Thursday, July 22, 2021

Thursday Night Links

  • BHP Group Ltd. ’s chief executive earlier this year reminded investors that mining companies that bet big on new production during a commodity-price bull run often end up regretting it. On Tuesday, the world’s biggest mining company backed up that message by forecasting a flat outlook for its output over the next 12 months. [WSJ]
  • My guess is that when CPG firms started advertising on TV in the late 1940s they were also bringing out frequently bringing out innovative new consumer packaged goods that benefited from massive television advertising explaining why this breakthrough product would make your life better (which it would — the life of the American housewife improved rapidly in the postwar era, in part due to much better products. Everybody today makes fun of old black and white TV ads in which housewives are ecstatic about their new laundry detergent or whatever, but the postwar actually was a golden age of reduction in the ancient drudgery of keeping a home). [Sailer]
  • American Tobacco’s advertisements made Bull Durham a familiar name to baseball fans around the nation. American Tobacco set up wooden bull ad signs in nearly every major league stadium during the 1912 season. American gave a $50 prize ($1,400 in 2021) to any player that hit the bull. Before Bull Durham, a huge marketing campaign was considered highly risky. However, the Blackwell Co., and later American Tobacco, showed future businesses the success that came from branding a product and keeping it before consumers. The company, and especially Julian Carr, used every conceivable advertising angle to promote Bull Durham. These techniques were unique for their time and greatly influenced modern day advertising. Bull Durham’s success did not go unnoticed by R.J. Reynolds. In 1913, he mounted his national Camel ad campaign, the first for a cigarette. [Gene Hoots]
  • In addition to heated tobacco and e-vapor, we announced in February our intention to enter the small but fast-growing nicotine pouch category this year. To complement our internal development, we have two important acquisitions to establish a base of capability in science, technology and manufacturing - and build our platform in modern oral. The first of these was AG Snus, completed during the second quarter. AG Snus has a relatively small, branded portfolio of modern oral products which provide us a foothold in the category. In addition, the proposed acquisition of Fertin Pharma will give us access to a range of promising oral delivery technologies and capabilities, some of which could be applied to the modern oral nicotine space. We will return with further news on our commercial plans in this area later this year. [PM Q2 2021]
  • However, even with the attention-grabbing developments around EV production, Jackson said the industry transition will be drawn out and both types of vehicles will coexist for decades ahead. "This is not like going from the flip phone technology to a smartphone, where they suddenly obsolete everything else," he said. [Autonation]
  • You know our first line of defense, in any events, when we look at that, we think that, this isn't a cliff, this isn't a situation where gasoline demand is going to start dropping at 10% or 20% a year going forward is nothing close to that. All of the modeling we've done and engaged consultants who do suggest that 1% to 2% decline in gasoline per year is a possible scenario, if any penetration happens at the rate that a lot of people will think it will happen in this space, diesel demand won't drop nearly as quick, if at all, it might grow. Jet fuel demand will grow. When you put all that together, we have a manageable issue to deal with. And again, if we're managing our tariffs on a cost per barrel oil, you have a 1% to 2% decline per year in volume. I'm not saying that's our projection, that's just, let's assume that that happens through the course of EV penetration. And it’s not just EV penetration, it’s fuel efficiency standards also, that that's certainly manageable within tariff increases to offset that. When we look at long-term projections, if you get at 25 years or 30 years, there's still a significant amount of refined products that are moving to the system, that are still going to require this infrastructure. I personally think it's probably never going to go to zero. You're still going to need this infrastructure long-term. It's hard for me to imagine an economy that's running 100%, electric and 0% on fossil fuels. We'll see how that plays out. [MMP]
  • The Federal Reserve continues to promote its “inflation is transitory” narrative. We’re not surprised. How many inflation-fighting options does the Fed really have that wouldn’t collapse the stock market and economy? We're not aware of any. And while we’re open to inflation eventually subsiding, as it stands now, we see few signs of it moderating. In fact, we see the opposite. [Palm Valley Capital]
  • The three biggest themes from the book were: The Great Stagnation is real, and was caused by careful strangulation of all of the potential avenues of search and advancement we have had. There is surprisingly little correlation between regulatory increase and scientific and technological progress and it can be seen over and over again in multiple sectors. There are credible paths of research as yet untapped, amongst all areas seen as science fiction - including nanotechnology, nuclear energy and yes, flying cars. [captainjcook]

Tuesday, July 20, 2021

Philip Morris Q2 2021 Earnings $PM

Philip Morris International Inc. (PM) released results for Q2 2021 this morning (conference call slides, notes).

Their cigarette volumes the first half of the year were down 2.2% compared to 2020, but heated tobacco unit (HTU) volumes were up 30%. The HTU unit growth was strongest in the EU, up 50% for 1H 2021 vs 1H 2020.

Smoke-free product is 13% of volume but 29% of revenue. More expensive than cigarettes and seemingly more profitable as we discussed last quarter. (We discussed this, which PM is secretive about, when we looked at Q1 2021 results.) Note that Altria has the exclusive license to IQOS in the U.S.

Net revenues for the first half were up 10%, cost of sales and marketing were both down, with the result that operating income was up 19%. Operating income margin was 45% versus 40%.

Net income the first half of the year was $4.6 billion. Net income over the past twelve months has been $9.5 billion and operating cash flow $14 billion.

At the current share price, the market capitalization is $147 billion and enterprise value is $177 billion.

So PM is trading at around 15 times earnings, and OCF/EV is 7.9%.

They are targeting $5 to $7 billion of share repurchases over the next three years.

Their furthest debt maturity is Nov 2044, it yields only 3%. (Equivalent treasury would yield about 1.75%.)

Saturday, July 17, 2021

Saturday Night Links

  • For one thing, you have to have a lot of low-carbon funds to meaningfully increase the cost of capital of high-emissions businesses; it’s not like any one fund manager — even at BlackRock — can point to coal companies that he put out of business just by refusing to buy their stock. For another thing, “raising the cost of capital of high-carbon emitters” means increasing the returns on their stocks, which implicitly means ”our ESG fund will get a lower return than a non-ESG fund, because we hope to raise the returns of non-ESG stocks.” This answers the client’s question — ”how does this fund reduce emissions?” — but not necessarily in the way that the client wants to hear: “We reduce emissions by giving you a lower return on your investments.” [Matt Levine
  • My girl and I get married at the end of this month. As we looked at a normal $30,000 American wedding approach, we found out halls and vendors couldn’t handle us until 2022. Why wait? Did the reception venue matter, and who would it matter to? This was about starting a life together, not a fancy party. As we decided on a small ceremony in a park, the only pushback we received was from outsiders expecting a big show. We show no stress compared to other couples planning big weddings. Covid meant no big shows, sports events or concerts. It clamped down on weddings. The masses will be reprogrammed to go out again in big settings, but this window of time offers us a chance to destroy one of the worst pieces of modernity. [The American Sun]
  • Well, that’s because, contrary to the accepted narrative, the SolarCity merger was more of a bailout than an acquisition. It was a last-ditch attempt by Musk himself to save his companies from total bankruptcy. By creating a  phoney solar shingle and presenting it to Tesla shareholders on the day before the proposed merger was set to go through, he persuaded them to approve it. [link]
  • With Chinese companies this sort of thing is generally called a “variable interest entity.” You set up a company in the Cayman Islands that can be owned by anyone. The Caymans company enters into a series of contracts with the local Chinese company, giving it, not ownership, but certain carefully curated economic interests and control rights over the Chinese company. Then you list the Caymans company in the U.S., and people buy its stock, and they sort of pretend that they’re buying stock in the Chinese company — they sort of pretend that the Chinese company is a subsidiary of the Caymans holding company — even though really they’re only buying an empty shell that has certain contractual relationships with the Chinese company. [Matt Levine]
  • "If physicians tend to be upper middle class, dentists are gloomly aware they are middle, and are said to experience frightful status anxiety when introduced socially to physicians - as dentists like to call them. (Physicians call themselves doctors, and enjoy doing this in front of dentists, college professors, chiropractors and divines." [Class
  • I remember driving up that first time to New York. You know that moment in The Wire where Bodie is going to mule drugs from Philly and the radio station changes? I took that word for word from DeAndre. We were driving up 95 and we lost 92 Q. We lost the hip-hop station and we started to acquire some end of the dial station. And all of a sudden, he’s listening to Garrison Keillor and Garrison Keillor’s doing his little Lake Wobegon voice and Deandre is like, “What The fuck?” [David Simon]
  • Bush II was actually the disastrous presidency that current liberals claim that Trump is. The enormity of the Iraq War fiasco alone boggles the mind. The trillions of dollars, hundreds of thousands of lives, and the social trust that was wasted and stolen by that lie. Trillions and trillions of dollars were pissed away; they could have paved the streets in gold here with all that; free college or free meds for every fat Boomer smoking cigs in an Indian casino, border wall too, I don’t know, but we could have done something with those trillions and they were just pissed away, they just went up in smoke. Where did that money even come from? Whenever anyone wants to do something of substance and value money is impossible to come by. Just that stuff alone probably makes Bush II the worst president in American history. The cynical use of the most blatant propaganda, lying, bullying and mental gaming techniques to produce that 2003 moment of popular enthusiasm for war, in the aftermath of 9/11 no less (cynically leveraging that trauma!) had a permanent affect on American society. [link]
  • Having just emerged from the fiasco of last year's coin shortage (which I wrote about here and here), the U.S. Mint has a new problem on its hands. The melt value of the nickel, or five cent coin, has suddenly moved higher than the coin's face value. The melt value of a nickel refers to the market value of the 3.25 grams of copper and 1.75 grams of nickel inherent in each five cent coin. In the chart below I've mapped out the melt value of a U.S. nickel going back to 2000, decomposed into its copper and nickel components. As you can see, the last time that the intrinsic value of a coin exceeded its face value was ten years ago, back in 2011. Thanks to the huge rally in copper prices over the last twelve months, the metallic content of a nickel is currently worth 5.9 cents. [jpkoning]
  • Byrne's and mine are essentially the same idea, that bitcoin is a ponzi. Except not quite. Bitcoin is a decentralized ponzi scheme, one without a schemer. I describe it as an honest chain letter. Byrne uses the word automated. After all these years, I still haven't seen a convincing explanation for why bitcoin is neither a Nakamoto scheme nor an honest chain letter. That is, I haven't seen a good positive/descriptive response to the positive/descriptive statement that bitcoin is a decentralized ponzi. One of the best alternative theories, bitcoin-is-money, broke down long ago in the face of empirical evidence. And the bitcoin-is-gold description isn't panning out too well. Bitcoiners haven't turned the perceived slight into a virtue. If someone is calling you names, then proudly adopt the slur. If the descriptive statement bitcoin is a ponzi is accurate and popular, then adopt it and make it your own. "Yep, of course bitcoin is a chain letter/Nakamoto scheme. And that's a good thing." [jpkoning]
  • The Nakamoto Scheme is an automated hybrid of a Ponzi scheme and a pyramid scheme which has, from the perspective of operating a criminal enterprise, the strengths of both and (currently) the weaknesses of neither. The Nakamoto Scheme draws strength from the same things which make pyramids and Ponzis so compelling, in that it promises insane investment returns, can be accessed by the man on the street with almost no effort at all, and recruits individual participants as new, self-interested evangelists of the scheme. It has no current weakness in that the regulators, blinded by lobbying from the Valley, have seen these schemes as futuristic and cutting-edge rather than what they really are: victim factories, which in the next crash will produce hundreds of thousands of howling investors with little formal legal recourse due to four years of inaction on the regulators’ part. [preston byrne]
  • The LifeView laboratory process uses DNA samples from both parents(saliva) and the embryo (standard few-cell biopsy) to obtain a 99+percent accurate genotype. This accuracy has been carefully validated and has been published in peer reviewed scientific journals, and exceeds the adult accuracy given by common tests like 23andme. Using this genotype, future disease risks are predicted for each embryo, using methods validated to predict disease state in the adult. This new technology, called polygenic risk prediction, uses AI applied to very large genomic datasets: genomes of up to a million individuals, together with their medical histories. There sulting polygenic risk scores (PRS) are tested in separate validation populations (i.e., people not used in the AI training) to ensure accuracy. This area of research is advancing rapidly, with hundreds of scientific papers published each year on polygenic risk prediction. Widely validated risk predictors now exist for important conditions such as diabetes, heart disease, cancers, schizophrenia, and many more. The LifeView team are world leaders in this field. In particular, they were the first to publish validation studies which showed that PRS could identify which sibling in a family was most likely to develop a specific disease condition later in life. Embryos are ranked in order of proposed transfer. Sibling selection using our ranking has been validated to reduce disease incidence. Each disease incidence reduction is particular to that disease, to the ethnicity of the cohort, and the number of embryos. The disease risk reduction is concurrent - which is to say that ranking the embryos based on a single, aggregate number (the Embryo Health Score) has been shown to reduce the diseases at the same time, in parallel. [lifeview]
  • You'll notice that all the traits being measured here are pretty serious medical conditions. In theory, you're not supposed to use polygenic screening to produce designer babies. What about in practice? Screening companies will give you the raw data if you ask for it, so if you want to screen for an embryo with green eyes, all you need to do is find some third party algorithm that can screen genomes to figure out the baby's eye color and plug in your data. [astralcodexten]
  • It doesn’t matter how much evidence of election fraud there is in Arizona or any other state. Nothing will change the official narrative that the election was honest and Biden won. Just like all of the evidence that 9/11 was a false flag attack hasn’t changed the official narrative of 9/11, and all of the evidence that COVID-19 is a hoax and the vaccines are deadly hasn’t changed the official narrative of the “pandemic”. The official narrative of any event is whatever the NWO wants it to be. A combination of numerous useful idiots in the public who believe that anything that deviates from the official narrative is “conspiracy theory”, politicians who are controlled or stupid, a compliant MSM, and other factors ensures that the official narrative will always roll on. At most, there will be an admission that there was a tiny amount of fraud that wasn’t significant enough to change the results of the election, and possibly a few election officials will be reprimanded or fined. Another consideration is that Trump knew, or certainly should have known, before the election that there was going to be fraud. But instead of taking any steps to prevent that fraud, he waited until after the election and then mostly just whined and complained on Twitter. That means that he is either totally incompetent or, more likely, had already been told that the fix was in and he was going to lose the election. Of course it wouldn’t significantly change anything even if somehow the election was declared fraudulent and Trump was reinstated as president. Despite the beliefs of the Trumptards, Trump was as bad as or possibly worse than Biden. Trump, with his declaration of emergency, Operation Warp Speed, and support of Dr Fauci, is largely responsible for the overwhelming success of the scamdemic tyranny that we are now experiencing. In fact that is why the NWO selected him to win in 2016. (And there was likely election fraud in 2016 to ensure Trump won.) If Hillary had been president in March 2020 when the scamdemic tyranny started, the (armed) Right likely would have resisted vigorously enough to stop it in its tracks before it could become ubiquitous. But now the Right is accustomed to the tyranny, and that tyranny is just going to keep getting worse. [link]

Thursday, July 15, 2021

Thursday Night Links

  • Even as oil prices reached their highest level in six years last week, many drilling rigs remain idle. The U.S. is producing roughly 2 million barrels a day less than it was before the pandemic. The number of active rigs drilling for oil rose by two this week and stands at 378, down from 683 pre-Covid-19, according to oil-field services firm Baker Hughes Co. [WSJ]
  • Democrats on the Senate Budget Committee agreed to roughly $3.5 trillion in spending for their broad healthcare and antipoverty plan, determining the scope of the party’s expected efforts on education, climate change, child care and a host of other issues while it has control of Congress and the White House. [WSJ]
  • The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—increased 37.2 percent (annualized) in June and is up 13.7 percent on a year-over-year basis. [FRB Atlanta]
  • In terms of the overall, or “headline” CPI, we judge that about 70 percent of it is composed of sticky-price goods and 30 percent of fl exible-price goods. About half of the fl exible-price CPI comprises food and energy goods, the remainder being largely autos, apparel, and lodging away from home. The sticky-price CPI includes many service-based categories, including medical services, education, and personal care services, as well as most of the housing categories which, by construction, change only infrequently. [FRB Atlanta]
  • I think research analysts and investors are beginning to understand that mineral companies, and in particular Brigham Minerals, offers a more efficient vehicle to return capital to investors, especially when times are challenging, as we saw at the onset of COVID and the shutting down of the economy during early 2020. If you assume the second quarter of 2020 was the ultimate trough for the energy space, I sincerely hope that that is the case. Remember that we distributed $0.14 per share via our divided for that quarter which when analyzed and assuming a $17 stock price equates to roughly a 3.3% yield. Based on all of those assumptions, with Brigham Minerals you theoretically have a downside floor yield of 3.3% which is higher than the yields of many E&Ps today without exposure to the continuing need to deploy capex. Looking at the first quarter of 2021, we're able to pay out a dividend at roughly 7.5% yield, which represents an incremental yield of 4.2% above the trough level we saw in Q2 2020. Importantly, we're able to deliver that 7.5% yield with over 13,000 gross undeveloped locations in inventory that will be organically developed for shareholders over time, again, free of capex. [MNRL Q1 2021]
  • I had thought "Elon seems exceptional", but he is basically a domain-specific guy who proxies Tesla/SpaceX engineers. Consensus systems have outed him intellectually. I didn't just realize this today; this is just one example of a laundry list of red flags, going all the way back to stupid things he did at PayPal, that indicate his primary mode of operation is a mimic who collaborates with engineers at his companies, then speaks as a proxy. The stages of decline in my view of Elon over the last few years: 1. This guy could be a genius. 2. This guy is just an exceptional technologist. 3. This guy embeds himself with an engineering team, soaks up concepts, then repeats things he wouldn't be able to figure out himself. [@csuwildcat]
  • "It seems like you can always trust bodybuilders and autists to be right about things that they have researched. (Even if market prices can take a long time to reflect this.)" [CBS]
  • It is observed that a B12 deficiency leads to increased uracil misincorporation, leading to impaired DNA synthesis and genomic instability. The deficiency also leads to global hypomethylation of DNA, a hallmark of early carcinogenesis. [NLM]
  • You also need to notice when you find beautiful places. It is not just materials and components that create these places, but patterns and interactions between materials, light, and space that create an atmosphere. Beautiful places do not repeat identically the world over, but they do rhyme. I suggest you start to collect some of these places. [Simon Sarris]
  • As an alternative to floating cities, it has been proposed that a large artificial mountain, dubbed the "Venusian Tower of Babel", could be built on the surface of Venus. It would reach up to 50 kilometres (31 mi) into the atmosphere where the temperature and pressure conditions are similar to Earth's. Such a structure could be built using autonomous robotic bulldozers and excavators that have been hardened against the extreme temperature and pressure of the Venus atmosphere. Robotic machines would be covered in a layer of heat and pressure shielding ceramics, with internal helium-based heat pumps inside of the machines to cool both an internal nuclear power plant and to keep the internal electronics and motor actuators of the machine cooled to within operating temperature. These machines could be designed to operate for years without external intervention for the purpose of building colossal mountains on Venus to serve as islands of colonization in the skies of Venus. [Wiki]
  • The sale of the Wine business and the plan to use proceeds to repurchase shares signal that management now views buybacks as "the best use of capital". We believe the same logic also applies on the ABI stake. Altria's ABI stake is currently worth $11.8bn, or 13.4% of its market capitalization - even if we assume just $10.0bn of deployable cash proceeds and a 10% higher Altria share price, selling the ABI stake to repurchase shares would still reduce the share count by 10% - more than offsetting the 4.1% loss in Net Earnings and 1.4% loss in FCF mentioned above; the net EPS gain would be about 6.7% and the dividend would rise correspondingly. [SA]
  • The bear should be, in any proper bestiary, the true king in Europe. The lion was put in place by Christianity looking to undermine pagan symbolism and myths by introducing another creature that could be molded with Christian attributes. The story of how the church replaced the bear is a bit difficult to read because there was plenty of cruelty involved, but I believe the religious aspect should be put aside. The bear IS the most powerful creature in Europe and it does have deep mythological roots for nearly (probably every) European culture. [The American Sun]
  • The realization that North Korea is just as bad or worse than most people think it is, while simultaneously being less of an inhuman, dystopian nightmare than South Korea, is probably the single most depressing blackpill I've had the displeasure of swallowing. North Korea: poor mountainous authoritarian shithole, you're basically living in Asian Albania. South Korea: birthrates are permanently below levels otherwise only seen during acute famines, students work more than interns in soviet labor camps, this is somehow seen as normal. South Korea is basically all the worst parts of the west, except that instead of having a 200 year run-up, the destruction of the old culture and social mores took place within the span of a single generation. It's basically western capitalism's own Soviet Union experiment. The Soviet Union during the tail end of stalinist collectivization (so when peopke started to have some food to eat again) was probably less insane and anti-human than what passes for normality in SK today for students. And that is NOT some sort of defense of stalinism! Japan, which westerners love to gripe about as this basket case of low fertility, has a birth rate of 1.42. South Korea just dropped to 0.98. Norks are at 1.90. Would you rather live in the irl version of children of men and buy funko pops, or have a family in Albania? [Anglo Distruster 40K]

Friday, July 9, 2021

Altria Reaches Agreement to Sell Its Ste. Michelle Wine Estates Business

Announcement today:

  • All-cash transaction with a purchase price of approximately $1.2 billion expected to close in the second half of 2021.
  • Altria expects to use net cash proceeds for additional share repurchases subject to Board approval.

Thursday, July 8, 2021

Thursday Night Links

  • When you go to the grocery store, its aisles bursting with plastic and boxes of ready made food items, you are there to buy time; time you will not spend transforming basic ingredients into components for your recipes and meals. What you buy in time, you lose in freshness, taste and nutrition. More than that, you lose the essence of what a good meal is: time well spent on yourself in your kitchen, communing with the elements that nourish your body. [link]
  • I have this pet theory that you can tell how free a city is by how irregular its street pattern is. Grids are great for managing traffic, and nothing else really. A town with an irregular street pattern is far more charming. If you think of a town as a home, the streets in a gridded town are corridors, not useful for much anything, but in a town with an irregular street pattern they become rooms, or real places. If you have a grand building, let it stop a street (in urbanism this is sometimes called a “terminating view” or a “focused street”). If you have several beautiful elevations in a row, curve the street to properly show them to the pedestrian (it can be hard to take in a building if you are next to it on a straight street or lot line). Consider also if streets are always necessary. Sometimes it can be better to divide buildings and blocks be series of interconnecting pocket squares or little plazas. [wrathofgnon]
  • Based on our estimates of 2021 FFO, we have CVE currently trading at 4.58x. But because CVE is deploying all of its free cash flow into paying down debt this year, the multiple compresses for 2022. [link]
  • A rapid rise in the price of Canadian crude is putting investors in an unusual position, prompting them to weigh environmental concerns against the copious cash flows that oil sands producers are now churning out. Since the start of year, the price of Western Canadian Select, which is heavy Canadian crude, has soared more than 75 per cent to around US$60 a barrel, returning to levels set in the fall of 2014 before energy prices collapsed worldwide. The recent rise tops the gains made by the North American benchmark, West Texas Intermediate, which is up around 50 per cent this year. With crude prices soaring, analysts expect Canadian oil sands producers to churn out substantial free cash flow in 2021. Canadian Natural Resources Ltd. alone is expected to produce nearly $8-billion in 2021, according to a May estimate from RBC Dominion Securities – and that’s after paying $2.2-billion worth of dividends. Suncor Energy Ltd., meanwhile, is expected to produce $6.4-billion after paying its own dividends. Investors are starting to notice, and share prices have risen this year. But a number of Canadian oil sands producers are still trading far below their pre-COVID levels. [The Globe and Mail]
  • Bitumen is what a desperate civilization mines after it’s depleted its cheap oil. It’s a bottom-of-the-barrel resource, a signal that business as usual in the oil patch has ended. To use a drug analogy, bitumen is the equivalent of scoring heroin cut with sugar, starch, powdered milk, quinine, and strychnine. Calling the world’s dirtiest hydrocarbon “oil” grossly diminishes the resource’s huge environmental footprint. It also distracts North Americans from two stark realities: we are running out of cheap oil, and seventeen million North Americans run their cars on an upgraded version of the smelly adhesive used by Babylonians to cement the Tower of Babel. That ancient megaproject did not end well. Without a disciplined plan for them, the tar sands won’t either. [Energy Skeptic]
  • It’s a fantastic color, if a little loud for a practical family crossover. In a world where Acura was still beloved, it would make perfect sense. Here, in the world where Acura still has some rebuilding to do, it gives me pause. I struggle to imagine who among us is pining for an Acura compact crossover in a supercar shade of bright orange. [RaT]
  • For the past 150 years, economics has been treated as a social science in which economies are modeled as a circular flow of income between producers and consumers. In this “perpetual motion” of interactions between firms that produce and households that consume, little or no accounting is given of the flow of energy and materials from the environment and back again. In the standard economic model, energy and matter are completely recycled in these transactions, and economic activity is seemingly exempt from the Second Law of Thermodynamics. [Energy and the Wealth of Nations]
  • On the index of neophyte national park day-tripper, a garbled place-name pronunciation is a strong indication of greenhorn status, but, from a public safety standpoint, it’s far from the most serious red flag that Dahlstrom will encounter today. [link]
  • One of my unpaid side jobs is managing a tiny family cemetery maintenance fund. It has a small amount of money that was collected over the years through family member donations to maintain the family cemetery. There was just enough CD Interest generated until recently to get it mowed a few times over the summer months. Now, thanks to the Federal Reserve, the account only generates $10 interest annually. I am being forced to move out the risk curve from CDs to some sort of stock fund, and I’d been considering XLU. Of course I didn’t fall off the turnip truck yesterday, so I’ll only move about 1/10 of the fund annually into the market. That way I don’t risk the market dropping 50% right after I move it. [Illusion of Prosperity]
  • The publication of the Federal Reserve Bank of Dallas’s Energy Survey has made for some interesting reading, detailing how ESG regulation is limiting the capacity to attract any capital in the oil and gas industry. The most eye-catching vignette was how a firm – which had relationships with 400 institutional investors, of which 100 were close – could find only one willing to give new capital to oil and gas investment. This trend was evident before the coronavirus pandemic: the resource replacement ratio, which indicates that new discoveries were only replacing 1-in-7 barrels of oil being consumed in 2019, compared with 1-in-3 in 2013; in other words, by 2019, there was a serious lack of new exploration. There is little sign of appetite for new capital expenditure, as estimates for total capital expenditure for the MSCI ACWI Oil & Gas industry have only modestly stabilised after the collapse during the pandemic, and the long decline from 2014, when the Saudis drove the price down in a bid for market share (Figure 4). The unwillingness to embrace capital expenditure is despite the sharp recovery in industry free cash flow (Figure 5), and speaks to anxiety about risks to price in the context of OPEC spare capacity, and ESG-induced risks of stranded assets. In addition to the potential supply constraints, oil consumption is trending back up. Driving conditions, which represent 26% of oil demand globally, are now above pre-pandemic levels. And while aviation is still below average, the trend is up. [link]
  • Today, most people in industrial societies don’t need to know much about the natural world in order to survive. What do you really need to know in order to get by as a computer engineer, an insurance agent, a history teacher or a factory worker? You need to know a lot about your own tiny field of expertise, but for the vast majority of life’s necessities you rely blindly on the help of other experts, whose own knowledge is also limited to a tiny field of expertise. The human collective knows far more today than did the ancient bands. But at the individual level, ancient foragers were the most knowledgeable and skilful people in history. There is some evidence that the size of the average Sapiens brain has actually decreased since the age of foraging. Survival in that era required superb mental abilities from everyone. When agriculture and industry came along people could increasingly rely on the skills of others for survival, and new ‘niches for imbeciles’ were opened up. You could survive and pass your unremarkable genes to the next generation by working as a water carrier or an assembly-line worker. [philg]
  • Obligations define my schedule and reflect my priorities at this stage of life. Most mornings start just after 6 AM. I either hear footsteps coming up the stairs as our 8-year-old comes to ask for breakfast or the rhythm of our 20-month-old banging against the crib as he tries to soothe himself back to sleep. I feel the cold kitchen floor on my feet while making my daughter breakfast. An egg-in-a-hole or pancakes is the most frequent request. The 20-month-old almost always starts his day gnawing through a banana. I drink coffee while staring at my phone as the kids eat. Most nights, my wife and I watch TV silently on the couch while one of us reads our phone after the kids are in bed. Over the last year, I’ve continued the gradual elimination of vices from my life that started after our first child was born. Coffee is often decaf. Late nights are beyond a rare occurrence. I gave up smoking pot years ago. In many ways, I’m a more polished version of myself. Smoother, but also less interesting. Occasionally I will find myself enrobed in melancholy brought on by the relentless responsibilities of adulthood and the exhaustion of being a parent with two young children. An emotional greyness creeps in. The accumulated stresses of life made visible through negative emotion. Gratitude is usually a balm to these feelings. [link]

Tuesday, July 6, 2021

Long Reserve Life Oil: Cenovus Energy Inc.

Some history of Cenovus Energy:

When the Canadian Pacific Railway was formed, the government of Sir John A. Macdonald compensated it for assuming the risk of developing the railroad with the subsurface rights for a checkerboard pattern of most of Alberta and part of Saskatchewan. These rights were later spun off to the company's predecessors. In April 2002, PanCanadian Petroleum Ltd was spun out of Canadian Pacific Limited. It subsequently merged with Alberta Energy Corporation to form EnCana. In 2009, Encana completed the corporate spin-off of Cenovus Energy, which held its oil business, representing one-third of total production and reserves, and EnCana Corporation retaining its natural gas business. In 2017, Cenovus purchased ConocoPhillips' 50 percent share of their Foster Creek Christina Lake (FCCL) oil sands projects and most of their conventional assets in Alberta and British Columbia, including the Deep Basin. Cenovus completed the acquisition of Husky Energy for C$3.9 billion in stock in January 2021. Cenovus has two projects producing oil in the oil sands – Foster Creek and Christina Lake (Alberta). Both projects use a drilling method called steam-assisted gravity drainage (SAGD).

Cenovus is listed on the NYSE (CVE, US$9.72) and the Toronto Stock Exchange (CVE.TO, CAD$12). (As you can see, a CAD$ is equal to 0.81 US$). When Cenovus acquired them, Husky shareholders received common Cenovus shares plus warrants. The warrants were issued in January 2021 and have five years until expiration (January 2026) with a strike price of CAD$6.54 (or US$5.30). With the CVE shares at $9.72, the intrinsic value of the warrant is $4.42 and they trade for $5.64. 

The combined company (Cenovus + Husky) is the third largest Canadian oil and natural gas producer and the second largest Canadian-based refiner and upgrader. As one description puts it,

"The transaction was transformational for Cenovus Energy because it filled the gaps in both companies' weaknesses. For CVE, it has excess production that it needed to sell into the market (insufficient refining capacity, and for Husky, it had excess refining capacity (insufficient production). By combining the two, the integrated business model flourishes and CVE is able to reap the benefits via synergy and better pricing realization."

As of December 2020, Cenovus reserves (proved and probable, net of royalties) were estimated to be 4.9 billion barrels. (Or, 6.3 gross of royalties.) Adding in natural gas reserves, their reserves are a total of 6.7 billion barrels (gross, 2P). At the present production rate of ~0.5 million barrels of oil equivalent per day, or 170 million barrels per year, those reserves are enough to last for 40 years.

Cenovus produces most of its oil by steam assisted gravity drainage (SAGD): "an enhanced oil recovery technology for producing heavy crude oil and bitumen. It is an advanced form of steam stimulation in which a pair of horizontal wells is drilled into the oil reservoir, one a few metres above the other. High pressure steam is continuously injected into the upper wellbore to heat the oil and reduce its viscosity, causing the heated oil to drain into the lower wellbore, where it is pumped out."

At US$67 WTI, Cenovus was projected to generate CAD$7.5 billion of operating cash flow and CAD$5.7 billion of free cash flow. The recent increase in oil price (to $75/bbl) should significantly augment the cash flow if it holds up.

The current market capitalization is CAD$23.6 billion and the net debt is CAD$13 billion for a total enterprise value of CAD $37 billion. (Or $30 billion in USD.) So, the FCF/EV yield before the latest increase in the oil price was around 15%.

Also impressive with the mature Canadian oil sands giants is the level of FCF conversion. If Cenovus spends $1.8 billion on capital expenditure and has $7.5 billion (or more) in operating cash flow, that is 75% FCF/OCF conversion which isn't bad.

Conoco got a lot of CVE stock when the 2017 acquisition took place (Conoco owns 10%), and they are selling it. When Cenovus was spun off in 2009, it traded for $25. Thanks to the long commodity bear market, it trades for a little more than a third of that price more than a decade later.

Something else you may notice is that the enterprise value of Cenovus per barrel of net 2P reserves is about US$6.