Market thoughts for 2026

We've learned the folly of attempting to predict things, and yet every living creature has to make predictions in order to survive. (An organism is a hypothesis of its environment, for one thing.) Whether you are an S&P 500 indexer, a Treasury bill doomer, or a value investor, you are making a prediction about the future. So here are some of our thoughts - just hypotheses - about what 2026 could hold.

There is a glut of oil. As we read third quarter earnings reports, we were startled by the production volume increases reported by oil producers, especially since the price of oil during the quarter was down about 14% from the prior year. As we write this, oil has dropped to $55.

Rents are falling, especially in the Sunbelt. The number of people per household (PPH) is pretty elastic - people can double up, give up second homes, move in with their parents, and so forth. The economy and job scene on the low end are tough enough that PPH is probably rising. Also, a significant number of people have been deported or self-deported, which reduces demand for housing.

Shelter (rent) is about a third of the consumer price index and energy is close to 10 percent. With rent and energy both falling, it seems likely that reported inflation numbers will be going down. Since energy is itself a major input into the other goods in the CPI basket, we probably have at least half the basket falling in price instead of rising. 

Falling inflation means that the Fed can keep cutting. Perhaps that allows the economy to hold together for 2026. Trump will certainly want it to, leading up to the midterms. Our CME fed fund futures have the FF rate at 2.75% to 3% by the end of 2026, which is two to three cuts from the current target of 3.5%. With wholesale gasoline down $1.61 per gallon and Trump picking a new FRB chairman, perhaps we should expect more cuts than two or three.

With more FF cuts but the ten year bond yield holdings steady, the yield curve is steepening. Commercial loan rates probably will decline but not as much as short term rates and deposit yields, which is great for banks' net interest margin. Community banks at 1x tangible book value would continue to do well, as long as credit holds up. (There's the potential for earnings yields of 12-14% to have wider margins on higher assets plus multiple improvement.)

Cheap oil and the economy holding together would be good for many types of businesses, but especially: airlines, hotel franchisors, online travel agents, consumer lenders, and consumer discretionary businesses of various kinds. If businesses keep advertising on Google and Facebook, that will continue to fund the AI/LLM/DC capex boondoggle.

With cheaper energy and lower commercial real estate borrowing costs, construction could comes back. That would mean that building materials would do well. Cement and aggregates have a particularly good industry structure of local oligopolies.

Stagflation is the big concern that we see. If the economy is weak and inflation is high, things can get very ugly. The Fed can't come to the rescue by printing. Perhaps that is what Warren Buffett is thinking about, the 1970s stagflation parallels. But it is hard to have stagflation with a plummeting oil price! Herman Kahn would probably be nodding here as the gods of the straight lines continue along.

GMO published an excellent essay recently: It’s Probably a Bubble, But There Is Plenty Else to Invest In.

Thursday Night Links

• Say half of the 97 million barrels of oil that Rystad Energy estimates China has socked away so far this year had shown up in storage facilities at Cushing, Okla., instead. That would bring Cushing’s storage levels to 70 million barrels—slightly above the level that contributed to turning West Texas Intermediate futures negative in April 2020. Back then, sellers holding front-month contracts had to pay buyers to take barrels off their hands as they were worried there would be nowhere to store the oil. Sanctions are making it very difficult to judge where the market will head next. The result has been an unusually steady oil price despite growing oversupply. But any sign that the glut of sea oil is moving onshore could cause the floor to fall out from under the oil price. [WSJ]
• But the puzzling thing here is that despite such weak oil prices, why isn’t US crude oil production declining? As you can see in our production composite index, December US crude oil production should have started to decline, but the latest figure points to a production reading near ~14 million b/d. We still have more weeks to finalize this month’s data, but the fact that we aren’t seeing material weakness yet implies that production could be stronger than expected going into 2026. Part of the reason for the outperformance stems from Exxon. In Q3 2025, Exxon reported that Permian production averaged ~1.7 million boe/d. In its latest 2030 company guidance update, it noted that the Permian is expected to grow to ~2.5 million boe/d (+200k boe/d vs previous guidance). [HFI Research]
• After more than two decades of flat or anaemic growth, US power demand is now surging. Electricity usage is projected to rise by an average of 5.7 per cent a year to 2030, based on forecasts from utility companies. Though some of this demand is due to reshoring activity and a broader shift to electrifying buildings and transport, more than half of the expected increase stems from the rapid build-out of AI data centres, according to consultancy Grid Strategies. Even if these projections prove overstated, conservative estimates still far exceed recent trends, requiring substantial investment in grid capacity to accommodate new loads. [Financial Times]
• President Saddam Hussein of Iraq today openly threatened to use force against Arab oil-exporting nations if they did not curb their excess production, which he said had weakened oil prices and hurt the Iraqi economy. The Iraqi leader did not mention particular countries by name in his nationally broadcast address today, but his warning was clearly aimed at Kuwait and the United Arab Emirates. In the last few weeks, the Iraqi oil minister, Issam Abdul-Rahim al-Chalaby, has frequently singled out the two Arab nations, which have been producing oil at rates far above the quotas mandated by the Organization of Petroleum Exporting Countries, as the main culprits in the steep fall of oil prices in recent months. President Hussein charged that the oil production policies of Kuwait and the United Arab Emirates had been the result of American influence, seeking to obtain cheap oil and harm Iraq, among other nations. ''The policies of some Arab rulers are American,'' the Iraqi leader was quoted as having said by news agencies from Baghdad. ''They are inspired by America to undermine Arab interests and security.'' President Hussein said, ''Iraqis will not forget the saying that cutting necks is better than cutting means of living.'' ''O God almighty, be witness that we have warned them,'' he added. ''If words fail to protect Iraqis, something effective must be done to return things to their natural course and to return usurped rights to their owners.'' [The New York Times]
• China cannot buy what it wants from the US, either because the US will not allow the sales (high-end semiconductors), or because the US struggles to produce the goods (Boeing planes).
  The US can no longer buy what it really wants from China (rare earths, magnets).
  The US won’t allow China to sell what China really wants to sell in the US (higher value added goods such as cars, telecom switches, tractors, earth moving equipment, trains, nuclear power plants), even if US consumers would actually love these goods, and even need them. For example, can US farmers remain globally competitive if everyone else drives cheap tractors and they do not?
  What the US really wants to sell to China (soybeans, liquefied natural gas), China can generally get elsewhere (Russia, Brazil, Colombia) for less money and with greater reliability. [Gavekal]
• The airport lounge was created in 1939 by American Airlines’ C.E.O., C. R. Smith, as a way to build support for commercial aviation. Smith called his first lounge, at LaGuardia, the Admirals Club. (He referred to his planes as the Flagship Fleet.) Membership was private, free, and at the company’s discretion. A manual listed those eligible: generals, congressmen, governors, judges, members of the U.N. Secretariat, “persons listed in Who’s Who.” New “Admirals” were commissioned in faux naval ceremonies. Often, they’d get a writeup in the local paper. Smith would send personal letters about Admiral business. (“Dear Admiral: As you know, we are not permitted to extend membership in the Admiral’s Club to the ladies. . . .”) He’d sign off, “C. R. Smith, Fleet Admiral.” [The New Yorker]

Monday Morning Links

• The 2007-8 Everything Bubble and the 2021 Duration Bubble, for instance, were both bubbles in which the right portfolio to own if you believed there was a bubble was a portfolio that would have an unacceptably low expected return if markets were fairly priced. But the 2025 AI Bubble looks little like either of those two and much more like the 2000 Internet Bubble, in which a bubble-agnostic investor could have owned a portfolio with a reasonable risk/reward trade-off in either a bubble or a business-as-usual scenario. Today, non-U.S. equities, deep value stocks, and liquid alternatives offer returns that look reasonable or better, regardless of whether AI is in a bubble. Tilting a portfolio away from AI names and toward those assets may save investors a lot of pain if it turns out we are in a bubble without meaningfully reducing expected returns if financial markets are somehow still fairly priced today. [GMO]
• There's basically always been a cottage industry of value investors complaining that the market has gone crazy, but that's a selection effect. People like reading about the market when it's up, or when it's crashing, but not when it's had a long period of underperformance or has been grinding down month after month. But value tends to underperform during bull markets, and also tends to crash alongside everything else in bear markets. And people talk a lot about stocks during bull markets and crashes, and a lot less in year three of a bear market or after a long, choppy period of sideways trading. So you should always expect value investors, of the discretionary or systematic variety, to be complaining about things. They do best when nobody's talking about stocks. And that's probably part of the risk premium that value has earned over long periods: to be a value investor is to underperform when stocks are all anyone is talking about, and to make your money when people don’t care about it all that much. [The Diff]
• For the last two decades, datacenter construction basically co-opted the power infrastructure left over from US deindustrialization. For AI CapEx to continue growing on its current trajectory, everyone upstream in the supply chain (from people making copper wire to turbines to transformers and switchgear) will need to expand production capacity. The key issue is that these companies have 10-30 year depreciation cycles for their factories (compare that to 3 years for chips). Given their usual low margins, they need steady profits for decades, and they’ve been burned by bubbles before. If there’s a financial overhang not just for fabs, but also for other datacenter components, could hyperscalers simply pay higher margins to accelerate capacity expansion? Especially given that chips are an overwhelming 60+% of the cost of a data center. We did some back-of-the-envelope math on gas turbine manufacturers which seems to indicate that hyperscalers could pay to have their capacity expanded for a relatively small share of total datacenter cost. As Tyler Cowen says, do not underrate the elasticity of supply. [Dwarkesh Patel] 
• OEM Bergen Engines has secured a contract to supply a 400MW power plant for a new AI data center on the US East Coast. Operating fully off grid in true islanded mode, it will be the first medium-speed reciprocating engine power plant in North America designed for AI-driven workloads. [Bergen Engines]
• When I first read about the discovery of a vast new deposit of lithium in a volcanic crater along the Nevada-Oregon border, I can’t say that I was surprised. Not because I know anything about geology — but because, as an economist, I am a strong believer in the concept of elasticity of supply. Now about elasticity of supply, in which we economists tend to have more faith than do most people. Time and again over the centuries, economists have observed that resource shortages are often remedied by discovery, innovation and conservation — all induced by market prices. To put it simply: If a resource is scarce, and there is upward pressure on its price, new supplies will usually be found. Not surprisingly, the Lithium Americas Corporation put in a lot of the work behind the discovery. Searching for new lithium deposits has been on the rise worldwide, as large parts of the world remain understudied and, for the purposes of lithium, undersampled. Just as Adam Smith’s invisible hand metaphor would lead one to expect, that set off many new lithium-hunting investigations. Sometimes the new supplies will be for lithium substitutes rather than for lithium itself. In the case of batteries, relevant potential substitutes include aqueous magnesium batteries, solid-state batteries, sodium-based batteries, sodium antimony telluride intermetallic anodes, sodium-sulfur batteries, seawater batteries, graphene batteries, and manganese hydrogen batteries. I’m not passing judgment on any of these particular approaches — I am just noting that there are many possible margins for innovation to succeed. [Tyler Cowen]
• Think about the last time you read something important to you—maybe it motivated you to do something differently, or changed the way you thought about something. Did you write to the author and let them know? Personally, I have literally never done this, as far as I can remember. (Huh, maybe I should…) Similarly, you should expect that most people who love your writing aren’t going to tell you that directly. So: lower your bar for what’s worth writing about! My personal standard is anything that I’ve said more than once in a conversation. [Ben Kuhn]
• Canadian sands, some of the world’s largest oil reserves, are also steadily contributing to higher Canadian oil output, now at 5.4mbpd! Canada is a sleeping oil giant and its capable operators figured out how to produce oil at low breakevens over the years. PS: if u see this as UAE oil minister, what do you do? Yes, you panic and order a reserve audit among OPEC members to get a higher quota as you know everyone’s oil reserves (which determine output quotas) such as Kuwait are overstated, as typical for ME low trust societies. My point? UAE had it with cheaters. They too want to produce more oil or leave OPEC sooner rather than later. Other nations that are set to produce more oil regardless of oil price volatility is Guayana, Argentina, Kazakhstan, potentially also Venezuela down the road. The latter possesses the largest oil reserves globally. [Alexander Stahel]
• China’s clean energy efforts contrast with the ambitions of the United States under the Trump administration, which is using its diplomatic and economic muscle to pressure other countries to buy more American gas, oil and coal. China is investing in cheaper solar and wind technology, along with batteries and electric vehicles, with the aim of becoming the world’s supplier of renewable energy and the products that rely on it. The main group of solar farms, known as the Talatan Solar Park, dwarfs every other cluster of solar farms in the world. It covers 162 square miles in Gonghe County, an alpine desert in sparsely inhabited Qinghai, a province in western China. [The New York Times]

Q3 2025 Earnings Links

• RCI Hospitality Holdings, Inc. (Nasdaq: RICK) today announced the acquisition of all the shares of RCI stock owned by ADW Capital Partners, L.P. The 821,000 shares were acquired for $30.0 million or $36.54 each for $8.0 million in cash and $22.0 million in two-year seller financing at 12%. The transaction closed today. [RCI Hospitality Holdings, Inc.]
• Tom Hill, Vulcan Materials' Chairman and Chief Executive Officer, said, "The combination of our aggregates-led business and our commercial and operational execution has resulted in strong earnings growth and margin expansion through the first nine months of 2025. Adjusted EBITDA has improved 20 percent over the prior year, and margin has expanded 290 basis points on a year-to-date basis. Aggregates cash gross profit per ton has improved 12 percent with widespread improvements across our footprint. These results demonstrate the compounding benefits of our strategic disciplines and reinforce our confidence in our ability to continue to deliver strong earnings growth and cash generation." [VMC]
• Commenting on the second quarter results, Michael Haack, President and CEO, said, "Eagle’s portfolio of businesses continued to perform well during the quarter, generating record revenue of $639 million, EPS of $4.23 and gross margins of 31.3%. We repurchased 395,500 shares of our common stock for approximately $89 million and ended the quarter with debt of $1.3 billion and a net leverage ratio (net debt to Adjusted EBITDA) of 1.6x, giving us substantial financial flexibility that supports disciplined capital allocation and long-term growth." [EXP]
• "With the completion of the Neches River Terminal next year, we are nearing the culmination of a significant capital deployment cycle that began in 2022. These investments included large scale pipeline and marine terminal facilities as well as gateway acquisitions that put Enterprise in a position to support production growth from the Permian and Haynesville basins for years to come. With this large wellhead to water build out cycle behind us, we believe 2026 will see an inflection point in the partnership’s free cash flow. Today, in connection with this expectation, we announced a $3.0 billion increase to Enterprise’s common unit buyback program." [EPD]
• Altria: "Smokeable products segment reported domestic cigarette shipment volume decreased 8.2%, primarily driven by the industry’s decline rate (impacted by the continued growth of flavored disposable e-vapor products, the majority of which we believe have evaded the regulatory process, and discretionary income pressures on ATCs) and retail share losses, partially offset by trade inventory movements." "[Smokeable] net revenues decreased 2.8%, primarily driven by lower shipment volume and higher promotional investments, partially offset by higher pricing. Revenues net of excise taxes decreased 1.3%." [MO]
• Genesis Energy L.P.: "Looking forward, the combination of growing total Segment Margin and lower absolute debt should produce a clear trajectory of significant and rapid improvement in our leverage ratio throughout 2026. Rather than focusing on what could have been this year, our attention is squarely focused on the future. We are well positioned to generate higher levels of Adjusted EBITDA and free cash flow in 2026 and beyond, giving us the financial flexibility to deliver meaningful long-term value for all our stakeholders." [GEL]

December 1st Links

• Without a meaningful drop in US crude oil production in 2026, the global oil market rebalancing will be stalled. The other way to think about it is that if the expected surplus is ~1.5 million b/d, then either global oil demand has to increase by that much or the supply side has to decrease by that much. In this case, if US crude oil production is flat at $60/bbl in 2026, then the only way to rebalance the market is for demand to increase. If there are any signs that demand does not keep pace and global oil inventory builds pile up, then you will see oil prices crash to push on the supply side. This is the asymmetric situation that we are running into. Inevitably, the supply side has to respond (via a decline). The global economy is not that healthy to pull us out of this incoming glut entirely, so without a material supply reduction, the incoming downturn is going to look very ugly. If history rhymes, then it will punish producers. That’s the situation we are going into now. To make matters worse for energy investors, Canadian oil stocks are priced for perfection today. [HFI Research]
• On the technology S-curve, we’re early. But that tells you almost nothing about the equity S-curve. You have to keep those two curves separate. If anything, history suggests the opposite: the earlier you are on the adoption curve, the more likely it is that markets have already tried to cram 30–40 years of expected impact into a 3–5 year price spike. The stock market is not patiently tracking real-world diffusion; it’s front-running the story. And then you have to ask what actually changes when a bubble peaks. Spoiler: it’s not the code, not the chips, and not even the next two quarters of P&L. What changes is the story in people’s heads, and once that flips, everything else (multiples, flows, “fundamentals”) gets reinterpreted through that new lens. Technologies diffuse on multi-decade S-curves. Stocks move in short, violent spikes. AI can be genuinely early on one and already mature on the other at the same time. [Early in AI, Late in the Trade]
  
• To me, it seems like the single most important quality in an investor is an ability to look for situations that are too good to be true, and then chase those down ruthlessly. It’s a strange combination of traits at the extremes of the explore/exploit dichotomy. Great ideas are rare, so you should turn over lots and lots of rocks. But they do exist, and you need to be able to recognize them and, when you really find one, put everything else aside to make sure you actually are exploiting it. If you optimize too much for the “explore” part of the equation, you will fail to follow up and execute on your best ideas as thoroughly as you should. But if you don’t explore enough, you will spend lots of time researching subpar ideas, eventually convince yourself they are great, and have mediocre performance. [Sardine Trader]
• The problem is simply how does one turn the complicated style of Thucydides into English. The two new translations take different approaches. W. Blanco writes, “I have tried to make a translation of Thucydides’ famously difficult text that would be accessible to students and general readers. To do so, I have relaxed the compressed, often crabbed, syntax of the speeches and have adopted a relatively colloquial vocabulary for them and for the narrative as a whole. I offer no apologies” [Bryn Mawr Classical Review]
• There are thousands of variations you could have used, each resulting in a similar-yet-slightly-different program. And that’s why prompt engineering is needed. There is no a-priori reason why your first, naive program key would result in the optimal program for the task. The LLM is not going to “understand” what you meant and then perform it in the best possible way — it’s merely going to fetch the program that your prompt points to, among many possible locations you could have landed on. Prompt engineering is the process of searching through program space to find the program that empirically seems to perform best on your target task. It's no different than trying different keywords when doing a Google search for a piece of software. If LLMs actually understood what you told them, there would be no need for this search process, since the amount of information conveyed about your target task does not change whether your prompt uses the word “rewrite” instead “rephrase”, or whether you prefix your prompt with “think steps by steps”. [François Chollet]
• In investing in emerging markets, Firebird often tries to divine the truth not from anything a company or brokerage analysts say – which frequently is misleading – but from what they don’t say, as well as other non-information that creates a mosaic. Just one example from hundreds I have: in the early days of the Ukrainian stock market an oleaginous broker came to New York pitching all the main exchange-listed stocks – except one, the one that to us seemed most interesting. He never mentioned the other one at all. Of course, it turned out that omitted stock was the only good one and the broker’s more important clients were already likely looking for shares, while the others were low-quality, with plenty of sellers. In reference to Sherlock Holmes’ Hound of the Baskervilles, I call that situation “The Dog that Didn’t Bark”. [Harvey Sawikin]
• Let's talk about something that will shape our future, but no one is yet considering or predicting: China will eventually open its borders to mass immigration. When it does it will absorb truly astounding numbers of immigrants, if proportional to say what the UK or Canada this will be 200-300 million or so people. This might sound almost physically impossible, but the surprising almost disturbing truth is that in the modern world it is easy move 200 million people. In 2023, 4.4 billion passengers were carried by the world's airlines. 200-300 million people in a graying ageing world of low fertility is enough to raise global labor costs. This will be completely distinct second China shock to Western companies hoping to offshore to places with cheap labor. The cheap labor good at working in factories will move to China. The West will get scraps of misplaced high end human capital and food app deliverymen. East Asian democracies such as Japan and South Korea are experimenting with mass immigration as their ageing population reaches true crisis. There is populist backlash in East Asia, but just as in Europe and America the people don't get a say when business owners speak. Unlike democracies authoritarian governments aren't picking the absolute most unassimilateable and unproductive immigrants they can find. But they are still importing massive numbers of workers. Look at Russia, Belarus, or countries such as Dubai and other Gulf monarchies. Authoritarian governments just want workers; they don't need welfare recipients to vote as instructed. No impactful elections, means there is no need to import political clients to socially engineer elections. This solves some but not all societal problems seen in the West. Neither China being an East Asian country nor it being an authoritarian country are therefore reasons to not expect eventual mass migration into China. When China exhausts its rural labor reserve, likely in the next decade, we can expect pressure to mount for either outsourcing or immigration. In the West we did both. I expect in China the CCP will after some nationalist grandstanding ironically come to the conclusion that mass immigration will be preferable to outsourcing. Marxist elites will prioritize maintaining the overall concentrated industrial base and cdemocracy. Mass immigration China will bitterly disappoint China doomers: China will not collapse due to low birth rates. It will do what bureaucrats do around the world. Human quantitative easing to make line go up. Mass immigration China will bitterly disappoint liberals: It will turn out it is much more economically efficient and politically sustainable to only import workers and not voters. We already saw 200-300 million people move to work in China's factories. It just all happened inside of China. The distances involved in these migrations are no less than say immigration from South or Southeast Asia would be. I also want to remind nationalists who might like China's nation state of the obvious point that the political institution that carried out the cultural revolution doesn't actually have any fundamental commitments to Chinese cultural continuity. I think the same kind of decision-making that interns the Uighurs for reeducation, imposes the one child policy, imposes internal border controls is actually exactly the kind of ruthless people as numbers technocratic decision-making that would import 100 million Indonesians to Shenzhen while policing them heavily to avoid demographic driven economic collapse. [Samo Burja] 

Monday Morning Links

• Titanium is the canonical process opportunity of the 21st Century, it sits well outside the economy for such an abundant material a clear sign that Kroll + chloride chemistry is the issue. Any viable electrolyte/plasma/FFC type route is a multi sigma unlock for humanity. Noble gases are on the floor, they are cheap to stockpile and tied to industrial air separation processes ie oxygen and nitrogen plants. Rare Earth sit tightly in the economically priced band, their pricing is separation process and demand mix dominated, not scarcity dominated. The kink/flattening at high abundance shows where scarcity stops mattering, beyond circa 10^3 ppm the economy hits the energy floor and energy / logistics drive price illustrating the Earth is well below its carrying capacity for humanity. [Object Zero]
• Half a century after the US and Soviet governments conjured a commercial titanium industry from scratch to feed their cold war machines, we’ve seen virtually no progress in making the metal cheap or abundant. Learning curves that manifested quickly for aluminum and stainless steel simply didn’t appear for Ti— its “idiot index”, the cost of Ti parts as a multiple of the cost of ore and embodied energy, remains >10x that of steel. At $25-$50/kg, titanium is just too expensive to be widely used. The total lack of progress keeps titanium in a reverse-Goldilocks zone where it loses to steel and aluminum on cost, and to composites on weight, and so is used only where its lightness and toughness are absolutely essential. Outside of aerospace, defense, corrosion-resistant process equipment, artificial joints and premium sporting goods, titanium is practically irrelevant. [Orca Sciences]
• The natural gas industry in unconventional fields has a similar supply structure to unconventional oil (supply can be adjusted fairly easily up and down). This already leads to a market that tends to be more oversupplied generally. In addition, two extra characteristics make natural gas bear markets even more prolonged and vicious than in oil. The first is that gas cannot be transported easily (LNG capacity is limited in many areas, and so is pipeline capacity, with trucking being cost-prohibitive), so demand is generally much more limited regionally. Second, gas can be a by-product of oil production (depending on the geology, a well will produce almost all oil, gas, or a mix), meaning that if oil is still profitable, its excess gas production will drive gas prices down. [Quipus Capital]
  
• On current trends, US coal demand will rise this year to about 465 million short tons, driven by higher electricity generation. From one perspective, that’s still down 60% from 2007’s record high and the third-lowest annual consumption in half a century. From another, the year-on-year increase of roughly 55 million tons would be the largest annual jump in 40 years. [Bloomberg]
• The Hyperion deal is a Frankenstein financing that combines elements of private-equity, project finance and investment-grade bonds. Meta needed such financial wizardry because it is already borrowing by the bucketload to build AI, issuing a $30 billion bond in October that roughly doubled its debt load overnight. Enter Morgan Stanley, with a plan to have someone else borrow the money for Hyperion. Blue Owl invested about $3 billion for an 80% private-equity stake in the data center, while Meta retained 20% for the $1.3 billion it had already spent. The joint venture, named Beignet Investor after the New Orleans pastry, got another $27 billion by issuing bonds that pay off in 2049, $18 billion of which Pimco purchased. That debt is on Beignet’s balance sheet, not Meta’s. The notes bear a 6.58% interest rate, much higher than the 5.5% yield on Meta’s comparable corporate bond, and have an A+ credit rating, one notch below Meta’s AA-. [WSJ]
• Would you believe me if I told you this supposed “coal-mining” company is rather capital-light as it doesn’t deploy much of its own capital in mining and has no direct exposure to coal prices? NACCO’s mining segments are really a collection of contracted mining operations in which customers provide capital, carry the mine-level debt, and reimburse nearly all operating costs. NACCO simply collects a cost-plus management fee per ton (or per MMBtu) with inflation-linked adjustments baked in. The accounting makes it look strange: most of the real economics don’t appear in gross profit or operating profit at all. They sit quietly below the operating line as “Earnings of unconsolidated operations”. Here’s where it gets better. NACCO is taking the cash flow from its coal-mining contracts and redeploying it into O&G royalties that don’t carry the same existential risk as coal. Management runs the company with a capital-allocation mindset and a strong balance sheet, choosing durability over leverage and short-term optics. [scavengersledger]
• My analysis of the truly great premium brands is that they are surprisingly indifferent to their shareholders’ near-term demands. Vail has moved away from this, and I have to believe the old way was better. Moreover, if the premium brand in question is also attempting to carry out an operational turnaround, I can’t help feeling that the capital structure and capital allocation policy that would best aid that operational turnaround is a conservative one. If nothing else, a conservative capital structure and capital allocation policy would give Katz some psychological breathing room, as well as some political breathing room when negotiating with Vail’s many constituents who feel the company’s shareholders have benefitted at their expense. [PIB Academy]
• A handful of proposed expansions to major pipelines in the country could noticeably increase the amount of oil that can be exported out of Western Canada. In total, they add up to the equivalent to constructing a large brand new pipeline. Enbridge is proposing four different expansions to its pipeline system, which is the largest in the country. The Calgary-based company announced a final investment decision on Friday to proceed with the first phase, which will cost $1.4 billion US to add 150,000 barrels per day of capacity on its Mainline system and an additional 100,000 barrels per day to its Flanagan South pipeline. The project should be completed in 2027. [CBC]

Suncor Energy (SU) - Q3 2025 Conference Call

Highlights from Suncor's Q3 2025 conference call:

• Upstream production, 870,000 bbl a day in the third quarter, far and away our best third quarter ever. In fact, 41,000 bbl a day higher than our previous best, which was achieved last year.
• Refining throughput, 492,000 bbl a day in the third quarter, our best quarter of any quarter ever, exceeded our previous best, the third quarter of last year. The third quarter is typically the highest throughput quarter each year.
• Recognizing all sales are not created equal, our highest margin retail sales are up 8% year-on-year, while lower margin export sales are down 11% year-on-year. 
• Operating costs, year-to-date OS&G, CAD 9.7 billion, essentially flat with year-to-date 2024. Despite 32,000 bbl a day higher upstream production, 14,000 bbl a day higher refining throughput, and 21,000 bbl a day higher product sales, higher volumes, lower unit costs. 
• Turnarounds, on our second quarter call, we shared second quarter turnarounds were completed at historically low cost and best-ever durations. Our third quarter turnarounds were completed equally well. A couple of examples: Montreal Refinery, our hydrocracker and hydrogen plants. Previously, 55 days to complete the work. We budgeted it at 50. We completed it in 40, going from industry fourth quartile to second quartile. Previously, it cost us CAD 80 million. We budgeted it at 71. We completed it for 62, again going from industry fourth to second quartile. I am really pleased to say it was completed without so much as a cut finger or a spilt barrel.
• We've dramatically reduced our WTI breakeven and at the same time reduced our net debt. We've materially grown free funds flow, fueling higher return of capital to shareholders.
• A few illustrations: third quarter 2025 AFFO, CAD 3.8 billion with WTI at CAD 65 a barrel. Last time we had CAD 3.8 billion AFFO was the third quarter of 2024, with WTI at CAD 75 a barrel.
• Third quarter free funds flow, CAD 2.3 billion, the highest operationally since fourth quarter of 2022 when WTI averaged CAD 83 a barrel, CAD 18 higher. Year-to-date free funds, CAD 5.2 billion, within CAD 200 million of 2024, despite oil prices being CAD 11 a barrel lower. Buybacks, CAD 250 million a month in 2025, every month. Independent of oil price, CAD 250 million when WTI was CAD 75 in January, CAD 250 million when WTI was CAD 61 in May. Year to date, we bought back more than 42 million shares, 3.4% of our float, at an average cost of CAD 53. Year-on-year, CAD 340 million more in buybacks, despite oil prices being down CAD 9 a barrel. At today's oil price, I strongly believe buying our stock is our best investment, and we intend to keep buying it month after month after month.
• Rich has previously described this as our ability to make craft cocktails for our customers. It is this competitive advantage, coupled with our strong logistics and trading capabilities, that enabled us to sell our oil sands barrels at 96% of average WTI over the quarter. Our downstream margin capture is consistently above industry benchmarks. This quarter was no exception, with margin capture at 92% of our custom 5221 index, an index which represents the margin power of our downstream business. LIFO gross margin was CAD 28.87 versus an average New York Harbor and Chicago 321 crack of CAD 26.39. Suncor is quite simply a margin machine, and this should be recognized as a core driver of this company's value proposition.

It would be hard to understand this quarter's oil results without the framework of cornucopianism. Producers are getting more efficient, increasing the supply and driving the price of oil down. ("Higher volumes, lower unit costs.") 

The most efficient, lowest cost producers' profit holds up reasonably well and so do the owners of low cost minerals. It is not great for owners of higher cost minerals! This may be why we are seeing a pronounced divergence between the share prices of Suncor and Dorchester, for example.

The current market capitalization of SU (at a $44.23 share price) is $53 billion and its enterprise value is $61 billion. (Net debt of $5.1 billion plus other liabilities.) Suncor returned $1.02 billion of value to shareholders in the third quarter with $490 million in share repurchases and $530 million in dividends, for an annualized shareholder yield of 7.7% on the current market capitalization. As of October 31 (not September 30) the number of shares outstanding is down 3.8% year-over-year. 

Suncor's adjusted funds from operations was $2.7 billion which was about the same as a year earlier. Capital expenditure was $1 billion which was also the same as the year earlier. The resulting free cash flow for the quarter was $1.7 billion (again, same as in 2024), which is an 11% yield (annualized) on the enterprise value. Capital expenditures were roughly flat while upstream production was up 6%, year-over-year. This was in an environment of $65/bbl WTI compared with $75 a year earlier. As mentioned in the conference call notes above, Suncor kept profits flat despite a $10/bbl oil price decline! (The WCS spread was $10.40/bbl vs $13.50 a year earlier.)

Suncor generated $2.1 billion of funds from operations from oil sands, $200 million from other upstream (e.g. offshore production) and $863 million from downstream (refining and marketing). The refining and marketing helped keep profits flat despite the oil price decline because they generated $366 million more funds from operations than the prior year. 

Suncor's proprietary 5-2-2-1 crack spread was $31.20 versus $26.05 the prior year and the company had higher refinery utilization/throughput, as was mentioned in the call note above. Suncor gets more diesel out of a barrel than a generic refinery refining lighter crude. Also, Suncor captures some of the retail margin via its fuel stations in Canada.