I love seeing the pictures, and I am happy to hear you are feeling a little better. I am with you, I don't think we are going to see placid markets for very long. Soon, I think we are going to have another chance to deploy that cash. In the meantime, I appreciate how you are sitting tight.
Glad to hear you're better! I agree that we are likely in for more volatility until the Fed is comfortable with the inflation impact of tariffs and reduced immigration.
While the Fed could look through the one-time impact of tariffs if they had confidence that the next Fed chair would keep inflation in check, Chair Powell seems understandably worried about his legacy. Some kind of recession seems likely while high rates and uncertainty delay purchases of durable goods. I took advantage of the rebound (and expiring covered calls) to sell my remaining WPC and raise cash. My EPR will be called away in June but I'm okay with that.
At the end of the Diamondback call, an analyst asked if Diamondback needed to diversify outside the Permian basin. The response was that other US shale basins have higher break-evens so it made more sense to conserve the inventory in the Permian basin for higher prices.
It certainly seems like conventional low-decline Canadian assets will be a better place to invest during volatility over the next year. I have a lot of VET in part because 50% of their net-of-royalty revenue is hedged for 2025 and 2026. (The Westbrick acquisition makes them the 4th largest Deep Basin producer and they can get $10 million/year in efficiencies just by drilling 2 mile laterals instead of 1 mile laterals.) VET has marketed its US (Powder River Basin) and SE Sask assets to delever but the selloff with the Saudi increase in supply hasn't helped. Hopefully the rebound in gas prices does. Worst case, VET now pays a higher dividend (5.76%) than CNQ.
I trimmed my CNQ on the rally this week and will look to buy more if it retests the low.
Thanks, Eric, for all that. I've seen coverage of this peak shale or peak US onshore thesis. Or peak Permian. Still I think the bark will prove to be bigger than the bite. It seems to me that somehow discussions of peak shale bring to mind the Tetons, with production set to plummet massively. But it seems far more likely to be like I-80 near South Pass, a high point amidst undulations with overall a slow descent. Slowing down to make the inventory last makes a lot of sense.
As to VET, I hope that works out. They should pay more than CNQ, they are 2% their size, and they have a lot of international complexity.
Most of my gains over the last 4 years were from shale royalties (Brigham Minerals which was acquired by Sitio Royalties) and it has been impressive to see the companies grow production via acquisition. Shale will continue to be able to respond to any spikes in oil prices, I just think many investors in those companies got used to growing production and dividend yields are won't be happy with shrinking oil production (due to rising gas-oil ratios) and lower dividend payouts due to high interest costs and funds spent repurchasing shares.
I would still repurchase Diamonback's royalty subsidiary VNOM on a selloff but I think the other royalty companies like Sitio will struggle with high debt and declining dividend yields. Also I should have a more diversified portfolio and keep upstream to 25% max.
Ironically my best investment over the last year has been in the trailer park--er manufactured housing lot landlord--Flagship Communities. They locked in debt for 10 years and can increase rents 6% per year. Hard to beat that.
I love seeing the pictures, and I am happy to hear you are feeling a little better. I am with you, I don't think we are going to see placid markets for very long. Soon, I think we are going to have another chance to deploy that cash. In the meantime, I appreciate how you are sitting tight.
Glad to hear you're better! I agree that we are likely in for more volatility until the Fed is comfortable with the inflation impact of tariffs and reduced immigration.
While the Fed could look through the one-time impact of tariffs if they had confidence that the next Fed chair would keep inflation in check, Chair Powell seems understandably worried about his legacy. Some kind of recession seems likely while high rates and uncertainty delay purchases of durable goods. I took advantage of the rebound (and expiring covered calls) to sell my remaining WPC and raise cash. My EPR will be called away in June but I'm okay with that.
Did you see Arjun Murthy's video (https://substack.com/home/post/p-163203307) and the Diamondback Shareholder letter (https://www.diamondbackenergy.com/news-releases/news-release-details/letter-stockholders-issued-diamondback-energy-inc-7) that said "As a result of these activity cuts, it is likely that U.S. onshore oil production has peaked and will begin to decline this quarter."
At the end of the Diamondback call, an analyst asked if Diamondback needed to diversify outside the Permian basin. The response was that other US shale basins have higher break-evens so it made more sense to conserve the inventory in the Permian basin for higher prices.
The Brent futures curve shifted significantly this week so 2028 crude is now higher than current: https://substack.com/home/post/p-163234690
It certainly seems like conventional low-decline Canadian assets will be a better place to invest during volatility over the next year. I have a lot of VET in part because 50% of their net-of-royalty revenue is hedged for 2025 and 2026. (The Westbrick acquisition makes them the 4th largest Deep Basin producer and they can get $10 million/year in efficiencies just by drilling 2 mile laterals instead of 1 mile laterals.) VET has marketed its US (Powder River Basin) and SE Sask assets to delever but the selloff with the Saudi increase in supply hasn't helped. Hopefully the rebound in gas prices does. Worst case, VET now pays a higher dividend (5.76%) than CNQ.
I trimmed my CNQ on the rally this week and will look to buy more if it retests the low.
Thanks, Eric, for all that. I've seen coverage of this peak shale or peak US onshore thesis. Or peak Permian. Still I think the bark will prove to be bigger than the bite. It seems to me that somehow discussions of peak shale bring to mind the Tetons, with production set to plummet massively. But it seems far more likely to be like I-80 near South Pass, a high point amidst undulations with overall a slow descent. Slowing down to make the inventory last makes a lot of sense.
As to VET, I hope that works out. They should pay more than CNQ, they are 2% their size, and they have a lot of international complexity.
Most of my gains over the last 4 years were from shale royalties (Brigham Minerals which was acquired by Sitio Royalties) and it has been impressive to see the companies grow production via acquisition. Shale will continue to be able to respond to any spikes in oil prices, I just think many investors in those companies got used to growing production and dividend yields are won't be happy with shrinking oil production (due to rising gas-oil ratios) and lower dividend payouts due to high interest costs and funds spent repurchasing shares.
I would still repurchase Diamonback's royalty subsidiary VNOM on a selloff but I think the other royalty companies like Sitio will struggle with high debt and declining dividend yields. Also I should have a more diversified portfolio and keep upstream to 25% max.
Ironically my best investment over the last year has been in the trailer park--er manufactured housing lot landlord--Flagship Communities. They locked in debt for 10 years and can increase rents 6% per year. Hard to beat that.
Happy to see you going better Paul.
Glad to see you are feeling better and hopeful that you will remain healthy for quite a while!
Thanks and me too!