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Polar Prospecting

 
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A, BBL, BHP, BP, C, CLF, CVX, EPI, EWZ, GMO, HUSKF, RIO, SU, TBT, TLT, XOM
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  • Suncor Energy reports first quarter results [View article]
    Frustrating to see the shares continue to trade below US $40 despite recent operating performance and strong energy prices.
    Apr 29 12:04 AM | Likes Like |Link to Comment
  • Suncor's New Fort Hills Project: 50 Years Of Stable Cash Flow And Dividends [View article]
    Thanks for taking the time to write another article, always a pleasure to read your SU coverage after earnings.
    Nov 14 04:16 AM | Likes Like |Link to Comment
  • Record Oil Sands Production Should Propel Suncor To $40 By Year-End [View article]
    $4 more to hit Mike's target, which is around 11% up from here. I had a look at the implied volatility of the Dec 13 options. As of today, it looks like the options market is pricing in a ~32% chance that SU will hit $40 sometime before the end of the year.

    I would welcome $40 by 2013YE or 2014YE, I'm not in a hurry. I will, however, continue to look out for a) potential gaps between existing guidance and actual operational results, b) negative revisions to guidance, and c) overly rich valuation metrics. Otherwise, I look forward to holding a stake in one of the most promising oil and gas companies on the market today.
    Sep 26 05:15 AM | Likes Like |Link to Comment
  • Husky Energy: Undervalued And Unloved, Solid Growth Prospects Offer 35%+ Potential Upside [View article]
    Thanks for taking the time to write, I've read a lot about these companies and found your insight to be valuable.

    One of my picks is Imperial Oil, which is why the following comment drew my attention: "Husky's EBITDA margin is only marginally lower than that of Canada's largest energy company Suncor and higher than Exxon Mobil (XOM) controlled Imperial Oil, as the chart below illustrates."

    As an IMO fanboy, I have just one criticism: I'm not sure about the use of EBITDA margin for the analysis of oil sands companies. Due to the high level of CAPEX in the oil sands industry, almost all companies use ROIC/ROCE as a benchmark for efficiency and profitability. EBITDA ignores the amount of maintenance and startup capital needed for production. SU, IMO, CVE, and Husky all include ROCE/ROIC at the front of their annual reports for this reason. I've never seen EBITDA margins quoted or used before in the industry, although just because I haven't seen it used before doesn't mean it can't be used.

    The reason I mention this is because IMO is usually acknowledged to be one of the most efficient employers of capital of all the oil sands operators and usually has a ROCE of 20+% (compared with 6-10% for SU and Husky). At face value, this conclusion seems to be at odds with the 11% EBITDA margin you mentioned above, which would lead us to believe IMO is the least profitable of all these companies. So what gives?

    As I mentioned, the primary problem here is related to CAPEX. The Kearl project at IMO doesn't use an upgrader and has one of the lowest initial and maintenance CAPEX requirements in the industry. It does, however, have higher operating costs than average. Using EBITDA margin to analyze IMO is to ignore this low CAPEX benefit and include the drawback of higher OPEX.

    Startup and maintenance CAPEX for these companies are huge and can vary considerably between different projects, which is why these companies tend to gravitate towards using ROIC/ROCE to measure performance. Once you take CAPEX into account, IMO has the most impressive record.

    On a somewhat unrelated point: although I think you'll be fine if you go with Husky, I think SU and IMO are both safer bets and will offer comparable long run returns with less risk.
    Sep 9 04:05 AM | 1 Like Like |Link to Comment
  • Record Oil Sands Production Should Propel Suncor To $40 By Year-End [View article]
    Thanks Mike, keep up the good work! 433,000 bpd lends credibility to management's Q2 guidance, which makes me hopeful about the additional low-CAPEX barrels that should be coming online as part of the debottlenecking.
    Sep 6 09:48 PM | 1 Like Like |Link to Comment
  • Warren Buffett Buys Suncor, And It Isn't Hard To See Why [View article]
    I'm also sensitive to the ethical issues you mentioned regarding the issuing of options to employees at the expense of shareholders. There's really no way to discuss the issue as it applies to SU without approaching the issue quantitatively. Bear with me as I go through the math to give us some context:

    1) Share Buyback Rate
    In 2011, SU repurchased 17.13 million shares. In 2012, that number rose to 46.86 million shares.

    3) Existing Options Outstanding
    SU has 47.3 million options outstanding. The weighted average price of these options is over $38, so only ~7 million of all outstanding options are in-the-money. That's a little under 15% of the amount of shares retired in 2012 alone.

    2) New Options Issued
    SU issued 5.1 million options in 2012 at a weighted average exercise price of $34.50. In 2011, SU issued 5.8 million options at a weighted average exercise price of $41.08 (2012 annual report page 115). New options granted, most of which are underwater, account for 34% of the shares retired in 2011 and 11% of the shares in 2012.

    Essentially, that means for every ten shares Suncor retired in 2012, it granted one option. In 2011, the Company granted 1 option for every 3 shares it retired.

    4) Takeaway
    It's disturbing when companies issue options at shareholder expense. Going forward, I expect to see around 5-6 million options exercised each year and around 45-50 million shares retired, meaning for every ~8-10 shares repurchased 1 option is exercised. The net effect of these counteracting forces is that EPS will increase, ceteris paribus. The number of options issued relative to the number of shares repurchased is still somewhat modest in comparison to other multinationals, definitely not enough to make me re-think my investment. Also, Buffett dislikes companies with overly compensated management teams. I doubt he would have invested last quarter if he thought management compensation was inappropriate.
    Aug 23 05:43 AM | 9 Likes Like |Link to Comment
  • Clash Of The Canadian Titans: Suncor, Imperial, And Cenovus [View article]
    Thanks. I went long at $30 early last year. Nice to see Buffett and Pickens taking stakes recently as well, looks like we beat them to the party! My gains are modest so far, but I'm planning to hold as long as management continues to execute and valuation is fair.
    Aug 16 12:14 PM | 1 Like Like |Link to Comment
  • Clash Of The Canadian Titans: Suncor, Imperial, And Cenovus [View article]
    Thanks! CNQ has one of the lowest cash operating costs I've seen at its thermal insitu deposit (just over $10/barrel). The stock seems reasonably priced too. If you're comfortable with exposure to pricing differentials, it looks like a solid bet.
    Aug 16 11:40 AM | 1 Like Like |Link to Comment
  • Suncor Energy Issues A Very Bullish 2nd Half Outlook [View article]
    "But even if the P/E were to contract by 25% (to 15), on earnings of $3/share that would lead to a stock price of $45, or 40% above today's price. "

    Hi Michael,

    Nice to hear your thoughts after the CC, I didn't listen in but read the transcript. Thanks for taking the time to write.

    IMO SU's being priced according to its operating earnings, the TTM P/E of 20 is inflated by the Voyager impairment charges. Over the last few years SU has traded at around 9-11x normalized earnings (excluding one-time items, FX, etc). It's currently trading at around 11x forward earnings. Although I'd love to see SU trade at 15x 2013 earnings around the end of the year, I think it's more likely that we'll see 10-11x 2013 earnings and 9-10x 2014 estimates (around $30-33 per share). That being said, watching this stock trade flat for the last few years has probably caused me to temper my optimism.

    Slide 6 from the Q2 presentation has me hopeful over the medium term though. It's the one with the planned production by project. It looks like SU's going to add almost 200kbpd to production over the next few years just by ramping up Firebag, debottlenecking, and increasing upgrader efficiency. From my understanding, these extra barrels can be achieved using relatively little CAPEX. As such, I'm expecting return on capital employed (ROCE) to break out from the 9-11% range to 15%+ over the medium term. Even if we don't get much of a move in price, cash will start to pile up and we'll get more buybacks and solid annual growth in the dividend.
    Aug 5 03:04 AM | 1 Like Like |Link to Comment
  • BHP Billiton Is A Buy In A Troubled Industry [View article]
    Bob,

    I'm half way through this book:
    http://amzn.to/145KDGi

    It's pretty good, gives you a lot of details about BHP (e.g. history, growth, and evolution). You might enjoy it.

    MJ
    Jun 20 06:16 AM | Likes Like |Link to Comment
  • BHP Billiton Is A Buy In A Troubled Industry [View article]
    I see, the difference comes from the FY. You'll get $5.77 (~10x P/E) if you use earnings from June 2011-June 2012 and $3.64 (15x P/E) if you use TTM (Dec 2011-Dec 2012). The 2012 data from Morningstar is fine but the TTM there isn't working properly, I checked ValueLine and the Company's statements. The forward ratios I've seen put it trading at 12-13x, but those are based on estimates...
    Jun 17 11:15 PM | Likes Like |Link to Comment
  • BHP Billiton Is A Buy In A Troubled Industry [View article]
    BHP is one of my favorite miners, but I think it can head lower. Assuming commodity prices & earnings don't drop (big assumption) BBL still trades @ 15x earnings and a P/B of 2.3x. BBL's a great company, but that's pretty pricey for a stock in a cyclical industry in my opinion. If earnings stay the same and people get spooked, I wouldn't be surprised to see the valuation compress to 10-12x earnings and 1.6-7x BV (think low $40s).

    BBL's also very large. I might pay something like 15x for a company growing very quickly, but BHP is huge (over twice as big as its #2 competitor RIO in terms of market cap). Other industry leaders like XOM trade at more modest multiples. I'm not sure if people are pricing in a recovery in earnings / commodity prices for BBL (hence the higher P/E) or if it simply enjoys a quality premium, but it's a bit expensive for my taste at the moment. That said, great company, I think you'll be fine if you're planning to hold long-term. Plus, who can argue with the merits of a 4%+ yield from an industry leader? Best of luck.

    mrj
    Jun 16 10:10 PM | Likes Like |Link to Comment
  • 6 Lessons Learned From Up And Down Markets [View article]
    Good points. As an illustration, this calculator lets you compare S&P500 returns with and without reinvested dividends. Over 30-40 years, the difference is very large, with compounding accounting for the vast majority of gains.

    http://bit.ly/RJFnmR

    Compounding reinvested dividends in individual companies can be destructive though, especially if your picks don't work out (think Bethlehem Steel or GM). The landscape can change over 5 years or less, even for companies we consider to be stalwarts today. What are your thoughts on using DRIP with an index fund vs DRIP with a basket of selected companies? If you stick to your strategy, are most investors better off with a buy-hold-monitor strategy or blind reinvestment into an index fund?

    So far my strategy has been to keep around 75% of my long-term investments in ETFs and using around 25% to invest in small caps sectors I understand well. As I get older (and hopefully become better at finding good companies and value) I'm thinking I'll shift to investing in some real assets that I'll have more control over (a house, rental properties, etc).
    May 22 10:53 PM | Likes Like |Link to Comment
  • 6 Lessons Learned From Up And Down Markets [View article]
    Larry,

    Thanks for taking the time to share your experiences. Sticking with a group of stalwarts using the strategies you shared is likely lead to solid long-term results.

    My strategy has been a bit different. I've been keeping most of my long-term investments in ETF index funds and my short-term investments in Mongolian CDs. I've also been putting some speculative money in small caps (~500MM-1Bln) in industries I know well, trying to find a 10-bagger over the next 3-5 years. As a younger investor, hopefully I don't kick myself later for not following your advice.

    mrj
    May 20 10:10 PM | Likes Like |Link to Comment
  • Suncor Energy Heartily Rewards Shareholders And Reports Q1 2013 Earnings [View article]
    I agree, SU is fairly low risk, but the share price never seems to budge despite usually impressive operating performance. It's been hovering around $30 for years.
    May 1 09:54 AM | Likes Like |Link to Comment
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