LateCycle Portfolio: September 2019 Purchases

The theme this month is VALUE.

Talk on the street (and by street I mean dissemination through public channels) is that big money is moving back into value stocks. Since August 2019, many stocks have rebounded 10-30%, and indexes like the TSX are breaching all-time highs.

Followers of this blog know that I have been highly leveraged since March 2019 (approximately 60% of my total portfolio value). After considerable deliberation, I’ve decided to utilize another $50,000 from an unsecured line of credit to enter the depleted energy sector.

A few things to keep in mind:
1) Leveraging is incredibly risky.
2) No one can time the market.
3) My decision was made based on the thesis that many energy
stocks are trading 2-3x cashflow while lagging behind growth in
global oil prices (and as such, any increase in oil should drive
stock prices higher, with estimates in the 100-200% range by
2021). A drop in oil prices will likely crater these stocks even
more, hence the increased risk and unknown variables.
4) Global recession fears are still present and can drive the oil
sector back down as quickly as it seems to be coming up. Always
have an exit plan. My initial thinking is long-term hold, however
this may change depending on how the market unfolds.

Purchases:

  1. Whitecap Resources
  2. ARC Resources
  3. TORC Oil & Gas
  4. Freehold Royalties

Instead of analyzing each stock for you, I advise you to do your own research. Eric Nuttall and Josef Schachter are two in-the-money investors who understand the sector and provide a decent starting point of analysis on how these individual stocks work within the energy matrix. I chose Whitecap, ARC and TORC because of their healthy balance sheets, high free-cash flow yields and overall discount to their peers. Freehold Royalties is not a producer, but rather collects royalties from producers and passes those dividends on to consumers. There is less upside potential with Freehold, but also less downside risk, so I find it a nice complement with the other three.

A few charts here highlight the disconnect between energy stocks and current energy prices:

Many intermediate Canadian energy players are trading at historically low valuations. Source: BNN
Valuations at $55 WTI are trading from 10-30% discounts to free cash flow. This means companies at current levels are essentially “cash cows.”. Source: Ninepoint Partners
Enterprise value is a measure of the company’s total value – this chart essentially showing these stocks are prime takeover targets. Consider bids on Husky Energy and Interpipeline earlier in 2019 – big money is interested. Source: Ninepoint Partners

At the end of the day, this sector is truly beaten up and is objectively cheap both historically and relative to other sectors. The risk lies in global oil prices and the nature of oil economics moving forward. I feel the risk here is worth the potential reward.

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