Saturday, October 9, 2021

Canadian Natural Resources (CNQ)

I'm interested in energy producers because I think we're in for a decade of inflation and currency devaluation.  I want companies that are producing crude, without much refining, paying sustainable dividends, and with manageable geo-political and ESG risk.

Extracting flammable materials from deep down is a risky business.  I want to spread the risk by taking many small 2% positions.

An oil producer's job is to extract oil & gas, sell it at a profit, then use some of the profits to replenish or build-up their reserves.  Usually I just take a cursory look at a company's reserves, profits/cashflow, debt, position on the cost curve, and political risk.

I'm looking at the 2nd largest Canadian oil producer CNQ.  I traded it years ago, first got the idea from Hedgeye (who no longer cover it).

Operations and political risk

80% of their 1H21 revenue is from Canadian oil sands, with the remainder from the North Sea and Africa.

There are two main political risks with Canadian oil production:

  • Oil production from Oil Sands is considered environmentally unfriendly.  Theres a risk of ESG pressure or environmental regulation.
  • Canadian oil has no pipeline to a port.  They must rely on the Keystone to the US, whose expansion was cancelled.  Canadian producers sell their oil at WCS prices, at a discount to WTI.
Apart from the above, Canada is a low risk country.  Unlike most other energy producing regions, it does not have political risk (nationalising resources or levying taxes).  And it will never be a war zone.

Reserves

Canadian oil sands require high fixed investment, but once set up have low or no decline.  Their reserves are effectively infinite.  

Finances

Simple to understand, they have fixed costs, and are operationally leveraged to oil prices.  Their 1H results from 2020 and 2021 illustrate this perfectly:

Debt at CAD 19b is a bit higher than I'd like.  They expect to reduce it to 15b by end of 2021.

A Morningstar report from last year estimates their cash breakeven costs at USD 35-40 (WTI).

The quarterly dividend is CAD 0.47.  They did not say they plan to increase it, but will engage in buybacks instead.  After they reach 15bn debt, half the company's free cash flow is targeted to buy back shares (pp11-12).

Conclusion

A (mostly) safe company, without the political or confiscation risk in many parts of the world.  High fixed costs.  Good leveraged play on oil prices.

Monday, September 6, 2021

Bought more Kazatomprom

Uranium is starting to be squeezed with with Sprott's Physical Uranium Trust buying on the open market.  This may be the even that kick starts the long-awaited Uranium rally:


Bought 340 GDRs at USD 32.69 this afternoon, it now totals 3% of my portfolio.

Short term this is risky, I'm buying something thats overbought after WSB has pumped it.  But longer term
Kazatomprom pays a 4% dividend while I wait for the action, and can go up 3X if U308 hits $100.  Good bull markets don't give you a chance to get onboard.

Sunday, August 22, 2021

Bought United Plantations (KLSE)

Bought a 5% position in United Plantations (on the KLSE), an efficient Malaysian Palm oil producer.

Its a steady, boring dividend payer.  Their cashflows generated cover their dividends and capex.  They should do well if CPO prices rise in an inflationary environment.  Last year, they paid 85 sen dividends at a 90% payout ratio with an ASP of RM 2613.

For their 1H results

  • Revenue increased 43%, but costs were up 66%, mainly due to a labour crunch in importing foreign workers.  PAT was up 3%.
  • The refinery segment took a ~30m hedging loss, which should be reversed upon delivery of goods in the coming quarters.  Around 3 sen per share.

The biggest risk is if covid is detected in their operations, they may have to stop them.

Unlike REITS, they are debt free, so will not be affected by rising interest rates.

This idea was from Asian Century Stocks (paid link)

Saturday, August 21, 2021

Sold my Gold. Stop Trading a while.

2 weeks after I build up my large 9% gold position, it hiccuped:

After that, I reduced the large position, losing ~USD 1K, and am now down to a manageable 3%.  Will probably sell it all.

The macro environment keeps changing too fast.  If I trade now I need to hold smaller positions for shorter times.  That doesn't suit me so I'll stop trading for now.  I trade best when I am willing to buy at times that no one else is - and thats not now.


The market is still reasonably priced, I'll just buy dividend stocks instead.

Friday, July 30, 2021

Bought Tencent and Gold

Took advantage of last weeks China stock turmoil to buy a 2% position in Tencent.  Bot 200 shares at HKD 460.20/share.

My reasons for buying:

  • It owns the omnipresent WeChat platform.   The company is a monster with its tentacles stretching throughout China's technology ecosystem.
  • Its reasonably cheap, at under 30X earnings with 15-20% growth and no net debt.

I am keeping the position to 2% because this stock can go to zero:

  • The VIE structure
  • Geopolitical risk.  How much are any China shares worth if missiles start flying over Taiwan or the South China Sea?

Also bought a big position in GLD, now 9% invested.  I consider gold to be a currency like USD or SGD, so can hold a lot of it.  Expect it to do well with rising inflation over the next few months/quarters.

I'm now almost 100% invested:


The holdings:


Friday, July 16, 2021

Why I want to buy Gold

 Gold may have stopped falling:


In the coming years, I expect periods of high inflation like in the 40's or 70's.  Gold serves as a decent inflation hedge, even if its not a great one:


In the coming quarters, I expect a lower q-on-q growth rate.  Gold does well when growth slows.  One caveat is that even through the growth rate should be slower, GDP growth itself should still be high (mid-to-hight single digits).

In the next few months I think there's a good chance of a market correction.  When market exuberance hits slowing growth.  Think it'll be a small correction like Dec 2018, not a crash like 2020.  Gold hedged against past market corrections well.  I put the chances of a correction this quarter around 50:50.

Gold is the best bet for me now.  Copper may be a better inflation hedge long term, but does badly with slowing growth.  Gold miners will go up more than gold over several quarters, but won't hedge against a correction.  So just hold the shiny yellow stuff paper.

I bought a small 2% position nought during last month's shakeout.  Right now its hard to buy more, its always overbought.  Got a feeling it won't be oversold for a while.

Lots of reasons to buy it.  No reasons not to.  This is my only high conviction trading/investment idea now.

Thursday, June 17, 2021

Where are we in the Palm Oil price cycle?

There are a lot of listed CPO producers in Malaysia, Singapore and Indonesia.

The CPO price is really volatile:


The latest peak is probably caused covid-19 supply disruptions, and is probably temporary.

Where are we in the commodity price cycle?

Demand

I don't think we can predict demand in the next few years.  There's too many moving parts:
We are better off looking at supply.

Supply

Palm Oil can only be grown at plus or minus 10 degrees from the equator.  In 2018, Indonesia supplied 56%, by far the most.  Malaysia supplied 28% with the remaining 16% from other Asian, African or South American countries.

The long term factors affecting supply are the number of hectares planted and the age of the trees.  The trees start producing 30 months after being planted, and reach peak yield at 7-13 years.  Production slowly declines since then:

Source: Palm Oil World

This December 2020 CPOPC report explains supply well:

Other figures corroborate this: Malaysian Palm Oil production has been flat for the past 5 years, while Indonesia's has been rising:


Source: Indexmundi (MsiaIndon)

In summary:
  • Malaysian CPO production has been flat, while Indonesia's growth has slowed (though is still currently growing enough to meet demand).  
  • If both Malaysia and Indonesia catch-up in replanting new trees, it would temporarily remove around 2.6m tonnes (estimated 3.5% of world production).  I guess it would take 4-5 years for production to recover from this, after which it starts exceeding today's numbers.
  • El-Nina has unpredictable short term effects on prices.  It may increase or decrease palm oil production, and affect soybean production (substitute for palm oil) in Latin America.
I would say that 2019/20 may have been the bottom of the cycle, but its not clear.  We did not see the type of demand destruction typically associated with the bottom of commodity markets.  But we did see some curtailing of growth.

If we do get a CPO boom, expect supply to catch up with demand in 3-6 years time.