Sold Canadian Natural Resources (CNQ)

I've held Canadian Natural Resources (CNQ) since late 2022 based on excellent fundamentals.  Its an efficient low-cost producer in a safe jurisdiction, with effectively infinite reserves, that pays dividends and buys back shares.

But there's now political risk.  The upcoming July USMCA negotiations were already looking shaky:

• USMCA expires on July 1st.  In preparation, the USTR January report has listed areas of contention: lumber subsidies, diary protection, the digital services tax, imports rerouted from China, and fentanyl.
• 70-75% of Canada's exports go to the US.  Canada has no choice but to bend.  The issues can probably be worked through.  For example, the Digital Services tax has not been collected, and there are efforts underway to remove it from the books.  It depends on the support Carney can get.
• If the USMCA is not renewed by 1st July, it enters a 10-year "zombie state", whereby the three countries have to meet once a year for a "rolling renewal".  CNQ will be effectively licensed to sell 3/4th of their output to the US on a year-by-year basis.

Quick numbers on Canada's oil exports.  Most of their exports go straight to the US through the Mainline and Keystone pipelines.  Canada's total production is 4+m bbl/day.   The only way for them to bypass the US is through the TMX pipeline (890k bbl/day), and that is constrained as the port can only take up to Aframax sized tankers. So for long distances, they usually shuttle the oil to California to load onto VLCCs to China.   They may be able to dredge the port by 2027 to allow slightly larger Aframaxes in.  New pipelines are at least 8-10 years out.

Now Carney has gone to China and lowered tariffs on China EVs.  This is a slap in the face for Trump.  The US cannot tolerate Chinese influence on their neighbour.

I still think the USMCA is going to work out, but there'll be fireworks beforehand.  In between today and July, Trump will unleash tweets about destroying Canada's economy.  Canada is going to get bitch-slapped, then ass-fucked.  I may look to buy CNQ again when Canada rolls over or Alberta becomes the 51st state.

Bought Oil, Sold Gold

A few hours after my previous post, Hedgeye's trading signal on oil changed to bullish trend. I've been waiting for months for this, so I bought a whole lot of oil stocks.  From 5% to 15%.  Risky, because its overbought and the signal can always flip back, but now is as good a time as any.

I still think we are in a decade of inflation.  I expect oil to maintain its price for one or two years, then explode in 2025 or 2026.  Like Uranium now.  Meanwhile, I'm paid to wait as oil companies gush cash (at 2023 oil prices) with generous dividends or buybacks.  For context, after peaking in 2022, the oil price hovered between $70-90 last year:

CNQ is a Canadian oil sands producer with long-life reserves, profitable, with generous dividends and share buybacks:

In 1Q24 they target to reduce net debt to 10 billion, after which they'll return 100% of free cashflow to shareholders.  I estimate either doubling dividends, or more than doubling share-buybacks.  Annualising their 9M23 profits, they are trading at a PE of 13.

Acker BP is a Norwegian O&G producer, that is still paying down debt but still also pays dividends:

Its trading at 12X 2023 earnings.

Var Energy is a smaller Norwegian producer, from Modern Investing Substack.  Although they pay dividends, they are a growth story, aiming to increase production by 50% by 2025.  Its trading 8 times 2023 earnings.  This company has more operational risk. 

The risks are politics and ESG.  Norway's district court overturned approval for several oil projects. While Canada will introduce a carbon tax.

Also sold my gold I'm as no longer expecting a recession.  And I need cash to buy stocks.

China reopening, oil, and doing nothing

I think China is reopening.  Rising cases occur when you reopen:

But official deaths have not gone up.  A quick google search shows a median of 18 days to die from covid, so we should know the death rate by now.  The latest numbers have 1 covid death yesterday:

Source: Worldometers.com

There's 2 risks to the reopening:

• China numbers are bullshit, so no one knows what the real hospitalisation/death rates are.  Low level officials will make up whatever numbers they think are desired.  And I'm sure no one reports bad news to Xi.
• Everything depends Xi.  He can reinstate zero-covid tomorrow.

We're getting a lot of confusing scenes out of China.  Protests, lockdowns and confusion.  It will be localised cycles of easing and tightening as they try to flatten the curve.  If they don't lock down soon, it will be too late, and they will have to let it spread.  So there's a small chance Xi imposes a harsh lockdown soon, and a bigger chance - growing larger by the day - that they just let it spread and try to slow it down.

My "China reopening play" is oil.  Zero-covid reduced demand by an estimated 0.5 to 1.5m bpd.  Long term I think oil goes up anyway, but China makes me buy it now.  Bought more CNQ and Equinor in the last 2 weeks, now its a 9% position (at buying price).  1% more to go.

Its a very oily portfolio: 10% in oil producers, plus another 35% in things correlated to oil (Gas pipelines, palm oil and LNG).

Also mechanically adding to my shorts as the S&P500 goes higher.  And the existing shorts are also growing bigger as the market gets higher; my shorts are now in the red:

Need to remind myself not to get too short, else the bear market rally will rip my face off.

Can't find anything to buy with the remaining 30% cash.  Despite a year-long bear market, stocks aren't cheap enough yet to catch falling knives.  I wait, either for things to get cheaper, or for the macro tide to turn so I can buy cyclicals like capex commodities.

Its hard, sitting in cash, foregoing dividend income, not going long or short.   I try to imagine myself as a multi-millionaire in the future, after the current bear market, recession and subsequent commodity bull.

Doing nothing is the hardest thing.

Sold 1/3rd of my CNQ position

 I bought a 2% position in CNQ 3 months ago, in the last month its up 20%.  Its starting to look parabolic:

I like this company and want to hold it for the next few years.

But I expect a correction around 2Q, which would hit oil.  CNQ is a high beta oil stock.   Short term, its way, way overbought.  And 2Q is only 10 weeks away, while the market is forward looking.

Sold 1/3rd of my position, @ CAD 64.44, profit 1.9K CAD or 29%.  Will sell more if it goes higher and my outlook stays the same.

Hope to buy it back cheaper later.