Tuesday, August 16, 2022

@PDXSag on the "Three Masculine Archetypes"

[From our CBS correspondent @PdxSag.]

I loved the Stewart Brand article that was in the most recent Thursday Links. Of course, everyone loves a man versus the sea story, but Brand’s je ne sais quoi comes from his recognition and exploration of the three masculine archetypes.

The first archetype in the article is the man who sets out despite a lean budget and less than ideal apparatus. This man, forced by circumstance, must trust his wits and will to carry him through. To be sure, it is not a fool-hardy trust. It is a trust earned through many real-life experiences, first as an apprentice and later as a journeyman on his own. This man has picked up a few knocks along the way, but the knocks were survived and afterwards he can take some personal pride, and find strength in them. The common metaphor for this man is that of forging iron into steel.

The second archetype is the man that chases his fancy woefully under-prepared and hoping Providence will magically carry him through. When the going gets tough he mentally escapes by ignoring his most pressing problems and concentrating on the things that make him feel good. Men such as these can go pretty far in life, often to the amazement of friends and acquaintances. However, when it ends it always ends in catastrophe. “Who could have known?” some men of the other two types will snigger to each other.

The third archetype is the man who conscientiously prepares nearly every detail in advance such that the test itself is almost anti-climatic. The question is not will he succeed. Barring an event of random bad fortune, admittedly always a non-trivial possibility in endeavors such as these, everyone expects him to succeed. The only question is how well does he succeed. Interestingly, the type 3 sailor did experience a bit of random bad fortune when his bowsprit became seriously bent following a freak collision with a freighter while passing packages of mail. And just as aptly, he experienced an anti-climatic ending. On the home stretch he realized he had no interest in winning and all the publicity that would be expected of the winner. So he sent a message that he was withdrawing and decided to sail on alone for another 3 months and 10,000 miles to Tahiti.

We all know types 2 and 3 as the proverbial grasshoppers and ants.

Type 1, curiously, has no well-regarded analog from the animal kingdom. Perhaps in times past this type was simply how most men were. Compared to the way of the ant, that’s not something you want to teach your sons. On the other hand, where would we be if we never embarked on a challenge unless and until we had everything perfectly prepared and the conditions, too, were perfect? So I shall nominate the first type as the honey badger. If you can’t always find it in yourself to be the ant, then be the honey badger.

Thursday, August 11, 2022

Thursday Night Links

  • ESG, then, represents an attempt at self-justification by turning virtues into sins to atone for sins now considered virtues. It is an alternative religious order. Those who reject this moral system in favor of traditional views will have an advantage in investing and won’t have to bear any “emotional cost” for doing so. Even if we accept the premises behind their weather models, reducing carbon emissions enough to move the needle on climate change would result in the impoverishment if not starvation of billions of people over several decades. Whatever climate effects might occur from higher CO2 concentrations are small compared to the geopolitical risks involved in reducing them. I don’t think meaningful reduction is politically possible, which means ESG is not an evil genius conspiracy theory but rather a pathetic act of religious devotion to a false god, i.e. a status display. Thus, investment in essential commodities, especially fossil fuels, should continue to produce outsize returns, without guilt, to those who can see the world clearly. My many friends in the petroleum industry do noble work, partnering with Providence in liberating humanity from its entire previous history of poverty and privation. Petroleum almost alone is the basis of our modern prosperity, a divine gift for mankind, the only creatures who could make use of it. [The Tom File]
  • The reality from the fundamental supply and demand of things is that the oil market deficit we are seeing won't end just because the Fed raised interest rates. We are talking about physical commodities here, so without proper capital investments, you won't get the needed supply. What the Fed may induce in the short-run by jacking up interest rates is by lowering oil demand. But over time, consumers adapt, growth resumes, and oil demand picks back up. As we've said many times over the past few weeks, if high oil prices are the result of the recent demand slowdown, then low oil prices will just push oil demand back up. The end result is a yo-yo market going back and forth. For a while, the market may believe that the Fed is effective in fending off inflation. Commodity prices drop, but then because of the price drop, commodity demand picks back up, and yo-yo supply/demand here we go. That's why this is a bear market for the broader equity market. There's no solution to the commodity market crisis we are seeing, and this is especially the case with the oil market. The only reason why I'm cautious about oil in the near term is that prices are high enough to dampen demand. But when prices fall, demand picks back up, and the deficit will worsen. [HFI Research]
  • Once the market sees what we see, demand is bottoming, then oil prices will start to go back higher further pressuring inflation. This will, in turn, result in the market realizing that inflation has not peaked and that the Fed will have to continue increasing interest rates. The end result will be where energy starts to massively outperform tech. [HFI Research]
  • The market cap of Suncor is $42 billion and EV is $53 billion. With net earnings of $3.1 billion for the quarter, shares are trading for 3.4 times annualized earnings. The adjusted funds from operations of $4.1 billion for the quarter is an annualized AFFO/EV yield of 31%. Suncor's proved and probable reserves are 5.8 billion barrels, so that's an enterprise value of $9 per barrel. The PV-10 of their proved and probable reserves was $50 billion at year-end 2021, which was calculated based on the $66.56 average WTI price last year. That means the present value of the reserves at a much lower oil price than current WTI covers almost all of the current enterprise value and puts a $3 billion enterprise value on the refining and marketing operations which earned $2.2 billion after tax in 2021 (and $1.6 billion this quarter). [CBS]
  • Given the inertia of a monetary inflation, bringing it under control to the point that inflation approaches what is now discounted in the markets (2.5%) will require an aggressive tightening of monetary policy over a sustained period, and a significant and sustained weakening of employment markets. As central banks pursue their dual mandate of maximum employment and stable prices, they will not be able to achieve both at the same time and will be forced to choose between too-low growth in order to achieve their desired inflation rate, or too-high inflation in order to achieve their desired employment conditions. In managing through this, we see them toggling back and forth in their prioritization, trying to avoid both an unacceptably deep economic contraction and an unacceptably high inflation rate, culminating in a long period of too-high inflation and too-low growth, i.e., stagflation. [Bridgewater]
  • So it is an error to wait around for inspiration, or to demand some feeling of readiness for an undertaking, or for a teacher or some other golden opportunity. I think these slouching inclinations come partly from an overly-systematized experience during childhood school years, and partly from a fear of failure. In fact, when you stop waiting for others—for either their permission or instruction—and instead begin on your own, fumbling through, regardless of how ready you are, this could be considered one of the true beginnings of adulthood. I think there is value in pushing learning and doing as close together as possible. I wish to learn like an apprentice with no fixed master, instead with repeated trial and sharing the results. If no teacher is found along the way, then the mistakes will be my teacher. Every undertaking is a series of questions and experiments. I believe every hard thing you do, for that matter, acts as a multiplier on the rest of your knowledge. [Simon Sarris]
  • Blake Masters: Well, in theory, better technology makes workers more productive. And more productive workers can command higher wages, which ultimately should make it easier to raise a family on one income. The problem is that  technological ‘progress’ in the last forty or fifty years has been mostly confined to the information technology sector, and this has actually only made it harder and harder for people to connect and raise families. Think of the kind of technology we have now: ubiquitous smartphones, Netflix, apps delivering bespoke marijuana products right to your door, etc; that’s not the kind of tech that encourages people to build relationships, because these technologies are designed to make people ‘escape’ rather than connect. Even dating apps, which are nominally about cultivating romance and connections between men and women, turn out to be pretty transactional and soulless. All of this enables a sad techno-culture that is basically hyper-individualistic and anti-family. I know a lot of CEOs and software designers in Silicon Valley who don’t even let their own kids near a smartphone. So no, I don’t think this kind of technology has much of a role in fixing these problems. Technology that actually made us more prosperous and productive? That’s a different story. [im1776]
  • Thanks to all of the jet charter companies having their best years ever (they and their clients all standing under a shower of federal cash), the level of staffing and service at FBOs is high anywhere that a Gulfstream might land. Air Traffic Control was operating smoothly and provided VFR advisories for the entire trip except for the last 40 miles into the Oshkosh area. The rental car crisis seems to have abated as long as you’re willing to pay 100 Bidies per day for a car that used to be $50 per day. Ubers, too, were plentiful (Indianapolis and Chattanooga). [Phil G]
  • They've lost 90% of their market cap. Apple Watch has, in some ways, helped the Rolexes and the Omega's of the world because Rolex and Omega and TAG Heuer, they are luxury to most people. They're clearly expensive. They start around 5,000 bucks instead of around one, like some of the other folks do. That's the baseline now. Now, you want a Rolex, Omega, TAG Heuer or above or nothing. You don't want the Shinola anymore. You don't want the Fossil anymore. And I think Apple Watch was a big, big player in that. [link]
  • He wrote the screenplays for most of the 37 feature films he directed, many of which are today considered classics: The Maltese Falcon (1941), The Treasure of the Sierra Madre (1948), The Asphalt Jungle (1950), The African Queen (1951), The Misfits (1961), Fat City (1972), The Man Who Would Be King (1975) and Prizzi's Honor (1985). [John Huston]
  • In all the articles I read about AI in the mainstream media, I tend to sympathize with the poor racist robots who keep getting condemned for Noticing Patterns. Machine Learning systems remind me a lot of myself. They go out and read a lot of crime statistics and book reviews and the like and keep coming up with theories about how the world works that make The Establishment extremely mad because they tend to use Occam’s Razor instead of Occam’s Butterknife. [Sailer]
  • Cenovus Energy Inc., through its U.S. operating business, has reached an agreement to purchase bp’s 50% interest in the bp-Husky Toledo Refinery in Ohio. Cenovus has owned the other 50% of the refinery since its combination with Husky Energy in 2021. Cenovus’s U.S. operating business will assume operatorship from bp upon closing of the transaction, which is expected before the end of 2022, dependent on the satisfaction of closing conditions. Total consideration includes US$300 million in cash, subject to customary closing adjustments, plus the value of inventory. In addition, the parties have signed a multi-year product supply agreement. “Fully owning the Toledo Refinery provides a unique opportunity to further integrate our heavy oil production and refining capabilities,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “Operating the refinery will open up additional synergies and capital efficiency opportunities, including connectivity with our nearby Lima Refinery. This transaction solidifies our refining footprint in the U.S. Midwest and increases our ability to capture margin throughout the value chain.” The transaction will give Cenovus an additional 80,000 barrels per day (bbls/d) of downstream throughput capacity, including 45,000 bbls/d of heavy oil refining capacity. [Cenovus]
  • A month after departure from England, it became clear that SUHAILI had a very serious leak, forcing him to pump the bilges twice a day. On a calm day off the coast of West Africa, he went over the side with mask and snorkel and discovered two long gaps in the planking on each side of the keel, and they moved with the rolling of the boat. Over a cigarette, he considered the nature of the problem and what he might be able to do about it. (Skilled maintainers advise never trying to solve a new or complex problem without a thorough mulling first.) If it was a structural issue, it could cause the boat to eventually break apart, but she had been overbuilt of strong India teak, and maybe it was just a matter of caulking the gaps – if he could figure out how to do it all by himself at sea. Dressing in a dark shirt and jeans to hide his white body from potential sharks, he dove down and tried wedging strips of cotton caulking into the gaps. But five feet underwater, he couldn’t hold his breath long enough to secure the caulking in place. He thought some more. Then he cut a 1- 1/2inch canvas strip seven feet long, sewed caulking to one side of it, coated it with Stockholm tar, and pushed tacks through the canvas every six inches. With a hammer he kept suspended below the hull, he was able to pound in the tacks to hold the caulking in place, but he could only manage one tack at a time before having to surface to breathe. It took two hours. Then, worried that the canvas strip might tear off eventually, he cut a long strip of copper that could be nailed over it. Meanwhile a shark had arrived and was circling the boat. He fetched his rifle, shot the shark, and watched it sink out of sight, apparently without attracting other sharks. He went back into the chilly water hoping that was so. He was successful with the copper strip, but the wind came up, and he had to postpone sealing the second gap until another calm several days later. When that one was done, his leak was fixed. Sometimes maintenance involves shooting the shark. [Stewart Brand]
  • A single dose of horse paste containing 20mg Ivermectin taken in the first day or so of the infection will cure you very shortly, and if taken prophylactically because you have close contact with Covid cases, gives you protection for a month or so. If taken after a few days, not so effective. In that case you might want to keep on taking it, though it has little effect after the first week or few days. Nicotine is also effective, and, unlike Ivermectin, effective later in the infection. Get a patch if you failed to take Ivermectin promptly. And all the usual stuff, vitamin D and balanced divalent salts, in particular zinc. [Jim]
  • Cardiovascular effects were found in 29.24% of patients, ranging from tachycardia, palpitation, and myopericarditis. Myopericarditis was confirmed in one patient after vaccination. Two patients had suspected pericarditis and four patients had suspected subclinical myocarditis. Conclusion: Cardiovascular effects in adolescents after BNT162b2 mRNA COVID-19 vaccination included tachycardia, palpitation, and myocarditis. The clinical presentation of myopericarditis after vaccination was usually mild, with all cases fully recovering within 14 days. Hence, adolescents receiving mRNA vaccines should be monitored for side effects. [link]

Sunday, August 7, 2022

Earnings Roundup Q2 2022 ($TPL $RGLD $DMLP $MRO)

In the "What I Would Buy Instead of Tesla" post back in October 2020 (almost two years ago), we mentioned Texas Pacific Land Trust as one investment idea:

Texas Pacific Land Trust (TPL) for $3.6 billion. At $460, the market capitalization is $3.6 billion and the enterprise value is about $3.3 billion. (They have a net cash position.) They get a royalty from their land in the Permian and do not do any production themselves. No debt and royalty ownership protects against the risk of ruin in the scenario where there is "deflation first" before an inflation. In 2019, they did $318 million of net income. In the 1H of 2020, they did only $85 million (which annualizes to $170mm). It's a higher quality asset than companies that are more expensive. I think it's a better inflation hedge than precious metals. The big question to me would be whether we overpaid if there's an extended period of deflation. But at least it would be far more likely to survive than something like XOM which has 3x its EBITDA in debt.

Texas Pacific Land has subsequently converted from a trust to a corporation, and has also greatly increased in price (increased 3.6x). The market capitalization is now $12.8 billion and the enterprise value is $12.3 billion. Second quarter 2022 net income was $118.9 million, or $15.37 per share, and adjusted EBITDA was $158.3 million. First half of 2022 net income was $216.8 million, or $28.02 per share, and adjusted EBITDA was $288.1 million. So the FCF/EV yield is 4.7% (based on first half results).

From their investor presentation: only about 12% of royalty acreage is developed with 20,000 gross undeveloped locations remaining. On their acreage, operators have 2,883 wells currently on production, 207 completed (but not producing), 452 drilled but uncompleted, and 480 that have been permitted. The 1,139 additional wells will drive quite a bit of cash flow when they come online. The company estimates that their acreage has 25 billion barrels of oil equivalent (gross). At a 4.4% average royalty, that would be 1.1 billion net barrels, an enterprise value of around $11 per barrel.

Another idea that we mentioned in that post was Royal Gold:

Royal Gold (RGLD) for $7.9 billion. A great business model - streaming/royalty interests on gold mines with no debt. Net income of $200 million for the past year is expensive, but it could/should grow as more mines come into production. (They have interests in 41 producing mines and 16 in development, plus more in the pipeline.) They do about 1 transaction a year but it's lumpy - they did none from 2006-2008 or from 2016-2018.

The market capitalization has actually fallen and is now $6.7 billion. They are debt free with cash of $280 million so the enterprise value is $6.4 billion. For the second quarter of 2022 they reported revenue of $146.4 million, operating cash flow of $120.2 million, and earnings of $71.1 million. On an annualized basis, the company is trading for 23x earnings (of $284 million) and an OCF/EV yield of 7.5%.

We mentioned Dorchester Minerals in that post too:

Dorchester Minerals LP (DMLP) for $358 million. They own producing and non-producing mineral, royalty, overriding royalty, net profits and leasehold interests. They have no debt. Net income for 1H 2020 of $10 million vs $28 million for 1H 2019. Prices were obviously down during the covid crash, and operators also curtailed production. They bought back some of their own units during April.

The market capitalization is now $1 billion. For the year to date 2022, they have earned $68 million and over the past two quarters (i.e. not counting January) they have distributed $65 million to unit holders. That is a distribution yield of 13% on the current market capitalization. See our past posts, "Is Dorchester Minerals LP Just a Depleting Asset?" and "Dorchester Minerals LP Retrospective".

We mentioned Marathon Oil Corp in a blog post in May of this year:

Marathon is an independent E&P company, based in Houston, with operations in the Eagle Ford, Bakken, STACK/SCOOP and Permian. It's a bit smaller than our Canadian oil majors - the market capitalization (at $27) is $18 billion and the enterprise value is $21 billion. [T]hey repurchased 3% of outstanding shares in one quarter. They're trading at 6 times annualized, adjusted net income, and the FCF/EV yield based on guidance for 2022 is 21%.

The market capitalization is down to $15 billion now and the enterprise value is $18.3 billion. They reported second quarter 2022 net income of $966 million, operating cash flow of $1,678 million, and free cash flow of $1,323 million. Their projection is $4.5 billion of 2022 free cash flow, assuming $100/bbl WTI and $6/MMBtu Henry Hub. (A $1/bbl change in WTI is ~$60MM of annual CFO, which would imply $3.9 billion at $90 WTI.) 

So they are now trading for less than 4 times annualized net income, and the annualized FCF/EV yield is currently 29%, and is likely still north of 20% at $90 oil based on their projections.

They have returned over $1.7 billion of capital to shareholders year-to-date. Over the past 10 months (since October 2021) they have reduced share count by 15%, and year-to-date they have reduced it by 7.3%. 

A great comment from the conference call:

We're trading at a free cash flow yield more than 25%, one of the lowest trading multiples in the entire S&P 500. We continue to believe that our equity is fundamentally mispriced. And as long as that's the case, we'll aggressively repurchase our stock. As I've said before, it's the best acquisition we can make.

We notice that their sales volumes are down 1% year over year from 348k boe/d to 343k. In general, oil companies are responding to their distressed valuations by using their cash flows to buy back stock and pay dividends, not grow production.

Saturday, August 6, 2022

Canadian Natural Resources Limited Announces 2022 Second Quarter Results ($CNQ)

[Previously regarding Canadian Natural Resources (CNQ) (one of the Canadian oil majors along with Cenovus and Suncor): Canadian Natural Resources Limited Announces 2022 First Quarter Results, Canadian Natural Resources Limited - Q4 and FY 2021 Results and Canadian Natural Resources Limited.]

Canadian Natural Resources (CNQ) reported results last week. Highlights from the results and conference call

  • Our second quarter financial results were very strong on the back of safe, effective, and efficient operations and a robust pricing environment, including a strong SCO premium to WTI. In Q2 net earnings were $3.5 billion and adjusted funds flow were $5.4 billion, allowing for significant allocation to shareholder returns through dividends and share buybacks, further debt repayment, and to the strategic growth opportunities, all providing long-term shareholder value. Returns to shareholders have been significant and increasing through 2022. As we have returned a total of approximately $6.4 billion to shareholders through $2.4 billion in dividends, and $4 billion through share repurchase equaling about 56 million shares year-to-date, up to an including August 3.
  • A substantial portion of our unique and diverse asset base consists of long life low decline assets which have significant, low risk, high value reserves that require lower maintenance capital than most other reserves, making Canadian Natural a truly robust and resilient energy company.
  • We continue to strengthen our balance sheet, having reduced net debt by approximately $1.4 billion in Q2/22, ending the quarter with approximately $12.4 billion in net debt. Returns to shareholders year-to-date in 2022 have been significant as we have returned approximately $2.4 billion through dividends and approximately $4.0 billion through share repurchases, for a total of $6.4 billion, up to and including August 3, 2022.
  • Our free cash flow allocation policy is unique in that shareholder returns are not impacted by strategic growth capital or acquisitions given our current net debt position is below $15 billion, and that our free cash flow is net of dividends. Through Q3/22, we will continue to target to allocate 50% of our free cash flow to share repurchases and 50% to the balance sheet.
  • Strong execution across the Company's operations year-to-date has resulted in substantial free cash flow generation driven by our top tier long life low decline assets with low maintenance capital requirements and our low cost structure. As a result, our financial position continues to strengthen, allowing for incremental returns to shareholders. Reflecting this, in August 2022, the Board of Directors approved an increase in returns to shareholders by declaring a special dividend of $1.50 per share, payable on August 31, 2022 to shareholders of record on August 23, 2022. This is a step towards the previously announced target to increase shareholder returns when net debt reaches $8 billion, which the Board of Directors see as a sustainable base level of corporate debt.
  • Year-to-date up to and including August 3, 2022, the Company has returned a total approximately $6.4 billion to shareholders through approximately $2.4 billion in dividends and approximately $4.0 billion through share repurchases via the cancellation of approximately 55.9 million common shares at a weighted average price of $71.47 per share.
  • Canadian Natural delivered record quarterly average natural gas production of 2,105 MMcf/d in Q2/22, increases of approximately 5% and 30% over Q1/22 and Q2/21 levels respectively. [...] As a result of the Company's diversified sales points, our natural gas production captured strong realized natural gas pricing of $7.93/Mcf in Q2/22, a 51% increase above Q1/22 levels and approximately 30% higher than the AECO benchmark price in Q2/22.
  • Canadian Natural had, as at December 31, 2021, the largest reported natural gas reserves in Canada with a proved and proved plus probable basis of approximately 12.2 Tcf and 20.2 Tcf respectively.
  • Canadian Natural has been a supporter of incremental pipeline projects, to ensure Canadian crude oil and natural gas can reach the world markets. It is important to have global market access to deliver the most responsible and leading ESG preferred barrels that the world needs. As per the latest public update provided by Trans Mountain Corporation on February 18, 2022, construction of the 590,000 bbl/d Trans Mountain Pipeline Expansion, on which Canadian Natural has committed 94,000 bbl/‍d, is targeted to be mechanically complete in Q4/23.
[Following figures in USD at an 0.774 exchange rate.]

The current market capitalization of CNQ (at a $52 share price) is $60 billion, and the enterprise value is $70 billion. With net earnings of $2.7 billion for the quarter, shares are trading for 5.5 times annualized earnings. The adjusted funds from operations of $4.2 billion for the quarter is an annualized AFFO/EV yield of 24%. For the year-to-date 2022, EBITDA of $8.8 billion less capex of $2.1 billion gives free cash flow of $6.7 billion, for an annualized FCF/EV yield of 19%.

CNRL proved reserves of liquids at the end of the 2021, net of royalties, were 9 billion barrels, calculated based on a $66 price for WTI. You are paying less than $8 per barrel of proved reserves of liquids at the current share price, not counting the 12 trillion cf of natural gas reserves. 

The PV-10 of proved reserves at the end of 2021, again assuming a $66 oil price and a $3.70 Henry hub natural gas price, was $65 billion at the end of 2021. With the share price decline since we posted last quarter, the enterprise value is now under 1.1x the present value of the proved reserves.

The difference between Canadian Natural Resources and our other Canadian majors (Cenovus and Suncor) is that CNRL does not have any refining or retail businesses, although they do upgrade the bitumen produced by their oil sands. Also, while they are an oil sands producer, both by mining and in situ extraction, they also have assets in the U.K. North Sea and Africa offshore (Côte d'Ivoire), plus conventional oil and gas production in Canada, including much more natural gas production than the other two companies. 

Remember what it is that we like about royalty trusts and long reserve life, slow decline Canadian oil companies. They both avoid the principal-agent problem that afflicts other types of oil and gas producers with small amounts of reserves that need to be replaced often in order for managements to keep their jobs. Those companies have a poor track record of creating long term value for shareholders because management's incentives are bad. They need to buy assets to keep their companies from liquidating (and losing their jobs), but they only have the money to buy assets at the top of the cycle when properties are expensive. The companies that fracked for shale over the past decade managed to transfer almost all of their investors capital (both equity and debt!) to sellers of land and service providers.

Suncor Energy Reports Second Quarter 2022 Results ($SU)

[Previously regarding Suncor: Suncor Energy Reports First Quarter 2022 Results, Goldman Sachs on Suncor and Cenovus, Canadian Oil Sands Earnings (Suncor and Cenovus) - Q4 2021, Suncor Energy Inc..]

Suncor Energy (SU) reported results last week. Highlights from the results and conference call (note that these figures are Canadian dollars, but we will translate to USD for discussion at the end):

  • Driven by a strong business environment, Suncor generated record adjusted funds from operations of approximately $5.3 billion, or $3.80 per common share, in the second quarter of 2022, as we executed planned maintenance across our asset base," said Kris Smith, interim president and chief executive officer. "Our confidence in our business and expected annual cash flows enabled us to return approximately $3.2 billion of value to our shareholders, which includes both the highest dividend per share and highest rate of share repurchases in the company's history.
  • Adjusted funds from operations increased to $5.345 billion ($3.80 per common share) in the second quarter of 2022, compared to $2.362 billion ($1.57 per common share) in the prior year quarter. This was the highest in the company's history, exceeding the prior per share quarterly record, from the first quarter of 2022, by 33%. The company's net earnings increased to $3.996 billion ($2.84 per common share) in the second quarter of 2022, compared to $868 million ($0.58 per common share) in the prior year quarter.
  • For the second consecutive quarter, Oil Sands delivered record adjusted funds from operations of $4.231 billion in the second quarter of 2022, compared to $1.844 billion in the prior year quarter, driven by significantly higher price realizations. Production from the company's Oil Sands assets increased to 641,500 barrels per day (bbls/d) in the second quarter of 2022, compared to 615,700 bbls/d in the prior year quarter, due to increased production at Syncrude and Fort Hills in the current period, partially offset by the impact of maintenance activities at Oil Sands operations, including the largest turnaround in Firebag history, which was completed subsequent to the quarter.
  • Refining and Marketing (R&M) generated record adjusted funds from operations of $2.127 billion in the second quarter of 2022, compared to $677 million in the prior year quarter. In the second quarter, refinery utilization averaged 84% and crude throughput was 389,300 bbls/d, compared to 70% and 325,300 bbls/d respectively in the prior year quarter. Solid utilizations in the current quarter outside of planned turnaround activities allowed the company to capture significant benchmark crack spreads and refining margins. Following the completion of planned turnaround activities, the company's refineries exited the quarter with an average refinery utilization of over 100%.
  • In the second quarter of 2022, Suncor continued to deliver on its strategy of growing shareholder returns, returning record value to its shareholders of approximately $3.2 billion, through approximately $2.6 billion in share repurchases and the payment of $657 million of dividends. Both the dividend per common share and the rate of common share repurchases during the quarter are the highest in the company's history. As at August 2, 2022, since the start of the year, the company has repurchased approximately $3.9 billion of Suncor's common shares, representing approximately 88.5 million common shares at an average share price of $44.40 per common share, or the equivalent of 6.1% of its common shares as at December 31, 2021.
  • The company has also made disciplined decisions to adjust and streamline its portfolio to enable a greater focus on its core business, to safely increase the reliability, utilization and integration of its assets while continuing efforts to sustainably reduce controllable costs. In the first six months of 2022, the company announced that it was taking steps to optimize its asset portfolio through the planned divestment of its E&P assets in Norway and its wind and solar assets. Subsequent to the second quarter of 2022, the company reached an agreement for the sale of its Norway assets, pending regulatory approval, for gross proceeds of approximately $410 million (Canadian dollar equivalent), before closing adjustments and other closing costs. The sale is expected to be completed in the fourth quarter of 2022, with an effective date of March 1, 2022. The sale process for the company's wind and solar assets is progressing, with a sale expected to close early in 2023. Based on interest received in the company's E&P assets in the U.K., the company has also commenced a sale process for its entire U.K. E&P portfolio.
  • Suncor will also be undertaking a strategic review of its downstream retail business with the goal of unlocking shareholder value. With the support of external advisors, this review will evaluate and consider a wide range of alternatives, from a potential sale of the business to options to enhance the value of its retail business.
  • With the company's confidence in its expected cash flows, the current business environment and expected proceeds from the dispositions of assets, the company expects to achieve the lower end of its 2025 targeted net debt range of $12 billion during the second half of 2022. Once net debt has been reduced to $12 billion, the company expects to allocate 75% of excess funds towards share buybacks and 25% towards debt repayment. Once the company's net debt balance is at its $9 billion floor, the company expects to allocate excess funds fully towards shareholder returns.
  • [Why is $9 billion the hard floor for net debt? Why is that the right number?] That's a good question, Doug. If you actually look at it in a low commodity price environment, and we're using $35, $40 WTI, if you look back at our history, we generally have made around about $6 billion of cash flow in that environment. The commodity price, much lower crack spreads. So the $9 billion is derived from one and a half times coverage on -- we would be one and a half times our cash flow at $9 billion.

[Following figures in USD at an 0.774 exchange rate.]

The market cap of Suncor is $42 billion and EV is $53 billion. With net earnings of $3.1 billion for the quarter, shares are trading for 3.4 times annualized earnings. The adjusted funds from operations of $4.1 billion for the quarter is an annualized AFFO/EV yield of 31%.

Suncor's proved and probable reserves are 5.8 billion barrels, so that's an enterprise value of $9 per barrel. The PV-10 of their proved and probable reserves was $50 billion at year-end 2021, which was calculated based on the $66.56 average WTI price last year. That means the present value of the reserves at a much lower oil price than current WTI covers almost all of the current enterprise value and puts a $3 billion enterprise value on the refining and marketing operations which earned $2.2 billion after tax in 2021 (and $1.6 billion this quarter).

Valero and Magellan Midstream on refined product demand

The Biden administration is claiming that refined product demand in late July was lower than in July 2020... here's what Valero (2nd largest refiner in the U.S.) has to say about it:

Manav Gupta -- Credit Suisse -- Analyst
Guys, I would actually ask only one question, and that is basically, can you help us understand the demand dynamics out there, there were some worries on demand destruction than there were some worries on recessionary demand. The conversations we are having indicates that's not the case, but you have the most diversified footprint. So help us understand gasoline or diesel, what are you seeing in terms of demand out there? And I'll leave it there. Thank you.

Gary Simmons -- Executive Vice President and Chief Commercial Officer
Manav, this is Gary. I can tell you through our wholesale channel, there's really no indication of any demand destruction. In June, we actually set sales records. We sold 911,000 barrels a day in the month of June, which surpassed our previous record in August of '18 where we did 904,000 barrels a day.

We read a lot about demand destruction, mobility data showing in that range of 3% to 5% demand destruction. Again, we're not seeing it in our system. We did see a bit of a lull in the first couple of weeks of July, but our seven-day averages now are back to kind of that June level, with gasoline at pre-pandemic levels and diesel continuing to trend above pre-pandemic levels.
And Magellan Midstream (54 refined product terminals in 15 states):
In terms of high commodity prices and the gives and puts on demand, as we've mentioned many times in the past, gasoline and generally transportation demand is fairly inelastic. I think we were maybe testing that a little bit in early July with the prices we saw upon them. But we haven't, I don't think, broken that inelasticity. I still think it's very inelastic. So even with higher commodity prices, as long as they stay within sort of an expected range, not too extreme, we don't see a lot of commodity risk up -- whether prices are up or down really driving that volume one way or the other unless you get to an extreme, which again, we may have tested in July, but we've come off of those extremes.
We'll see who's right.

Note that when fuel prices spiked in June, the EIA did not publish their data for two weeks because of a "voltage irregularity," and once publication resumed after this "pause," the data has no longer seemed congruent with what other sources are reporting.

Pipeline Earnings - Q2 2022 ($EPD $MMP)

[Previously regarding Magellan Midstream Partners (MMP) and Enterprise Products Partners (EPD): Magellan Midstream Reports First-Quarter 2022 Financial Results and Raises 2022 Annual Guidance, Enterprise Product Partners L.P. Reports Q1 2022 Earnings, Pipeline Earnings - 2021, Pipeline Earnings - Q3 2021, Magellan Midstream Partners, L.P..] 

Magellan Midstream Partners (MMP) reported results last week. Highlights from the results and conference call

  • Earlier this morning, we reported second quarter net income of $354 million compared to $280 million in second quarter 2021. As noted in our press release, these results include a $162 million gain in the current period related to the sale of our independent terminals network, which is reflected in income from discontinued operations and a $70 million gain in the prior period primarily related to the sale of a portion of our interest in the Pasadena marine terminal joint venture. Excluding both of these gains, net income decreased about $18 million quarter-over-quarter.
  • Drivers of the increase in transportation and terminals revenue included record high quarterly transportation volumes resulting from additional contributions from our recent Texas expansions and higher South Texas volumes, which moved at a lower rate as well as continued demand recovery from pandemic levels, especially of aviation fuel. For the quarter, total refined products volumes were up 3% versus '21 levels.
  • During second quarter 2022, Magellan repurchased nearly 3.9 million of our common units for $190 million, resulting in total repurchases of 21.4 million units for $1.04 billion under our $1.5 billion repurchase program authorized through 2024. 
  • As we previously announced, we closed on the sale of our independent terminals network on June 8 and have been actively putting those proceeds to work. Including working capital adjustments, we received a total of $447 million for these assets and deployed $190 million during the second quarter into our equity buyback program, underscoring our commitment to maximizing long-term value for our investors.
  • Magellan continues to forecast annual DCF of $1.09 billion for 2022. The recent decline in commodity prices as well as the potential for slightly higher expenses during the second half of the year are currently projected to mostly offset our modest financial outperformance year to date. While management continues to monitor general economic conditions, including inflation and refined products demand, we do not expect a material impact to our annual guidance.
  • In terms of high commodity prices and the gives and puts on demand, as we've mentioned many times in the past, gasoline and generally transportation demand is fairly inelastic. I think we were maybe testing that a little bit in early July with the prices we saw upon them. But we haven't, I don't think, broken that inelasticity. I still think it's very inelastic. So even with higher commodity prices, as long as they stay within sort of an expected range, not too extreme, we don't see a lot of commodity risk up -- whether prices are up or down really driving that volume one way or the other unless you get to an extreme, which again, we may have tested in July, but we've come off of those extremes. 
  • [Guidance implicitly implies about $100 million more DCF in the second half of this year versus the first half of this year. Just wondering if you could walk through some of the drivers?] The first thing I would note is, one, the tariff increase is in the middle part of the year. The second piece I would note is that there is a seasonality to our business. If you look, we often have because of the timing of the butane blending activity, the fall is usually a more significant activity in the fall than it is in the spring. So there's some seasonality that comes with particularly our blending business. And then also our underlying pipeline has some seasonality to it. So there's some seasonality that's just sort of built in. In many ways, the second half of the year just tends to have more activity and do fundamentally better. So it's higher tariff rates, it's more activity due to seasonality in the back half of the year
  • If you look at the forward curve for the differential between Midland and Houston or East Houston, the forward curve shows that there should be improving differentials over time. If you look right now what's happening, I wouldn't say that we're seeing dramatic improvements today in that differential, what we can earn today versus what we could earn yesterday, but directionally speaking, the forward curve is pricing in wider differentials, so we would expect those to improve from here. You're right, production continues to grow. As that production grows, it should minimize through time the amount of excess capacity out of the [Permian Basin], which should continue to drive. So it all makes fundamental sense that we should start seeing some higher differentials. I still think that the question is, when are they going to show up where you can actually realize them and start seeing them in the results. And we're just not there yet, but we certainly see the potential for improvement as we look out over 2023 and certainly as into 2024 and beyond.

The common carrier pipeline system for refined products that Magellan owns is the longest in the United States, extending approximately 9,800 miles from the Texas Gulf Coast and covering a 15-state area across the central U.S. It has 54 product terminals throughout those states. It is interesting to hear their comments that there was only a mild impact on refined product demand even in July. That is consistent with what we have heard from Valero, but not consistent with the gasoline product demand data that has been put out by the EIA - not since they had a two week data delay in June.

They shipped 143 million barrels of refined products in Q2 2022 versus 139 million in Q2 2021 and 132 million in Q2 2019. Aviation fuel volume has recovered to 8 million barrels this quarter, not quite back to the 10 million in Q2 2019, but a big recovery from 3 million in Q2 2020. Revenue per barrel of refined product shipped is $1.73 vs $1.61 in 2019.

Magellan management has said in the past,

"As we go through an energy transition cycle over the next five or 10-years, it's reasonable to assume that you have more refinery rationalization. And typically speaking for a pipeline company that is a net positive, because it creates incremental transportation opportunities basically to fill the hole that if a refinery closure is creating. And we have a system that's ideally situated for that since we're connected to half the refining capacity in the country. And so, we're not supply constrained in any way. So if we have a refinery close in a certain market, we've got plenty of sufficient supply. And in most cases, sufficient capacity to fill that hole with barrels removed over a longer haul, which is typically a higher tariff. So, I think we do have operating leverage going forward around our refined product system."

The current market capitalization of Magellan is $10.3 billion and enterprise value is $15.3 billion. So far this year, they have generated about $490 million of free cash flow (EBITDA less capex, excluding cash from the sale of the independent terminals network). That annualizes to a 6.4% FCF/EV yield. Their guidance of $1.09 billion of distributable cash flow implies a shareholder yield of 10.6%.

Enterprise Products Partners (EPD) also reported results last week. Highlights from the results and conference call:

  • Enterprise reported record net income attributable to common unitholders of $1.4 billion, or $0.64 per unit on a fully diluted basis, for the second quarter of 2022, compared to $1.1 billion, or $0.50 per unit on a fully diluted basis, for the second quarter of 2021.
  • Distributable Cash Flow, excluding proceeds from asset sales, increased 30 percent to a record $2.0 billion for the second quarter of 2022 compared to $1.6 billion for the second quarter of 2021. Distributions declared with respect to the second quarter of 2022 increased 5.6 percent to $0.475 per unit, or $1.90 per unit annualized, compared to distributions declared for the second quarter of 2021.
  • Capital investments were $383 million in the second quarter of 2022, which included $301 million of growth capital expenditures and $82 million for sustaining capital expenditures. Capital investments were $3.9 billion for the first six months of 2022, which included $3.2 billion for the acquisition of Navitas Midstream, $576 million of growth capital expenditures and $157 million for sustaining capital expenditures.
  • Gross operating margin from the NGL Pipelines & Services segment increased 21 percent to a record $1.3 billion for the second quarter of 2022, from $1.1 billion for the second quarter of 2021.
  • Gross operating margin from the partnership’s Crude Oil Pipelines & Services segment was $407 million for the second quarter of 2022 compared to $419 million for the second quarter of 2021. Gross operating margin for the second quarters of 2022 and 2021 included non-cash, MTM losses related to hedging activities of $38 million and $10 million, respectively. Total crude oil pipeline transportation volumes increased to 2.2 million BPD in the second quarter of 2022 from 2.0 million BPD for the second quarter of 2021.
  • Gross operating margin from Enterprise’s Natural Gas Pipelines & Services segment increased 13 percent to $229 million for the second quarter of 2022 from $202 million for the second quarter of 2021. Total natural gas transportation volumes increased 19 percent to a record 16.8 TBtus/d for the second quarter of 2022 from 14.2 TBtus/d for the second quarter of 2021.
  • Gross operating margin for the Petrochemical & Refined Products Services segment increased 29 percent, or $95 million to $421 million for the second quarter of 2022 compared to $326 million for the second quarter of 2021. 
  • U.S. energy independence is now more valuable than ever. It is clear that Russia has a strangle hold on Europe. And Russia and China appeared to be aligned in policies that are in direct conflict with Western Values. Fortunately, the U.S. has an abundant energy resource. It is the fact that our crude oil, NGLs, LNG cargos are the only short cycle resources the world has left. We have tremendous hydrocarbons potential, but unfortunately it is squandered in the current political climate that is intent on restricting its development. 
  • Appalachia alone has over 25 Bcf a day of production upside, that's more than what Europe imports from Russia. However, this potential is unattainable, not by economics or resource, but by massive amounts of laws and regulations that are vague best and consistently applied and consistently. In addition to being the only short cycle resource the world has, our energy is environmentally superior. It's much cleaner because it comes from shale and it's produced here in the U.S. under environmental and safety standards that are second to none, it’s not oil and gas versus renewable debate as so many make it out to be.
  • Enterprise’s view has always been, we are absolutely going to need it all. And what most call energy transition is actually going to be badly needed energy additions that will take place gradually. Oil and gas will be in high demand for decades. People who say otherwise are either extremely naive or have their own agenda. Demonizing fossil fuels, overt restrictions on investments and massive layers of regulation that are designed to keep it in the ground will only creep chaos in the form of ever increasing shortages and high prices.
  • Moving on to distributions and buybacks, we declared a distribution of $0.475 per common unit with respect to the second quarter of 2022. This is 5.6% higher than the distribution that we declared for the second quarter of last year. This distribution will be paid next week on August 12 to common unit holders of record as of the close of business on July 29. During the quarter, we also repurchased approximately 1.4 million common units at a cost of $35 million. For the 12 months into June 30, we returned over $4 billion of distributions to limited partners and $235 million of buybacks. So for the last 12 months, our payout ratio compared to adjusted cash flow from operations was 56%. And our payout ratio of adjusted free cash flow after excluding the acquisition, the $3.2 billion acquisition of Navitas Midstream was a payout ratio was 72%.

The current market capitalization of Enterprise is $56 billion and the enterprise value is approximately $85 billion. Their free cash flow for the second quarter was $1.75 billion which annualizes to $7 billion a year, an 8% FCF/EV yield. The company is trading for 10 times this quarter's earnings

Pipelines are a kind of hedge against over-production by E&P firms. If they bump up against the pipeline transport capacity in a given location (like the Permian), the pipelines' profits should increase sharply since they are bidding for an inelastic supply.