'This is a new all-time high in the stock' | CEO of Smead on Cenovus Energy

Añadido: 2026-05-03

[00:00:00]It's time for hot picks. Today, we are looking at three Canadian energy producers.

[00:00:06]And we've got one of our favorites, Cole Smead, CEO and portfolio manager at Smead Capital Management. Cole, it's great to see you. Thanks very much indeed. Before we get into the individual stocks, you reckon the market the energy market is is underestimating this supply disruption from the Persian Gulf and how long or severe it will be?

[00:00:27]Yeah, and before I get into that, Andy, I just want to say congratulations on a wonderful on behalf of all my colleagues and the thousands of Canadians that spend their time here in the desert every winter. And so we owe you a drink, dinner, or a round of golf whenever you'd like. So >> there. Thank you.

[00:00:42]>> [snorts] >> Uh so to your point, Andy, the answer is unequivocally, you know, if you look at global indices, we're sitting at, you know, 3 to 4% sitting in this space. And this is a rude awakening for investment markets. If anything, investors thought this was going to be adorably cute like Venezuela, and [clears throat] they found out that this is a 60-day stalemate so far. And the time needed to actually get votes to Asia with this crude is going to be 30 to 40 days out.

[00:01:10]So there's real-world implications going on. And you know, watching it's even interesting to see like the Arc purchase go on this week.

[00:01:18]You know, with them getting taken out, people are thinking, "Oh, it's a 30% premium. This is great." Well, you if you look at Arc's performance, Arc's Arc was not one of the winners. And I think I have a piece out today talking about the idea that the real winners in all this are the oil names. They continue to be. And if you look at the futures market, the contango there that investors are willing to bet on isn't as valuable. Looking into backwardation for years argues supply is going to be tight for a very long time, and it requires a lot of faith. And that's really what investors have been missing time and time again in the space.

[00:01:49]Let's get into some of your stock ideas. CVE, mighty player in the oil sands. And of course this bodes well for the oil sands really if people are questioning security of supply in energy.

[00:02:03]No question. No question. You know, you know, you got long reserve life in these assets. It's something that, you know, they they haven't been as excited about up until really late last year.

[00:02:13]And then you're really seeing the strength of this come to pass. You know, I mean, the MEG purchase, it just looks fantastic right now. I mean, they're going to increase production into this environment. That looks great for them.

[00:02:23]You know, they'll use the NOLs from MEG, which has worked out to their favor.

[00:02:27]You're seeing them buy out preferreds.

[00:02:29]You're going to see them do buybacks.

[00:02:30]That's all great. If anything, this is a tailwind that also feeds the downstream business. You know, I've been critical, we've been critical on the downstream business because we think the best businesses are pure upstream. That being said, the reality of the math is that the diesel crack spreads right now are literally minting downstream. And so that is going to feed Cenovus in a way that it doesn't some of the other independent producers that don't have a downstream asset like that. So that's all to their credit. But again, this is, you know, a new all-time high in the stock. And I Yeah, I just don't think we're going to see the period that we saw prior where, you know, people are going to be worried about the oversupplied market. We're going to have to build up supply for a few years here.

[00:03:10]And it it just walk us through what you said about backwardation there again in the oil market because I want to make sure I had it straight. Right now, we have a situation where the futures are a lot lower than physical prices.

[00:03:26]So what is that telling you telling us again?

[00:03:29]Yeah, so you know, spot today is high.

[00:03:31]If you go 2 years out or more, you're at $70 or lower per barrel in the futures.

[00:03:35]Now, admittedly, just so your listeners know, there's not much volume as you go out the futures curve either. In other words, you can't go out and trade that a lot of volume. Can one of the big producers go out and trade 5 or 6 years out? The answer is no. So I don't think that's not a very good physical guide to a hedging what they can potentially do.

[00:03:51]Also, if you go back, Andy, is this a good predictor of the future? It's not. It didn't predict Iran. It didn't predict Ukraine. And so people use it as, you know, like they'll look and say, "Well, what's mid-cycle? Oh, is the middle of the curve moving?" That's what, you know, the last 2 years these stocks have moved on. If that moved down, they traded the stocks down. And the only problem with that is go look at the Baker Hughes rig counts. Rig counts are down 8 to 9% in the United States the last year. Has spot been pretty nice for those producers? Yes. So what are we learning? We are learning that the industry has been trained into not misallocate capital, to not waste it on frivolous capex spending. And we're seeing that play out in the open market right now where even very high spot prices relative to recent past or history are not causing them to go out and drill. Now, comparatively, if you look back at the 2010s, you had contango. So as an investor, let's just say I knew nothing about the companies, I knew nothing about the environment. I just know that in contango, oil companies lose money. And in backwardation, oil companies make really good returns. I mean, 5 years looking back on a lot of these, it's 40% compounded. What would I rather have? I want backwardation. Does it require faith? Yeah, I have to look into the hole of 70 or less 3 years out. But you know what? Faith is where the big money's at. Backwardation, of course, where the futures price is lower than the the spot price.

[00:05:14]Sorry, we've used up a lot of the time.

[00:05:16]Strathcona is another stock that you like to look at. Cole, walk us through that if you would.

[00:05:21]Uh Strathcona might be the cheapest name in the in the space right now. They If you look at their total capital they have running the business, about 1.3, trades at 1.3 times its total capital.

[00:05:32]You know, they are, you know, unhedged.

[00:05:34]They're they're going to be going at this and watching, you know, revenues, you know, month to month in, you know, March and April, they're probably running 80% higher revenues per day than they were running to start the year. And so what I think the street is going to have to do is the analysts are going to sit down and say, "Okay, Cole, what if we stop this today and go to $70 oil the rest of the year?"

[00:05:53]You're going to see returns on capital in these businesses of 25 to 30% even if we drop to 70% or 70 dollar prices. Now, what is that relative to the multiple?

[00:06:03]You know, if you make 25 to 30% returns on capital, you don't end up trading at 1.3 times your total capital in Strathcona's case. So I I just say that because they remind me of a stock that got a lot of love last year, has cooled off relative other players this year, but I think people are going to have to buy the stock because of the attractiveness, the capital allocation.

[00:06:22]And I will add one more thing. On my recent visit to Calgary, Adam and Connor and I were joking around about this, but Andy, no one is saying that these are the good old days. Right?

[00:06:32]Oh, the good old days, the good old days. These are the good old days. This is a golden era in the history of the energy business, and it is not going to stop right now. And then people need to buckle up.

[00:06:42]Finally, Tamarack Valley. We're very tight for time. What's your verdict on that one?

[00:06:48]Yeah, vote against the board recommendation for a poison pill. Great management, bad board idea. Vote against proposal three. It's a really bad idea.

[00:06:57]And if you have any questions, find me.

[00:07:00]Okay. Okay.

[00:07:02]There could be money to be made in the takeover of this company, Cole.

[00:07:06]Yep. I totally agree. They should be merging with Headwaters unequivocally.

[00:07:09]'Tis the season. Thank you so much. I really appreciate it. And when I'm down in Phoenix, Arizona, I'll give you a call. Thank you very much. Cole Smead, CEO and portfolio manager at Smead Capital Management.