Tuesday Morning Links

• "[H]e who is the most bullish on the market, or has the lowest cost of capital, or has some other personal motivation for doing a deal, or ideally all three, wins the ship. Everyone else does nothing but talk about the very good and rational reasons they have for not doing deals. The simple fact is that you must take a view on the market." [The Shipping Man]
• "[E]vangelicals, who were already a lower status group in the country, are now increasingly viewed with hostility and as the leading threat to the new public moral order and even to the republic itself. The various attacks against 'Christian nationalism' are an expression of this. In this environment, support from evangelicals will perhaps ultimately become more of a liability than an asset to Israel." [Aaron Renn]
• The rise of the internet has a historical parallel in the invention of the printing press in the West. Moderns don’t think about this too much, but the printing press was cataclysmic to the powers that existed in Europe in 1450. It was the end of the medieval era, the end of the rule of Kings by force and Church by fear of the fires of hell, and the beginning of the devolution of power to …. people who controlled the printing press. This was recognized by the powers of the time and various attempts at censorship were made. Censorship before this era was trivial: the Church had a  near monopoly on literate people and books and the powers that be employed the rest of the literate people to keep an eye on each other. After the printing press, all kinds of local elites grew up around distribution of information: Martin Luther probably would have been leader of some obscure sect like the Waldensians or other proto-protestant heretics who originated before the printing press. There probably wouldn’t have been a thirty years war, to say nothing of the eighty years war and the Dutch Republic (they were espanich before), no Switzerland, and the Pope might still have an army. The type of country we typically think of as “democratic” (aka pluralistic merchant Republics) came about from the Dutch Republic, which means the political organization most of the world pretends to use today took its shape in part because of the printing press. [Scott Locklin]
• It’s my impression the average American person was more angry with the Japanese, since they were the ones who actually attacked Americans. It brings to mind the weird hysteria about Germans in post-WW-1 among physicists like Hale (who if you recall didn’t want to allow any German physicists to visit America post WW-1; including Einstein who was a Swiss Jew). Before WW-1, German was the most common spoken language in the US, and Germans had substantial parallel social institutions; there were over 500 German language newspapers in the US in 1910 and thousands of high schools were taught exclusively in German. This is something which fundamentally changed American society, but is little remarked upon today, and seemed to be entirely top-down elite driven. Some huge fraction of Mencken’s less popular writing from 1917 to the 1930s is his grousing about this: this is more or less unintelligible to contemporary readers without this historical context. Ordinary people were made uncomfortable enough by this moral panic, they’d change their names. There should be a history book: imagine if, say, all Spanish speakers and Spanish speaking institutions disappeared in the next decade, and Latinos changed their last names en-masse. That would be pretty noteworthy, and I bet someone would write a book about it. I’m pretty sure there were more German-Americans in 1910 than there are Latinos in the US today, at least as a fraction of the population, and their influence and institutions were much greater. Some of this change was coordinated by British intelligence and propaganda, but it was more complicated than that. Probably it was a moral panic the same way the last couple of years have demonized Russian people and culture in the US. [Scott Locklin]
• Let me take you inside Amazon for a moment. During my tenure, company leaders used words like “fluff” and “puffery” to describe disciplines like design and copywriting. The site was bare-bones on purpose, so customers could shop without wading through slow-loading pages or annoying pop-ups. Our copy was also functional to the extreme. The vendors who paid for promoted ‘co-op’ weren’t thrilled with our austerity. Other online retailers provided them with beautiful custom campaigns, while at Amazon even a holiday graphic was just a regular product shot with a sprig of holly slapped on it. [Big Technology]
• I've been predicting the demise of inflation for at least a year now, and today's CPI report makes it official—there's no denying that inflation has fallen to within spitting distance of the Fed's target. Not coincidentally, the market has finally acknowledged what I've been expecting for many months: the chances of another Fed tightening at this point are zero. The only issue now is when the Fed starts to cut rates; the market thinks the first cut comes at the May 1st FOMC meeting, while I think it happens much earlier. [Scott Grannis]
• Some sources claim rather vaguely that triangulation was acquired by the Europeans from the Arab mathematicians during the Renaissance but fail to give any source for these claims or to reference any Arabic works on the subject. More directly some sources claim that the great Islamic scholar al-Biruni, who wrote extensively on geography and geodesy, used triangulation. This claim is simply false. He used geometrical methods to determine the longitude and latitude of various cities but his calculations did not just use triangles and he had no measured base line and made no sightings. He merely constructed geometrical models of the positions of the towns respective to each other based on travellers’ tales of the scale of their separations. Historically there is very little doubt that the technique of triangulation emerged once and once only in a pamphlet written and published by Gemma Frisius in 1533. It is a strange fact that relatively insignificant scientific discoveries and inventions proudly carry the names of their discoverers and inventors but most people, including the people who write books about it, never stop to consider who invented triangulation, which until the invention of GPS, was the only tool, and a very powerful one, capable of producing accurate maps with their incredible economic, political, military and scientific significance. Gemma Frisius belongs in the pantheon of great modern scholars for his invention and not forgotten and ignored even by those who earn money writing about the incredible applications that this invention made possible. [The Renaissance Mathematicus]
• Certain invading ethnic groups were more successful than others, with Germans and Czechs being the most effective, Scandinavians an intermediate category, and old Colonial Americans being eager to sell and leave. The same process of invasion took place in Nebraska, in Minnesota, even in the Texas Hill Country. In the struggle for living space the German farmer always won, because from his point of view to sell his land was to rob his children. "When the German comes in, the Yankee goes out" was the proverb, Kathleen Conzeen says. [Uriah]
• Uranus was the first planet to be added to the seven ‘wanderers’ that had been known since antiquity. In order to determine the orbit of a planet it is not enough to simply discover it, one has to observe it systematically over many years or even decades carefully measuring and recording its positions. In the decades following Herschel’s discovery this is exactly what happened to Uranus; however in the course of time it became clear that the orbit of Uranus displayed several perturbations (irregularities) that were not compatible with its theoretical orbit as determined through Newton’s law of gravity. This meant that either Newton was wrong or that some unknown gravitational factor was affecting the orbit of Uranus. Both Le Verrier and the British astronomer John Couch Adams determined that the perturbations must be the result of a relatively large planet and calculated the theoretical orbit of it. Armed with Le Verrier’s calculations Galle and Heinrich d’Arrest discovered the planet Neptune only one degree away from the position predicted by Le Verrier on the day that they had received the information. This was a stunning confirmation of Newton’s theory and remains till this day one of the greatest triumphs of science. [The Renaissance Mathematicus]

Tuesday Night Links

• Suncor shares are valued at 3.6-times 2024 EV/Debt-adjusted cash flow, assuming $80 per barrel WTI, versus its pre-2020 average of more than 6.0-times. Before 2020, the company was considered a “best-in-class” operator and as such, its shares traded at a significant premium multiple relative to peers. Today, Suncor's halo is gone, but its Q3 results increase our confidence that it can return to its former top-tier performance. If it can, good things lie in store for its stock price. For context, today’s top operator, Canadian Natural Resources (CNQ), trades at 5.4-times 2024 EV/DACF. At that valuation, Suncor shares would trade at $64 per share. Suncor's shares will gain added benefit from the company's relatively clean balance sheet and its commitment to delivering capital to shareholders, both of which have improved dramatically relative to the pre-2020 timeframe. [HFI Research]
  
• It all had to do with the people living between the two walls. They were... hill people who had perfected the art of not being governed. They managed to be so thoroughly intractable, so impossible to control or corral, so very unpleasant to be around, that the Romans eventually threw up their hands in disgust and left them alone. It’s important to understand that this means they must have been true outliers, because the Roman Empire had “unit economics” like an enterprise SaaS business, where “customer acquisition costs” are financed on the assumption that they’ll be paid back in the distant future. Every Roman bureaucrat understood that newly conquered territories would be a drain on fiscal and military resources for a while, until a generations-long process of pacification and Romanization slowly made them net contributors in both departments. But in the case of the lands between the two walls, the payback timeline was so long, and the implied interest rates so high, that even a people as meticulous and relentless as the Romans decided there were better opportunities elsewhere. I count this as a serious victory for the theory of defensive barbarism. [Mr. and Mrs. Psmith’s Bookshelf]
• As part of our search for "royalty-like" businesses that are good at converting revenue to free cash flow that can be distributed to shareholders (like Lamar Advertising), we recently did a screen of the companies in the S&P 500 index. Now while our royalty partnerships and trusts convert 90-100% of revenue to free cash flow, we are interested in finding other businesses that are royalty-like (accepting lower margins than true royalties) for two reasons. First, to diversify away from commodity price exposure and volatility. (Nobody said it is easy being an oil man.) Second, because mineral properties are depleting while some types of royalty-like or "tollboth" businesses can exist almost in perpetuity. As long as there is human activity and commerce, there is the possibility that Visa will be getting a cut of it, whether the energy for it is coming from fossil fuels or from the sun. [CBS]
• I rely on a study from--I believe his name's Hendrick Bessembinder from Arizona State University-- and what he did is he looked at every single public company from 1926 to 2016. So he covered a 90 year period. There were a total of 26,000 companies. And of the 26,000 companies, 25 of the 26,000 companies produced returns that are T-bill returns or less. So in other words, there was only 1000 companies that could create excess returns above risk-free T-bills returns. Now you look at public companies, and you realize that companies can come public and because there's a lot of incentives in the market, from whoever the constituent is, that their shareholders, their private equity holders, the investment bankers, whatever, you bring the companies public, but how many of them are exceptional companies? How many of them--and the reality is, most of them end up falling into that bucket that Professor Kay said, That's the gray bucket. That's the bucket of which, essentially, it's the efficient market bucket. And so, there's only a tiny number of exceptional companies. And you understand that there's some very specific things that permit exceptional companies to be sustainable decade after decade after decade. And many, many of them have to do with getting to the point where your customers are fanatically reliant, whether it's a consumer product or whether it's a business product, but your customers are fanatically reliant on what you deliver to them. If it's a consumer product, it's somebody is hooked on Coke, and they're gonna drink coke come hell or high water. If it's a business product, it gets locked into the workflow of the business, it's something that your customers are ecstatic about. And that just essentially codified to us that what we needed to do, if we were going to have concentrated positions, we basically had to have super, super high confidence. And you had to find exceptional companies. [Reece Duca]
• The likely N. American successor culture will be a truly new thing. The origin story will be a "Triple Founding." With Jamestown, Cortes, and the Native cultures receiving approximately equal foundational status. Most people will have at least some ancestry from all three founding cultures, but N. Euro will probably remain predominant. So the result won't just be like current Latin America by any means. Language will remain mostly English, which is of course rapidly becoming the global language. Religion will be one of the biggest changes from 20th century America. The Mainline protestant churches of the founders (and their associated culture) will be nearly extinct, with most people being Secular, Catholic or increasingly exotic forms of Evangelical/Pentecostal. Details of culture are hard to predict. But multiple trends, including fertility rates, indicate a notably more extroverted, less inhibited culture. Perhaps we could say that more and more of the country will start to feel something like today's Texas. This new culture will obviously diverge farther and farther from it's European roots, perhaps most notably by remaining much younger and more dynamic than the hyper-aging nations of Europe. [Empty America]
• Isaacson is a popular biographer who tries to cash in on topics that are timely and will sell books at the moment. The moment though is probably not the time to write a serious biography of Musk since the jury is still out on whether he will be successful or not. He and many of his businesses are very heavily leveraged and could easily go bankrupt in which case he would be some sort of footnote in US business history. Twitter at the moment seems like an investment disaster though perhaps Peter Thiele will be proved right that it is not a good idea to bet against Elon. Apart from the engineering stuff, Elon’s ideas that he is quite eager to share with all and sundry typically lack historical perspective and seem puerile — at about the level of Lex Fridman, A lot more time will needed to tell whether he was someone worth paying attention to or just an oddity. [link]
• A friend’s son is a high school senior. If he were “of color”, his test scores, grades, and athletics would guarantee him admission to any of America’s most elite universities. As a white kid, however, he is likely to be rejected by the usual elite suspects. I told him that he is likely to get a better education from professors whose actual job is teaching undergraduates. In other words, instead of a research university he should look at the four-year liberal arts colleges. Amherst, Swarthmore, and Williams, for example. He doesn’t want to get tangled up in rainbow flags, BLM, and pro-Palestinian demonstrations, though. He has some unacceptable political points of view, e.g., that civilians should be able to own guns as an aspect of self-reliance. His career interest is software engineering (so actually the most sensible plan would be to get a job as a software developer and do an online bachelor’s in the evenings) and, therefore, his most likely major is computer science (which he will be dismayed to learn has very little to do with software engineering!). On the plus side, nearly every college or university in the U.S. now has a substantial CS department. [Phil G]
• Back in the day when science was progressing, and scientists didn’t have time to make podcasts, smoking the tobacco pipe seemed to work a lot better. I’d love a real performance enhancing drug for my noggin, but so far nicotine seems to be the closest legal thing there is which doesn’t make you insane or ill with long term use. Note I said nicotine here; smoking cigarettes definitely has big downsides. Vaping: almost certainly does also. Safest ways to take nicotine in descending order: gum or pills, snuff (unfermented, in your nose), snus (unfermented). Below that in safety maybe smoke the occasional pipe or cigar. Putting smoke (or “vape juice”) in your lungs is guaranteed to be bad for you. It’s not the nicotine though which is bad for you. Nicotine causes a slight increase in blood pressure, generally more than made up for by giant prophylaxis against Parkinsons disease and the increase in mental performance. [Scott Locklin]
  
• There are lots of progressive Protestant churches, which seem to confirm this thesis. There are also plenty of counter-examples, though, especially among conservative evangelicalism. These differences aren’t limited to Protestantism – if you read a few Ross Douthat columns, it seems there are plenty of conservative and non-conservative factions with Catholicism. Relatedly, Protestantism largely embraces modernity, and many right-leaning intellectuals are decidedly against it. In Protestantism, family sizes are often smaller, ministers can get married, democracy is ok, individuals can interpret the Bible themselves rather than needing the church to do it, transubstantiation doesn’t happen, and more. Catholicism, by contrast, often involves significant changes in opposition to modern culture on all of those fronts (though not on every single front; they have often encouraged innovations like workers’ rights). [Fergus McCullough]

Sunday Night Links

• It is no accident that the American military is in a recruiting crisis. Who in their right mind would want to fight for a regime regarding which the primary controversy is whether it is merely stupid or actively evil, and of which it is not controversial at all that the stupid and/or evil people managing it hate you? [Postcards From Barsoom]
• Whenever addictive and destructive neuro-chemical pathways are introduced to a society it takes generations for said society to learn how to adapt to these temptations. China has learned the hard lesson of opiates at least twice, and I think that has some influence on their cultural (in)tolerance of those substances. With the invention of distillation in the 18th century, 19th century America was drowning in hard liquor, 9 gallons per person annually of 80 proof. It took a century and the temperance movement (largely driven by women sick of their deadbeat husbands) to help us regulate to a point, but alcohol is still many’s greatest demon. The same process must happen with screens. I’m pretty sure it won’t just be with screens though. All invasive technology will have to be rejected (on a personal and moral basis just like other substances which activate dopamine artificially). We must see that screens (and their connection to the internet) are like cigarettes for our soul, rotting us from the inside, making us less capable of interacting with the real world. [Chaos Ordered]
• Like Scott, I do not want to preach radical skepticism. I want to preach scientific reasoning. If you’re interested in the research on $topic_x, you should familiarize yourself with the methods of that field, and especially with the field’s most critical voices. You should know what’s right and what’s wrong and be able to recognize all of the issues that are common enough for the field’s researchers to see them with a sideways glance. Most people are not equipped to do this. When they are, they may not know they’re capable; when they’re not, they may wrongly believe they’re capable. Scott’s recommendation to decrease your confidence in claims is good, avoiding biased people’s conclusions is also good, although I would like to add that biased people are good to read to understand flaws in the arguments of the people they oppose, and the need to look at all of the evidence is still quite obvious. I want to add that thinking about causal inference by focusing on designs is necessary to build a proper understanding of science in general. One well-designed, high-powered study is often much more valuable than a vast number of more poorly-identified and lower-power studies. This is so true that the man of one study who knows he’s the man of one study because the rest are garbage is often much less wrong than his peer men of many studies.
  [Cremieux Recueil]
• When humans observe a task, mirror neurons simulate the feeling of physically performing that same task. Musicians in the audience are playing their instruments in their mind, and if all we could see was their synaptic activity, we would struggle to differentiate between the performers on stage and their fans. Likewise with literature. When we look upon this ancient text, our neurons fire in a particular way that no human brain has experienced since the last reader carefully wrapped the scroll and returned it to its alcove, minutes or years before looking out the window and noticing that the volcano had come to life. Recovery of ancient writing is cognitive archaeology. [Casey Handmer]
• Sovereign finance should be viewed simply as a form of banking. Sovereigns raise funds for unspecified purposes and promise risk-free returns they may be unable to provide in real terms. When things go wrong, bondholders think taxpayers should be on the hook, and taxpayers think bondholders should pay. As usual, everyone has a patsy, someone else was supposed to take the hit. Ex ante everyone was assured they have nothing to fear. [Interfluidity]
• Looked at the right way, this last decade was essentially about copying China without admitting it, from the Atlantic pushing for China-style censorship to NYT calling for China-style industrial policy. All of that is precedent for what a Democrat/Communist pact might look like. Think about how Hollywood came to rely on Chinese money, preaching civil rights while practicing selective censorship…but at country scale. A Democrat/Communist pact could be a return to Obama-era Chimerica, but on different terms, where China becomes at least an equal partner and perhaps eventually the unofficial driver. With that said — yes, the silver lining of such a rapprochement is that we could avoid WW3. But it’s a monkey’s paw outcome, because detente would allow Democrats and Communists to focus on their many other enemies within and without — from American conservatives to Chinese liberals, from India to the Internet. And so the implications for everyone that isn’t a Democrat or Communist are ominous. [Balajis]
• These bond losses remain “unrealized” so long as people don’t come looking for their money. But when they do — like during a bank run when banks must pay out, or during hurricane season when insurance companies must fork over cash — then bad assets are sold and losses become “realized.” And then we all “realize” that the poor dumb institutions that bought US government bonds in 2021 are actually insolvent — unless the Fed prints to paper over a bond crisis the Fed itself caused. Which it will do, over and over again, until the crisis devalues the dollar itself. Anyway, this is what happened in March 2023 when five huge banks died in quick succession, followed by a quick print called BTFP to cover up the Fed’s failure. [Balajis]
• Not a single corporate journalist, politician, regulator, or policeman thought to investigate SBF until Erik Voorhees smelled a rat and Ian Allison found the rat. In fact, even the least self-aware corporate journalist in modern history admitted that citizen journalists “outshine traditional media on coverage of FTX implosion.” So: yes, the only reason SBF was even exposed, let alone convicted was because of people posting on Twitter. Twitter is important! That’s why the regime didn’t want Trump to post on there, doesn’t want you to post on there, and doesn’t want Elon to let you post on there. [Balajis]
• Because digital glasnost is upon us. We now have truly free speech. And so millions of people have now been able to match up their individual observations with each other in public, thereby discovering that much of what the US establishment says is manipulated, misleading, or erroneous in some fashion — in a word, fake. Of course that doesn’t mean the US establishment is always lying. Sometimes they’re in error. Sometimes their data is merely noisy, or quietly revised. Sometimes they are telling the truth, but spinning it. Sometimes they are taking a position for tribal political reasons. And sometimes they are, of course, outright faking it. [Balajis]
• It is important to emphasize the word available because poor credit is obviously not in itself a cause of poor loss experience. In this sense, it is analogous to territory. Presumably credit is predictive because it reflects varying levels of "stress", planning and organization, and/or degrees of risk-taking that cannot be directly measured by insurers. These specific conjectures have been offered many times and they are intuitively plausible. However it is less conjectural to say that whatever credit might be a proxy for, it is not a proxy for any other variable (or combination of variables) practically available to insurers. In our data mining projects we explicitly set out to generate the most comprehensive universe of predictive variables possible. In this sense, we therefore use credit in the "ultimate" kind of multivariate analysis. Even in this truly multivariate
  setting, credit is indicated to have significant predictive power in our models. It is beyond the scope of this paper to comment on the societal fairness of using credit for insurance pricing and underwriting. From a statistical and actuarial point of view, it seems to us that the matter is settled: credit does bear a real relationship to insurance
  losses. [Cheng-Sheng Peter Wu]

Canadian Oil Producer Earnings ($SU $CVE $CNQ)

[Previously regarding Suncor Energy, Cenovus Energy, and Canadian Natural Resources Limited.]

Canadian Natural Resources Limited
Once again, an outstanding result from the titan of the Canadian energy industry. Third quarter capital expenditures were up only 2.3% with liquids production up 5.2% year-over-year. Their production volume of 1.4 million BOE/d was the highest quarterly volume in the history of the Company.

Management said that "with current strong production volumes and expected free cash flow in Q4/23 and beyond, based on current strip pricing, we are quickly approaching a net debt level of $10 billion, which we forecast to achieve in Q1/24, at which time we target to increase returns to shareholders to 100% of free cash flow." The share count was down 2.4% year-over-year at the end of the third quarter - it would be nice to see the repurchases accelerate.

The current market capitalization of CNQ (at a $67 share price) is $73 billion, and the enterprise value is $82 billion. Cash from operations for the third quarter was $2.6 billion and the company spent $875 million on capital expenditures. The remaining free cash flow for the quarter was $1.7 billion, of which $534 million was used for debt repayment, $718 million was used for dividends, and $434 million was used for share repurchases. The free cash flow yield on the enterprise value was 8.3% based on the quarter's results. 

This was during a quarter with an average WTI price of $82 and an averaged realized price for liquids by CNQ of $64. In its latest investor presentation, CNQ says that free cash flow per share would be 30% higher at $100 WTI than at $85 WTI. (Notice also on slide 8 of the presentation, CNQ management points out that oil sands mining and upgrading requires much less capital expenditure to maintain production than shale.)

On the CNQ conference call, management was asked (by the Goldman Sachs analyst Neil Mehta) whether they were interested in M&A in Canada. The CEO said that "we have a huge reserve base... we don’t have to do any acquisitions to create or find more reserves, so we have that part in the bag."

Suncor Energy Inc.
The current market capitalization of SU (at a $32.50 share price) is $42 billion, and the enterprise value is $51 billion. Cash from operations for the third quarter was $3 billion and the company spent $1.1 billion on capital expenditures. The remaining free cash flow for the quarter was $1.9 billion, of which $1.3 billion was used for debt repayment, $489 million was used for dividends, and $217 million was used for share repurchases. The free cash flow yield on the enterprise value was 14.9% based on the third quarter's (annualized) results. The shareholder returns (repurchases and dividends) for the quarter are a 6.7% shareholder yield. The company has bought back 3.5% of shares outstanding YTD. Suncor's earnings per share were 86 cents, so a P/E of 9x. 

Funds from operations were down versus the third quarter of last year, but up significantly from the second quarter of this year. One key performance metric was that refinery utilization was 99% for the quarter instead of 85% the prior quarter.

Some highlights from the conference call:

*On October 3, we announced a revised deal to acquire Total Canada for $1.468 billion. This is an improved deal versus the original deal. Specifically, we no longer have a contingent payment provision in the acquisition. Similar headline valuation to the earlier Teck deal, but we’ve got additional benefits. Commercial patience and persistence were key here, and we’re pleased with the deal. We’re on track to close the transaction later this month. It addresses long-term bitumen supply uncertainty associated with our upgraders, fills our upgraders for the long-term, but also enables additional value creation, value creation through regional synergies, with mobile equipment deployment, value creation through directing higher yield PFT from Fort Hills to our upgraders, a number of incentives and, as I said, we’re quite pleased with the deal.

*Let me move on to mining fleet performance for context. The cost of physically moving ore from the face of a mine to a crusher for the start of extraction, that’s our single highest cost component in the production of bitumen. Today, we move about 1.3 billion tons of earth per year to support production, and we’ve got a competitive cost gap versus best-in-class, comprehensive efforts to lower our cost per ton. The winning formula, fewer trucks, bigger trucks, more efficient trucks, and, of course, companion or compatible shovels, that’s our mining improvement strategy in a nutshell. So, this year and throughout 2024, we will add via a combination of purchase and lease 55 ultra-class 400-ton trucks to our total fleet, displacing nearly twice as many smaller third-party, less efficient, higher cost vehicles. Each truck will be pre-equipped for ultimate driverless or autonomous operation. The cost for these acquisitions and leases are in our guidance for this year, as well as our guidance that we’ll issue shortly for 2024. Once in place, this action alone is expected to lower our overall corporate breakeven by $1 a barrel.

*I suspect you’ve noticed a few references today in terms of per barrel. This reflects a new and evolving vocabulary within the company, thinking about and communicating the impact of our actions, plans, and improvements in unit per barrel terms. In addition, a subset of us similarly talk about the impact in per share terms. Our vocabulary is part of creating clarity and focus, developing a results-oriented, high-performance culture.

The oil sands segment generated funds from operations for the third quarter of $1.27 billion, with a sales volume of 656 thousand barrels per day and an average crude price realization of $74/bbl.

The refining and marketing segment generated funds from operations of $1.1 billion, processing 463 thousand barrels per day and making a gross margin (LIFO) of $31 per barrel.

Cenovus Energy Inc.
The market capitalization of Cenovus (CVE) is now $33 billion (at a $17.5 share price) and the enterprise value is $40 billion. The upstream segment earned $2.5 billion of operating margin during the third quarter (compared with $2.1 billion the prior year quarter) and the downstream (refining) segment earned $673 million (compared with $358 million).

Their free cash flow (as we define it, CFO less capex) was $1.24 billion for the quarter, which gives a free cash flow yield on the enterprise value of 12.4%.

In the third quarter, the company returned $876 million to shareholders by way of $438 million for the partial payment of the common share warrants obligation, the repurchase of 13.8 million shares for $264 million, and $193 million of common dividends. The shareholder yield on the market cap was 10.6% (annualized).

The company also repaid $973 million of debt. Cenovus’s shareholder returns framework has a target of returning 50% of excess free funds flow to shareholders for quarters where the ending net debt is between $6.5 billion and $2.9 billion. (Net debt is down to $4.3 billion as of the end of the third quarter.)

Capital expenditures for the third quarter in their upstream segment were up 74% year-over-year while production of crude oil was up only 3%. For the current year-to-date, the upstream capital expenditures are up 68% while crude oil production is up only 1% compared to the first nine months of last year.

Thursday Night Links

• One way to look at the Sexual Revolution is as a powerful poison designed to eradicate human beings like bacteria in a petri dish by interrupting their natural reproductive ecology. Like an antibiotic, if the dose is insufficient to uniformly kill the entire population, any surviving members become resistant. Dutton then simply identifies the two populations who have successfully resisted the poison: highly religious, intentionally fertile families who reject the Sexual Revolution explicitly, and those who lack the self-control or conscientiousness to make use of its technologies to prevent unintentional pregnancies. [The Tom File]
• The ability to resist leftist-induced dysphoria is the new crucible of evolution. Where once the crucible of evolution was child mortality it is now Woke morality. Where evolution was formerly selecting for resistance to genetically-based diseases, the emphasis has now switched to ‘memetically’ based diseases; ideological mind viruses that induce infertility in their nonimmune hosts. Those who resist leftist ideology, and its direct and indirect inducements not to procreate, are those who survive. In significant part, this will be those who are, for mainly genetic reasons, religious and conservative. [The Past is a Future Country]
• Nowadays, if I see a book that interests me, I always just buy it. The upside of interesting and useful new information vastly outweighs the downside of being out $20 or $30 dollars. Sometimes I buy books and they turn out to be uninteresting or fail to hold my attention. I place it in a pile. Every couple of months, once the stack reaches around 6-10 books, I’ll then donate them to a local used book seller. He allows me to trade them for 1 or 2 used books from the store. [Rob Henderson]
  
• Dorchester Minerals, L.P. (the “Partnership”) announced today the successful consummation of a notable lease transaction in the Midland Basin. On November 6, 2023, the Partnership leased 243 net acres in two tracts of land in Reagan County, Texas for $30,000 per acre and a 25% royalty. Additionally, the Partnership executed an amendment to an existing lease on two separate tracts of land also totaling 243 net acres in Reagan County, Texas for $18,750 per acre. The resulting payment of approximately $11.8 million will be included in the Partnership’s fourth quarter distribution to unitholders. [Dorchester Minerals, L.P.] 
  
• I was sent to Amarillo by BlimpDAO to find information about the auction of The National Helium Reserve. Who might buy it? For what price? Who will the buyer sell the helium to? Will China make a bid? What impacts will this have on efforts to bring blimps back? BlimpDAO is an Urbit-affiliated DAO. Nobody knows what either of these things are, and I’m not going to explain them now, but suffice to say both are Silicon Valley alt-darlings for similar reasons. Both seek to bring about a calmer, more pleasing, and more comfortable kind of human connection. Both work against the establishment by building networks of counter-elites. Both obsess over packets flying through the air. [Mogmet Tadnem]
• Air Products doesn’t want the system to be owned by a competitor or an unqualified operator, Kornbluth says. “On the other hand, they don’t want to buy it themselves, because it’s a messy, risky asset. The preferred state is the status quo.” The law doesn’t put a specific deadline on the sale of the government’s helium assets, so the system could run as is until the dome is empty, many in the industry argue. Proceeds from continued sale of the government’s helium stock could pay the operation’s bills until then. [Chemical & Engineering News]
• Some Tesla skeptics think that the S&P 500 selection committee can be talked out of adding Tesla to the index. I doubt it. The market cap is now $350 billion and growing. What are they going to do, not have a top ten (by market cap) company in the index? To exclude it on the basis of skepticism or suspicion would be an active choice of security selection. It would imply that the market could be hugely inefficient, that the entire philosophical predicate of indexation was wrong! No, the whole philosophy of the S&P 500 index is one of freeloading: the active participants in the market are supposed to set prices, which passive investors can then take as fair. So if the market says that Tesla is worth $350 billion, that is not something for index investors generally or the S&P committee to second guess. [CBS]
• “My baby has been our $100 billion strategic plan that we will hit over the next three to five years. We’re unveiling that next week,” she said, casting it as an uphill battle to win support for riskier investments. “We will finally be in the $100 billion club when we unveil this, and the only way to pull that off will be to increase private equity. I won my battle with [Chief Investment Officer Marcus Frampton].” Monday’s special meeting of the Board of Trustees was a bucket of cold water. [The Alaska Current]
• The spacious, beautiful and sustainably designed modern winery is carved into the hillside. It is gravity-fed, rather than using mechanised pumps to move the wine around and decorated in indigo, the colours of Florence’s football team Fiorentina. It is surrounded by freshly landscaped gardens designed to attract bees to its local flora. The flat roof, with its views of the nearby countryside, is covered with solidified lava imported from Etna, where the Ferrinis also make wine. (Maybe hauling this from Sicily to Tuscany wasn’t all that sustainable?) [Jancis Robinson]
• Investors appear to be ignoring the facts here and only seeing what they want to see. We believe GFL’s “stock story” has turned into an edition of the National Enquirer or People Magazine. Soon after the Company’s IPO, it was the target of a long short-selling report that effectively accused GFL’s founder and chief executive officer, Patrick Dovigi, of being Italian and in the mob and being a profligate spender because he owned a yacht. To be fair, we understand that Patrick grew up in a small town in Canada playing competitive hockey and bootstrapped this entire business from one single asset. [ADW Capital Management, LLC]

Mineral Royalty Owner Earnings ($DMLP $NRP $STR $RGLD $TPL $PREKF)

Dorchester Minerals, L.P.
The market capitalization of DMLP is now $1.11 billion (at $28 per unit) and the enterprise value is $1.08 billion. For the third quarter of 2023 (10-Q), the partnership earned $30 million of net income (compared with $34 million the prior year), generated $34 million of cash from operations (compared with $46 million the prior year), and distributed $26 million to unitholders. The CFO/EV yield is 12.6% based on the third quarter results, during which the average oil sales price was in the mid-$60s/bbl and the average natural gas sales price was around $2/mcf.

Yesterday, Dorchester announced that they had leased land in Reagan County, Texas for an $11.8 million bonus payment and a 25% royalty. That upfront payment amounts to $0.30 per unit, and the royalty payments will hopefully be substantial once the wells are drilled and go into production.

Natural Resource Partners L.P.
The market capitalization of NRP is now $872 million (at $69 per unit). The capital structure is complicated so it is worth discussing the assumptions that go into the enterprise value calculation. The partnership has $60 million of current assets (mostly cash and accounts receivable) and $52 million of current liabilities. We add back all deferred revenue including $6.4 million of the current portion which is a current liability. The partnership has $171 million of long term debt, $6.8 million of other long term liabilities.

After some significant repurchases of preferred stock and warrants during the quarter (see 1, 2, 3), there is now $72 million of preferred stock outstanding and warrants to buy 2.2 million shares. For our enterprise value calculation we use the difference between the current unit price and the warrants strike price of $34 to calculate a liability of $77 million. In the end it may cost more than this to settle them if the partnership unit price continues to appreciate.

That gives an enterprise value of $1.1 billion for the partnership. For the third quarter of 2023 (10-Q), free cash flow was $80 million. (For the trailing twelve months, it has been $304 million.) That gives a FCF/EV yield of 29% using this quarter's annualized number. 

There is a slide in the August 2023 investor presentation showing annual free cash flow figures since 2015. For the year 2016, which when the coal market crashed and most of the miners went bankrupt, NRP still had free cash flow of $76 million. If that were to happen again (a 75% decline from current level), the FCF/EV on the current valuation would be 6.9%.

Recently, the producers' cash cost per ton of met coal has been around $100 per ton, with Arch at $97/ton and Warrior at $114/ton. In 2016, the cash cost of met for Arch was only $53/t. With the producers' costs per ton having doubled since 2016, it ought to be difficult for the market-clearing price to drop as low as it did in 2016 (at least for a protracted length of time), and hence it ought to be difficult for free cash flow to drop that much again.

If coal prices and production levels as well as earnings from the Sisecam (soda ash/trona) minority interest hold up, and if the unit price stays the same, then the partnership might be able to pay off its remaining $312 million of net liabilities by the end of Q4 2024. Paying off liabilities is management's stated intention. (Q3 2023 call: "We continue to believe that aggressive retirement of debt, preferred equity and settlement of warrants, while maintaining common unit distributions is the right strategy to maximize long-term common unitholder value.")

If they achieve that deleveraging, then the current level of free cash flow (~$320 million annualized) would be a 37% shareholder yield on a $872 million market cap.

Sitio Royalties Corp.
The market capitalization of STR is now $3.7 billion (at $24 per share). Unlike many of the other oil & gas royalty investments, Sitio has a significant amount of debt: about $1 billion, consisting of $601 million on a revolving credit facility (floating interest rate, currently 8.42%) and $405 million of senior notes due 2026 (also floating rate, currently 11.29%). So the enterprise value is now $4.6 billion.

In the third quarter of 2023 (10-Q), Sitio earned only $275 thousand of net income, thanks to a $24 million hedging loss. If you add back $81 million of depreciation, depletion, and amortization for the quarter, you get an "adjusted-CFO" yield of 7% on the current enterprise value, or a 9% yield if you assume the hedging loss is "one time" and add that back too.

In addition to being highly leveraged (with expensive, floating rate debt), Sitio is the only royalty investment we follow that hedges. Sitio has a slide in their latest investor presentation that says "Sitio is able to drive down Cash G&A per boe with each large acquisition". It seems like their model is to use expensive debt to aggressively acquire properties and increase scale, and they then have to hedge the commodity price to reduce risk. Lots of moving parts, with the goal being to spread the overhead cost over more barrels.

Sitio reports their their G&A cost per BOE as $2.17 for this quarter. We might also look at it as $7.45 per barrel of crude oil. By comparison, Dorchester's G&A is $3 per BOE and only $4.57 per barrel of crude oil. Another way to look at it is that Sitio spent 7.6% of revenue on SG&A for the quarter and Dorchester spent 6.6%.

So, Dorchester is smaller yet operating more efficiently. Dorchester also managed not to bungle and blow the whole quarter's earnings with a hedging loss. The entire point (to us, at least) of owning royalties and the reason that they are first class assets is that you always make some money owning them. It may not be a lot some of the time, but you never lose money. Borrowing money at 11.3% and selling both puts and calls on commodity futures puts you in a position to lose money.

Royal Gold, Inc.
The market capitalization of RGLD (at $105 per share) is now $7.1 billion. They have $236 million of net liabilities (excluding deferred taxes) so the enterprise value is $7.3 billion. For the third quarter of 2023 (10-Q) they reported revenue of $139 million, operating cash flow of $98 million, and earnings of $49 million. The company is trading for 36x earnings (annualized) and an OCF/EV yield of 5.4%. 

Several developments negatively affected the quarter and made earnings and cash flows lower than they would have been. Newmont's Peñasquito mine in Mexico had a four month strike (although an agreement has been reached with the union), Centerra’s open pit Mount Milligan mine in British Columbia has also had some issues with ore quality resulting in guidance there being lowered, and there was also a delay to the ramp-up of Barrick’s expansion of its Pueblo Viejo mine in the Dominican Republic. 

There is upside to Royal Gold if those mines' issues can get fixed, as well as upside from mines that have already been funded but which have not gone into production. Something mentioned on the conference call is that their cash G&A costs remain are 5% of total revenue, which compares very favorably with Sitio and even Dorchester, as we noted above.

Texas Pacific Land Corporation
The market capitalization of TPL (at $1,650 per share) is now $13.5 billion. The company has built up quite a cash pile during the shareholder activism dispute, so the current assets net of liabilities are $747 million and the enterprise value is $12.75 billion.

In the third quarter of 2023 (10-Q), Production volumes for TPL (in BOEs) were down 6.6% for Q3 2023 versus the prior year. Royalty revenue was down 33% because of the lower production volume as well as lower commodity prices. (The price of natural gas in particular was much lower than last summer. Revenue for easements and other surface-related income, land sales, water sales, and produced water royalties were all up year-over-year.

Expenses were $27 million (excluding depreciation) versus $25 million the prior year. Thankfully legal fees were only $1.7 million this quarter and not the gigantic $17 million we saw one quarter earlier this year during the heat of the shareholder activist battle.

Interesting to note that the expenses (again excluding depreciation) are a hefty 17% of total revenue. That's partly because TPL has established a "water services" business which is lower margin than collecting royalty revenue.

Operating income was $127 million for the quarter, and if you add back $3.6 million of depreciation, depletion, and amortization, you get a cash flow-like number of $131 million, which would be an annualized yield of 4% on the current enterprise value.

PrairieSky Royalty Ltd.
The market capitalization of PREKF (at US$17.80 per share for the U.S.ADR) is $4.25 billion and the enterprise value (with $195 million of net debt) is $4.4 billion.

For the third quarter of 2023 (MD&A), PrairieSky's net earnings were $40 million (compared with $55 million the prior year) and earnings plus DD&A were $67 million (compared with $83 million the prior year). That's a "cash generation" yield of 6% on the current enterprise value.

Royalty production volumes averaged 25,469 BOE per day, an increase of 8% over Q2 2023 and 2% over Q3 2022. Quarterly oil royalty production averaged 12,084 barrels per day, a 4% decrease from Q2 2023 and a 6% increase over Q3 2022. The average realized price for crude oil this quarter was $67.55/bbl compared with $75/bbl the prior year.

With the cash generated from operations this quarter, the company spent $11 million on property acquisitions, $42 million on dividends (4% dividend yield), and $4 million on debt repayment. One odd thing disclosed was a "$13.3 million termination payment related to a leadership change in the quarter".

Monday Night Links

Links

• The regime is caught in quite a pickle as the tools it used to quash its domestic competition are now crippling it in the geopolitical struggle of great powers. Its policies of industrial outsourcing, regional military recruitment, becoming a service based economy, subsidizing mass college enrollment, mainstreaming white racial guilt and finally mass immigration, were either designed to or by chance weakened and neutered their only non patronage class "white working class and middle class Americans". While these policies solidified their hold on power, got them filthy rich and marginalized their political rivals, it also has greatly limited their capacity to compete with rival great powers. Countries rich with natural resources and national pride are chewing up US hegemony at a rapid pace and our leadership has no counter. Years of abandoning merit for identity quotas, risk averse safetyism, dumbing down academic standards, creating a cartelized command economy that stifles innovation, and zero accountability for failures has collapsed [their] ability to stop decline. In order to stave off a USSR style collapse, the regime would have to empower and economically reward its white conservative constituents who could then form a politically powerful bloc. It's the ultimate catch 22 for them. [Jim Sharp]
• They can't remain a superpower without rebuilding the country's manufacturing base and arms industry. But that means transferring a lot of wealth and power into the arms of the Red States and working class; their two main domestic political enemies. And a asset-light economic zone without strong military and industrial base to support that military is a target, not an empire. So yeah, they're screwed. [Carolina Lion] 
• [I]t’s an iron law of history that revolutions never, ever come out of popular uprisings. The wheels of history are turned by political entrepreneurs — individuals or close-knit groups who notice ahead of everybody else that the world has changed in some fundamental way. This unstable situation where material conditions have shifted but society keeps rolling in its groove creates a sort of potential energy, like a charged electric field or a boulder perched at the top of a cliff. In the world of business we call this a market opportunity, and we admire those with the gumption to seize them. In the world of war and politics, market opportunities often look more like a forest full of dry tinder, and the would-be entrepreneur needs an additional quality, fanaticism, that enables him to calmly light a match and flick it over his shoulder. [Mr. and Mrs. Psmith’s Bookshelf]
• Holston Army Ammunition Plant is the *only* plant in the US producing high explosives. It was built in 1943, and has been barely modernized. Feast your eyes on the glory of HSAAP. Some more funny pics from the sole HE plant. That guy bagging? That's moving C-4 between work stations. [Tokyo Morose]
• In case you are wondering how bad the US bottleneck is when it comes to military production there is exactly one factory producing high explosives for the United States and it is very outdated when it comes to machinery. [Carolina Lion]
• A pattern I've noticed is the New York Times' fear and loathing of prosperity in North Dakota. It's weird. The normal human reaction to a cold, emptying-out place finally getting a lucky break would be, "Oh, that's nice." But to the NYT, North Dakota is an endless horrorshow of cashiers making $24 per hour and other atrocities. [Steve Sailer]
  
• Gender dysphoria has sailed up as the number one socially induced psychological disease of our time. About a decade ago, apparently out of nowhere, people started questioning their gender identity. Since gender dysphoria is fashionable here and now, it is talked about as something very particular. A book called Crazy Like Us: The Globalization of the American Psyche (2011) by journalist Ethan Watters suggests it isn't. Psychological disorders have always been sensitive to trends. Watters presents the way Western-style anorexia reached Hong Kong as his main example. [Wood From Eden]
• Charles Taylor wrote a very long book about “disenchantment,” which is the secularizing process that made people stop thinking of the universe as being full of ghosts and demons and miracles and purposes, and start thinking of it as a collection of self-contained particles bouncing off each other. But he curiously underemphasizes the extent to which it was a scientific revolution that made that whole process intellectually plausible. We all know how that story ends — with quantum mechanics, Gödelian incompleteness, and the rest of it all filling the universe with ghosts again. But even the quantum universe and the relativistic universe are just elaborations on Newton’s “System of the World” and abide by its basic philosophical premise: that the universe is like a big computer that takes its current state, applies certain rules, and produces a next state. In fact this assumption is so pervasive, the revolution has been so thorough, most physicists cannot even form the thought that there could exist a conceptually well-defined alternative. [Mr. and Mrs. Psmith’s Bookshelf]
• [T]he welfare state requires an endless supply of young people to produce more, consume more, and generate ever more taxes for bureaucrats to distribute. A prolonged shortage of young bodies will stress the social safety net to the breaking point. Expensive retirement and health insurance schemes are likely to collapse. The marginal will slip into poverty—the poor will grow desperate—but government will lack the funds to do much about it. The political consequences are unfathomable. My guess is that crime and turbulence will be a constant background noise but not revolution, since the minimum levels of testosterone needed for that kind of venture will be lacking. Economically, a world dominated by the old will be less innovative, less dynamic, and more risk averse. The only way to compensate for a shriveled workforce will be through technology—but that’s just what you won’t get from the geezers in charge. [Martin Gurri]
  

Earnings

• In the U.S. & Canada, RevPAR rose more than 4 percent, with many urban markets showing outsized growth.  Group and business transient saw mid-single digit hotel revenue gains in the quarter, largely driven by rate increases.  Leisure transient demand in the region has also remained solid, leading to 4 percent hotel revenue growth for the segment compared to the year-ago quarter. [Marriott International]
• Our world class assets delivered top tier operational and financial results in Q3/23 with average quarterly production volumes of approximately 1,394,000 BOE/d, which is the highest quarterly volumes in the history of the Company, including record quarterly production volumes for both liquids and natural gas of approximately 1,035,000 bbl/d and 2,151 MMcf/d respectively. Following the completion of planned turnarounds at our Oil Sands Mining and Upgrading assets, synthetic crude oil ("SCO") production was strong, averaging approximately 491,000 bbl/d during Q3/23, capturing robust SCO pricing at a premium to WTI. Additionally, as a result of strong execution in our thermal assets, production growth was ahead of plan, as Q3/23 average thermal production volumes increased by approximately 44,000 bbl/d to 287,000 bbl/d from Q3/22 levels. As a result of our focus on effective and efficient operations, the Company had strong liquid netbacks in Q3/23, similar to Q3/22 netback levels when commodity prices were much higher. This resulted in significant free cash flow for the Company. [Canadian Natural Resources]
• "NRP had another robust quarter with $80 million of free cash flow generated in the third quarter of 2023 as a result of continued strong performance from our mineral rights assets and a significant cash distribution from our soda ash investment," said Craig Nunez, NRP's president and chief operating officer. "We also made noteworthy progress towards our goal of eliminating all preferred units and warrants by redeeming $50 million of preferred units at par with cash and repurchasing a total of 1.46 million warrants for $56 million in cash. I am proud of the NRP team for the continued strong performance and am confident our strategy to retire all outstanding debt, preferred equity, and warrants while maintaining common unit distributions will continue to maximize long-term unitholder value.” [Natural Resource Partners LP]
• CVE currently trades at a debt-adjusted cash flow multiple of 5.1-times versus a 6.6-times multiple for CNQ and a peer group average of 6.3-times, according to RBC. CVE’s third-quarter results suggest its relatively low trading multiple discount is unwarranted. The shares are also cheap from a free cash flow perspective. Third-quarter results indicate that Cenouvs is capable of generating roughly $2 billion of free cash flow with WTI in the low-$80s per barrel and the WTI-WCS spread in the $12-$13 range. We believe the company is capable of generating $10 billion of free cash flow, or $5.30 per share, at $90 per barrel WTI, which is where we expect prices to trade over the coming years. At $40 per share, they would trade at a free cash flow yield of 13.3%. This share price is equivalent to $29.20 for the U.S.-listed shares. [HFI Research]