Getting the #COM Back Together

The Blind Squirrel's Monday Morning Notes. Year 3; Week 18.

• The 🐿️ does not believe that dreams and hopes of the Canadian Oil Mafia were shattered by last week’s Federal election results. Cheer up!

Getting the #COM Back Together

Let me cast your minds back to late 2021 / early 2022. The 🐿️ had then already been a salivating energy bull for quite some time. ‘Triple digit’ crude was a ‘mathematical certainty’. This turned out to be correct. Fleetingly. Certain prominent members of the finance commentariat were commissioning baseball caps emblazoned with “WTI $250” on the front (you know who you are! 😉).

While this rodent suspected that $250 per barrel was a slightly extreme scenario (and probably represented an economic world which would look pretty scary), he had strong sympathy with the view that energy prices were going a lot higher.

I genuinely believed then that OPEC spare capacity ‘was a myth’; that the US shale production growth ‘was clearly rolling over’; and that the Biden administration’s attempt to control retail gas prices with releases of the Strategic Petroleum Reserve ‘was futile’.

I owned an irresponsible number of contracts of long-dated out-of-the-money calls and call spreads on WTI futures and thought that I had the crude oil bug pretty bad. That is, until I came across the Canadian Oil Mafia. My own Twitter timeline had become overrun with #COM hashtags.

While the rest of the world had been liberated from lockdown and travel restrictions many quarters earlier, Hong Kong (where the 🐿️ was then living) was still very much locked down that winter of 2021/22. Time freed up by not getting on planes was on occasion filled by listening in on Twitter ‘spaces’ calls. The Canadian Oil Mafia appeared to host one pretty much every night (my morning) with 100s of excited attendees.

#COM were no ordinary energy bulls. They had developed a cult like obsession with the free cash flow properties of Canadian oil and gas companies. Many of my mornings in Asia bore witness to #COM devotees announce that they had insane proportions of their net worth tied up in Toronto energy tickers.

#COM’s ‘high priest’ was the CIO of Ninepoint Energy Fund, Eric Nuttall. Ninepoint Energy Fund, September 2021 to present.

Some of these conversations were hilarious. The (non) risk management confessions were alarming. There was plenty of reference to dividend cover and free cash flow yields, yet it was clear that many #COM mafiosi were wildly levered into the trade via margin accounts and option trades.

After a stellar performance during 2021, #COM members were already convinced that they had safely secured prosperous retirements. By the time Putin’s tanks crossed Ukraine’s border in February 2022, lighting a fire under global commodity prices, the #COM were perusing superyacht brochures.

The Bull Case for Canadian Energy

Making the positive case for Canadian energy stocks is not hard. Canada’s vast hydrocarbon resource base does not suffer from the same high decline rates as the (primarily shale) reserves of its southern neighbor. Reserve life for the oilsands assets is measured in decades not years.

I share the view with most of the world that ‘51st State’ jokes are not remotely funny, but this map is an excellent illustration of Canadian resource wealth.

The fallacy that Alberta’s oilsands assets could not be extracted without high prevailing spot prices for crude has long been debunked.

In December 2022, the C.D. Howe Institute calculated that most oil sands producers “will continue to produce and potentially marginally to expand as long as the prevailing price of Western Canadian Select crude oil remains above C$40 per barrel. The majority will continue to produce as long as the prevailing price is above the C$25–$30 range, and some will continue to produce at prices as low as C$15–$20.” This is a far cry from the prevailing view 15 years ago that the sector was unprofitable without a minimum of US$75 / barrel spot prices.

TD Economics estimates that Canadian oil could account for between a quarter and two-thirds of incremental global supply for many years into the future given the right investment in infrastructure to allow access to both Pacific and Atlantic export markets.

The leading industry players enjoy ‘fortress’ balance sheets and are led by management teams relentlessly focused on disciplined capital allocation policies (buybacks and dividends). Yet these stocks currently trade at meaningful valuation discounts to their US peers.

The Return of #COM

To be honest, if the blow-off top in energy-related assets between March and early June 2022 was nothing short of spectacular, the drawdown over the subsequent 5 weeks to late July was nothing short of brutal. After a few weeks of dip-buying discussion, the #COM ‘spaces’ calls went dark. Canadian energy equities were dead money for most of the next 3 years as those yacht brochures gathered dust in desk drawers.

Towards the end of last year, the ghost of #COM made a gradual reappearance. The collapse in popular support for Justin Trudeau’s Liberal Party pretty much ensured that a ‘pro-energy’ Conservative administration led by Pierre Poilievre would finally bring righteous salvation to Canada’s energy stocks.

We need to define ‘salvation’. Canada’s energy resources should be the envy of the world. However, for some reason, Canadian politics have ensured that the Saudi Arabia of North American hydrocarbons has been forced to play with 2 hands tied behind its back for much of the past 15 years.

Regulatory impediments to investment in energy export infrastructure (principally pipelines to the coasts and LNG export terminal capacity) and ‘net zero’ legislation that effectively functions as a production cap on domestic energy producers has created a perverse scenario in which Canada exports the bulk of its oil and gas production to its southern neighbor at a discount to global market prices.

Source: Alberta Economic Dashboard.

To make matters worse, Canada then reimports roughly one in every 8 barrels of its annual consumption of value-added refined products back from the US.

Source: CAPP

CAPP, the industry association for Canadian energy producers, estimates that legislative barriers (C-69 for pipeline permitting, C-48 - the West Coast tanker ban and C-59 - the emissions caps) have resulted in the cancellation of C$280 billion worth of energy projects.

Those tin-eared “51st State” and “Governor Trudeau” jibes from the new Trump administration ended up messing up the #COM dreams of a Canadian energy salvation. Poilievre’s leadership in the polls vaporized with 6 weeks of Trump’s inauguration.

My Canadian friend Kevin Muir nailed it with this meme.

Or did they? I do not believe that all is lost for #COM. It is very unlikely that last week’s re-election of the Liberal Party under the new leadership of ‘Davos elitist’ Mark Carney marks the end of a Canadian energy renaissance. As Kev pointed out, both prime ministerial candidates placed reforming the Canadian economy to reduce reliance on the United States and shore up economic (and energy) sovereignty at the forefront of their policy agendas.

Whatever Carney may have said about Liberal commitments to C-69 on the campaign trail is irrelevant. Politicians campaign in poetry but govern in prose. The Canadian economy simply does not get reformed - to the extent required by current realpolitik - without removing the shackles on the domestic energy industry (not to mention avoiding a constitutional crisis with those secession-curious Albertans).

Even ‘Team Davos’ has given Carney the green light! The paper published last week by ‘arch globalist’ UK PM Tony Blair’s think tank highlighted a major ground shift in ‘globalist’ climate policy.

The 50-page document is worth reading in full (link via image above).

Blair’s own forward to the paper does not pull any punches:

“…any strategy based on either “phasing out” fossil fuels in the short term or limiting consumption is a strategy doomed to fail… Political leaders by and large know that the debate has become irrational. But they’re terrified of saying so, for fear of being accused of being “climate deniers”. As ever, when sensible people don’t speak up about the way a campaign is being conducted, the campaign stays in the hands of those who end up alienating the very opinion on which consent for action depends.”

Carney clearly has a green light from his ‘WEF’ mates in Davos! In Section 2, the 🐿️ sketches out his own plans for membership of the Canadian Oil Mafia.