Malcolm Shaw / Hydra Capital Oil
Oil is on everyone’s lips. Believers are being manufactured daily by the buybacks, rapidly improving balance sheets, earnings growth, and free cash flow yields offered by the oil stocks. Even with China in its own version of covid lockdowns, oil has barely budged. Summer driving season in North America is coming and the Russian “situation” isn’t going to improve any time soon (that is a huge hole to fill). At this point, I haven’t met a lot of oil stocks that I don’t like. I happen to currently like Cardinal (CJ.TO, last at $7.23), Africa Oil (AOI.TO, last at $2.27) and Yangarra (YGR.TO, last at $2.92) the best, but that’s just me trying not to pick what everyone else already loves. CPG, TVE, BTE, WCP, MEG, you name it… I think they’re all priced for about $80 right now, so every day above $80 is a good day — and every day over $100 is a very, very good day for holders of oil stocks. I’d throw an honourable mention in here for Vermillion (VET.TO, last at $27.47) because of the company’s direct exposure to European energy markets. I’m not sure if that’s going to end up being a good thing or a bad thing in the end (“windfall tax” risk?), but right now, VET looks set to mint a lot of free cash flow, for years to come, based on strip pricing.
CJ is easy because it’s about to start paying a dividend and should have a lot of room for increasing it if oil stays strong. CJ is Scope 1 negative in terms of CO2 emissions, so it’s hard to argue with its “low-decline + ESG” chops. CJ, not typically known for new discoveries, has been showing success in new areas as of late that are worth keeping an eye on. CJ also has one of the bigger tax pool holders out there, with $1.2 billion of tax loss carry-forwards. CJ is almost as clean as a story comes and its top two holders are smart cookies (Murray Edwards and Eric Nuttall).
AOI is very simple for me. I listened to their year-end call not long ago and came away with the following in terms of value… Kenya is worth a buck. The giant offshore Namibia discovery (via Impact Oil and Gas) is worth a buck. The rest of the minority-equity portfolio is maybe fifty cents right now, but that could grow with drilling. Offshore Nigeria is worth no less than two bucks, and maybe as much as three or four bucks. That means that AOI is trading at half of my most conservative estimate of its value in an $80 oil world. As a result, I see little reason not to own it given its first-class management team and the Lundin Group’s global resource prowess. I think the market wanted a bigger dividend and was maybe surprised about some of AOI’s hedging losses, but that’s water under the bridge now and oil is still over a hundred bucks, so I’ll own it while it’s on sale. I do own a little bit of Sintana Energy (SEI.V, last at $0.145) and Eco Atlantic (EOG.V, last at $0.58) as side-bets on offshore Namibia and South Africa exploration respectively. SEI is an “area play”, while EOG for me is specifcally about the Block 2B target in South Africa that should be drilled in the back half of this year.