Title: Cole Smead (Smead Capital) — 25% ROE at 2x Book: Finding Value in Canadian Energy
Show: Trevor Rose (YouTube podcast — Calgary; recorded in person during Stampede, Jul 10)
Guest: Cole Smead — CEO & portfolio manager, Smead Capital Management (~US$5.5B AUM)
Date: 2026-07-16
URL: https://youtu.be/gfXcRtFwsmM
Length: 1:06:14
Note: Fillers (um/uh/"you know"/"like"/"I mean" as tics) and stutters/false starts removed; wording otherwise verbatim; (mm:ss) cues kept exactly. Recorded 2026-07-10 ("it is July 10th, it's Stampede"); published 2026-07-16. Sponsor segment (ATB Capital Markets, ~30:27). Auto-transcript garbles: "Miota"=Meota (Saskatchewan), "Vawn"=Vawn asset swap, "Will Lundeen/Lundin"=William Lundin, "Adam Waters"=Adam Waterous, "Kemira"=(guest reference, garbled), "sag D/Seg D"=SAGD, "Epcor"≈(as spoken; per context an energy holding), "soup"=super(major), "Spur"=Spur Petroleum, "Case"=Kaes Van't Hof (Diamondback CEO), "Canadian piece"=(garbled), "Glencore in late 2004/2005"=(per context 2024/2025, Ivan Glasenberg buying + Liberation Day).

(00:01) Good morning, Mr. Cole Smead. Welcome back to the podcast. Happy Stampede. I appreciate your time. >> Really good to be here and town is great this week as usual. >> This is part three and in person this time. So, it's great to do this face-to-face. >> Yeah. >> Do you get much skiing in this year? >> You know what? I did.
(00:18) It was a rough winter except if you were in Banff, obviously. I noticed this week that the Bow is quite engorged with water, which means there's still plenty of snow up there. I did a little Montana, finally got my first fresh powder in March. It was a pretty weak skiing year for the Smead family. >> I know you're a big fan of Banff, so you're back and forth sometimes.
(00:37) I figured you'd get some days in at Louise, maybe Sunshine. >> It's funny. I probably haven't been up there for five or six years to ski. So, to your point, I need to make a priority as we get around to the winter, come in town on a Friday, do some business meetings, and then head up.
(00:53) My main draw is that can I get the wife and kids to go? Otherwise I would just go by myself. >> With US currency, it's also cheaper. There's a lot of Americans up here this winter. >> It is. I grew up in Seattle, Washington. So, I spent a lot of my life going to Canada for one reason or another.
(01:10) We did, when I was eight, for example, we did a big drive up through Jasper, down through Banff. And so most of my life it was a dollar 30 or better. Obviously 08, it was at par. I think we're going back to par at some point here. I think the commodity realm, I think the problems the United States has, etc.
(01:29) would lead us to that. But again, for right now as an American, this is awesome. >> Cheap skiing. >> Yeah. >> You're also back and forth during the summer. Like we said, it's July 10th, it's Stampede. So, I think you're out doing site tours this week. >> Yeah, did a site tour on Wednesday or probably Thursday.
(01:48) Strathcona did it with some of their investors, and we went out to their Miota asset, which is in Saskatchewan. These are assets that their business has really been put together post what was their Vawn transaction. They already had assets there, but this really strengthens their position Saskatchewan.
(02:04) A couple things your listeners should know about Saskatchewan that's unique. A, they know they're not Alberta. >> Mhm. >> So I think there's a lot of incentive for them to make it as business-friendly and producer-friendly. So for example, lower royalty rates in Saskatchewan. Secondly, things like water recycling aren't required like they are in Alberta.
(02:22) And then lastly, pre-approved pipelines to get oil moved around for example. So in SAGD operations, you have Cenovus there, you have Strathcona there, and then you have Cardinal Energy with a smaller SAGD project. You're going to see a lot of production growth coming out of Saskatchewan.
(02:41) And it was really interesting. This is all modular built. Back in the day people try to go do things on site. Modular build, on the pad. They're about to have first oil there. They also the other asset we checked out there was their Hamlin Railway Terminal. When that announcement went off that Strath had bought that terminal, it's kind of like, "Well, why are they paying this small dollar amount to own a railway terminal?" Well, we learned at the site tour that
(03:07) they're trucking it in from the Miota asset for example. They bring it there, they drop it there, they do about a 100 car pull for Canadian National Railways is about 56,000 barrels. Using Miota, they'll be pulling down about 30,000 barrels there. So if you think about it, that means about every 2 days they should have cars go out.
(03:27) Why do they want that? Two main reasons. One, they don't need diluent to get it to there because it's not going through pipe, which means it's a true heavy oil blend. So when the refiner gets it, they can blend that differently, so they get a premium price.
(03:43) More importantly, I think for finance people like me, they get paid in 9 days, from the time they pull it out of the ground Mhm. to when it's hitting Gulf Coast and getting paid. So, you'll see much longer lead times on pipe. And so, you're getting a combination of price premium and cash flow turnover quicker.
(04:01) It's a really interesting asset that again, I think there'll be a lot more production that goes out through there over time. >> Also, a quick shout out to the Smead Capital Stampede party. You guys had a good one few nights ago. It was >> We did. Yeah, and to your point, when in Rome, right? If you're going to come to town and do business, what do you got to do? >> Mhm.
(04:16) >> You got to throw a Stampede party. >> Mhm. >> And so, that was our first one ever. So, if you're listening to the podcast say, "That'd be fun. I want to go." DM me on X or something like that. But, we had a great time. I got to visit friends of yours, friends of mine.
(04:29) It was a lot of fun. >> There was three or four past podcast guests there. So, I was impressed. Yeah. Good environment. >> We've talked about this before. This is a friendly town. It's a communal town. People are very warm. It's just a very fun place to build relationships and do business in.
(04:44) >> Yeah. Setting made for a good spot to do that, too. We actually get to talk to people. >> Yeah. It was very intimate. It was like a speak easy private feel, [laughter] but it was good. >> So, the recent news from Smead Capital in terms of Canada was as of July 2nd, you're now registered with the Ontario Securities Commission.
(05:01) Your first formal move into Canada, I think. So, congratulations. >> Yeah. It's really fun. We've owned businesses here in Canada, primarily from about 6 years ago to today, okay? And as we do business here, we run into folks and they want to learn more about us and prior to this, we were only doing business in the United States.
(05:19) We also have a couple funds that we run in Luxembourg for European and Asian customers. But, we had no way of serving a Canadian market. What we're going to do is we registered as a what they call investment fund manager and a portfolio manager. That'll allow us to run things like separate accounts for larger institutions and family offices.
(05:37) And then secondly, launch funds here in Canada. And so, we're working on putting together the filings to go out and launch a couple funds. That's our plan. And we'll be able to provide more details on that, but analogously, we just want to serve investors here in Canada just like we do in the US and just like we do in other jurisdictions of the world.
(05:54) And so that's what we see as this. I think the other thing too is, why are we doing mutual funds? Because that's our core business. We run most of our capital, we run 5 and 1/2 billion dollars US dominantly in mutual funds. And so we're just sticking to our core business and continuing to do the same thing that we're already doing for investors.
(06:11) >> Could there be any inside benefit you might be able to get a place in Canada, Calgary / Banff? >> It wouldn't be a bad thing. Most of your listeners probably don't know this, but we are rolling off old Trudeau restrictions in '27 that will allow an American like me to finally be able to buy a place in many what they call CMAs or census metro areas across Canada.
(06:33) So to your point, I hope that maybe the condo market gets crushed here in the interim in Calgary by year end. >> You must be seeing value in Canadian equities and stocks also. >> Do. And I think the opportunity of right now is just different than it was a year ago or two years ago, okay? On the oil side, for example, think of the consolidation we just saw with the close out of MEG.
(06:57) And then you had the Vawn asset swap with Cenovus and also Strathcona. I think we're going to see a continued cleanup at times. There might be some marginal sales from one of the SAGD players to the other where they can patchwork better scale together. It makes better unit economics. But it shows you that in the oil world, it's more narrow today.
(07:19) The opportunity set is more narrow. So, across our investors, we own Cenovus. That's our largest holding across our book. Secondly would be Strathcona. We also own in that SAGD world, we own International Petroleum, okay? And then we also own Imperial Oil, okay? And as we think those assets together, we think about this mix of heavy oil SAGD, but pretty geographically focused.
(07:48) That's the main issue. Can you get geographically focused? As these folks are talking about growing barrels, it's 30,000 per flowing barrel that they're going to bring new barrels to market. And then why are they doing that? Well, go look at the valuations of their stocks. The EV per flowing barrel is much higher for the stocks.
(08:04) So, effectively they're going to arbitrage between their private operations inside the business and the public market valuation of those same barrels, okay? Now, that being said, how tough would it be to bring a new asset in that realm and get scale? It's very very tough.
(08:24) So, if you were thinking, okay, who else is in that realm of heavy oil, you have Suncor and those businesses and you also have CNQ, but more SAGD focused. Those I think those other players are more SAGD focused. Cardinal is in the SAGD market in Saskatchewan, but most of their oil production is elsewhere.
(08:45) It is conventional oil across Alberta. If you go out and say who else is out there maybe in the private market. Conoco does 20,000 BOEs a day. So, there are some other players in that, but if you're thinking, okay, who could go out and do another 50,000 BOEs per day looking forward in 2 years? It's very few players ultimately, okay? So, we think that narrowness also says something to investors.
(09:10) What do I mean by that? The old the people talk a lot about when you're investing, what does it take to do that, okay? Well, you have to have the vision to see them. You have to have the courage to buy them, and then you have to have the patience to hold them.
(09:27) And the fewest of those three is the patience. Time and time again, and I'm sure you see this on X, I see it, too, or you talk with people in town here. Everyone could tell you about the thing bought really attractively. And that's fun to talk about. >> Mhm. >> Problem is, who wants to tell you about the thing that they just sat on? >> Mhm.
(09:46) >> That's not fun. >> Yeah. >> That's not sexy. >> Yeah. >> That's not beer good conversation over a beer here at Stampede, okay? The reality is that's how you get wealthy on an after-tax basis in this life, okay? And so, I think back of, we've been involved our investors have been involved in Cenovus since the Husky merger.
(10:05) Okay? >> Mhm. >> And so, you just think through that whole process. Has there been up and down to that? Yes. But the economics are never better than right now. The ability to bring barrels to market, the valuations of those barrels in the public markets, the scarcity of the oil market, things of that nature.
(10:20) I just think of how good it's been to just be terribly patient versus saying, "Okay, this has gone up. Let's go find something new for this capital." Have there been occasions that you can find new opportunities that are interesting? Yes. But the aperture in the opportunity set is getting narrower and narrower and narrower.
(10:36) The only other place outside the SAGD operators that we're currently invested is Tamarack. Now, why? Because there was something unique about the Clearwater. And watching what's going on in water flooding and applying capital to an asset like that and watching it produce incredible returns on capital by just cash. >> Mhm.
(10:54) >> I tell people a lot that you effectively take the net earnings every quarter that they're making and then you should add the reserves they're creating. And so, what are we learning? Well, we might end up learning that those are long reserve life assets that you're not allowed to book up front.
(11:09) >> Yeah, exactly. >> Okay? So, there are unique things that come out. But let's use the Clearwater. How big of a basin it is? It's not that big. Does it need to get more scale? It does. That's called when is Headwater and Tamarack just going to finally merge? It's like the most overweighted marriage in the You think MEG was overweighted? It's like this is going to become like a new like when are they going to merge? When are they going to merge? So, that needs to happen. Those
(11:33) companies need to get together. I think the time's right. I think the season's right. All the stocks have picked up. Everyone's feeling a lot more rich and happier right now. There is talk of the EV to EBITDA of Headwater is still higher than Tamarack. That being said, I think if what you lop off of SG&A off of Tamarack and what you get in a dividend cut cuz Tamarack's dividend would go down in a merger, I think there's good unit economics for everyone there and we can continue to
(11:59) build on scale. What can we bring to market in barrels relative to the price that they trade for in the open market because bigger picture idea for both these plays, Clearwater are the SAGD players. The world's short on oil. Okay? If you look at what we have to build up, from what we just lost in 2026 in inventory, we're going to need to produce a million barrels more per day for 3 years, okay? It looks like based on crack spreads, the demand's humming.
(12:29) And so, if demand's humming, it's growing. And if demand is growing, we're going to need a million barrels more per year. So, looking 3 years out, we're going to have to do something close to 4 million barrels extra supply. And the question is, okay, I think Canada's in for one. I think maybe OPEC plus is in for one.
(12:48) Where are we going to get the other two? So, and the only way to fix this, Trevor, and I like this, is price. You want me to make more? How do you get supplies to do that? Higher prices. Okay. >> So, sitting up a fund in Canada is expensive for Suncor, but you're seeing the pros outweigh the cons. >> Yeah, if you think about this this is, our we expect you to do the same thing we do in other jurisdictions, okay? So, do we have to hire a new investment team person people? No. Do we have to hire a
(13:16) new executive? No. I will say this and I'm going to give a shout-out to CFA Canada and I'll even throw a shout-out to the local CFA Society here in Calgary. I was talking about this with Patrick Reed over at the investor relations person at Suncor years ago. At the CFA Institute or CFA Institute of Canada, they went out and did a lot of lobbying around making sure the CFA designation is has benefits in Canadian regulations.
(13:45) So for example, usually someone like me would have to go out and do certain security tests that are required because of the role. I'm what they call the ultimate designated person here in Canada for entity. Well, here's the catch. I have a CFA charter, which means I'm exempted under that, okay? And so that creates a very natural pathway for us.
(14:07) We had to hire a Canadian CCO. But your point beyond that, are we changing our operations? No. We're mainly just dealing with the fund costs and startup costs. And we found some really good partners here in Canada. I've mentioned this publicly that Bennett Jones was our legal counsel. We work with some great folks over there.
(14:23) So all things equal, we think this is a great long-term business. We see a great vision of running a lot of capital here in Canada. Is it as big of a market as the United States? No. But I also think there's less competition here in Canada. If I look and say how often is it that entrepreneurial firms like us come to Canada, set up shop, want to seek out capital from advisors and family offices and what not.
(14:46) They do it occasionally. It just doesn't happen very often. It tends to be the big US asset managers that come here. And as you know, they just tend to own a lot more stocks, be a lot more diversified. Versus we only own 25 to 30 securities. And so when we talk about Canadian MPs like in our non-US portfolio, that's 35% of our portfolio.
(15:05) >> Yeah. >> So it's meaningful. We care. These are big positions. Have few eggs in the basket and watch the basket as Munger once said. And so we believe that. >> But on the flip side, as you said, there's not many US companies coming up to Canada. Why do think the public markets are being ignored? Why do you think US investors ignore Canada? People aren't dumb, so to speak.
(15:27) So, what do you see that others miss? >> People tend to be pretty lazy in the investment management business. Okay? Lazy being this. Would that require learning a lot about Canadian regulations for an organization? Sure. There'd be folks in their compliance team and their leadership team that have to get up to speed with it.
(15:46) There's just work. We've learned a lot. We effectively was about 11-month process with the OSC. We learned a lot. We learned that it's very different in the United States. That process would never go 11 months, for example, okay? That would be considered unacceptable in the United States. Now, again, we learned.
(16:02) But if you go to some folks and say it might take 11 months, in this world people don't wait 11 months for anything, for sure, okay? And so I just say that because I think it's a mix of work. Second, I think it's a mix of the time. Thirdly, you have to go out and seek out capital and build relationships.
(16:20) The one thing that this is great for is that this is a concentrated bank market. Okay? So, if someone says, "Where are we going to distribute our funds?" We're going to distribute those to the banks and the dealer platforms. Well, that's great because that's the same thing we do in these other markets.
(16:34) We are effectively a wholesale model. We work with other financial intermediaries to go out and distribute what we do. And that's always been our model and that will fit very well in a Canadian context. So people if someone came up to me on the street and said, "Oh, I'm interested in what you're doing.
(16:48) " I'd be like, "Great, call your financial advisor." >> Yeah. >> Call the bank that you work with and they'd love to introduce you to what we're doing. >> Interesting. As you're saying, Canadian energy is roughly 30 40% of your international value fund. You've got Suncor, Tamarack, International Petroleum Corp, Strathcona.
(17:05) >> Mhm. >> Strathcona is about 7%, Epcor is about 2 to 3%, Tamarack is about 5%, Suncor is about 15 16%. >> It's come yeah, you'll see that that's coming down and the reason why it's coming down is cuz we deal with some regulatory restrictions in our regulated funds globally that it's really tough to keep that position. We had that from MEG.
(17:27) >> Right. >> Okay, so MEG gets bought out and you have what was a 6 and 7% position come together and then oil stocks take off this year. And so to your point, we woke up in a much larger position. >> I see. >> And so we brought that down not because we don't like Cenovus. We do. I think it's attractively priced.
(17:45) What we were we were talking about this week with some folks. But we just it's really tough in regulated vehicles. Like, for example, in Canada, one of the regulations here for mutual funds is you cannot own larger than a 10% stake. It's not allowed. So it's like, okay, if you're preparing to run other funds like that, you just can't have it.
(18:05) So, we brought that position down very thoughtfully. We could have done that when MEG merged. Why do we not do that then? Because we thought it was cheap. >> Yeah. >> So we want to be very patient back to that idea with how this played out. We can't say where that money is fully gone yet, but you'll see that we're recycling some of that capital back in, the E&P space here.
(18:26) So again, are we seeing a lot of new opportunities? Well, we just started buying International Petroleum early this year. It's our first time ever owning that security. And so that looks interesting. The Blackrod asset coming to market, if someone else says, well, what's the kind of math they're putting together? Well, just take and say, okay, what's the average SAGD player trade for enterprise value per flowing barrel? They have a 30,000 BOE project in Blackrod that'll be fully
(18:53) producing in 2 years. And so, take that, add about 22,000 barrels in their other heavy oil business. They have an asset called Southfield which is half gas, half oil. The half of the gas is really just a hedge in the other operations, but since it's a half gas asset that doesn't really compare with their others, put a comp to that, use a placeholder.
(19:14) We used about 700 million Canadian dollars to that. And so, take that 700 million, subtract it from the market cap, and then just figure out what the other barrels are worth. And ask yourself from here to two years out, what's your IRR? That sounds terribly simplistic. And I think it works, okay? That's the math we started out doing this year.
(19:31) And then as everyone knows, EV per flowing barrel moved up, okay? Now, one thing I don't think is totally understood about that company, just as an example, is I mentioned they're building this asset. So, they've been doing CapEx, they'll be going through CapEx the next two years to get that to where they want it.
(19:48) Now, here's the catch. That's a growth project, okay? What's really weird about them is right before they're going to do a growth project, you'll see that they were buying back stock. >> They've been doing a lot of buybacks. >> Okay. It's very odd to find people that are in the growth business who like doing buybacks before growth projects, okay? Why do I think they're doing that? I think good capital allocation has been very tough to find in this business, okay? In our interactions with Will Lundin and his team,
(20:19) I think Will's a good capital allocator. I think Will thinks about this world very purposefully and very appropriately. We have been really pleasantly surprised by how they think about money. They think about it a lot like us. And those buybacks are going to be very valuable as we wake up at this much higher production number.
(20:39) Because what does that mean? It means they bought the stock back for a much lower EV per flowing barrel versus what they're going to be worth coming out in two years here, okay? If your listeners are not familiar with the Lundin family, it should be noted that the Lundin family have made themselves a very rich family starting with Adolf, the grandfather, in cyclical commodity businesses, okay? And what are we talking about today a lot? A cyclical commodity business. And so the stewardship
(21:10) gene that they have is a very unique thing. I think it's understated because it's not in the mining bu- Everyone in the mining business knows them. But not everybody in the oil business might know who the Lundins are. So, I would tip my cap to Will.
(21:26) We're very excited to be involved in that business. And again, where are we going longer term in that business? Once they do the 30,000, they'll do another 10,000 barrel addition on that, Blackrod. There's a whole 'nother phase Yeah. where they could do another 30 and a 10 to mirror that.
(21:42) Now, when you're doing these projects geographically close to each other like that, the scale and the benefits and the costs get better and better and better. And once you did a 30,000 project and you go to another, guess what? You learned even more. How would I do this differently? And so, as we see this go on, if you want to run those numbers out, just say, "Okay, when do I think they're going to get to 80,000 BOEs in Blackrod? And what do I think the EV per flowing barrel will be valued at?" And figure out how much time does that take
(22:10) and where we're going in that. And then just say, "Okay, what would be my return from today to then?" And I think you're going to find out really quickly that this business is going to go up a lot in value as they go out and create this value in Blackrod. >> Speaking of going up, Mr. Will Lundin did the podcast a couple years ago and ever since the stock just continues to go up. So, I should have bought it.
(22:31) >> Well, it's done really well. I give it We're just new to it and it To your point, it'd gone up. And so, I think the other thing too is and I'll throw out another idea to you and we were talking about this in the context of one of the businesses here in town. Some people were good at winning the war.
(22:49) What was the war? It was the 2010s drill, baby, drill, right? There were some people that dealt with war better than others. >> Yep. >> Isn't it interesting that the businesses that are dealing with peace well are different? So, I was having a conversation with someone that I won't mention, but I said, "You guys were good at the war.
(23:09) Are you good at the peace?" And to your point, what it looks like is IPCO coming in this peace time with a really good year in the oil business, they're dealing with it really well. And the other thing you have to remember is the Lundin's own it. They're a large holder. And so, when they're buying back stock, our sense from conversations with them and others is that you got the Lundin's, you have a handful of family offices in Europe that trade the stock in its Swedish offering out there and they've a listing out there, and those are pretty
(23:36) long-term holders. So, when they're doing these 5% buybacks, they're not buying from all the folks outside of the Lundin's. They're buying out of a much narrower float. So, 5% buyback on them, there's potential that there's maybe only 50 to 60% of the actual stock that could sell into that, okay? Now, that's causing this pressure on the stock and people are gosh, it feels expensive.
(23:59) Yeah, but if you think about what the asset value is going, it isn't, okay? I'll add one more way of thinking about that dynamic because I had a lot of conversations on this this week and I think this theory's going to prove out, okay? The same question's being asked of Imperial Oil right now. Cuz if you look at the EV per flowing barrel, this thing looks incredibly expensive.
(24:19) Now, why? We think it's more technical in nature. We got involved in their business. We started buying it in the summer 2024. Here was our big idea. It's a boring business. It's a sleepy business. It's the oil stock your grandmother would own, okay? But produced attractive returns on capital and we would argue they just weren't getting the right multiple for that at the time.
(24:39) And you get super low cost of capital because ExxonMobil owns them, so you're effectively floating Exxon bonds. Lastly, they were buying back stock then, okay? Now, if you think about it, Exxon owns 70% of the stock. So, they are participating in the buyback, which means effectively 3 and 1/2% of that 5% NCIB is going to them.
(24:59) But on the other 1 and 1/2 percent that should go to the 30 percent. Here's the catch. I don't think 30 percent's trading. Okay? I personally believe that only 15% of their float actually trades at all. Now, who is the other 15%? Well, the other 15% would be people who have been on that business, owning it for decades and have such big tax liabilities that they'll never sell it, okay? And you're never going to see them show up in the shareholder registry either cuz they're not an institution or an advisor like us, etc. And so they
(25:30) just own it personally. I think half the float doesn't trade. And so when they're buying back 1 and 1/2 percent in the open market, what's actually going on is they're shoving a 1 and 1/2 percent buyback down on 15% of the stock. It's a squeeze. It's a technical squeeze. Now, will that hold in the long term? I don't know, we'll see.
(25:49) They've their buybacks are backing off. It doesn't look like they're going to do as much as they used to in the end at 5 percent in the NCIB. So maybe that will be kind of what erodes that squeeze, if you will. But I think that's the state of affairs cuz if you look at all the other securities like Cenovus has done well, but Cenovus doesn't trade that multiple.
(26:04) Suncor, who we don't own, they trade at a higher multiple than Cenovus, but they don't have that technical issue going on. So I think that's unique to Imperial. That being said, what would I do if I was Imperial? I'd be buying other people's businesses all stock cuz I'm getting this big premium.
(26:19) Now they're probably not going to because again, they got to go ask their daddy if they can go do something, and their daddy's probably going to say, "No, you can't do that." But if they were being really entrepreneurial, they should make a run at Cenovus cuz the spread between the value of their stock, EV per flowing barrel, versus Cenovus, you could create the next soup, the global supermajor of a combined company like that.
(26:41) How do you get to supermajor status? 2 million barrels. Who does that? ConocoPhillips, right? ConocoPhillips does 2 million barrels. So, we I think we talked about before this idea of where we're going to a railroad framework. There's two Canadian railways two Canadian railroad companies you know Canadian Pacific Kansas City and then Canadian National Railways and then we have effectively four US operators were about to go to three, okay.
(27:06) So as we look at that we're going to go to two maybe three super majors in Canada and we're going to have maybe three or four super majors in the US and the question is who? Okay. I think Cenovus or CNQ Suncor could be one of those. But they got to get to 2 million barrels and they got to get there to over time. And so how are we going to get there? I admittedly Imperial doesn't produce enough oil to get there today.
(27:31) They'd have to get bigger in scale to go there too. So I think those companies have all got to be thinking about that frankly and I think Imperial's premium in the market would argue for going out and doing deals if you got that. >> Yeah. Kemira had the same thoughts when I spoke to them a couple weeks ago too. So you're not the only one thinking that way.
(27:48) >> Yeah again just because we say that doesn't mean it's going to happen. But the unit economics argue that again the great part about being public I know Munger's talked a lot about this over the years but the great part about being public is if your stock's expensive you can use that to your advantage.
(28:04) Okay and if your stock's cheap you can also use that to your advantage. There's different things you do from a capital allocation policy in each case and you just got to know when you're in one situation when you're in the other and most people they're like the guy with the hammer to them everything looks like a nail.
(28:20) And the problem is there's Phillips screws and all kinds of other things you got to deal with out there in life. >> Speaking of Pembina they also have a great midstream takeaway with South Bow coming online and it all came online ahead of schedule and within budget so some really good advantages there. >> Yeah I think egress is just a different world today to your point.
(28:38) You know I it's funny we when we were looking at the Hamlin railway terminal at Strathcona done a little presentation before and they looked back it was like a I think it was like a 10-year look back at pipe costs. So, they were showing what the diffs were on various pipes historically speaking the last 10 years versus the railway.
(28:56) The railway had the best differentials, okay? But there's various reasons for that, but the old days of $25 diffs we're not going to see that again in my lifetime. >> Let's hope. >> Okay? Well, we don't have to hope, okay? It's already should be shown in the marketplace. Go look at the diffs the last 12 to 18 months.
(29:16) It's a different world. Now, there's a couple reasons for that. One is that the market is sniffing out the fact that pipe's coming. Okay? I think there's like three announcements just in the last 2 weeks here, okay? Now, are all those going to get done? No. But if you're existing pipe, what do you know? If you collect too much on diffs competition's coming cuz people can see that profitability and say, "I'm going to make that money.
(29:42) " Okay? Also, if you talk to folks like Cenovus, why does Cenovus have downstream refineries? Well, they would tell you that's for pipe. It's guaranteed pipe for them, okay? And so, as we think about that, if pipe's under earned compared to the past on diffs the question is, are even some of the majors here in Canada like Cenovus going to still want to own some of these downstream assets like they did if the capture price is smaller compared to the past? So, I think that's a conversation.
(30:10) What's the rationalization of downstream and midstream assets as pipe costs get tighter? Mhm. I think it's a really important conversation, but I'm going to throw out a crazy idea to you. Could we have 15 on the high end? Sure, but I think that's the high end going forward. >> For the diff? >> Yeah, the diff.
(30:27) I think we could see a $5 diff. >> Yeah. >> Okay? >> This podcast episode is powered by ATB Capital Markets. ATB Capital Markets provides financial solutions and strategic advisory services to help businesses thrive. With a track record of successful deal execution, ATB is a full-service investment dealer with a deep understanding and commitment to the industries it serves.
(30:51) Visit atbcapitalmarkets.com for more information. >> So, listener, why what is the diff why has it been happening and why do you think it's narrowing? >> Yeah, and the diff just so your listener know, it's just the difference between say WTI pricing, West Texas Intermediate, versus WCS. And effectively, it's the cost to get it out of basin.
(31:10) And so, how you get out of basin, there's various pipes you can do that. TMX coming online as example is one way to do that. Or rail, like we talked about. There's various ways you could do this. But they all have a cost. Cuz you got to pay someone to get it, from >> It's not free.
(31:23) >> Yeah, it's not free. From Hardisty, for example, where you're going to take that, is it going to the Gulf Coast, things like that. And so, it takes money to get it out of the ground, it takes money to move it, it takes money to refine it, and they all got to collect spread, and the movement is the diffs that we're talking about.
(31:40) Now, I think about this two ways. There's been really kind of a double leverage factor for the Canadian players. Because, if what I say is holds true, that means you've collected nice leverage on diffs. Which means that the best return on capital increase in North America wasn't US producers. Yeah, WTI went up. But that helps everybody.
(32:01) But diffs tightening added even more cash return to the Canadian investors. So, I just think about a world where let's say we have average $10 diffs going forward, or maybe it's 12 and we're a couple bucks off here or there. Fine. That is half the diff of the fighting for pipe. >> Yeah. >> We're just not going to see that like the past.
(32:23) Now, what am I really saying when I say that? We got the scale in the oil business. We got egress pricing that's different than the past. What am I really saying? You and I will hear people around town, maybe some of the grayer hair or blue hair here in town, they'll say the good old days, the good old days, the good old days.
(32:42) Trevor, what no one is saying right now, these are the good old days. This is a golden era of Canadian oil assets, and no one is saying that. Now, why? Because they think there's this karmic god that sits over Alberta or Saskatchewan, and as soon as you say something good, god's going to zap you karmically.
(33:06) >> [laughter] >> But, I know god, and that's not how he works, okay? And so, I just think people need to recognize that this is unique, and they need to adapt to the peace. Like we're talking about, this is a golden era, and therefore, I think the thing we're going to have to see people adjust to is because this is a good era, because he grows it differently, the older models for thinking about how to price and how to deal with this and how to scale, they have to adjust, okay? And I think you're seeing people adjust.
(33:33) Like, why is John Mackenzie wanted to go grow production at Cenovus? Because it's a good era to go out and grow in. Why is Adam doing that at Strath? Good era. Why is Will Lundeen doing that? Good era, okay? That's the catch. It's a golden era for those that recognize it, and therefore, you need to take advantage of this in ways you can.
(33:54) What they will do is they will use a lot of cash to go out and grow production. Takes time, though. So, can you use all your excess cash doing that? No. So then, from there, what's your second best way to go out and allocate capital? We'll buy your existing assets via a stock buyback, okay? And if you can't use all your cash through that, what's the last option? Maybe increase your dividend marginally or throw out a special to your shareholders just to get rid of the cash.
(34:20) And that's a really good framework for thinking about how executives should deal with this. >> And your thoughts are the framework is it's a peace time in the sense that people aren't competing for market share, ramping up production too high. It's I guess a good era to be in for the shareholder in Canadian energy. >> Yeah, it's a very rationalized market.
(34:38) You think of how few of players dominate the total say oil production of the market. I think the gas market looks different. We need to get scale to Duvernay in the money. And they're great assets. But the catch is that they're primarily producing condensate, like NGLs. What are they really in? They're in the oil business, okay? And so again, that's a whole another phenomena.
(35:00) That there's going to be a lot more scale that comes out of that. And again, they're great underlying assets and resources, but where we are in the pendulum of the scale conversation, we're much further ahead in the curve in the oil business right now. >> You also own Conoco and Diamondback, I think, in the US? >> Yeah, we own those in our US portfolio.
(35:19) Conoco is just such a great picture of where we're going to end up in all the super majors, okay? As some of your listeners may or may not know, they got rid of Phillips 66. They spun that out, okay? So, the I'll call it any midstreamer or refinery assets went with that. Shout out to Doug Terrason, who's on the board at Phillips 66.
(35:41) If your listeners haven't read his book, Can't Deny It, wonderful framework book for thing about Doug really built the framework of why upstream, why super majors, and Conoco has ran that playbook. They don't have any downstream assets. So, as we talk to folks here, what are we really interested? Ultimately, not having downstream assets.
(35:58) Getting rid of those because the best returns in upstream. But I just say that because they're the only super major out there to have that business position. They're very focused on that. Are they going out and buying good assets when they see them? Yes. What's the only weird thing? It seems that the super majors are really interested in offshore assets, in places like the Gulf of Mexico or off of places like, as Chevron and Exxon fought over the Hess Guyana asset. They really like
(36:27) those long-life assets. >> Mhm. >> Now, why not Canada? Why not more in Canada? And Conoco has assets here, but it doesn't seem that they're trying to go out and scale more deeply here like others like Cenovus or Strathcona have been doing here more recently. >> Mhm. >> So, why? I don't know.
(36:47) Remember Cenovus used to actually be partly owned by Conoco and they sold that stake off over time. So, again, that's a part that I don't get. Diamondback, Case has been great. I think Case has probably been on your show here or there. But Case they're doing a great job of just communicating the reality of the Permian, right? They're not in the growth business.
(37:09) Why? The barrel and the asset resource just isn't there like it was 20 years ago. And so, therefore, they are going to do that only when it's profitable for shareholders. And they really see kind of a fixed barrel production world in the Permian. I don't disagree with that, but here's the catch.
(37:23) There still needs to be more scale, okay? So, all you use them. They don't seem like they want to be buyers in that market for better for worse. That's fine. That just means they're going to get bought at some point. Okay? That's what's going to happen. Why? Cuz someone's got to go to 2 million barrels to be the next supermajor or a supermajor is going to want to be deeper in the Permian, okay? I'll let you know, we could talk about Oxy, too.
(37:44) Oxy is in a position of either eat or be eaten. They do about a million one barrels about the size of Cenovus on a flowing barrel basis. And they need to get bigger or they need to sell. Well, if you look at their business, they effectively have deep Permian where most of their stuff is and they have some other assets particularly places like Oman for example, some offshore assets.
(38:05) So, those offshore assets can't be sold because a lot of times those are very special government arrangements. And so, therefore, they're going to be in a world where they're going to want to get deeper in the Permian and find long-cycle assets elsewhere in the world. Well, frankly, I just explained APA who we own, okay? the old Apache.
(38:22) >> Yep. >> Apache is doing 400,000 barrels. A lot of that in the Permian. What else they own? They own Egyptian assets, which when you have a little problem in the Middle East and you produce oil and gas in Egypt, you can mint money for a season. >> Mhm. >> And then they have Suriname, which is next door to Guyana, and they're building over time, nothing near term, an asset in Alaska.
(38:43) But that Suriname asset's making oil in the next 2 years. And they partnered with Total on that. So we think that mix of onshore, short cycle, and long life assets, which would be both places like offshore or the oil sands, that's the mix that the majors should be going towards as they think about their capital allocation.
(39:02) We think APA's a sitting duck. I think the recent high out was about 45 bucks. I could see someone walking in paying 50 doing all stock. The returns on capital would go up. You look at SG&A, it's about 350 to APA. Take that to zero, slap a seven to 10 or five to 10 times multiple on that, you got your little M&A playbook.
(39:21) And you can do it all stock. And we're going to see more all stock deals. So I think there's needs to be more consolidation in the Permian because the basin's not going to grow, okay? Versus we got a lot of consolidation in the Canadian space more recently, but that basin's going to grow. Okay? Am I saying that Permian's bad? No.
(39:37) When you have oil price runs like this, it's actually a higher torque market. >> Yeah, huge torque. >> It's huge torque there, okay? So I'm really excited to see what's APA's Q2 cash. >> Yeah. >> It's going to be big. >> back. >> Dying back. The Both those Q2 cashes are going to be big.
(39:55) >> Yeah, so I as we think about those assets, we just think about them differently because the nature of the business. If someone says, "All things equal, do I prefer higher reserve life businesses like we can find in Canada?" Yeah, the best reserve life is in Alberta. Saskatchewan has good reserve life, not as good.
(40:14) What are we learning in Clearwater? There's way more reserve than people thought. >> Exactly. >> And I think the one thing I tip my cap to some of the folks I've met this week here, hanging out Wildhorse, for example, or people that I've met in America, never never doubt the ingenuity and the creativity of the petroleum engineer of North America.
(40:33) >> Yes. >> They tend to do way greater things with way less than you thought for way longer. And so, I'm not as much in the quick decline camp of American production. I'm more in the it's probably going to flatline and be on a slower decline. But again, that's still a decline.
(40:49) And we talked about we need 4 million more barrels over the next 3 years at some point. >> Yep. >> And it's just not there. >> That's been my point on the podcast is that the oil business, first of all, has so much ingenuity in it and great engineering. It's also looking through the windshield business, whereas you can do the spreadsheet math on the decline in the reserves in the some of the basins, but it's not tangible, but production keeps going up.
(41:13) For instance, in the US, May exports were the record high. >> Yeah. >> So, everyone keeps calling for the demise of the sector, but it's not I wouldn't bet against it is my point. >> Yeah, no, I agree. And you got to remember, we just had a move up in prices. So, there's reason to meet the market there.
(41:32) But let's say we sit back in the $70 realm for I don't know, 6 months. Yeah, you're probably going to see a steady state quicker, right? The great part of these things is price determines what's going to happen. Low prices mean it will probably decline. High prices mean it will either flatline or grow, potentially. >> Mhm. >> Because ultimately those are torque assets. Those are high I short cycle.
(41:52) I just think we're going to get to the right mix of short cycle and long cycle. Right? Long cycle's going to meet the ever-growing demand. But when you get price spikes, what's the best way to address that? Short cycle assets. And we're going to see businesses that have a good combo of both, because as a capital allocation, right? You're going to think about, okay, what are we building longer term versus what can we address now to capture some of this? >> But for your energy sleeve, it sounds like you're leaning towards E&P. I think
(42:18) you had Glencore and Frontline, too, but your thesis is more E&P? >> Yeah, yeah. So, if you look at our portfolios, we're about 20 to 25% in the energy space depending on where we've been in the last quarter with the prices backing off. On the non-US side, it's something like I'd say about 35%.
(42:34) Okay, now, Frontline will get lumped into the S&P GICS energy sector. But it's a tanker business. Okay? If someone asked me where we at in the tanker business, that's a really good debate right now. Okay? We got involved in it in when the market was very tight in '22. What was going on then is tanker companies were selling their boats for steel prices cuz steel was high and scrapping those.
(43:00) And let's say you liquidated five boats, you might only buy two or three. So, you have this declining supply of tankers. And so, I remember talking to some of the sell-side analysts and I'd ask, "Hey, isn't this super bullish? Like, supply's tighter than all get out." And they yet yeah, it is.
(43:15) So, why don't you have buys on all these things? And they're like, "Cuz it's a cyclical business." It's like, yeah, that's always true. And so, we got involved in the space. It's we've made really good returns. John Fredrickson is the capital allocator at Frontline. He is the most successful in the industry. You'll commonly see us get involved with great capital allocators in various cyclical sectors.
(43:35) I was kind of saying the Lundin families, or Adam Waters is kind of fame so far. And so, John Fredrickson was that in the tanker business. So, late in '25, there was a Korean company that came out and swallowed up a lot of the tanker market either through buying boats or leasing them at very high charter rates.
(43:56) It was odd because it was like, "Why is someone taking up a quarter of the market suddenly?" Fast forward, we then have our move happen. And what you'll see is that people don't want to give up on their boat rates cuz the idea if you give up on your boat rates, you ain't going to get the boat back cuz someone else will pay a higher price.
(44:13) So, boats have been running really high prices through this conflict, called about $100,000 per day on a boat. And will that sustain has been the big debate cuz you have kind of a squeeze. Well, there's two schools of camp. One is that this is a squeeze and prices will back off and so you're stupid to not sell some of these businesses now, okay? That's one theory.
(44:35) The other theory is that when oil is starting to flow and people need to get inventory moving that there could be an even higher move in the price of daily rates on tankers, okay? I said patience is the most needed thing. What are we doing? We're playing the game of patience. We think the tanker business because it's been so cyclical in the past, people don't recognize that the lack of supply that's came into this with and the world we sit in is for one reason or another people are just going to hold on to boats whether to be to
(45:02) hold in storage or just to hold to not give up their charter rates. We think that's going to be the case. So, we're being very patient. We might look up in a year and be like, "Cole, you were an idiot. Why'd you guys not sell some of that stock?" That's potential. But I think if anything patience is what we want to practice in this.
(45:20) Other commodity businesses like you mentioned, we got involved with Glencore in late 2004 when Ivan Glasenberg bought more in the spring of 2005 during liberation day when everyone scared. We got a chance to get some more of that stock. It's done really well for us. They're a good proxy for commodities in general. They're in the copper business dominantly and secondly in the coal business and nickel and zinc and they have this great marketing arm that just tends to mint money in commodities in general.
(45:45) I think about them as a proxy, a long-term proxy commodity in some respects. Got to remember they went public in 2011 at the height of commodities in some respects. Their actual low was when metals and mining load in 2016. That was the dead flat low on the stock. But people got kind of disappointed in copper in the last about a year ago.
(46:02) >> Mhm. >> And so what happened is you just had this exceptional moment where people were more freaked out because of liberation day and tariffs and all this stuff on commodities. What do you wake up with a year later? Well, it wasn't as scary as people thought. So, we like their capital location.
(46:16) We like the capital structure of that business. The only other business we really own in what I'll call commodities, we own West Fraser Timber in Vancouver. It's funny going out to Miota, that's the first site visit I've ever done in the oil business and we're 6 years into owning Canadian piece for example.
(46:30) >> Mhm. >> The only other site visit I've ever done is about 10 years ago I went up to Quesnel, British Columbia. Which is the operating home of West Fraser Timber. That is the largest lumber mill in the world. How do you get there? You drive up to Vancouver when I was living in Seattle, fly to Prince George, the northern capital of British Columbia.
(46:49) >> Yep. >> And then you drive out to Quesnel. You know you're in Quesnel, British Columbia when you can sit down at the diner and do a little gambling for breakfast, >> Yep. >> okay? >> Yep. >> So we if you haven't been to Quesnel, it's very unique in that but we went out and saw the mill and what you see when you whether you go see a SAGD asset or whether you go look at a lumber mill, there's really no one out at these sites.
(47:11) These are advanced manufacturing assets is what they are. Great scanning technology, great temperature technology. You might see a human at the end of that. You see a human driving a truck for example to get the oil away from a site. The humans are involved but they are overseeing the processes at play.
(47:30) >> Mhm. >> And so I just don't think people understand that these are not people businesses. There's great people behind these. There's great people that build these but the actual continued operations of these businesses come down to a lot of systems and processes and technology, not actual human oversight minute to minute.
(47:46) >> Last year too you've mentioned that the public markets versus private market has had a gap between the two and Mr. Adam Waters did the Arc deal, sold the assets to Strathcona. The idea was that maybe he get more value there and make a bid for MEG in the public markets. There was a gap in the value between the two.
(48:03) Are you still seeing that? >> Yeah, there you're going to see a liquidity gap, right? And so that's why of the few assets that are private out there, there will be a step up in price that they can get as they sell to public players, okay? Now, there's on the oil side there's not a lot of assets left.
(48:20) As we think about the the Tourmaline what he did was he effectively kind of mentally shorted the gas market at that time. Right? He gave up on gas assets. At that time people were pretty bullish on the gas business because they're like, "Oh yeah, oil demand sucks and we got a supply got but AI computing computing power generation is going to be big.
(48:41) " So he effectively swapped with the market what he was more excited for at that time and bought oil assets. Great timing. He obviously put pressure to get more consolidation. I don't think people realize how much value Strathcona is going to extract out of the Vawn asset. In other words, yeah, he lost MEG but what he got is something incredible there in Saskatchewan.
(49:05) So I think he did really well for shareholders even though he wasn't successful in his bid and his attempt. The one thing I did learn in that process is the takeover laws is like there's the rules and there's the laws and then there's unwritten rules in between there that as long as the king's court doesn't say no to you can do.
(49:23) And I think that's a whole another debate but it just did a lot of like as investors here grow up really quickly. This is still the wild west. And people are going to create what's going to be in their advantage and their interest. So we have to be thoughtful about that.
(49:39) So again, you want to make yourself as investor friendly as possible in this season where you could be the buyer or you might be swapping assets to get a better checkerboard at times. But that arbitrage is still there. I just You on the oil side there's just not a lot out there. I mentioned in Saskatchewan, there's really only three players in Saskatchewan.
(49:56) So, it's like cool, yeah, Cardinal's there. Cardinal has a smaller SAGD project. Cardinal's main problem, we don't own it, is that they have these other legacy assets in Alberta that are all across the map and there's not that much scale in those either. Do I think Cardinal SAGD assets are interesting and attractive? Yeah.
(50:15) >> Yeah. >> I do, but we got to buy everything else to get to that SAGD asset. If they either sold that or spun it or did something like that, we'd be pretty interested in that cuz they could grow that platform and that's a good market to go out and grow barrels in. >> But the idea is that their industry {slash} privates market deals are valuing assets higher sometimes in the public markets.
(50:37) So, like if you look at the Bureau of Land Management sale that what Devon paid for those assets, there's a gap. Do you still see that gap? Do you agree with it? Why do you think that is? >> Yeah, the US side, you're going to see that gap and you're going to continue to see people that bring assets to the public players cuz if you want resource, that's the easiest way to do it.
(50:53) Have someone else build it, know the resource is present and then they get to arbitrage the multiples going from private to public, okay? That's the US math, roughly speaking. Because land is dealt differently in Canada, right? I mean, crown, these are crown lands and there's royalty rates that are paid to the government, ultimately the provinces, that's a different thing.
(51:10) Most of the assets in the United States are royalty rates paid to private land owners in comparison. So, I think you have to think about this the private versus public a little bit different here. To your point, there's just I think there's fewer ways to gain a lot of barrels privately here in Canada.
(51:29) Let's use an example. Let's use the Clearwater cuz I think that needs to consolidate. Is Spur has the most scale in that market right now. >> Yeah. >> Now, >> It's incredible. >> do I think Spur uh and by the way, again, we don't own it, just so your listeners know. But do I think Spur's done a really good job? Yeah.
(51:46) I can look at the profitability per barrel. They're minting cash, okay? Now, here's the catch. Everybody knows what they're doing. Everybody knows how much they're making. So, what are Headwater and Tamarack Valley doing? We don't own Headwater, but we do Tamarack. They're just like it's a game of copycat.
(52:03) Like all of life is a copycat game. How do I apply a good idea from someone else in some other place into an industry? We do that commonly. So, everyone's looking saying what has Spur done? They're further along that road in water flooding, etc. They're copying that, okay? Now, Spur it trades for higher valuation than the two public players do if it was public.
(52:23) There's a gray market there. They do trade shares. A lot of the brokers here in Canada will trade those shares. It's not liquid enough for us as a gray market security. And so, we wouldn't touch it, okay? Now, if that was public it would have a better valuation. They're one of the oddities where they trade a higher valuation than the public players, okay? What I don't get is why wouldn't Spur just go public and not pay that big dividend and buy the other players on all stock basis and turn on buyback stock and own the whole play.
(52:50) And now, my theory, and this is a tip of the cap, this is not a criticism of those folks, is ultimately they're just they've made so much damn money, they just don't care. Okay? And you know what? Again, tip of the cap to them for doing that, but I also don't think handing out a big dividend is what the markets want today.
(53:06) We just think the markets are saying loud and clear they prefer buybacks cuz investors like us don't want to get taxed on dividends, okay? And if your stock's cheap, which a lot of these we think are attractively priced buybacks are the way to go. Don't pay out a dividend.
(53:18) Or if you're going to do it, have it be a nominal amount. Because ultimately, if you get into a bad market, which we can occasionally get in bad markets in this business, those dividends are liabilities. And so, if these stocks back off, the oil price backs off, you have a big liability you got to pay to equity owners.
(53:34) And people I just don't ever hear people say that's a liability. It is, just like a bond payment is. >> One way you framed it that 20 to 25% return on equity under two times book. And that's what you're looking for in terms of businesses to acquire. Are you still seeing that in Canada and the US? >> Yeah.
(53:50) Yeah, it's we've been in a kind of a paradox here recently and I think there's an easy way to think about it. So, let me just use top of mind for me is like Cenovus, okay? I think I was looking today, Cenovus trades at like one and a half times their it's called about one and a half times their capital base, okay? I think the net cash of the business and this I mean I think I'm using end of year numbers, but and the net cash of the business they had then was about 6 billion in debt.
(54:13) And I'm using dollar terms. 23 billion in book. It's about 29 billion and I think the stock is at in dollar terms like 48 billion. So, maybe we call 1.6 times capital right now, okay? Now, if you look at back where the stock price was during oil being higher, it was closer to two times capital, okay? So, now at two times capital, they on a daily basis were accruing relative to capital on a free cash flow yield basis, they were doing about 35% of free cash compared to capital.
(54:45) So, what I'll call returns on invested capital about 35% daily, okay? Now, simple way for your listeners to think about how much businesses get priced when you think about returns on capital and what you pay for capital is that if you produce 35% return on capital in the long run, you don't ever trade at two times capital, okay? [laughter] If you can't sustain that, you trade for a lower multiple, a 35% return on capital business might trade for anywhere from I don't know, say five times capital, four times
(55:13) capital minimum, maybe as high as six times capital, okay? Somewhere in there. So, what the market was implying was that it didn't think Cenovus and the other oil companies would continue to produce as high of returns on capital on a daily basis as we saw at points during the spring. Okay, that's fine.
(55:32) But at two times capital, what's the market implying? That they're going to produce teens returns on capital. Okay? Now, by the way, today what are they producing? Teens returns on capital. >> Mhm. >> So, what is going on is because the market is not pricing these through the cycle at the average return on capital that they're likely to make.
(55:53) What's happening is these multiples are just too low, which is why the companies are buying the stock back. So, if you go if you look for the year 2026 and we all walk away and say, "What did they actually make?" For the year 2026, they're probably going to make something like over 20% in returns on capital.
(56:09) And again, their stock trades for about 1.6 times capital today. That's too low. Okay? And what's odd is that I said we've been involved in this the oil patch here in Calgary for 6 years. This is like a long-tailed durational structured alpha opportunity. And you know this, there are some people that understand that.
(56:34) But there's not a lot of people that understand that. Okay? And we're just not seeing this move by buy-side PMs as say in the United States or globally, places like London or Singapore, looking and saying, "You know what? There is a long-term structured alpha tail to this." Because this whole saga is just going to continuing to show that these businesses trade for capital multiples that are too low relative to this being the golden age of these businesses.
(57:04) >> I resist barrel counting on this podcast, but since it is July 10th, oil prices are down 70-ish. I don't know if you do much of that, your thoughts on the macro, are you thinking about oil prices? >> Yeah, I think if you look at the crack spreads, actually this is going to go out in my quarterly letter.
(57:22) I called it in in honor of Stampede, the title of the piece is called Stampeding to the next problem. Okay? And I mentioned that we're up here this week. But that's pretty simple. The crack spreads are arguing that if you're a refiner, you love getting every barrel you possibly can.
(57:40) You've never made so much money collecting barrels and making jet fuel and gasoline and every kind of product like diesel out of that. The catch is that if demand's humming like that, we're going to see the we're going to see inventory draws that we just never seen before. I mean, Cushing's down to 19 million barrels right now.
(57:58) It's like there is a certain level that we can't go below cuz pipes got to have something in to move it, otherwise you get pipe problems, okay? So, we're getting closer and closer and closer. But, again, Mr. Market in the oil business and the futures market says there's no problem and oil is abundant, okay? Now, something that I think is really important is has there been times before in markets where you see a big spread between the physical market and the financial market? Yes.
(58:29) If you go back to I think it was the Michael Lewis's book, The Big Short. There's a scene in the book and also this comes up in the movie if I recollect correctly is that Burry and all these guys are out they're short CDS, right? And I remember one of them called up their Goldman broker.
(58:52) And they're like, "What's the price on our CDS today?" And the Goldman broker gave them the price. And he's like, "What are you talking about? That's not the price. They already knew the underlying mortgages were all defaulting." And yet, Goldman at that time and they used Goldman, but all the brokers are doing it.
(59:09) So I'm not picking on Goldman cuz they're a good institution to deal with. Goldman was not giving them the price that was actually real. >> I remember that, yeah. >> Now, why? As Munger says, incentives shaped outcomes, okay? The reason why they didn't want to go give them the correct marks on that CDS wasn't because the paper was garbage.
(59:30) It was garbage and the homes were defaulting. But Goldman would have had to remark their own books on that same paper. The idea being if they go give them the correct price, they got a bunch of mortgage assets that I got to mark down. And therefore it's a hit to their capital. So, what do I think's going on today if we have something analogous like that happening? I think the financial market is mispricing this just like they did then.
(59:54) Everyone for an elongated period of time has felt we've been in a glut. And you hear about a glut and a glut and a glut and we're in a glut. The main barrel counting math mystery is when will China come back to the market? Because that's the main thing. Because effectively they're drawing reserves. >> Yeah, exactly. >> And they were building admittedly reserves in 2025 at a time when people were like, "Wow, it's an oversupplied market, but it's not getting ruined, okay?" And so they've been pretty good oil traders for better for worse.
(1:00:20) They can do that for a season, they just can't do that forever. And so has it benefited us to your point to sit down and barrel count for too long or worry about this supply glut that everyone's talking about? No. >> Exactly. >> It hasn't really benefited. If anything, it's shaken you off the bus, right? It's got you off the path of really having the patience to sit and just own and be a great owner of these wonderful assets.
(1:00:44) >> Couldn't agree more. >> Yeah. >> Yeah. But yeah, so today's 70 bucks, but we'll see. >> We'll see. Now, I'll give you my three-year view. I think we're going to average 90. Okay? >> Yeah. >> And by the way, if I'm wrong, I don't really care. >> Yeah, exactly. >> These businesses are priced that I could be wrong, but if we're wrong to the downside and it's a lot higher than that, wonderful.
(1:01:07) One other thing I'll add, okay? Because I think this is really missed. The main people that we disagree with, the demand destruction bears are wrong and they're lying to people. They're wrong. Okay? Now, I'm not saying that because of say crack spreads or something like that. We had over $100 barrel in 08 for the first time ever.
(1:01:28) We peaked out at 147, okay? We've seen over $100 barrels in the 2010s. We also saw $100 barrel in 2022. And then we saw it here more recently, okay? We had we went into a deep crisis in 08. Now that was partly due to the oil price, I'm sure, but I was also because we had a lot of toxic mortgages and other problems.
(1:01:50) It was a credit crisis. Now, going back to the 2010s, did we see a bunch of recessions off $100 oil? No, we didn't. And did we see a recession in 22? We didn't. So, I think people are mispricing what I'll call the oil beta sensitivity of the consumer. I was having a conversation with my Uber driver.
(1:02:10) I think you have very interesting conversations with your Uber driver from time to time. And I was explaining to my Uber driver a couple weeks ago that at at that we had prices say $75 in 07, okay? And I said to him, here we are we're 18 years later and we're looking at $70. So, what does that tell us? This commodity has been cheap relative to many other products in society.
(1:02:31) Compared to housing or all these other things. Compared to gold. Super cheap. Okay, it's super cheap. Okay? So, I just say that because the idea that $100 prices caused demand destruction and recessions, I think that's fantasy. Go look at the average car and its fuel efficiency it's gained.
(1:02:51) It's reducing oil beta sensitivity, okay? Go look at airplanes, they're getting more fuel efficient. So, I just think the actual price of the commodity it's less leverage to the underlying economy. That being said, if you look at what's going on with crack spreads, there's places in Asia that have dealt with some real prices in this, okay? So, there's inventory that needs to be built up.
(1:03:12) There needs to be a lot more end product built up in inventory. That's what's really driving crack spreads. Is there's not a lot of product built up in inventory and that's causing a lot of near-term need and near-term spread on the refiners. That too will pass cuz admittedly, if you can make $70 being in the refinery business, I'm going to want to be in the refinery business at some point.
(1:03:29) Okay? And so is everybody else. So, I think we're going to see that alleviate at some point. As that alleviates what the refiners are making on the end product, I think you're going to see the producers start to over earn compared to the 70. We'll probably gain 10 bucks on spread or something like that as they have to back off on their spread to the end customer.
(1:03:47) >> Mhm. As we move towards the end, >> Yep. >> sounds like you're happy to own E&P for the foreseeable future. >> [snorts] >> What's the most mispriced attribute in the market these days? >> I think it's what we talked about earlier. I think the most mispriced attribute, whether it be talking to investors, talking to executives, is that people need to understand where we're at.
(1:04:12) Because where we're at, what prices do you pay for what is a really good era? What capital allocation is required of that? Like growing production marginally and sensibly at low prices, using your excess cash to buy back stock and then figuring out what after you're done all that, what you do with it next. That's just very misunderstood.
(1:04:31) And then the last thing that goes on with that is where we're going in scale. Right? It's like, "Hey, we're in a good era. It's a golden era." And so the guy that's got the great asset down the street from you that you've always wanted to buy, but you just don't want to give him a better price cuz you just don't want to benefit someone like that.
(1:04:48) You're in a golden era and if he doesn't recognize that, take advantage of the foolishness of their shorter sided thinking, even if it's at higher prices. I think the industry really needs to adapt to that, particularly in the oil side. And the fun part of being here is as I'm visiting with some people that are in the field at times or whatever.
(1:05:07) I tell them that and it's like they feel so refreshed to hear that from an outsider. I think that's part of our role in this industry in this town is to go out and tell people how good this is because ultimately people have are having trouble recognizing that. I think that is so important because I think that optimism and that view of the industry right now will change how this industry will continue to scale and transform over the next decade and prepare their businesses to be as investor-friendly to folks like us coming in from the
(1:05:38) outside that I think there's going to be a lot of generalists that show up the next decade in this business. Why? Cuz there's not a lot today, okay? I think the hedge fund pod community is the past. I think we're going to see a lot less of them. You know why? It's going to be long-term capital that shows up here more repeatedly.
(1:05:54) It's not what are you doing this next quarter? That's a waste of time, okay? Quarters can move, but there's a great 10-year vision for this business. >> It's great to see you again. Happy Stampede. >> Yeah, good to see you, Trevor. You as well. >> Finally in person. >> Yeah. >> So, I appreciate your take and yeah, maybe we'll get a part four in one of these days.
(1:06:12) So, hope you have a good trip back. >> Yeah, thanks for having me.