in that stock buyback okay and to your point that that stock buyback is being allowed for because of the low dividend okay now let me add one other thing to this if I'm going to give you a wild scenario a totally out of this world
44:50 wild scenario it would be this the reason why that's allowable is because ultimately Exon would be too afraid whether it's true or not of someday the Canadian people walking in and saying we do not want American company owning such a large player in our country we want to nationalize that that's the overarching fear now I don't think that will ever come to pass just so we're on the same page but that is the fear and so I say that because that can be taken advantage of there could be an era where another Canadian company walks in and says hey
45:18 we want to take you out in an AllShare transaction and do I think the Canadian government would have any trouble having Exon being you know reduced in size not at all and so my wild scenario is we wake up in a decade and Exxon Mobile is not the largest shareholder because someone else has coming and done an all stock deal uh to merge those Powers together and create the largest Canadian producer okay interesting and I would imagine given the political climate right now between Canada and the US do you is this
45:47 a scenario in 10 years or is this a scenario you think that's this year next year I that's the great part I I don't really care in fact if anything I wanted to go on 10 years where the the silly uncle has sold all of his stock back and the BuyBacks and my ownership is just grown and grown and grown and then someone comes and put some icing on the cake much later so you know so I again for the long-term investor you know that's possible and I'm not saying like oh I like it because there's some deal premium I can ascertain no I'm just
46:16 pointing out the absurdity of your Rich Uncle giving you his credit rating at the banks and turning around and selling stock in the open market that's absurd but here's what I love about the stock market absurd things like that happen all the time and therefore that's the opportunity for someone to go out in the stock market all right let's take a quick break we'll get back to more of the questions in the [Music] mailbag for over 25 years Raymond James has been helping Canadians achieve their financial goals they are Canada's
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47:15 com plannned okay our next question is about tamarak Valley this is the one that said ask the American Eric nuttle what he thinks of Tamar Valley um and do you have a price prediction one year out this one coming from Fred and C say marray yeah I I would so I think a lot about tamarak Valley like beex to be honest okay um you know if you go out and look at free cash flow yields again these stocks all look cheap I think you're going to you know pay seven times free cash for this stock today but again I think the idea that we're really
47:47 focusing on is what is return on invested capital and um so you go from like a a teens uh free cash flow yield to return on invested Capital it's actually closer to about 10% and so as you move out to that um the question is relative to the price to invested Capital are you getting something incredible and again at $85 80 oil your Returns on invested Capital are going up but again at these prices who's going to gain a lot of Leverage as you go to higher oil prices and therefore where can your return invested Capital be a
48:20 lot higher um you know if there if there's anything I could be discounting at A Moment Like This Is Where are there higher break evens and thus where the break evens could rip even higher um but again we're looking at this as a through the cycle game and I think we're what we're seeing is through the cycle who continues to produce attractive Returns on invested capital and I think that's what investors should be focing the mo focusing the most on um so again caveat empor being is this stock cheap it's cheap do I think it's probably going to
48:47 do well it's probably going to do well but it's just not what we think is the highest return for us as investors and again is there any balance sheet issue in this business no I mean I think they got a little over two years of debt um that's that is not anything meaningful in the debt markets and um you know they've been buying back shares to to to my last recollection and so they've been doing a lot of the right behaviors but I think what we're seeing is there is separating a we you know the chaff from the wheat and at this market
49:13 cap you're at limited liquidity limited ability for a lot of people to buy it I mean at this size even for someone like us it's just not the historical size we want we'd prefer anything $3 billion or us greater um or $5 billion us are greater um it doesn't mean we wouldn't own something below that I mean Meg falls into that world we own that and so we we just look at at the business a little differently compared to what we own so then I wonder if it's a no on the next question too this one is coming from Brown Mary bosu on X can you ask
49:44 colme about greenf fire Fairfax disclosed in the annual report that they have a large position looking at the stock seems like a bit of a disaster yeah but it's someone else's disaster that's always the good part in this industry so um we we have an interest in this because obviously the waterous boys uh Adam and Conor and I call them the water spys but they're actually father son if if not all your listeners are aware um and they own a big chunk they own 60% it looks like on Bloomberg correct and and from what we understand
50:15 that's coming from the waters energy fund side so their LPS if you will which in full disclosure we have no involvement in their LP structures we are a public market investor but I just say it because obviously we own St Kona so we have an interest alongside them uh as minority investors in that stock so you know this is a non tar sand business okay so it's not what your traditional conventional um if you you know there's about a half million Barrels in Canada that are non-ar Sands and so this is not a Core Business to Canada it is non-core
50:45 from an asset Bas and perspective okay um the history of this business was these leases were owned by a Japanese company originally that Japanese company finally decided to monetize this at some point and put something into it um then another player came in tried to do that it didn't work out so well and now you have the watus uh L LP owners coming in to really take control of this business now you know a natural question could be why don't the watus uh uh why doesn't the waterous interest come in and acquire this and bring this in stth Kona
51:18 because they're not similar assets first off it's it's it's not a similar risk reward as what's going on at stth Kona also is noted um you know it's a very small market cap okay and so there's a unique risk that's being taken it doesn't mean the water investors are going to be successful at making sure this you know puts Humpty Dumpty back together again there is work from what I understand that needs to be done to improve the asset in the right environment this could work am I saying that it couldn't end up being part of
51:47 Strath con at some point no but I don't think it matches the assets that Strath Kona has um to your point uh you know Fairfax not only disclose their involvement with greenfire but they also disclose I think that they're the largest wat energy fund LP investor as well and so Prem has been highly interested and involved in what the waters folks have been doing on the private side thus turned public in Strath K's case let me give you something bigger to think about to this am I shocked that someone like Prem who's had a lot of success the last two
52:19 or three years in his stock and producing the returns that again most people didn't think they could produce I will fully disclose we looked at uh Fair facts I consider that a Miss that's something that we looked a lot at and and we we just were sucking our thumb for lack of better term to use Charlie mongers parland um and I tip my cap to Prem for what he's done the last few years um I am not shocked that prem's involved with the waterers family um I think the waters family are the best and let me say it again they are the best
52:49 capital allocators in the Canadian Oil and Gas space and I like full stop okay just like need some pregnant p for a second that's quite pregnant and we're going to talk about one of their other Holdings TR Kona in your pro piics correct so you know I I would say if if um if I was running small smaller amounts of money and I just had to go anywhere fashion which we really like dealing in larger liquid businesses in our xus portfolio um I think green fire is interesting not because the business is easier but because of who your
53:19 partners are and the risks that they're assuming alongside of you and so again I'm not making a recommendation I just find that terribly interesting and what I have seen on the the watus um team is they're the kind of people you want to be invested in what I think is shocking to me I'll use the US view of this if someone said who is the most successful investor in the history of the American Oil and Gas space I would say it um it is Harold ham he is the most successful of all time when I look at the Canadian
53:50 space that is Adam watus and ultimately in the long run his son Connor um they are the most successful ever seen they understand this wonderfully they are financiers and investors as much as they are people that think about operating a business and I just say that because time and time again I can find my incentives aligned with them I'm terribly interested in so from a greenfire perspective I just can't put any capital of our investors in that because it's just too liquid I say that because if I'm not willing to do it for
54:20 our investors I'm not willing to do it for me personally it's our ethos I have all my committed Capital sitting side by side with our investors it's who we are it's how we do business so as we come up to Canada that's the same thing I would tell them listen we are side by side even if I find something attractive I can't do with our investors it's not the ethic I want it's not the alignment that I want and so we just choose to do nothing on something like that but do I think highly of what the waterers family
54:43 is doing there yes if you're a smaller investor take with that which you w w with what you want um should you take a look at it plausibly should you invest in it that's for your decision and let's squeeze in these last two because you've been giving great answers so let's try and squeeze SE in before we get to your pro picks um would you buy the dip in cnq this one coming from Barb and Winnipeg cnq underperforming underperforming oil suncore the broad energy sector some say it's just a victim it's the easiest one to sell
55:10 because of tariff concerns yeah I I would say that's true so like the people that wanted a lot of liquidity uh that are like I don't want to take the Tariff risk I can see that because it's the most likely to be indexed also okay um so you're thinking like a sector ETF kind of a world um is that the most attractive relative to the returns and the pricing no um so we're not doing anything on that I we found Imperial to be a lot more attractive but I think cnq was trading at a bigger premium relative to Imperial last summer for example and
55:39 so I just think you're seeing kind of a return to normaly in the majors Sun core's good thing it's got going forward it's got Elliot pushing to be more focused and I think investors have quickly responded to their focus here's one thing I will say on the majors and I'm not criticizing anyone on this but just to give you a view of the majors do I think it makes any sense for an EMP to own Refinery assets no do I think it makes any sense for an EMP to own mid-stream assets like pipelines no I think those are low return businesses
56:08 relative to pulling good old oil out of the ground okay so I say that because you know I the same criticism I you know of Suncor getting more focused and getting out of their Downstream assets and some of the marketing assets they have Etc you know it's the same criticism some go back put back to sovis sovis has had a lot of Mis starts in the Refinery assets um I think the world of John's team but we're kind of at a point in sovis where the question could be asked should you be in the refinary business I'll throw out a scenario I
56:36 think there's good assets in the refiner assets maybe they do a taxfree spin since most of those assets sit in the US and I know I'm probably jumping ahead of my propic but those assets could be in a US listing spun out taxfree to shareholders and therefore we could see what the US market values those and possibly gives the opportunity at some point in the future where it gets out of its tax ta free Spin era where a refiner would want to come in and buy it I think we're going to see more of that in these Majors I I think we're going to see them
57:02 get more focused to give you the right Paradigm for these Canadian Majors uh kico Phillips that's what they should look like at the end of the day we own kico on the US side kico is an enp solely focus on that and what has it been doing producing the highest returns in the space gets out at the refinery business and we will get back to um sovis in propix let's squeeze in one more kind of not an energy stock but it's interesting that you own it and it's in the new right now it's a question about cushard this one coming
57:28 from Shane low on X cushard recently had a 15mon low and of course they are doing everything they can to try and buy s and I which is the parent company of 7-Eleven right now the offer on the table is $47 billion to buy it yeah so um just to bring all your listeners up to speed on this you know you know a lot of their brands in Canada we have Circle K here in the United States which is the dominant brand in Phoenix Arizona where I sit everything's a Circle K so anytime I want to interact with card's business
57:58 I just drive down the road and there's a Circle K okay so I think incredibly highly I mean I was mentioned the waters family earlier in this space uh you know buard is he's a Savon I mean he's just nothing short of a savant he is the convenience store and and Gas Distribution Savant and I think the world of the partners including uh buard that not that long ago had voting shares that were Superior to non- voting shares and they're I think was age 65 came about and rather than lying to shareholders for years and saying we get
58:29 to 65 we're just going to collapse the voting into the non-voting um they didn't do that they did the right thing they collapsed voting and non- voting together and we just wake up as sympatico side by-side Partners I say all that because when we got involved with cushard was when they took a shot at car for the the obviously the French retailer you know what they call hyper hyper Supermarket uh business um that's when we stepped in now why I think a lot of Canadian investors think about cushard as this blue chip high quality
59:02 take no risk business now that's th% that's what they think of but that's not what the business is this is a PE rollup story in the public markets it always has been and so I think what happens is you know they'll do a roll up they'll bring on another business and it works and so all the Blue Chip guys and gals get all gigged up and they're like oh it's super high quality blah blah blah you know look at the Returns on invested capital and what do they do they end up overpaying over a you know call it a three to fiveyear window they get to the
59:36 higher multiples on that so we stepped in in carfor why because they're like oh my gosh you're going to lever and buy businesses which by the way side note that's the history of that business and they're like wow you're big Risk Takers we we're going to sell your stock well what happened on the back of that was buard and other Executives started buying in the open market we love Insider buying we follow Insider buying veraciously I didn't you know we'll talk more about that in the Pro piics but um they started buying the open market and
1:00:05 then what when they was determined that they weren't going to be able to go after car for um is that they started buying back stock too again just like super shareholder friendly activities going on by the executives and the business okay um by way I love the line the French use at that time you know we need uh I think they called it like food Independence or food Freedom or some just ridiculous ter term it just shows you how backwards that the French can look at some of these things no offense to those folks in Quebec but it is a
1:00:32 French problem um so so what came out of that is they didn't buy anything they bought back stock the businesses succeeded now they go after seven and I the thought by Bay Street was they'll never get this deal done this will never happen that was the overriding theme we heard from analysts on the margin none of our investors think that seven and I will ever get captured well it seems to be they are the stocking horse still many many many moons later and I think investors are waking up saying why are they spending
1:01:04 so much time on this and ultimately because buard and the other Executives they don't care about what you think your stock price is that's not their job their job is to figure out what they can attractively buy and they see something really interesting on this so I think we are going to see this stock drop until there's crystallization on seven and I ultimately and with this deal going on you're not going to see any BuyBacks um because the cash needed for the deal and so I you know do I think it could fall more yeah it could fall more you know we
1:01:37 bought it at about 16 times stre cash flow back when the car for was happening um and you're about at those multiples now but again if you look at the profile 7i it's a different profile than the business was back then um and so I I think I think the stock could probably do poorly in the inter room just because to your point I think all the Blue Chip IDI need to get washed out of the stock for a season and you know what good riddens to them they're the kind of people that overpay for businesses in a lot of cases and again I'm the kind of
1:02:04 person do I like a good balance sheet yes do I let good Returns on invested Capital yes but a lot of these people that call themselves quality investors they're really momentum investors they like to see a business succeeded for a long time and pay up more for it and I you know I'd love to see that stock lower we only we back when we bought it we bought 1% of our portfolio that's all we got maybe I was sucking my thumb didn't buy enough um that's all we've owned is is that 1% in what it's grown to and so I you know I think the world
1:02:31 of the company and I'd love to buy more you know if tumult continues to show up all right now is a great time to get into Cole's propic his top conviction [Music] ideas propix 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 atb's Capital markets arm is a fullservice investment dealer that offers investment in corporate banking sales and trading institutional research and risk management visit atb.com inthe money for
1:03:08 more information all right Cole your first pick is stth Kona you talked a lot about the watus boys and how you like to invest alongside them you call them the best capital allocators in the energy space in Canada they're here in this one the stock is bouncing off about a one-year low how do you think about the stock and the upside from here yeah it's so I let me give a little back history too I was up in uh I was up at the Calgary Stampede uh this would be you know two years ago and I remember sitting um you know I I I can be naive
1:03:42 occasionally not often but occasionally and we're sitting at a sell-side event and and Adam comes in and he's talking about how constructive he is on the commodity of oil and he's you know talking about what they've seen to build up what was then the energy fund the various you know uh LP funds that they had and I turned to my colleague at the time and I said gosh that guy's just he he's just spoton I said if we ever could get a chance to invest alongside of him in public markets I'd love to do it well I was being naive because obviously it
1:04:13 wasn't too too much later that the Pipestone merger was going to go on that fall so I say that because you know they did the deal the stock was like in the high 20s low 30s you know upon consummation quickly fell to the low 20s has ran up as high as I want to say 35 and it's kind of came back to the mid-20s again okay so what what we think is predominantly bothering this stock is nothing other than it's a limited float stock so for example there was about 9% that was publicly traded that was the original Pipestone Equity the rest was owned by
1:04:49 the waters energy fund LP holders but really controlled by the GP AKA Adam watus as the chairman okay and so recently they distributed 11% of their shares to some of the earlier uh fund investors for Waters energy fund LP holders and you've seen that with roughly a little over a doubling of the um you know dispersement of shares so about 20% are are now float quote unquote the volume on the security is about doubled okay now I point that out because this is a security that if it you had 80% or 70% of the stock publicly
1:05:24 floating right now I think you'd see people responding to it differently because frankly it's one of the largest producers in Canada but yet it has one of the most limited floats out there in Canada because of these holders add on to the fact like we talked about earlier that you have Prem Wata and some of these people who are collecting those shares when Prem collects his shares out of the original wat energy fund is he going to go out and be like great I got my shares now I'm going to go sell them no so you have these very long-term
1:05:53 incentive shareholders that are greatly squeezing the liquidity that's what we see more often than not as a primary reason to keep investors away from the security um when you think about the balance sheet structure this is an investment grade security that's been very important to the watus uh to the watus uh family is to keep this as an investment grade security much of that happened is they came out of being public um they took off some of their Hedges at the time so that the banks would recognize that they're paying off
1:06:20 debt and they want to keep a very high uh quality balance sheet in that and we just like the return uh profile of this business um I think that the discount is showing up via the liquidity today and so as we look at these prices we don't think there's these prices are very connected to the assets they own these are very longlived assets I think that's a feature that we are very much looking for in Canada has in common with other names we own um but the other you know if I was going to give one knock on the security because of their ownership and
1:06:49 the limited liquidity there won't be BuyBacks because again how do you squeeze this but here's what I look at Strath Kona for Strath cona is a vehicle for acquisition okay in other words think of everything I just said about bushard at alation cushart I think the watus family will go out on the acquisition spree in all share deals but with one caveat when their stock represents a value that means they should go do stock deals and we are not there in my opinion and in our opinion we're not there for their stock so they won't do that now but at a
1:07:28 higher price on their stock you will see them go do all share deals if that what they can buy right now is it a bigger discount relative to say book or the value of the assets they will go do those but only if it's discounted relative to theirs so you could see them picking off some private deals in the public markets they might not have enough premium to go do that right now but I think you'll see their deal activity pick up um over the next two years because again a few weeks ago some people looked over the edge even as
1:07:56 operators and said I'm 60 I just don't know if I want to do this anymore it's been a good run do I really want to have to go through a pounding every two to three years and that's just been the nature of the Beast I I don't know so um that's that's one of our largest Holdings I think it sits uh on our X us portfolio sits something over almost almost 7% but again even we are somewhat limited on the on the IL liquidity of the stock and the liquidity that we see right now where is it easy for us to go out and add say 50 basis points or 1% to
1:08:28 our portfolios and that no it is not easy and so I think that's the only thing that holds us back at times from you know having a bigger position in the security okay so let's talk about something that is a little bit more liquid which is your second pick that's Meg energy um how do you think about this one this one bouncing off about a two-year low what's the upside yeah so I you know if someone said what do I think's really going to get locked at unlocked at Meg first off Meg's a single asset base and so it's like back to my
1:08:54 focus idea for the bigger players it's like uh I'm I'm pretty focused to start out with I have a single asset that's what Darlene's dealing with the CEO of Meg um so it's tough to not be focused on that you know they have a they have a smaller dividend they've put in place the last few years obviously like I said I'm not a fan of that that being said it's not massive um you know I think their primary conduit for Capital returns will be BuyBacks and at these prices I mean it's a dream to buy back at these prices so let me say this um
1:09:23 what do we think we're really G to take out in value over the following you know two years 3 years 5 years is the existing NOS that Meg has net operating losses just to not skip over the nomenclature is what still sits on the balance sheet of Meg um these are what we'd call deferred tax assets and how you recognize these deferred tax assets is you create uh profitable income off your oil assets but you don't pay any cash taxes and so there is an argument to make and this has not been a unique argument I'm not the first want to make
1:09:55 it I'm just too damn stubborn and therefore I'm going to recognize this is that the math works like this as we look forward five years Meg will recognize those whether we're at low prices or at high prices at higher prices they recognize those NLS quicker and if a buyer happened to come in to acquire their stock uh you know in an AllShare Transaction what the buyer could do is if they have similar B uh asset Basin in situ as they call it they could recognize those NLS quicker which means someone could fund the deal
1:10:29 premium out of the NLS over the following two to three years okay so in plain terms this is a potential takeout candidate a very likely takeout candidate well I I just think it's likely because the math makes sense do I have some Edge in the m&a world and I know how to pick a bunch of takeouts not a chance I mean that's just not what we do um I just say it because I can as a finance year I can pin the math out pretty easily um but again I'm not sitting in a boardroom I'm not the executive of a major that could do this
1:11:00 but I just know the ma math Works fairly well because me Meg is producing very attractive Returns on invested capital in a way that most of the people aren't okay they're producing mid teens return on invested capital and it doesn't trade for much more than Book value ultimately so again you come in and pay a premium relative to book with attractive returns all stocks so that way the shareholders of Meg are sharing your risk and I think that pens out pretty well for a myriad of companies but again it at this
1:11:27 juncture the question is who thinks they can go out and acquire attractive assets and be focused on being an EMP that that might not be their focus they might say you know what we think m&a is aggressive um I think there's a lot of low te or to put it in normal term low testosterone players in the industry who because they can't drill they're not very confident um and and I think they're not thinking about this like a financier or an investor would that Meg is a perfect m&a pitch it's a banker's dream and I I tend
1:11:58 to look at things more like that because I'm trying to get really attractive returns relative to the capital needed run to the business and that's what Meg fits really well into now do we have to have that no we could be Rip Van wink will run the business off for 10 years and we'll recognize all those NLS but acquirer could capture that to take out the assets and what they could turn around to do is use the excess Capital that they're getting off a Meg to go out and buy more stock back and if the me shareholders don't like that buy them
1:12:22 back let's get into your third pick which is sovis bouncing off of a three-year low quarterly results I think like kind of at the end of February were a miss and the stock uh got taken down it's bounced a little bit since then um you sounded like you were getting a little cautious on covas talk to me about um you know why you still have conviction in the name and where you think it can go from here yeah the the asset Basin long life asset basins are what we're most attracted to and that's what covis has okay so when I was
1:12:53 talking about earlier their focus we think that their refiner assets are being priced at zero and plausibly have negative value based on to your point how the stocks trade it okay so let's just say that theory is right um if that theory is Right recognizing any value in those refiner assets would be more value than we're getting today a shareholder so recognizing the value could be selling the assets recognizing the value could be spinning those off taxfree and letting Mr Market as as as Ben Grant once said value that in an open fair
1:13:26 market way maybe in the United States um I I think that's I think people are looking and and really frustrated with the refiner Assets Now is it smart to be worried about the refinary assets no it's a small part of the business if I remember correctly off the top of my head sovus uh they only refined about 20% of their existing production so the idea that that's the main state of the business it's not but that's what came in via the Husky deal predominantly was the refinery assets they've since acquired to fully control some of the
1:13:54 some of the assets that they shared with say BP for example um and so they've been buying the other joint venture stakes in their refiner assets but they're now in a position where if you want to spend those or sell those you have a 100% control you're not sitting there with your JV uh partner debating whether you want to sell those assets I think it's in a very marketable position if they so choose to do that but again we want their existing production we think their assets are great um these the valuation of the stock is is is is
1:14:21 trading you know call it one and a half times book or less and again we're getting the return profile that we want they're not producing just over 10% Returns on invested Capital we we're in the mid teens world and if I just run those businesses off it plays in that same Paradigm so if I was you know I didn't mention this enough earlier but Reserve Life how long you can produce these assets um that's what the Americans on the other side of the Border are going to have trouble with they're going to have trouble recurring
1:14:45 their flowing barrels currently because of the drop off in peran assets are very high drop off two to three years of great cash flows and then you go to the floor after that these car Sand's businesses produce long Reserve Life and therefore it's your more maintenance capital and like I commented with Meg a little bit but sovis too it I'm really glad some Canadian investor or foreign investor many moons ago capitalized these tar Sand's assets and built them and paid prices to do that that make no sense but the you know there have been
1:15:16 write Downs to go on in these respective businesses and recognize lower value on the asset Basin and that's why we're seeing these historically High Returns on invested Capital even at lower parts of the cycle is because the assets are looked with very much of a disdain and even though Canadians report an IFRS we don't think there's willingness to adjust the books up to probably where the book value of these assets are which is why the returns are looking attractive relative to the Past Cole thank you so much for your time and
1:15:45 especially your thorough response to a lot of these individual stocks I appreciate it thank you so much I appreciate your time as well all right coming up on the show next time glob stocks have taken over for the longest time it's been all about us exceptionalism but really since the inauguration of Donald Trump US Stocks have started to underperform Global stocks we're going to talk about this trend and how you can make money on the other side James Cook is our guest he is a portfolio manager with mattco he'll be
1:16:13 taking our questions you can find us anywhere on social media at in themoney pod you can email us questions at in themoney pod.com and we'll see you on the next episode [Music] watching do me it doesn't mean