Do Your Own Due Diligence.

Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long AOI.V, CCE.V, CRE.V, EMM.V, FIL.TO, FOM.V, HBM.TO, NAN.V, NICU.V, NPK.TO, NPR.V, NSE.V, NXE.TO, NETZ.C, POE.V, RPX.V, STRR.V, SPC.V, SURG.V, TAO.V, TNZ.V, U.UN.TO, VLE.TO, XYZ.V, and YGR.TO (Image credit to Lukas Tennie on Unsplash)

Last year I decided to take a cue from the Chinese zodiac and plowed ahead like an ox through the fields of energy and materials... and a lot good things were turned up. So much happened last year that I can't even try to recap it, but for me, if there was main a theme for 2021, "energy" was probably it. Having been left for dead, energy stocks staged remarkable comebacks, showering faithful investors with triple-digit returns in the process, while the market recognized just how cheap they had become. Coal, uranium, copper and lithium also presented some big wins with what felt like relative ease; with the latter two showing the power of the electrification theme. Gold was a tougher place to be (though not without its big wins) and fertilizer was a stealth winner -- Nutrien is over $90 as I write this. Nickel is in a stealth bull market, trading at over $10/lb currently (a 10-year high), while zinc still seems to be the Rodney Dangerfield of base metals despite being at 5-year highs. They say diamonds are forever, and while the stocks of most diamond companies have had terrible years (just look at Mountain Province (MPVD.TO, last at $0.75) and Lucara (LUC.TO, last at $0.58)), rough diamond prices are (also) at ten year highs ... hmmm. Also in the things-that-make-you-go-hmmm category, I haven't heard many people talking about the rare-earth-element sector lately... something that almost no one thinks about, but is critical to the world's electric-motor-driven future. All in all, from my perch, "stuff stocks" felt the best they have for years, but broad investor sentiment is still tepid at best. Decisions, decisions. You never want to stay at the party too long, but it hardly feels like anyone is swinging from the rafters, so could it be that things are just warming up?[urcr_restrict]

Like most people, I'm not sure what to make of the overall market or where to be overweight. With inflation taking its coat off and getting comfortable by the fire, it looks like interest rates are going up, but the question remains... "How fast?". I have no idea, but the breadth of the move in the commodity complex reminds me of the last, and most profitable stage, of the bull markets seen in 2004-2007 and again 2009-2011 (coming out of the 2008 financial crisis). To me, it feels like 2022 could be the year that money really sloshes into hard assets (like energy, materials, and gold) as investors look to get exposure outside of the heavily-owned and highly-valued US tech sector; perhaps getting better protection from inflation in the process.

On the supply side, no one thinks much about commodities until they realize that the prices are going up and supply takes time, and capital, to respond. And these days, it is not getting any easier to find, permit, finance, or develop new mines or hydrocarbon accumulations. Layer on production shortfalls from existing operations, across a broad spectrum of the commodity complex -- for a broad spectrum of reasons -- and you've set the table for scarcity. Psychologically, scarcity creates that auction market I was talking about over a year ago... and loads of liquidity in the system means that buyers don't mind paying up for surety of supply now.

Speaking of liquidity, now comes the Fed's balancing act of not tipping the market into recession while still trying to rein in inflationary pressures. I'm not sure how this market cycle is going to end, but I doubt it happens in the first few rate hikes. If my gut is right, at some point, the Fed will be under criticism for hiking rates "too slowly". If I start hearing the word "overheating" in the context of the economy, I'll start looking over my shoulder, but right now, the omicron variant and its impact on Q1 is all anyone can think of, so I'd say there's probably some time before anyone starts talking about things getting too hot.

If I have to pick a place where things could get crazy, it's the oil market. EV adoption rates aside, the sheer volume of the existing (and still growing) ICE fleet means that oil demand isn't peaking this year or next, or even the one after that. Meanwhile supermajors are far less likely to sanction new, long-lead, exploration and development projects, which leaves relative minnows to try to make up for the void they are leaving. State-owned oil companies aren't likely to save the day either, having to deal with things like (a) pressures at home over more pressing immediate matters brought about by covid (e.g., stability, health care, employment, food), (b) woke-left pressure to constrain the role of public and private capital in hydrocarbon development, or (c) tired old oilfields which are already producing at maximum capacity. Energy stock price charts are telling me that the market is starting to take energy seriously again; and I think that some portfolio managers are starting to strap on energy as a bit of a "hedge" against the disruptive effects of a good old-fashioned energy price spike.

All I know is that it's not materials and energy mania out there. A lot of people have made a lot of money in a lot of places over the last couple of years and as a result, having no energy or commodities exposure hasn't hurt their performance. With a lot of the ETF/crypto/tech crowd now looking around at what other games there might be in the casino, I have to think that there might be some gas in the tank of the materials and energy trade. I'm not planning to just keep plowing ahead with blinders on, but I'm willing to keep my mind open enough to see if the market is really ready to pick up the commodities torch and run with it, again, as The Latest Next Big Thing. A friend who's been in the market as long as I've been alive recently told me that typically you'll see the Dow and the TSX at the same value before the end of a market cycle... and for that kind of relative outperformance to happen, he says that the energy and materials sectors have to be working, full stop. Here's hoping.

Here's a run down on some old names and some new ones. As always, I'm long and therefore biased, but I see lots of opportunity in the year head.

Small Cap Energy Special Situations

Africa Oil (AOI.V, last at $1.95)

I've followed AOI since it was formed, and maybe even a little before that. AOI is a "Lundin vehicle", so it gets an automatic checkmark from me in terms of management quality. For those who have lost track over the years, AOI recently bought a 50% interest in Prime, a corporate entity that owns separate 8% and 16% non-operated interest in two Nigerian deepwater platforms operated by Chevron and Total SA respectively. The assets were purchased from Petrobras in a deal made in November 2019, and I don't think a lot of people paid attention at the time. Combined, the two developments that Prime has an interest in produce some 450,000 bopd -- this is not a Mickey Mouse operation. Fast forward to today, and the debt that AOI took on for that acquisition has already been paid off... and now it's time to harvest sweet, free cash flow. AOI's interest in Prime looks set to deliver somewhere around CDN$1B of free cash flow (net to AOI) by 2025 at US$75/bbl Brent (Brent is currently US$87/bbl). There are some remaining hedges through April 2022, after which AOI is unhedged on its ~30,000 bopd of production. Sustaining capex appears to be in the tens of millions per year while free cash flow is in the hundreds of millions per year. Look, I know that Nigeria isn't everyone's cup of tea, but the valuation is low enough -- and the free cash flow potential high enough -- that I've got a decent position in the boat. If this was in the Niger Delta, I'd likely stay away for security and HS&E reasons, but deepwater offshore is like operating on the moon -- and the operators don't come any better. One thing that caught my eye during my DD on this one was the Chairman's Letter from December 2021, in which Mr. Craig highlighted the fact that AOI is now debt free and that the company expects to start talking about returning capital to shareholders (dividends +/- buybacks) when it reports its annual results in February of 2022. Sure the stock is up almost a buck since this time last year, but I don't think this is on a lot of people's radars yet. I polled probably a dozen people who would be the most likely to know AOI and not one of them was current on the story. Not one. Hmmmmmm. In the worst of it, AOI got down to $1/share, so at two bucks, I don't think it's done with its ongoing re-rate. I have AOI trading at around 60% of the after-tax NPV10 of its reserves (Prime interest only), with no value attributed to any of the rest of its substantial portfolio of African exploration and development projects/holdings. Volume has been picking up lately and the OBV indicator suggests that the stock is under accumulation, so it would seem I'm not alone in my view.

Tenaz Energy (TNZ.V, last at $2.80)

Tony Marino and his team haven't been idle. With the recapitalization and rollback complete, TNZ has just 27 million shares outstanding and a market cap of about $75 million. The company has about $25 million in the bank, and its Leduc Woodbend oil field is objectively worth $50 million considering the sale of 1/8th of it for $7 million not that long ago, but in a far worse oil tape. That means there's no "promote" in TNZ. I don't know when a deal comes, but if TNZ can pick up even just a single point of multiple expansion in the market on its coming asset acquisition(s), the accretion to the equity value could be significant. TNZ has big plans and I have big dreams for it, so get get 'em Tony. I owned SDE right after it recapped, and boy do I ever wish that I just held onto that one rather than trading it away for a buck. I don't plan on doing that again when there's a management team that I believe in and a good energy tape. When TNZ gets its first deal that will be the beginning of the story for me, not the end. Likewise for TAO below.

Tag Oil (TAO.V, last at $0.37)

Yep, still waiting... but at least the administrative plumbing of the energy sector has been moving in Egypt (e.g., Transglobe (TGL.TO last at $4.12) had its new production contract ratified recently), so I can't help but wonder if Q1 is the quarter that TAO finally shows that it can get deals done, and good ones at that. Anything that takes this long must be worth waiting for, right?

Valeura Energy (VLE.TO, last at $0.435)

This still trades at around 75% of its cash value. It's not a huge position for me, but if they get a new deal, VLE could very well be "born again" in the eyes of the market, and energy stocks are half-way to cool again. At such a big discount to cash, I'm content to hold it.

Pan Orient Energy (POE.V, last at $1.30)

This week, POE shareholders will vote on paying a 40 cent per share special distribution. This will reduce POE's excessive cash on hand as it prepares to wind itself down, perhaps into an exploreco. The company says it should release reserves on its well-performing onshore Thailand oil assets in early February, which will probably set the table for the monetization of said assets later in the year. I hold a small position here and will watch to see if it gets "too cheap" after the special distribution, but I expect the pending reserve report will make the odds of that less likely.

New Stratus Energy (NSE.V, last at $0.50)

Well, Jose Arata got the deal closed and has taken Repsol's place in Ecuador with a 35% operated interest in blocks 16 and 67, netting little NSE about 5,000 bopd of production. Mr. Arata has talked about big capital and production plans in the media over the last month or two, so I'm long a modest position to see if NSE can help Ecuador to revitalize its dismal domestic oil production profile. Most people have still never heard of NSE, but I used to work as a geo in the very basin (the Oriente Basin) that NSE has just bought into... a basin where I believe there is likely to be a lot of low hanging fruit if you can navigate the politics.

Yangarra Resources (YGR.TO, last at $1.84)

I have nothing new to say, but YGR is typically early with its reserve reporting, which I think could be enlightening this year. By my guesstimates, YGR is trading at around 50% of the value of its PDP (proved developed producing) reserves and at less than 20% of the value of its 1P (proven) reserves. YGR's Cardium wells boast quick paybacks and high IRRs -- and the company had no hedges to speak of as of last report. With a fairly predictable, and stated path to returning excess free cash flow to shareholders once debt-to-cash-flow gets to 1.0x, YGR looks like a very compelling small cap value play in the energy sector. Management-shareholder alignment is excellent here as management owns 18.5% of the company (25.8% on a fully-diluted basis). CEO Jim Evaskevich fully understands the importance of returning cash to shareholders, and he's the biggest one, so I'm being patient with this one.

Uranium

I'm a broken record here. My two main positions are Nexgen (NXE.TO, last at $5.79) and the Sprott Physical Uranium Trust (U.UN.TO, last at $14.78). It's starting to don on the market that nuclear might be the greenest energy option of them all, but even if western countries don't get it, China does. Soon China will overtake the U.S. as the world's largest producer of nuclear energy. Uranium is a "future facing" commodity and it currently trades well below its marginal cost of production. Not a mining or energy company in the world would face criticism from its shareholders if it were to buy Nexgen. The U.S. market drum should beat loudly for uranium this year given the momentum of, and interest in, the Sprott Physical Uranium Trust and its pending U.S. listing. Utilities are going to need to start contracting for long-term supply soon and without new production, things would get really dicey towards the end of the decade. I've seen the uranium price spike before, and with the backdrop in pretty much all materials across the board, I think the market's interest level has a lot of room to build.

Gold

Anacortes Mining (XYZ.V, last at $1.40)

This one has somehow landed into the "broken story" bucket for me, which is remarkable given the quality of the deposit, the upside potential at depth, and the pending PEA that could highlight this as "Prime Mining 2.0" (PRYM.V, last at $3.89). I really, really mean that. Tres Cruces is as good as deposits come. The oxide resource is low-strip and high grade, the jurisdiction well-established and open to mining, and the new CEO, Jim Currie, has real mining chops. Some of the recent selling is likely a case of "selling begets selling", but at some point, XYZ will run out of sellers and it'll feel like the skies have parted. It might happen after the PEA comes out, it might happen after the company shows what kind of holes this deposit can produce, or maybe it might happen after some corporate event. With the PEA expected in about 6 weeks, I guess I'll get my first answer then. Drilling probably starts in April (best guess) and that might be what really gets the story "lit". I've been following this story for so long that I'm bored of it, but today, if you showed me drill holes like the ones that were drilled at Tres Cruces some fifteen years ago, I'd be taking a hard look at it, I know that. As they say, sell 'em when they're flying and buy 'em when they're crying.

North Peak Resources (NPR.V, last at $2.28)

I've been long NPR for a long time, but recently it took off so fast that I got whiplash. The stock ripped higher on the back of news that Brian Hinchcliffe, with his geologist Mike Sutton, settled on the Black Horse gold property in Nevada as the company's core asset. The Black Horse property is the site of 41 historical shafts and adits where Old-timers mined gold from high grade veins over a hundred years ago. Subsequent drilling by (prolific) prospector Gary Grauberger to shallow depths over a portion of the prospective trend proved up a 350,000 ounce oxide gold resource with a grade of 1.2 g/t, which is high for Nevada oxide gold. The mineralized system appears to be 2 miles long and gold is present in both disseminated and high-grade mineralization overlying a fault zone that has feeder-zone potential. This could be a monster of a project and, with only 21 million shares outstanding, NPR has one of the tightest share structures you will ever come across. Given the success of Mr. Hinchcliffe at Kirkland Lake Gold, I suspect that he and his shareholders (many of whom were likely large holders in Kirkland) will have no trouble attracting capital or interest when it's appropriate. Drilling should start late in Q1 at Black Horse and will target both high grade zones and bulk tonnage oxide ounces. That's enough of an introduction to a story that's still in its early days, but now you've heard of it, so keep it on the radar. I have big dreams for this one given the share structure, so here's hoping.

Red Pine Exploration (RPX.V, last at $0.50)

This explorer is a relatively new gold position for me and I'm still waiting to see what kind of legs it has at its Wawa gold project, which is naturally near Wawa, Ontario. The project ownership was split for a long time between RPX and a family trust/estate for years, but that ownership quagmire was solved about a year ago when RPX finally became the sole-owner of the project. The Wawa gold project hosts a historical resource of 230,000 ounces indicated plus 470,000 ounces inferred at an average grade of about 5.5 g/t, but it's barely been drilled below 300 metres. To that end, RPX has been busy drilling and has already extended mineralization some 500 metres down dip of the existing resource and also has doubled its vertical extent with high-grade hits as deep as 550-600 metres in new and existing zones. With four rigs running and lots of cash (~$10mm) in the bank, RPX is going to have a lot of new data (~25,000 metres) from drilling in 2022 and the geology is such that I think it could attract real attention if mineralization continues at depth. There are multiple prospective shear structures here and some very interesting hits are being found where the structures intersect one another down-dip of the existing resource. Smart money says this could be the next Island gold mine, and in that context, Alamos Gold's (AGI.TO, last at $9.22) 19.3% equity holding would seem to make quite a bit of sense. Pierre Vaillancourt from Haywood is currently the only analyst with coverage on RPX with a $1.40 target price, but I'd expect others to join him in 2022 if pending results look anything like the early ones that have come back from Wawa. RPX is overdue to release assays from intervals bearing visible gold (VG) in holes completed in 2021 so stay tuned.

Lithium

Critical Elements (CRE.V, last at $1.42)

Nothing new here... despite having its federal approvals, CRE is still waiting for its provincial approvals. Sometimes I wish that the workers in these departments realized that the market is a dynamic place where the saying "time is money" actually means something... and that taking longer doesn't equate with doing a better job. The delays that the province has caused for CRE have undoubtedly held up project financing, offtake agreements, and potential strategic partnerships. As a Canadian, it's embarrassing to see needless delays like this. The federal approvals were in place five months ago and this is an environmentally benign mining project that is supposed to help Canada benefit from the world's Great Green Transition. What has happened to CRE is an illustration of the kind of inefficiency that has permeated government offices and decision making processes. With that venting out of the way, what I will say is that lithium prices are on fire and CRE is the best development stage asset that I can think of given its location, scale, modest valuation (at least I can thank the government for that) and a potentially short timeline to significant catalysts (starting with provincial permits, which although slow in coming, should come soon). CRE's spodumene deposit is located in Quebec and is a key component of the province's "battery metals complex". 2022 should be a good year for this one as it starts to hit institutional radars. Given the move in lithium prices, the NPV of CRE's Rose project likely exceeds $1B based on my back of the envelope math and that's just for "Phase 1". As a result, I'm content to sit with my stock and grumble about the government in the meantime.

"Exotics"

Giyani Metals (EMM.V)

This is literally a copy and paste about what I said about this company in my last note as my view remains the same... Manganese. It's the "M" in NMC lithium-ion battery chemistry. We've heard lots about cobalt and nickel, but no one talks about manganese... except people like the management team at Giyani. This company has a near surface, free-digging, very high grade manganese deposit in Botswana that checks all kinds of feel-good EV supply chain boxes. Updated economics on the project are due any time now, so battery metal enthusiasts will want to bookmark this one. The first pass on economics here looked very impressive. If the pending new study is as strong, I expect EMM will jump on the battery market train to higher levels.

Commerce Resources (CCE.V, last at $0.23)

This is in my farm-team category as I look for bottom-fishing ways to play rare-earth elements (REEs)... these are the elements that are needed for making the magnets that will power the electric revolution. REE supply is grossly concentrated in China and this has created an uncomfortable position globally after what we've just learned about the fragility of supply chains. CCE's Ashram deposit is a big one (~250 million tonnes), is located in northern Quebec, and has been extensively studied as it moves towards pre-feasibility in Q4. The project is conventional in that the main REE host is monazite, a mineral that is coveted for its high Nd and Pr content. CCE did a PEA on Ashram in 2012 which showed a >$2B pre-tax project NPV on about $760mm in capex. Given that (a) the key revenue generating REEs have doubled or tripled in price since that PEA was done and (b) the PEA did not include a potentially valuable fluorspar byproduct (fluorspar is used in EV battery manufacturing), I'm thinking the PFS due in Q4 could be quite compelling for someone looking for a large, non-China, source of REEs. I may be wrong, but to me, this looks like a strategic mineral deposit located in a great jurisdiction; so I'm in the bleachers with a small position and cheering for it to get noticed by the market... just in case the sector heats up. I need to do more work on this, but looking at the chart I feel like I'm probably buying closer to a bottom than a top.

Fertilizer

My only real "ag" exposure outside of Nutrien (NTR.TO, last at $90.31) is Verde Agritech (NPK.TO, last at $3.78). I've mentioned NPK before, so I won't run through it again, but what I will say is that the chart has been as pleasing as the recent news from the company. On January 10th, NPK guided for 700,000 tonnes of sales in 2022 with full-year EPS of $0.50/share then and guided for 1.4 million tonnes of sales in 2023. That puts the stock at about 7.5x 2022 EPS and perhaps 3.5-4.0x 2023 EPS if all else is equal. There's a significant ESG factor here that I can't quite value, but even with its move up I can't say that NPK looks expensive if you believe in the (fully financed) tonnage ramp that management says is on the horizon.

A Nickel for Your Thoughts

After a bidding frenzy for Noront Resources (NOT.TO, last at $1.08) and its currently-stranded Eagle's Nest deposit that ended with a $600 million offer from Wyloo, I started thinking about nickel again. My current exposure to nickel comes via North American Nickel (NAN.V, last at $0.57), SPC Nickel (SPC.V, last at $0.155) and Magna Mining (NICU.V, last at $0.50). I still like the idea of FPX Nickel (FPX.V, last at $0.59), but the market seems to be slow to accept it. Maybe some other time I'll dig more into the nickel names, but I mention nickel briefly here because there are not a lot of ways to play it and it's through $10/lb already, so I think it's time to start paying attention.

Lastly, I'd be remiss in not mentioning Talon Metals (TLO.TO, last at $0.74) here. Talon recently signed a nickel offtake deal with none other than Tesla (TSLA.US, last at $1,049). Granted Talon still has to permit, finance, and build its Tamarack project located in central Minnesota (the financing will probably be easier than the permitting), but having Tesla as a customer probably can't hurt the process. Resource expansion drilling has been going well, with some remarkable high grade hits outside of the existing resource. Now that the initial Tesla-news-bump is a few days old, I may have just talked myself into buying back a little bit of this one.

Copper

Copper is acting well as continuing jitters about Chile and Peru have buyers thinking ahead. I can't make a macro forecast for copper, but I know we are going to need a lot more of it in an electric future and that the way to expand supply tomorrow is to make today's price higher. So far so good in the copper price department and names like Teck Resources (TECK.B.TO, last at $42.59) and Freeport (FCX.US, last at $44.08) are showing real leadership. My copper basket moves around a lot, but off the top of my head it currently includes Hudbay Minerals (HBM.TO, last at $9.88), Filo Mining (FIL.TO, last at $15.06), Foran Mining (FOM.V, last at $2.64) Arizona Metals (AMC.V, last at $6.11), and Surge Copper (SURG.V, last at $0.35). In their respective order, that stable of names includes a larger cap story trading at a big discount to NAV (with good zinc and gold kickers), an emerging global giant deposit/district in Argentina led by the Lundin Group, a Big tonnage VMS deposit in Saskatchewan backed by Prem Watsa, a Big tonnage VMS deposit in Arizona, and a right-sized copper deposit just waiting to be plugged into mothballed existing infrastructure at Imperial Metals' (III.TO, last at $3.66) nearby Huckleberry mine complex.

Carbon Credits

It looks like the carbon market is going to be gigantic, so it's time to start thinking about ways to play it. To me, "carbon" feels a lot like weed did before legislation made weed a real business (i.e., a handful of companies with business plans based mostly on projections of things that haven't happened yet). At this point in time, with Carbon Streaming Corp (NETZ.C, last at $14.05) wayyyyy in the lead, the 2nd place trophy (outside of Advantage Energy, AAV.TO, last at $7.39) appears to go to Kevin McLean's Star Royalties (STRR.V, last at $0.66) which is starting to do carbon deals through its partnership with Bluesource, a North American leader in the carbon offset credit market. Star Royalties has gold royalties as its "main" business, but it has created a fully-owned carbon-focussed subsidiary called Green Star Royalties which would seem to be a prime spin-out candidate sometime down the road. Green Star's value could easily eclipse its parent company if it can capitalize on the coming opportunity in the carbon sector.

I can never cover it all, but if you've read this far, thanks so much for the continued interest. While 2022 could be a challenging year for the broader indexes in a rising rate environment, I'm optimistic that the case for hard assets remains strong. Yes, the Fed will raise rates and ease off the liquidity pedal this year, but in past cycles the market "breaking point" rarely occurs in the first few hikes, which suggests to me that once the covid cuffs are off there could still be some swinging from the rafters yet. I'm running with about 15-20% cash on any given day as I know there's going to be a big tax bill coming this year, but while I'm keeping one eye on the exit (just in case), so far things are ticking along just fine. Like I said in the title -- I figure that if it ain't broke... don't fix it...

Happy hunting.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long AAV.TO, ARX.TO, CJ.TO, CPG.TO, ERF.TO, ERTH.C, NPK.TO, SWN.US, TAO.V, TNZ.V, VET.TO, VLE.TO, and XYZ.V (Image credit to Ivars Krutainis on Unsplash)

It was the best of times, it was the worst of times. For a lot of investors, the market has been nothing but a house of pain for months. When things get frothy and people are paying 35-50+ times earnings (or even higher), talking about “price to sales ratios”, or discussing metrics like “revenue multiples”, you just know that it’s not going to end well. This was particularly true for tech and “growth” stocks where money felt like it had been falling from the sky for long enough that people became comfortable with it. Now, investors can’t go for five minutes without hearing/thinking about inflation, the tech/growth stock bubble has shrivelled, crypto is in the tank, and there are a lot of people wondering how so much money disappeared as if it were a mirage. While it was great on the way up, investor concentration (through ETFs and tech & meme-dominated retail preferences) has shown its ugly side as a lot money is in variations of the same theme, and that theme has been broadly for sale. As a result, the market has not been kind to those who were/are HODLing companies (or digital assets) that they probably had no business HODLing in the first place. Meanwhile, investors with high exposure to “value” (i.e., paying reasonable prices for good companies who generate free cash flow with sustainable/growing earnings and/or dividends) and commodities are more likely to have experienced more of a speed bump rather than a spike strip over the last month or so. This is not to say that energy, value, and commodities stocks are somehow immune from correction (in the worst markets, all stocks are just stocks at the end of the day), but a lot of the stocks in these sectors do show rapidly improving balance sheets, abundant free cash flow, increasing share buybacks, and increasing dividends — is it any wonder that they have held up better than most? Sure, tech might be a little oversold short term, but I suspect the days of “all tech, all the time” are over for now.[urcr_restrict]

Fears of economic recession have given commodity investors something to think about, and rightly so. Food and energy prices show little sign of easing significantly in the near-to-medium term and, while that might be good news for food and energy producers, it is putting real stress on people’s pocketbooks around the globe. This is especially true in emerging market economies, where the food/energy spend is a bigger percentage of annual income… and this comes at a time when the world is just starting to get its head straight after one heck of a covid spending hangover. If there’s one foreseeable thing that I worry about these days, it’s the ability of emerging market economies to service their debts in the face of a strong USD and high(er) interest rates. “EM debt crisis” has a newsy ring to it, and I think it’s a real possibility. Fortunately, emerging market economies tend to be sellers of resources, which gives them a natural hedge against a rising USD, but the magnitude of the increases in food and energy prices over the last year has been so significant that you have to wonder about how far that “natural hedge” can take them. Time will tell, but it’s not a time to be complacent. There could be some real instability in the back half of this year as crops that usually come to market in the fall from Russia and Ukraine simply don’t show up.

In terms of positioning, my cash levels are around 15-20% on any given day. That might seem high, but I think this is the kind of market where it’s not a bad idea to have some cash kicking around, despite inflation headlines telling me that I’m losing purchasing power every month. For me, after big runs, my thesis on running with elevated cash levels is twofold: 1) it allows me to take advantage when others are behaving irrationally / selling things for weak reasons (e.g., people who get bored of waiting, or those who are selling to meet margin calls or because “the market is down”) , and 2) it lets me sleep well at night after a couple of good years knowing that there’s a cash pile to draw on if the music unexpectedly stops. Not long ago I said that making money is easy in a good market, but holding on to it is the tough part. In markets like this, money can feel like sand falling through your fingers if you’re not careful and, while I think commodities and energy might have a ways to go yet when you look at their relative weights in the S&P, it’s sometimes best to plan for the worst. Today, I see a lot of energy/gold/materials companies trading at values that look “fair to cheap”, not a lot that are “ridiculously cheap”, and almost none that look “expensive”.

Overall, I don’t mind the landscape, but I will remain vigilant as I draw on the memory that commodities, and energy especially, all looked pretty good before the market top in 2008. There was a deep, deep trough during the Great Financial Crisis In Q4 2008-Q1 2009 after which commodities and gold roared back from 2009-2011, but I remember wondering at the time why I didn’t raise more cash when the stocks were flying just months earlier (hint: it’s always clearer in hindsight). This time around, I figure that if I’m running 80-85% invested and commodities keep going (I’m fairly long), then I’m probably still very happy, but if things take a nasty turn sooner that I expect, the cash will be invaluable at the lows. Things got really, really messy during the ’08 crash… a lot of resource/commodity stocks fell 60-90% during that time. To give specific examples, from top to trough, the XEG (TSX Energy Index) dropped from $$29 to $11 (-63%) in about six months and the XGD (TSX Gold Index) dropped from about $23 to $10 (-57%) over roughly the same period… it happened in pretty much a straight line. If that doesn’t scare you, TECK.B dropped from $50 to $4 (-92%) in those six months… then, just two years later, it ticked as high as $64 (+1500% from the lows). Freeport McMoran dropped from $60 to $8 (-87%) and was back to $60 two years later (+650%). Try that kind of volatility on for size with no cash in reserve! My main point in all of this? I endeavour to never be a forced seller… and I’m trying not to be too greedy having been lucky enough to catch this commodity move coming out of the 2020 lows because you just never know when the party is going to stop. Just ask a tech and/or crypto investor what they wish they’d done six months ago. Enough said.

So, with visions of a guillotine poised to pass judgement on greedy market participants, what better time to talk about a few stocks?

Natural gas

Now that I’ve seen nat gas hit $9/mcf, count me as floored. What’s equally surprising is that Canadian gas stocks like Arc Resources (ARX.TO, last at $18.77) and Advantage Energy (AAV.TO, last at $10.29) haven’t made new highs yet, but maybe that’s just a work in progress, so I remain patient. As a result of the move in nat gas, Birchcliff Energy (BIR.TO, last at $11.26) and Pine Cliff (PNE.TO, last at $1.96) have been screening well at strip pricing, but I don’t own them — only because I can’t own them all and a guy can only have so much torque to a commodity. One “torquey”name that I currently own which has some fairly stinky characteristics is Southwestern Energy (SWN.US, last at $8.80). SWN has an atrocious hedge book in 2022, but the fact that the stock is moving tells me that the market is looking past 2022 and into 2023 and beyond. I think that’s significant. I say that because if anyone is thinking that the run in gas is a flash in the pan, it may be time to consider otherwise. LNG exports are showing every sign of being in a multi-year structural bull market (driven by exports to Europe) and that’s not to be taken lightly. It may have ramifications for Western Canada as well, and you can bet your bottom dollar that industry hawks are watching for Shell to give a green light to Phase 2 of its Canada LNG megaproject on the coast of British Columbia. Market multiples would suggest that the market is still discounting current energy prices as an aberration that will resolve quickly, but I have to wonder if that’s the case. Historically, when the North American energy producers were operating with a full compliment of rigs, equipment, and people, the industry would respond quickly with additional supply to price spikes like these, but the “energy is dead” attitude of last six or seven years has left a mark. I’m still wrapping my head around the idea that natural gas could be “higher for longer”, but I mention the concept here for readers to think about when they read the news over the summer and heading into fall. Seeing this kind of natural gas price strength at this time of year is like a flare in the night sky… it’s hard not to notice it.

Oil

It’s hard to believe how far oil prices have come since last year. The oil stocks have been very good to the faithful, and the companies are in money-printing mode for the first time in as long as I can remember. Balance sheets are in full-on repair mode, with the debt levels of many producers dropping shockingly fast. Meanwhile, debt-to-cashflow multiples are dropping to levels that would have seemed ludicrously low a year ago. I have nothing real to add on oil macro, but man, what a ride it continues to be. For larger caps, I’m sticking with half-positions in Enerplus (ERF.TO, last at $18.70), Vermillion (VET.TO, last at $27.65), and Crescent Point CPG.TO (last at $11.00) as they all screen well on the broker comp sheets. CPG broke out to new highs recently and the rest can’t be that far behind at this rate.

Speaking of breakouts, Cardinal Energy (CJ.TO, last at $9.25) had a nice move higher on the back of announcing a 5 cent monthly dividend starting for folks who are shareholders as of June 30th. At 6.5%, CJ’s yield is still pretty juicy relative to anything else in the group and the company has guided towards bumping its dividend higher later this year if oil prices continue to cooperate. Most impressively, given CJ’s low base decline rate and low sustaining capex requirements, the company suggests that its 5c/month dividend would likely be sustainable at a WTI oil price of $55/barrel. At this price, CJ’s market cap is starting to run into the net asset value of its reserves, so I’ve scaled it back in my portfolio from being very overweight to just being chunky.

On the news front, my favourite little oil company that could, Tenaz Energy (TNZ.TO, last at $2.65) announced that it is acquiring UK-listed SDX Energy for about 15 million shares of TNZ stock. The deal appears to be highly accretive and I would expect nothing less from Tony Marino and his team. Elephant-minded investors might remember SDX used to be known as Sea Dragon Energy and was listed in Canada, with assets in Egypt and Morocco. Some might worry about food insecurity catching up with Egypt and Morocco later on this year, but I figure that I’ll just worry about the things I can control, and accept the things I can’t. I don’t have a crystal ball, but at this valuation I like my chances. Saudi Arabia recently pledged $15B in food aid for Egypt this year. Here’s hoping they can get grain moving through the Black Sea via Odesa this fall.

The deal, which requires a shareholder vote on both sides, would see little TNZ step its production up to around 4,700 boepd as it tacks on development assets in Morocco (gas) and Egypt (gas and oil), both of which also have exploration upside. TNZ highlights that the business combination would take TNZ’s reserves up to 17 million boe, is accretive 141% to production per share, and would be 212% accretive to operating income per share. I have a big bet on TNZ and this is the kind of deal that I was hoping for… At current prices TNZ trades at just a little over 1x EV/DACF (not a typo) on a pro forma basis, and will boast nearly $0.90/share in cash when the deal closes. I saw a note today that suggested the cash pile could grow to around $1.50 per share in just a year’s time. This is on a stock that closed at $2.50 today, meaning that I think TNZ is dirt, dirt, cheap at these levels. In light of its low share count, TNZ shareholders have a lot of leverage to value creation here; a $1 move in the stock (~40%) would equate to about a 1x cash-flow multiple expansion. Cue the Guns n’ Roses song “Patience”... there’s a lot of story to be written here.

In other “deal news”, about a month ago, little Valeura Energy (VLE.TO, last at $0.52) finally found something new to focus its attention (and cash) on — an offshore oil asset package in Thailand. VLE scooped the assets from KrisEnergy for around US$10 million assuming that all development milestones are met ($3 million was paid up front). VLE also needs to pony up US$9.2 million over 14 months for a MOPU (mobile offshore production unit) that is on site at the Wassana oil field. Total 2P reserves associated with the deal are around 4 million barrels of oil, with some 13 million barrels of exploration upside in near-field targets, including 5 million barrels in the discovered, but as yet developed, Rossukon oil field. I would encourage interested parties to peruse the presentation on the VLE website on this one. In it, VLE shows that it hopes to have ~3,000 bopd on stream by the end of this year and shows a ~4,500 bopd target in 2023. On those kinds of numbers, it seems to me like VLE should have a pretty clear path to a $100 million market cap, which would mean a share price somewhere in the $1.25 range, (give or take) without too much imagination. That’s assuming that all goes according to plan, and I’d expect VLE will have regular updates on its progress this year, which means investors will know if it is delivering as promised. If VLE hits its signposts on time, shareholders should do well. The company says that its initial 3000 bopd production restart will yield US$9 million in cash flow every quarter. That would seem to be pretty sweet in light of the all-in purchase price of around US$20 million, so here’s hoping. VLE will still have around US$20 million in cash post-deal, so it is well equipped for either further acquisitions, or any unexpected costs, or perhaps both. 

And yes, I’m still waiting for little Tag Oil (TAO.V, last at $0.24) to haul something into the boat as the last of my three “companies searching for a deal” stocks. TNZ, TAO, and VLE all started the year looking for deals, and only TAO remains. With TAO trading at about a nickel over its cash value, I like the risk-reward here as much as the first day I met it, but now its arguably far closer to the main event simply through the passage of time. Patience.

Fertilizer

This is already long, but Verde Potash (NPK.V, last at $9.90) put out some big numbers two weeks ago on its Cerrado Verde project in Brazil. Recall that this is a glauconitic siltstone that NPK grinds up +/- some additives and then sells into the (big) local Brazilian market.  NPK’s product offering is right up the middle of the fairway of ESG investing. Five decades of dumping chemical fertilizers on our agricultural lands has increased soil salinity significantly and the world is looking for new options. NPK’s product produces healthier, more drought resistant plants, isn’t prone to runoff the way that chemical fertilizers are, and it restores micronutrients into soils where it is applied. I said some time ago that this project spits out numbers that verge on ludicrous and NPK didn’t let me down. When they released their pre-feasibility study results on May 16th, the NPV of the lowest contemplated production scenario came in at US$2.91 billion. Given NPK’s tight share structure, that’s over C$60/share for those following along. See? I said it would be ludicrous. The market seems skeptical and that’s understandable, but NPK is in the middle of a lot of agricultural activity in Brazil and in a world where things like fertilizer are getting harder to come by, a locally-sourced, ESG-loaded, product stream like NPK’s just might fit the bill. Time will tell.

I hadn’t heard of EarthRenew (ERTH.C, last at $0.30) until newsletter-writer extraordinaire Keith Schaefer pointed it out not that long ago as potentially being “the next NPK”. At first, I was skeptical, but I try to stay open minded, so I did have a real look, and eventually tuned in to their investor call on May 19th. These guys were impressive on their call. They are clearly agri-science geeks, have great passion for what they do, and really understand the critical importance of soil health (and how to enhance it). ERTH's pelletized fertilizer product combines organics, bacteria, and mycelium (mushrooms) into little nuggets of soil-restoring, plant-growing, goodness. ERTH has the ability to add pretty much anything they want to their pellets should farmers want to have some traditional “chemistry” in them. I flag this one as one to read about and dig into at your leisure. The company has a very aggressive growth plan laid out in Western Canada and if it executes, 30 cents is going to look pretty good. Maintaining soil health and restoring soils isn’t just ESG mumbo-jumbo… it’s real, multidisciplinary science that corrects oversimplified views developed during a different era. EarthRenew feels very forward-facing to me and I’m glad to be a holder.

A quick aside on fertilizer and the concept of “idiocracy”. If you haven’t seen the movie Idiocracy (directed by Mike Judge of “Bevis and Butthead" fame, among others), I highly recommend it as a light comedy with a disturbing -- because it's potentially valid -- point. The idea being that a democracy is only as good as its leaders, and if the leaders are selected by voters who don’t take their responsibility seriously, very bad things can happen. In this case I’m referring to Sri Lanka. I may be over simplifying, but it would appear that the current crisis in Sri Lanka has been driven by the “green” push of its recently elected leader. Part of his political platform involved turning Sri Lanka into an organic farming mecca… and in order to do so, the government banned the import of “chemical fertilizers” in a single year, giving farmers no time to prepare, never mind figure out how to farm organically. Unsurprisingly, the result was/is an unmitigated disaster. Crop yields plummeted and a food crisis has ensued. The government reversed its ill-advised stance on fertilizers, but it was too little too late. This should serve as a lesson to those who think that the world can “just stop” using hydrocarbons. It is dangerous for governments to suggest actions based on virtues that do no align with practical reality and voters should remember that. Measured, studied, and practical transition is a good thing, but jumping blindly into new, unproven policy flies in the face of logic… you do so at your own peril.

Gold

The jury is still out. After a nasty drop, gold has recovered to around $1850. My call is going to be that the trend will be determined by whether or not gold prints a $1900-handle or a $1700-handle next. Not overly insightful I know, but right now gold is in the “no one really cares” category. I’m firmly in the “I-have-no-idea-which-way-gold-is-going-to-break-but-when-it-does-I-will-act-accordingly” camp.

On gold, I have to mention Anacortes Mining (XYZ.V, last at $1.02) here given that drilling has just started at their 2.6 million ounce Tres Cruces deposit in a mining-friendly region of Peru. If you’ve been reading my notes, you’re probably tired of hearing about XYZ from me. The good news is that most people have never heard of XYZ. I expect that to change when drill results start coming out. This project hasn’t been drilled since 2008 and it’ll produce some head-turning holes; there’s no doubt in my mind about that. I’ve waited years to see this drilled again, so here goes nothing. If I had to guess, I’d say that results should start to come back some time in July. The program is expected to consist of 3,000 to 4,000 metres of core-drilling, costing US$1.6-2.0 million. Holes will be drilled to test for extensions of known mineralization at depth, to gather additional rock for metallurgical testing, and to upgrade resource category confidence (e.g., move “indicated" ounces to “measured”). Tres Cruces is completely off the market’s radar — for now. Drill baby, drill.

That’s long enough and I think I’ve covered the critical bases. More next time, but for now I’m hopeful about the market, but I’m being cautious with loose trades. There’s tension out there in the air, and volatility in the market, which will test even the most seasoned investor’s nerves. Within all of that volatility, I’ll watch the charts for signs of sector breakouts and sector breakdowns, because the tape always tells the tale — and you don’t fight the tape.

Happy hunting.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long every stock in this post (Image credit to Pixabay)

I've tried writing this update many times over the last few weeks, but I just kept coming back to the title of my last note: "If it ain't broke, don't fix it". The energy sector continues to work as a theme while the world questions just what kind of risk premium can be put on the gotta-have-it commodities. Inflation is on everyone's lips, and the developments in Ukraine have put the Fed in a bit of a quandary. If inflation is running hot because of global shortages in energy and materials (assuming that's what's going on in those markets), then would "aggressive" Fed rate hikes have any impact on the prices of the commodities that are driving the underlying inflation? To do that, you'd have to increase supply (Fed can't do that) or decrease demand for commodities (only way to do that is to cause a recession). While the Fed can remove liquidity from the system, it can't do anything about where the remaining liquidity chooses to hide. I don't know about you, but my screen clearly showed "gold and energy" as the two shelters in the storm today, and that's becoming a recurring theme. And while energy has been a pleasant place to be for a while, gold has actually started to shine a little more as of late. I think that's because managers are starting to think about where to hide as the tech stocks with no earnings (or trading at crazy earnings multiples) continue their declines in the face of some I-sure-hope-this-inflation-doesn't-stick-around numbers. Likewise, managers who are long the traditional 60-40 debt-equity portfolio split are probably starting to think about hiving off some of that negative-real-yield debt in exchange for a few percentage points of gold in the portfolio -- you know, just in case.[urcr_restrict]

I was reminded today that the paper market for crude oil is many multiples of the actual physical market. Given what we've seen happen with the cryptocurrency mania, "meme stocks", and tech-stock frenzy, is it crazy to think that traders might get a little overzealous with crude in this environment, while the producers cheer them on? For those who don't remember, in 2008, when oil hit $147 a barrel, there was no actual physical shortage of crude. OPEC was tight on spare capacity, but it was by no means exhausted. That was around the time that they added an extra digit to the price signs at gasoline stations. In 2022 dollars, $147 probably translates into something like $200 today. Let that sink in a little. Don't get me wrong, it all ended horribly, but inflation is a b*tch and it's stickier than you think... and maybe a little more punctuated. We all know prices keep going up, but rarely does it smack you in the face. Given that the price of my weekly salmon salad (in a food court) just went up $3, consider myself smacked in the face. That salmon salad is never getting cheaper. Just like that extra digit never left the sign of the gas stations. So where is the new normal for crude? I have no idea. Will it be volatile? Likely. There are a lot of moving parts right now, but if I ignore the noise and think about which sectors are showing consistently and dramatically improving financial outlooks, it's energy; with an honourable mention to gold.

Some quick thoughts today on what comes to mind:

The story-of-the-day prize goes to Africa Oil (AOI.TO, last at $2.68) as Upstream Online published a story of a (technically unconfirmed) massive oil find at the Venus-1 exploration well in offshore Namibia. A lot of hyperbole was used in the article with regards to the scale of the "discovery" (again, unconfirmed) and I like hyperbole when it involves something that I own. AOI owns 30.9% of privately-owned Impact Oil and Gas, and Impact owns 20% of the offshore Namibia discovery in question. The other partners are Total, Qatar Energy, and Namcor (the Namibian NOC). If confirmed, this could be a highly material discovery and Impact's 20% interest would be worth a tidy sum to AOI. Before this news hit, I felt that AOI was worth something close to $3/share with a fair degree of comfort. If you want to guess that a world-class offshore oil find is worth US$10 billion, Impact's piece would be worth some US$2B, which would be ~CDN$750 million net to AOI. That's about $1.50 per share. Add it to the $3 that I thought AOI was worth before, and I see a $4-handle coming to a theatre near me if this discovery is for real. At that level, I still think I'm getting Kenya for free and the rest of AOI's exploreco holdings for free. Good times. I love seeing a big discovery, so here's hoping it's officially confirmed as "huge" in the coming days/weeks. **Update Feb 24th: The discovery was confirmed by AOI this morning and you can read about it here**

For those looking to play around the edges, Sintana Energy (SEI.V, last at $0.195) is the closest to the action and appears to have a 20% carried interest in PEL 90, which sits directly to the north/northeast of blocks where the Venus-1 and Graff-1 wells were drilled (Graff-1 is also rumoured to be a separate discovery by Shell in the block immediately east of block where Venus-1 was drilled). Close doesn't mean SEI is anywhere close to drilling a discovery of their own, but they are the closest, smallest way to try to get "exposure" if this is an emerging area-play hotspot like offshore Guyana. SEI also has a 25% carried interest in a high-impact onshore Colombian asset where little SEI is partnered with none other than ExxonMobil. That asset (block VMM-37) could become relevant in due course. I own some of this one and have subscribed on the most recent private placement at 15 cents.

While I'm talking about AOI, I may as well mention Eco Atlantic (EOG.V, last at $0.63) here. My interest in EOG is not for its offshore Namibian exposure (their blocks are pretty far from the action), but rather for EOG's offshore northwest South Africa exploration target on Block 2B. You can dig into that one at your leisure if you're interested, as their well won't drill until the back-half of 2022. It's a "re-drill" of a past discovery of unknown size. New seismic interpretations suggest significant up-dip potential from a historic shallow-water offshore discovery well. I mention this because I think it's always good to bookmark these things for revisiting a little later in the year. I own a few as a marker position.

I've rotated my Yangarra (YGR.TO, last at $1.76) into Cardinal Energy (CJ.TO, last at $5.23) in recent weeks as I got to know Cardinal better. CJ offers me exactly what I was looking for from YGR, but I think it gets to Dividendtown sooner, and CJ provides amazing visibility on what that journey looks like. I still very much like YGR and its CEO Jim Evaskevich, but CJ's lowest-in-industry base decline rate means that there's more free cash flow available to pay me a fat, juicy, monthly dividend. By CJ's projections, that dividend looks like it'll be 5 cents per month to start, which means CJ would have an effective yield of 11.4% if it's still at this price in a few months when the dividend is likely to start. The two biggest holders of CJ are Murray Edwards and Eric Nuttall, which is some very good company to have when you're investing for value. CJ is unhedged, so I'm going to make hay with them while the sun is shining. As a point of reference, at an 8% yield, CJ would be a $7.50 stock, so I think my risk-reward is favourable on this one.

Nothing new on Tag Oil (TAO.V, last at $0.42) and Tenaz Energy (TNZ.V, last at $2.38), but I will say that they remain top positions for me as I wait for them to get deals. TNZ is pretty much bullet-proof given its cash balance, minimal debt, and underlying asset value at Leduc Woodbend. TAO still has the market entranced with the idea of a Rally Energy or Kuwait Energy redux... and if you knew either of those stories you would know why I'm willing to be so patient with Abby and team at TAO. Enough said.

Gold. The tape says it all. Gold is up $20 as a write this and even the bulls are barely long gold. I have all kinds of gold exposure. I like Osisko Mining (OSK.TO, last at $4.02) at these levels given its 100% ownership of the big, and high-grade, Windfall deposit. OSK's share price got hit when its would-be partner, Northern Star, apparently didn't offer JV terms that were to OSK's liking. Nothing has changed about the deposit... and deposits like Windfall, in jurisdictions like Quebec, are a rare breed. I own some Barrick (ABX.TO, last at $29.11) as well, simply because it's a liquid, large-cap, beta go-to gold name. Likewise for Agnico Eagle (AEM.TO, last at $69.83).

I'd be remiss if I didn't mention Anacortes Mining (XYZ.V, last at $1.35) here. Anacortes should deliver a PEA on the Tres Cruces oxides in the next couple of weeks. I expect that to show a low-cost, high margin, quick payback operation. It'll be old news to me, but I have to remember that "the market" has never realllllly looked at this story. In April, when Anacortes plans to start drilling, what do you think happens when they start pulling intercepts pushing 200 metres or more of 2-3 grams per tonne gold starting at just tens of metres from surface? I think the main issue with XYZ is market exposure, not the deposit. The deposit is excellent, Peru is open for business, and the project is in a very pro-mining region of Peru. Readers of my notes will know that I like some things that can be pretty far off the beaten track, but XYZ has everything going for it so I remain optimistic that once news flow picks up, things could change quickly for this one.

Speaking of things changing quickly, Verde Agritech (NPK.TO, last at $6.33) has been an absolute rockstar as of late. The stock is through $6 and isn't showing any signs of letting up. When I first mentioned this in October of 2020, the stock was trading for 1/10th of what it trades at now. I mention this one on the heels of XYZ because when I first mentioned NPK, I specifically flagged how it was illiquid and no one cared on it (sound familiar?). Witness the NPK chart to see how things can change once the pieces start falling into place. Food for thought. NPK is trading as a fertilizer proxy with a killer-app "regen ag" kicker angle. This stock could see double-digits or better by the time all is said and done if they keep up their operational and market momentum. Bravo to the CEO, Cristiano Veloso, for keeping the share structure so tight after all of these years.

I still love Advantage (AAV.TO last at $6.61) and look forward to their upcoming financials in the hopes of hearing more about Entropy, the world's better carbon-capture-at-source mousetrap. National Bank put out a great sum-of-the-parts analysis on AAV today and highlighted their $11 price target on the stock. I'm not going to argue with them. The stock looks like it just bounced off its 200-day moving average, so I'll keep an eye on that price as a support level going forward.

Back to gold, North Peak (NPR.V, last at $3.12) is one of my other favourite under-the-radar gold stories. It has performed exceptionally well share-price-wise and is currently drilling at its Black Horse project in Nevada. The drilling is targeting previously "scout drilled" high-grade bulk tonnage oxides (~1.2 g/t) and high-grade crosscutting structures (up to 42 g/t). A little bit of success could really move this one given the scale of the project and the fact that it has only 21 million shares outstanding (will be ~24 million post the recent financing). This is a Brian Hinchcliffe vehicle, and given his success with Kirkland Lake and Rupert Resources (RUP.TO, last at $5.40), I'm willing to ride shotgun as the geos figure out what Black Horse has to offer.

I still like uranium, same names as always.

For copper, between Bell Copper (BCU.V, last at $0.53) and BCM Resources (B.V, last at $0.25) I have two monster-hunting exploration stories in Arizona and Utah respectively. Both companies are hunting absolutely massive blind copper porphyry targets and I mention them here because the early data has confirmed the geological model for both stories. Grade and tonnage are big unknowns here, but both companies are led by technical teams will as much experience as you can have when it comes to searching for, and discovering, these kinds of deposits. These are very high risk stories, but either one could multi-bag if successful.

I'm running out of energy and I feel like I've barely scratched the surface with this note, which should give you some sense of how many names I'm following right now. One last story that really deserves mentioning is North American Nickel (NAN.V, last at $0.58). NAN has signed a LOI with privately-held Premium Nickel that would see the Botswana nickel assets -- Selkirk, Selebi, and Selebi North -- consolidated under the NAN banner after a concurrent $20 million financing by Premium Nickel is completed. The asset package represents the potential for something on the order of 25-100 million tonnes of high-grade nickel-copper-PGE sulphide mineralization at Selebi alone. That's absolutely world class. Drilling will be underway shortly and the most immediate catalyst would be the extension of mineralization in a geophysical target area beneath the old mine workings. The Selebi mine never shut down for lack of ore and NAN is determined to figure out what was left behind. If you're serious about nickel, you need to be aware of NAN, full stop. Oh, and CATL (yes, that CATL) is one of NAN's biggest shareholders. That can't hurt. NAN's stock is halted until the Premium Nickel deal is completed, but I think it's one to watch if nickel hangs in here.

Wow, as I type this, I'm reading that Russia has launched missiles into Ukraine. Gold, guns, and oil would seem to be in high demand tomorrow morning in the market. Russia is a big commodities producer (including nickel, ahem, NAN) and the developing situation could be far-reaching in the commodity complex. For example, the U.S. gets 38% of its uranium for its reactor fleet from Russia and Kazakhstan. Hmmmm.

As they say, stay tuned.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long AAV.TO, B.V, CRE.V, EMM.V, NPK.TO, NSE.V, SURG.V, TAO.V, TNZ.V, U.UN.TO, VLE.TO, XYZ.V, YGR.TO (Image credit to Gyu Seon Choi on Pixabay)

About a year ago, I wrote about being an "ox" in 2021, with a bias towards energy and materials. Energy stocks have since reclaimed reasonable portions of their former glory after the market realized that they had become way, way too cheap in the face of what could be a looming energy crisis. Much of that re-rate has occurred now, and although the energy names still represent great value, money flow is just down to value-versus-growth market dynamics at the moment. I remain a bull on oil and gas, and seeing the market shake off this morning's news about a coordinated SPR release is certainly encouraging. There are a number of great energy companies, with great and improving balance sheets, trading at what I think are attractive valuations. That doesn't mean the market is going to rip them higher tomorrow, but if energy prices even just hang in around this level, the sector is going to generate the kind of free cash flow that can't be ignored forever. Meanwhile, the mainstreaming of the electrification theme means that copper has been good if you've been in the right names, with small-caps generally outperforming relative to the larger-cap names. Uranium and lithium are so hot that they are on fire, while junior nickel, manganese, and rare-earth stocks are largely still waiting for their time in the sun as part of the electrification trade. Gold had my eyebrow up with its recent move up to the mid-$1800 range (despite a coincident strong move up in U.S. dollar), but yesterday gold dropped $40/oz on Powell's reconfirmation as Fed chair, and today I'm reading about the Turkish lira being in free-fall -- so I'd bet the Turkish central bank is out there selling gold today to try to support the lira as they try to figure out which way is up. I feel like gold is on the verge of something here, so my views will be heavily influenced by the direction of the next major move, with an eye on treasury yields and the dollar. Overall, balance sheets in the mining group are improving rapidly, much the same as they are for the energy stocks. It does look like M&A will continue to be a theme for both energy and materials, so I'm trying keep that in the back of my mind when I think about my holdings. The other theme that appears to be alive and well in these sectors is that of discovery/delineation stories. These are stories where a great deal of value and interest can develop quickly, making for some impressive returns if one is lucky enough to find one in the early days. After all, mines and oilfields need to be replaced as they are depleted by the cash-rich producers.[urcr_restrict]

In terms of positioning, lately I've found myself pulling "loose" bets off the table while keeping smaller bets in play in smaller-cap names where I see the potential for outsized value creation. Those loose bets would be characterized as "beta" (i.e., market-driven) names while my higher-conviction stories would be my "alpha" (i.e., event-driven) names. I find that interest in any given commodity and its associated stocks can come and go depending on the day, the week, or the month, but as long as the underlying backdrop is broadly favourable for a given sector, the smaller companies that are truly generating value can be rewarded handsomely. Granted, moving down market is a riskier and harder game, but I think I can mitigate that risk with position size... and, by running fairly cash-heavy at the same time, I've lowered my overall market exposure because hey, you never know what's lurking around the corner -- and let's face it, it's already been a good run. It's my opinion that at this point, in this market, no one should still need to prove to themselves that they can make money in stocks. The money making has been good; there's no question about that. It's the hanging on to it that's the hard part, and I think that's something no market participant should forget.

With that in mind, I'm by no means pulling in the horns. I just want to focus more on specific situations where I think step changes in value are possible, as opposed to, "Hey, maybe this could go up 30% because the chart looks good and I like the sector". I'm sure I'll make some loose buys along the way, but I'll keep tight stops on things to make sure I'm not exposed to unnecessary damage. I never know where these notes are going to go when I start writing them, but I guess I'll lay out some of those special situations here, in no particular order, for folks following along.

Advantage Energy (AAV.TO, last at $7.87)

I singled Advantage out about six months ago for its embedded carbon-capture subsidiary called Entropy Inc. For anyone not aware, Entropy has developed a modular, scalable, carbon-capture technology that it projects will have CO2 capture costs of half of anything that might be considered to be a peer. It gets interesting when you consider that Aker Carbon Capture ASA (ticker: ACC, listed in Oslo) is probably the closest peer to Entropy... and it has roughly doubled in value over the last twelve months to a ~$2.5B market cap (despite having almost no revenue). Now think about the fact that Aker's goal is to be able to capture CO2 from direct emissions at twice the cost of what Entropy is targeting. In other words, their goal is to be half as good as Entropy. Hmmmm. Advantage owns 90% of Entropy, has a fantastic gas business, and has a market cap of $1.4B; so a person could draw some conclusions about the amount of upside in play if Entropy is as good as billed. The market should get a good look at the performance of Entropy's technology when the first phase of a commercial-scale system is rolled out at Advantage's Glacier gas plant in Q2 of 2022. Whenever there's some kind of transaction that pegs the market value of Entropy, I'll revisit my value argument and see how it holds up.

Anacortes Mining (XYZ.V, last at $1.75)

CEO Jim Currie says it best when he points out that the Tres Cruces deposit was lost in obscurity for the better part of 20 years, under the radar of almost anyone in the industry. There hasn't been any drilling on the deposit since 2008, and no one has ever done an independent economic assessment of the project despite its top-tier grade, notable scale, and potential for expansion. Having been hidden in Barrick's portfolio for nearly two decades, the Tres Cruces deposit has almost no drilling deeper than 350 metres, despite the fact that it remains open at depth and is in true elephant country for mineral deposits. Tres Cruces is a fully preserved epithermal system, capped by a pre-mineral rhyolite that protected it from erosion. Jim Currie's last job was as COO of Equinox Gold and he is a proven mine-builder, who now has his hands on a high-grade deposit that's open to low-cost expansion at depth. I'm looking forward to seeing how this plays out in 2022. This is essentially a Prime Mining (PRYM.V, last at $4.70) replay (the assets are very similar). The difference being that PRYM has a market cap greater than $500 million while XYZ has a market cap of less than $100 million and is just going into a series of catalysts similar the one that took PRYM up multi-hundred percent once the market figured out what it was. Drilling at Tres Cruces is expected to start up in Q1 2022 which is not that far away... I can't wait.

Tag Oil (TAO.V, last at $0.40)

Well, what can I say? It's been a year and I'm sure that the TAO executive team are feeling the pressure to get something done that makes sense for the company and its shareholders... but sometimes there's really nothing to do but wait. Having had the benefit of watching Rally Energy 5-bag in the last major energy cycle not long after Abby came in, I'm keen to see if lightning can strike twice. I see no reason why it can't given the level of experience and expertise represented by this team. I'd argue that the recent pullback in oil helps TAO, not hinders them as they look to ink deals.

Tenaz Energy (TNZ.V, last at $0.27)

When I first came to Bay Street, I had the pleasure of working with an energy analyst who was the happiest guy I'd met in the business. Just a really, really nice guy. Once in a while, he would mention some massive position that he'd have put on years ago and smile about how simple it all was... "Just follow the teams," he'd suggest. Stick with quality management teams and they'll always build value in the long run was the mantra. Well, all I can say is that he's retired now and riding horses around on his own farm, probably still following some of the same teams around. Sometimes there's no need to reinvent the wheel. When Marino and crew came into Altura for a re-cap, I couldn't have been happier. I've only added stock since the news and continue to do so. Riding the equity wedge in a re-cap/acquisition story alongside management with this level of industry experience seems like a good idea to me if all I need is the patience to let them execute. Tenaz's corporate goal is to have 50,000 boepd of production within reach by Q4 2022. Time will tell.

Uranium

The case for uranium remains strong from a climate perspective and the market remains undersupplied. The elephant in the room is the Sprott Physical Uranium Trust (aka "SPUT", U.UN.TO, last at $14.30), which continues to mop up millions upon millions of pounds in the spot market at prices below the marginal cost of production. I'm keeping it really simple with uranium and my main position is the SPUT (uranium in a warehouse), because for most of the equity values to make sense, the uranium price itself simply has to be heading higher. It doesn't have the leverage that NXE, DML, UEX, or FCU might have, but for now, I'm content to play uranium by "owning physical".

Yangarra (YGR.TO, last at $1.60)

The stock sold off after Q3 results were reported for two reasons. Production came in at 8,700 boepd vs 9,700 boepd expected and there was "below type curve" performance in some of the wells were drilled in the quarter. Sometimes the details matter. The production miss was due to the fact that YGR had approximately 800 boepd offline while it was drilling/completing on one of its pads, meaning it had to shut-in producing wells on the same pad. Add that back and you're looking at 9,500 boepd vs 9,700 expected. That's "in line"... not a miss. Next, with respect to the underperformance of some wells, welcome to the world of statistics. YGR drills wells above the type curve and below the type curve in what is a real-world example of statistics in action. They base their budgets on the "average" well. In the quarterly report discussion, they mention that four additional wells have been brought onstream at West Ferrier which are not experiencing the same lower flush production (IP) rate and that they remain confident in the corporate type curve. If was reading into that, I might be thinking that the West Ferrier wells are outperforming, thus giving confidence that the "average" is intact. I guess we will see. With a 14-well pad planned at West Ferrier starting in January, I suspect we will be hearing more from this area going forward. I have YGR on autopilot and would prefer to be woken up when the stock starts trading above its PDP reserve value, which is about 100% higher than here. YGR continues to screen as one of the cheapest producers in the Canadian energy sector on EV/CF, P/CF, P/NAV, and EV/FCF metrics. Maybe the market figures it out in Q1, but I think it's a cheapie that's being overlooked.

Critical Elements (CRE.V, last at $1.72)

With Federal permits in hand, little CRE is waiting for provincial permits before it can officially enter the lithium dance-a-thon. If you haven't noticed, lithium is red hot right now as a manufacturer-led staking rush for battery materials continues. CRE has a spodumene (hard rock lithium) deposit in Quebec that boasts impressive economics and a preferable ESG footprint in the eyes of European manufacturers. The project would be an integral part of the "Quebec battery complex" and I expect it will hit a lot more radars once provincial permits are in hand. I can see no rational reason why the provincial permits wouldn't be forthcoming, so I'm content to wait. It could be days, weeks, or months, but CRE can afford to wait, having just raised $25 million a couple of weeks ago.

Valeura Energy (VLE.TO, last at $0.48)

This is very simple for me. VLE has cash of around 60 cents per share. The stock trades for 48 cents. The balance sheet is clean. A discount to cash suggests that the company is going to destroy value going forward. If VLE was trading at cash value I might think I could do better with the cash myself, but with the stock trading at a 20% discount to cash value, I don't mind taking the other side of this "no market faith" bet.

Giyani Metals (EMM.V, last at $0.40)

Manganese. It's the "M" in NMC lithium-ion battery chemistry. We've heard lots about cobalt and nickel, but no one talks about manganese... except people like the management team at Giyani. This company has a near surface, free-digging, very high grade manganese deposit in Botswana that checks all kinds of feel-good EV supply chain boxes. Updated economics on the project are due any time now, so battery metal enthusiasts will want to bookmark this one. The first pass on economics here looked very impressive. If the pending new study is as strong, I expect EMM will jump on the battery market train to higher levels.

New Stratus Energy (NSE.V, last at $0.56)

New Stratus announced that it has an agreement on Repsol's assets in Ecuador where it hopes to extract some 115 million barrels of oil over the coming years. The news release was lacking in some of the details about how this circa US$200 million two-year capital program (2022-2023) is going to be paid for, so the market can expect to see an additional update from NSE on that soon-ish. At this point though, fans of Jose Arata are on notice. He's baaaaaaaa-aaaack. Place your bets. There's some 30c paper coming free-trading near month-end. I might add to my position if it somehow gets close to that deal price.

Verde Agritech (NPK.TO, last at $1.84)

I don't really have anything new to say on this one, but the chart seems to be talking so I'll wave my arms a bit. NPK recently reported that they are sold out of their glauconitic siltstone fertilizer for the year and are planning to triple capacity immediately. The best part is that the expansion is fully funded by internally generated cash and bank debt, which means it comes with zero equity dilution. NPK has spent years trying to breakthrough in the Brazilian fertilizer scene and it looks like it might be time to pay attention as volumes ramp up. Once upon a time, I remember when the scoping economics on this perfect "regen ag" (regenerative agriculture) play pegged a billion-dollar NPV on the full-scale operation. To be sure, NPK isn't at those production levels yet, but they appear to be on the path. NPK's naturally-slow-release fertilizer is impressive on so many levels. It replaces potash (KCl), thus ending the cycle of chloride (salt) accumulation which is toxic to beneficial microbes in agricultural soils. It supplements silica content in plants, adding to weather and drought hardiness. It replenishes micronutrients in the soil (e.g., magnesium) that are depleted by crop production and natural weathering processes. Once you start reading about it, you'll wonder why everyone doesn't use it, or want to use it. So there you have it. I dare you to read about what NPK wants to bring to a reasonably large portion of Brazil. I feel like the winds of ESG could really take this one places.

Surge Copper (SURG.V, last at $0.31)

It's not rocket science. The Huckleberry mine, literally adjacent to Surge's copper-gold deposits, is on care and maintenance and its owners are trying to figure out its future. Surge has a big resource (with a resource estimate pending soon-ish) and needs to process it somewhere. Hmmmmm. Whatever would the logical conclusion be? Can you say 1+1=3? All I will say is that if Surge's rock doesn't go through Huckleberry's infrastructure (owned by Imperial Metals), then someone missed an opportunity to create a boatload of value. I have no idea if or when this happens, but I think it should, so I am long stock... in the hopes that it will.

BCM Resources (B.V, last at $0.17)

BCM Resources is whale hunting in the desert. I'm talking about the White Whale kind of hunting. The kind of hunting where you can go broke trying... especially when you get early indications that you are in fact in a blind (covered) porphyry system, which BCM appears to have done. It's very early days here and I don't think that BCM has hit anything that'll knock the market's socks off yet, but the allure of this treasure hunt is building as they continue to confirm the geological model. This is a tiny position for me, but if it ever hits a long, good grade hole, it could have quite a move given its relatively low market cap, so I think it's a good minnow to have on the radar.

I'm short on time this morning, so I'll cut this off here. As usual, this note touches on a fraction of the things I follow, but that's what bubbled to the surface today!

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long AAV.TO and WCP.TO (Image credit to veeterzy on Unsplash)

Lately there's been a lot of talk around our (virtual) office about energy markets, energy policy, the electrification theme, and carbon. When I say we discuss carbon, I'm not talking about debating the drivers of climate change, but rather carbon's role as a new "commodity" coming to a market near you. Personally, my thinking on carbon is partly based on what we just witnessed/are witnessing with respect to the creation of the marijuana market. Before legislation officially brought weed into the capital markets, marijuana was "external" to the formal economy. The market existed, but there was no money to be made in it without breaking the law. Once the laws changed, *poof*, a new market appeared; a market that made a lot of early investors a lot of money. Now, with a growing chorus, shifting global government policies (and "net zero" commitments with respect to fighting climate change) mean that carbon dioxide, which until relatively recently had no value associated with it, now does have a value. This is no "niche market". The size of the global carbon market is expected to meet or exceed that of the largest commodity market in the world today; the oil market. This is a seismic market event in progress.

As they say, "one man's trash is another man's treasure"; and carbon is no exception. Emitted for centuries by human industrial and agricultural activities without any apparent cost or consequence, carbon dioxide is clear, colourless, odourless, and, until relatively recently, largely worthless. Today, as more countries and companies around the world set "Net Zero" emissions targets in the hopes of trying to limit humanity's impact on the Earth's climate, "carbon" (carbon dioxide) is being priced in a variety of markets, at levels largely set by governments. Ultimately, the "cost" of carbon will be paid by the consumers of goods and energy (which should come as no surprise) and I can't see how the inclusion of that cost won't be broadly inflationary, but that's beside the point. The point is that these policy changes are more or less baked in the cake now, so I'm just going to roll with them, which means that I want to think of how I can play this from a market perspective. There are two ways to reduce carbon dioxide in the atmosphere... you can try to pull it out of the atmosphere ("sinks"), or you can stop it from going into the atmosphere in the first place ("sources"). These are not mutually exclusive options, but for this note I'm only going to focus on the "source" side of the equation. If you're running a gas-fired power plant today, or burning gas in an industrial process, your "trash" is CO2, and now, like it or not, you're going have to deal with it. That's a lot of trash looking for a home.[urcr_restrict]

Enter Advantage Energy (AAV.TO, last at $4.96). Advantage has been one of my favourite Western Canadian gas companies over the years (not that it's made me much money) and a few months ago, they announced the formation of a wholly-owned subsidiary called Entropy Inc. Around our office, we think this looks like a game-changer. Entropy's focus will be the global deployment of its groundbreaking carbon capture technology for point source industrial emitters. To quote Advantage directly:

"Advantage Oil & Gas Ltd. and Allardyce Bower Consulting Ltd. (ABC) have jointly developed breakthrough carbon capture and storage technology capable of commercial profitability at a carbon price below $50 per tonne. The first deployment of the technology will occur at Advantage's Glacier gas plant near Grande Prairie, Alta., and is expected to enter service by March, 2022.

The modular carbon capture and storage (MCCS) technology can be retrofitted to most point-source industrial emissions, including sectors that are difficult to decarbonize like power generation, blue hydrogen, liquefied natural gas, oil and gas processing, and production of cement and steel. In partnership with ABC, Advantage has established Entropy Inc., which will own the technology with the intent of deploying it widely in the global effort to decarbonize.

The modular technology is extremely versatile, applicable to projects as small as 8,000 tonnes carbon dioxide equivalent per year, allowing decarbonization to occur in easily financed increments. There is no upper limit to the scalability for larger projects. MCCS recovers approximately 90 per cent of carbon emissions."

For those not aware, being able to profitably capture carbon at a price of $50/tonne is a Big Deal. Look at where Entropy is on the cost curve (linked here and shown above). This is Holy Grail-type stuff. Right now, as the world rushes to put up wind and solar farms which are materials-intensive, land-intensive, intermittent and/or battery dependent, and of limited lifespan, I feel like we can all take a collective breath; because when it comes to gas-fired power generation (as one example), Entropy's got us covered... or so the story goes. Entropy's modular units capture CO2 by running combustion gas through a proprietary fluid that extracts the CO2 in a cyclic process (the fluid is "gassed up and degassed" in a loop). Once the CO2 is captured, it is injected into suitable underground rock formations/reservoirs (North America has no lack of these) where it will remain sequestered for geologic time... or perhaps used for enhanced oil recovery projects like the one that Whitecap (WCP.TO, last at $6.25) operates at Weyburn, Saskatchewan. Meanwhile, pipeline companies are already positioning for the scale-up of CO2 capture, distribution, and injection networks. The mechanism of the market never ceases to amaze in its ability to respond and allocate resources, does it?

The first full-scale deployment of Entropy's modular carbon mousetrap will be at Advantage's flagship Glacier gas plant and is scheduled to be operational in March of 2022. I can't believe this wasn't front page news when it came out and the more I think about it, the more I think there's a huge opportunity here that the market hasn't figured out yet. Imagine being able to economically capture 90% of the CO2 emitted from gas-fired power generation or cement production... ninety percent! That's huge, just huge. It seems almost too good to be true, but the scientists and engineers from Alberta and Saskatchewan who came together to make this happen are among the brightest minds in this sector, so maybe it's not so surprising after all. Canadians tend to be modest by nature, but I think that this advancement might be worthy of a little bit more excitement. Maybe even some socially-distanced chest-thumping. I mean, come on, this is the definition of manna from heaven from a climate change perspective... and it will let us use the extensive, and installed global generation/transmission capacity that we've got, carbon-guilt free!

I'm not breaking out the champagne yet, but I've got it in the fridge and I know where the glasses are, and I mean that. If Entropy's carbon capture tech is anywhere close to as good as advertised, the market is going to be hearing a lot more about Advantage Energy and Entropy going forward. Advantage's share price has generally moved up in lock-step with the rest of its gas producing peers as part of the greater move in the energy sector, but with an embedded story like Entropy's, I start looking at clean-tech stocks like Ballard Power with a $6.5 billion market cap and wonder a little about what Advantage could be worth over time (I'd argue that Entropy's technology is as important and scaleable, if not moreso). Today, Advantage's market cap is roughly $1 billion and I'd argue that the gas assets are easily worth that on their own, so am I still getting a free call option (or at least a very modestly priced one) on Entropy in my Advantage position? I think so. To be sure, there's a lot of story to be written here yet, but I sure am liking how this chapter reads...

Time will tell.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long AAV.TO, AMI.V, AOI.V, ARX.TO, ATH.TO, ATU.V, CJ.TO, CPG.TO, CPI.TO, ERF.TO, NSE.V, POE.V, RBY.TO, TAO.V, TGL.TO, TOU.TO, TXP.TO, VLE.TO, WCP.TO, and YGR.TO (Image credit to David Mark on Pixabay)

What a difference a few weeks can make. Like a lightning bolt from the sky, energy has become a very hot topic as natural gas, coal, and power prices have rallied to multiyear highs. Oil has also had a nice tailwind after the unexpectedly long outage in the Gulf of Mexico took over 30 million barrels out of oil inventories at a time when they were already being run down. On top of that, oil got a nice lift today to new highs as OPEC+ stuck to its plan to gradually raise output despite calls from the White House to increase output faster. But the real story in the energy markets lately is natural gas. Gas stocks have been creeping higher for a while, but the natural gas market had generally been flying quietly under the radar. That's usually the case until it isn't. Gradually, after a series of compounding events, gas is all of a sudden in short supply, confounding a market that had been led to believe that cheap and plentiful gas was here forever. There are too many links in the chain to go through them all in detail, but weather (both hot and cold), energy policy, renewables, LNG market dynamics, carbon reduction goals, and the electrification theme are all part of it. It feels a bit like one of those rogue waves you hear about in the ocean... you know, like the one from the Perfect Storm... where the course is already charted and there's no time to do anything about it but hope... gulp.

Granted, winter weather is a wildcard... give the northern hemisphere a mild winter and maybe things don't go more goofy... because they've already gone goofy. Energy markets are seeing electricity and natural gas price spikes in China, the western US, and much of Europe. The extreme natural gas prices in Europe are affecting everything from meat supply, to cucumbers and tomatoes, to beer, to fertilizer... never mind the absolutely sky-high bills that energy consumers (i.e., everyone) are seeing. Hopefully Russia comes to the rescue this winter with Nord Steam 2 coming online for Europe. Hmmmm. So Europe is counting on Russia to be charitable with gas supply? Interesting times indeed.[urcr_restrict]

The current situation in the energy markets isn't something that can be fixed overnight. This isn't a "well, just get them to open the taps" situation. The end of the natural gas inventory filling season is fast approaching and it takes time to get crews into the field to complete new wells... and there is only so much LNG to go around. It takes even longer if you have to drill the wells, never mind build (or Lord help you, permit) new infrastructure. And where do you get the workers after whittling down the workforce through layoffs and downsizing caused by too many years of poor returns under the "growth at any cost" model? My point is that the natural gas supply response has a lag time to it. Same goes for oil. By the time you see that things are tight, it doesn't matter. Pick your metaphor; the ship has sailed... the train has left the station... the rocket has left the launch pad. And now, even though the oil and gas stocks are starting to hit more radar screens, they are by no means widely owned, and yet they represent tremendous value propositions in the context of a broader market trading at historically high multiples. To drive that point home, energy was the ONLY sector in the S&P to post a positive return in Q3... that's the kind of thing that gets portfolio managers thinking.

There has been a lot of virtue signalling by various asset managers who have shunned hydrocarbons as part of some kind of "solidarity" with the climate change movement, but personally, I think they are misguided. In Europe, we are seeing the effects of current "popular" energy attitudes and policies. It costs consumers, impacting the folks with the lowest incomes the most, and exposes the electrical grid to supply failures when policy doesn't line up with reality. It has cost Europe dearly in that Russia now has Europe by the you-know-whats every winter. It means that the market needs to come to grips with the idea that oil and gas companies may choose capital discipline over volume growth for some time; pushing inflation higher, because energy prices are embedded in literally everything. This idea of shareholders ceasing to reward mainstream energy companies for growth, and instead rewarding them for juicy return-of-capital-to-shareholders policies, is a big change. An equally big change is the massive amount of capital that has been chasing "green" energy projects, leaving "traditional" energy companies to fend entirely for themselves when it comes to funding the finding and development of new resources to replace those which are being depleted.

I think a lot about perception and reality when it comes to the market… and when I think about energy and materials, the gap between the two seems to have grown particularly wide as voters and politicians amp up the green narrative in the name of fighting climate change. The thing is that minds can change faster than the system that modern civilization has built over the last two hundred years. The path to a less carbon intensive future has been mapped, but not yet travelled, and we are seeing the pitfalls along the way in real time — and it’s not even winter yet. While the perception seems to be that you can starve the producers of the bulk of the world’s energy from outside capital, the reality is that they will take their pound of flesh, and then some, while you do. Meanwhile, metals like lithium, copper, tin, nickel, manganese, aluminum, and rare earths are all needed convert the world’s horsepower to electro-power, but no one gets a monthly bill for those, so they don’t attract as much media attention. At least not yet. Give the green push some sustained momentum though, and those metals will make headlines of their own in due course. Goldman Sachs calls this “the revenge of the old economy”. I think of it more like “paying attention to the relationships of a bunch of interconnected moving parts”.

Having said all of that, I am not immune to taking profits and/or trading around my more liquid holdings. When energy stocks sold off to their 200-day moving averages not that long ago, I added to a lot of names quite aggressively. Last week, I did take some of my liquid oversized positions down to more right-sized ones, and that’s left me with a lot of cash that I hope to be able to deploy on another dip in the future (today that's not working). The thing I wrestle with these days is the fact that, despite the big moves in the stocks, the energy sector as a whole still looks really, really cheap. Heck, the whole commodities sector is cheap relative to the market — the cheapest it has been in a very long time. Regular readers will know that I like gambling analogies and, as Brian Clouse in our office will tell you, craps is probably the best approximation of the stock market that you’ll find in a casino. You “buy” your numbers and play those numbers until someone rolls a seven or makes the point. Any time before the dice are rolled you can place new bets or take old bets off. You also have the option of “pressing” the bets (just letting your winnings pile up on top of your initial bet on any given number) or “getting paid” (taking your winnings up and out of play from any bets you had on the table for any given roll). It's a real exercise in money management, and everyone has their own risk tolerance; just like the market. So while I've taken some big liquid bets down, I'm still very long, and am barbelled with a lot of what would be considered "special situations" as I look for alpha-driven returns.

Oil and gas stocks are being referred to these days as The New Tobacco, which is both a compliment and a disparagement at the same time. I'm not going to wade into the weeds in terms of the validity of that characterization, but the fact is that tobacco stocks have made people a lot of money, for a long time, even after the dangers of smoking were well known, all while the number of smokers continues to decline. I joke about Flavour Country in the title of this post because below I'll run through a selection of lesser-known energy stories that I think could/will attract attention over the coming quarters as a result of company specific events that could present step-changes in valuations. My list of larger-cap favourites still includes names like AAV, ARX, ATH, BIR, BTE, CJ, CPG, ERF, MEG, TOU, TVE, and WCP, but so does everyone else's. This post is devoted to some of the lesser-known small caps (mostly oily) that I think will benefit as more money comes into the energy sector in search of outsized returns. These names represent a very different flavour of energy stocks relative to those that I just listed above. They are all microcaps and small caps, so they are higher on the risk curve, but I've followed almost all all of them for years, which is why I don't mind including them in a higher-risk basket as I look for juicy returns.

Altura Energy (ATU.V, last at $0.32)

I wrote about this one recently here, but it certainly falls into the special situation basket. Altura, soon to be renamed Tenaz Energy, is in the midst of a recapitalization, with a vote set for October 7th to approve the new plan and financing. I expect the vote will pass easily, after which the record date for an associated rights offering will be set. The rights offering applies to shares bought in the open market up to the not-yet-set record date which will see ATU holders get 1/8th of an 18c right for every share held that was not issued in the recently completed $29.5 million financing. For every eight shares of ATU held on the record date, holders will have the right to buy one additional share at a cost of 18c. ATU had 109 million shares out before the deal was announced, meaning that around 13.6 million rights will likely be distributed sometime in October that would bring in about $2.4 million of additional proceeds if all of the rights are exercised. After that, the next event will be the capture of Tenaz's first new asset, which the incoming CEO Tony Marino has already identified. Not knowing what or where the asset is doesn't bother me much, because I think that Leduc-Woodbend handily backstops ATU's value where it is today and that I'm getting a free call option on whatever Marino captures over the coming months. The first deal could be announced before Christmas and the first deal won't be his last. Tenaz plans to lasso 50,000 boepd of production over the next 18 months and has committed to a return-capital-to-shareholders business model. Riding the equity wedge on an acquisition play is attractive to me in this market given that qualified, technically competent, and financeable buyers are hard to find in a world where a lot of asset holders are under pressure to reduce their carbon exposure for non-fundamental reasons. I've written more on this here than I've intended to already, but suffice it to say that I'm long, and bullish.

Tag Oil (TAO.V, last at $0.38)

I first wrote on TAO over a year ago and with Egyptian Parliament reconvening on Tuesday, October 5th, I think TAO's wait should soon be over. TAO has kept a rotating senior management presence in Egypt for at least the last six months, and given Mr. Badwi's most-recent success with his Egyptian-Omani Kuwait Energy (sold in 2019 for US$900 million) I very much look forward to seeing what he and his team pull out of their hats. In a market like this, where folks will be looking for that elusive early stage energy opportunity, I think TAO is well-positioned to catch the market's eye. I expect to have more to say about TAO in the next 1-3 months. Usually the waiting is the hardest part, but I've found this wait quite easy so far.

Yangarra Resources (YGR.TO, last at $1.83)

Not that long ago, I said that I think the market will start to wake up to YGR when they report Q3 results in late October/early November. Well, the market has woken up a little bit, but I think there's more gas in the tank, so to speak. CEO Jim Evaskevich hasn't been idle over the last two years... instead he's been busy making structural changes with respect to YGR's operations that should see his already-low operating costs stay that way. YGR has around $200 million in debt, which Jim plans to get down to ~$190 million by year-end and into the $150-160 million range by Q2 2022, at which point his debt to cash flow multiple should be around 1x. Attentive readers will notice that implies 2022 cash flow of around $160 million and they would be right (that assumes $30/boe netbacks on 15,000 boepd in 2022). A quick review of YGR's corporate slide deck will show that the company expects to free cash flow somewhere between $300-500 million (that's ~$4-6/share) over the next five years at $65 oil and $3 AECO gas. YGR's current plan is to run one rig, full time, in its Alberta Cardium fairway at a cost of about $80 million per year and to pay out excess free cash flow after every quarter in the form of a special dividend. With only 85 million shares outstanding, and after accounting for a $30 million debt repayment in H1 2022, that implies the potential for $0.65/share of free cash flow in 2022 alone -- this is on a stock currently trading at $1.80. Even if production was held flat in 2023 at 15,000 boepd, YGR would free cash flow $1/share. For those paying attention, that's nearly the entire share price in free cash flow over that two-year period at oil prices $10/barrel lower than where they are currently, and a fairly conservative AECO price. YGR's year-end 2019 reserves (remember that I don't even look at year-end 2020 reserves values because that was a scorched-Earth year) showed that PDP reserves alone were worth over $3/share at the time and I suspect year-end 2021 reserves will be at least that much, if not higher. YE 2021 1P reserves values could be knocking on the door of $10/share, but I'll have to wait and see in Feb/March when reserves are reported. Did I mention YGR is essentially unhedged? The last of YGR's minor oil hedges (1,000 bbls/d) just rolled off at the end of September and the company has only a little over 730 boepd (4.4 mmcf/d) of gas hedged until the end of 2021. That means that YGR is reaping vast rewards this year from elevated energy prices and that's set to continue in 2022 and beyond. YGR has had a nice run, but I haven't sold a share and am unlikely to until I see prices approaching PDP reserve values unless the market turns absolutely upside-down. Right now, an average YGR Cardium well would be expected to pay out in about 6 months and would boast an IRR greater than 300%. Sometimes it's nice to be small because there's a lot of torque in YGR in my opinion, and YGR has good leverage to AECO gas, for which I like the long-term outlook.

Pan Orient Energy (POE.V, last at $1.02)

I mention POE because it's a fairly pure play on Brent oil prices. POE has lowered its operating cost structure in Thailand and improved its sales pricing materially over the last year. Drilling has also gone well. Unless POE gets into the exploration business again, I don't expect to make a big score here, but I can easily make a case that the stock is worth $2 based on what I know today. POE is an odd story in that twice it has made asset dispositions at prices far in excess of what the market would think is possible and I think this is a good environment for them to monetize should they wish to sell. POE has about 60% of its market cap in cash and is minting money right now from its ~1,300-1,400 bopd of Thai oil production. POE is a small position for me, but I like it.

Condor Energy (CPI.V, last at $0.43)

I was about ready to give up on CPI and then I reflected on its market cap and assets. Granted Turkey, Kazakhstan, and Uzbekistan aren't on the hot lists of places people typically want to venture, but Don Streu and his team are very well suited to the task. Condor has a few potentially very material irons in the fire and should be drilling a Kazakh oil exploration well this quarter so I own it as a bit of a call option on something good happening. It's a small position, but it has massive potential upside should the Uzbek gas deal come through or if CPI gets into the LNG/CNG business in Kazakhstan. This is not for everyone, but I'm okay with owning a little as I wait to see what it turns into.

New Stratus Energy (NSE.V, last at $0.30)

Almost no one will have heard of this story, but CEO Jose Francisco Arata is one of the most connected people you will find in the South American energy scene. NSE is working on acquiring assets in Ecuador and completed a $10 million financing recently that caught my eye. Ecuador used to be a no-go for me, but with the market accepting a number of mining stories in the country I feel like the door is open for energy as well. Almost 20 years ago, I used to work in a group focused on Ecuador and one thing that I'll say is that there's a lot of low-hanging fruit there. If anyone can get it done, it's Jose Francisco, so I wish him luck as I ride a small position.

Touchstone Exploration (TXP.TO, last at $1.95)

TXP was my favourite stock of 2020. While the energy world imploded in early 2020, TXP briefly wobbled before coming roaring back as the company's success with finding gas in Trinidad allowed it to power through a tough market, making a lot of money for those who bought it during the swoon. TXP did a very big no-no when the Chinook "discovery" turned out not to be a discovery at all, at least not the massive gas one that the market, myself included, believed it was based on early drilling results. I'd blown out my TXP balance on the Chinook disappointment, but rehooked some after the recent drilling update out of the very material Royston target. It "appears" to be a discovery, but the market isn't going to give a lot of credit for it until it's tested given what happened at Chinook. My TXP cost this time around is in the $1.50 range, which I felt represented low-to-fair value based on what's drilled and tested at Coho and Cascadura, but if Royston is indeed a discovery, it could be the biggest one yet, which might take TXP back up to $3 territory. This is a small position for me as well, but CEO Paul Baay named the target after his father, so you've got to be believe that they've liked this one from the start. Royston test results could be available in late October to early November.

TransGlobe Energy (TGL.TO, last at $3.25)

If there's anything I've learned over the last year, it's that things can move very slowly in Egypt. I'm specifically referring to the ratification of TGL's new PSC terms, which seems to be taking forever. You could read my TGL notes from last year and they'd be every bit as valid today, but the share price is quite a bit higher now. Given the move in oil prices and TGL's tight share structure, the stock could have quite a move on ratification day, should that day ever arrive. As mentioned above, the Egyptian parliament sits again on October 5th, so I'm cautiously optimistic. TGL is an odd story, but it's made me a fair bit of money, so I'm still long a piece of it in the hopes that the new deal is ratified in Q4 as per the company's recently communicated hopes. Production is rising in Egypt and will be set to rise a lot more if the deal is ratified. I view TGL as a cheap way to play Brent oil prices.

Valeura Energy (VLE.TO, last at $0.48)

Old VLE. After round-tripping this one a couple of years ago, it has fallen so far that it's now trading at around 70-75% of its cash value. Even if I assume they burn $5 million in G&A for another year, it still trades at about 80% of its cash value. I have mixed emotions about owning VLE given my profound disappointment from its Thrace Basin play, but the discount to its cash value is too large for me to ignore. As of June 30, 2021 VLE had $53 million in cash relative to its $39 million market cap and the company is actively searching for a new asset to sink its teeth into. Here's hoping they find something that catches the market's eye and can get it for a fair price. Again, this is a small position for me.

Athabasca Minerals (AMI.V, last at $0.17)

I've followed the company for the better part of 15 years. It's an odd little aggregate producer in Alberta that should benefit from increased oil patch activity and infrastructure improvements in Alberta. If it was just the gravel production, I probably wouldn't give it a second thought, but the frac sand angle has always intrigued me here. AMI has a proposed frac sand project with none other than Shell as the offtake partner that has yet to be built or sanctioned, but this is a sleeper "ESG" play given its location in the Western Canadian Sedimentary Basin (WCSB). Recall that most frac sand comes from... Wisconsin!! That's a very long train ride, rife with track congestion and logistical hurdles when it comes to timely delivery. If I was an energy company like Shell, and I need to drill A LOT of wells to fill my Canada LNG commitments, I'd be looking for a local frac sand source to a) lower my sand costs and b) lower my carbon footprint. I haven't reached out to management recently, but AMI's market cap is so low that I think I'm paying for the gravel and getting a free call option on the frac sand potential should Shell follow through with its offtake aspirations. Speaking of Canada LNG, that could be a game changer for WCSB natural gas (read, Station 2 and AECO pricing) which would only intensify frac sand demand. It's a cheapie with a chance.

Africa Oil (AOI.V, last at $1.92)

This is a Lundin-backed vehicle that made a very large oil acquisition in Nigeria that is paying off handsomely so far. Recall that AOI also has an oil development project in Kenya. As part of the covenants of the project acquisition facility, AOI is about 50% hedged through 2022, but it's still printing money right now. It's up there on the risk curve given the jurisdictions, but that's nothing new for the Lundin group. I highlight it because this is the kind of story that gets forgotten in the fog of market disinterest, but it's a very material piece of business and likely worth multiples of where it's trading. The chart suggests that folks are starting to figure it out so I'm flagging it as a small position that I think has a reasonable risk-reward profile given the cash that the Nigerian assets are spinning off. That cash is paid to AOI as dividends from a subco and AOI appears to be on a path to have that acquisition paid off by the end of 2022 at which point the cash should really start piling up. I have no specific catalyst on this one, but should the Kenyan oil project come back to life, that could make for a nice bump.

Rubellite Energy (RBY.TO, last at $2.25)

Never heard of Rubellite? You're not alone. Recently spun-out/sold by Sue Riddell's Perpetual Energy (PMT.TO, last at $0.32), Rubellite is a pure-play on the Alberta Clearwater. The Clearwater play has grabbed a fair bit of market attention as one of the best oil plays in the basin in terms of well economics. RBY has a large number of $2 warrants outstanding that expired today at noon, so the stock has had a lot of selling pressure out of the gate. I can't speak intelligently to RBY's prospects other than to say that the Clearwater gets a lot of attention and the Riddell's are very well-known in Calgary, so I think this could be worth a punt. I have it trading at around 2-2.5x 2022 EV/CF and it is debt-free. RBY is very small, hoping to grow to 2,000 bopd in 2022 (from ~350 bopd currently) and perhaps 5,000 boepd by 2024. RBY says that its production ramp-up could be accelerated, but as it stands it looks like an internally funded organic growth play. I don't particularly like the lack of visibility on near-term free cash flow relative to something like a YGR and I really don't know the assets very well, so it's a small bet for me, but after letting HWX get away from me at $1.40, I've got a little RBY just in case.

Welcome to Flavour Country. Happy hunting.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long BTE.TO, CMMC.TO, CS.TO, and WCP.TO (Image credit to Clyde Thomas on Unsplash)

If you were starting to think that stocks only go up, I'm sure that last week was a stark reminder that they don't. The market has become a little jittery about rising bond yields and what that could mean for stocks, which has brought volatility up a bit. There are myriad variations and permutations of the expected effects of, and response to, rising bond yields, but in the end the most important question comes down to what the Fed does if it sees bond yields rising "too high, too fast". If you google "yield curve control" you'll get yourself a tutorial on the Fed might do in order to keep rates low enough for them to hit their target inflation rate (or higher) for "a while". Personally, I think the Fed is committed to seeing inflation run above target, but is likely to pull the yield curve control lever only when "forced" to do so by the market. I'm not sure what that looks like (likely some form of market turbulence), or when/if it happens, so in the meantime all I can do is look at what I own and try to think rationally about how I'm positioned in light of what I think the future holds during the Great Restart. Markets have been hot, but the world isn't even out of covid purgatory yet, so I think things could get hotter. That doesn't mean there won't be corrections along the way, but we are fresh out of a full-blown market meltdown and the U.S. is only just about to get the next stimulus/relief package passed, never mind the infrastructure bill(s) that will follow. We could very well be heading into a Roaring Twenties redux, one hundred years later. I guess we'll see.

Back in December, I'd written about staying the course and being an "ox" when it came to my outlook for 2021. That included staying long energy and materials, which has served me well. I find that it's a lot easier to make money by focusing on value in sectors or specific stocks that aren't well-owned or popular and then just remaining patient until the crowd shows up. It's so much harder to find value in the same names/sectors that everyone else is poring over. A year ago, you could say that materials and energy companies across the board were out of favour, trading at fractions of their underlying asset values and longer-term highs. As it stands today, I think that copper is a little more popular than I would like (i.e., could be prone to correction/consolidation), the market is just starting to come around on nickel, gold has pretty much washed out (I'm looking for gold to have a nice bounce after testing the $1700/oz level, perhaps as soon as this week or next), silver and lithium are holding up well, gas is still attractive, but oil has me the most excited for the big win potential. You know, oil; that stuff that is the foundation of modern society as we know it, that almost nobody owns and everybody loves to hate? It might be a bit overbought in the short term, but I'm getting really optimistic on oil looking through to the end of 2021 and beyond.[urcr_restrict]

Today, the energy sector represents just ~3% of the S&P index and, as Jim in our office likes to say, "there are portfolio managers out there right now who think oil stocks are just something that only old guys own... and that all they do is go down". There's good reason for that. Generally speaking, if you haven't owned an oil stock for the last six or seven years, you haven't missed much, other than a feeling of eternal disappointment. In late 2014, the U.S. shale production boom -- driven by the preceding four years of $90/barrel average prices and nearly unlimited access to capital -- finally caught up with the oil market as supply growth overran demand. Oil was left for dead; taken for granted as eternally available and plentiful. Only the largest companies were left with any level of market respect or ownership, while the small-to-mid caps were avoided like the plague. Fast forward to today and the general narrative is that oil is evil, still plentiful, and something to be shunned by investors until it quietly fades into the twilight. Look no further than all of the funds that have proudly touted their divestments from oil stocks over the last few years... at decadal lows, by the way. What a tough decision it must have been to kick something into the ditch in the name of virtue when it was already there. The market today is behaving like the world is going electric tomorrow, which it is not, and therein lies oil's great revenge.

I'm not some kind of pro-oil nut as a matter of practice. Just because my background in in oil and gas doesn't mean I'm not a big fan of a low carbon future. The push for green energy is both admirable and practical, even necessary, but I think that the market is completely out of touch with reality when it comes to how fast we can shift away from oil. The consequences of the last six years of upstream underinvestment are about to come home to roost. Capital inflows into the sector have been all but cut off for years, and producers are now focused on debt repayment and return of capital to shareholders, as opposed to production growth at all costs. That is a profound and real shift in thinking. The weak companies are gone and buried for the most part, and the free cash flow generation potential of the remaining companies is already starting to look impressive. Only the strong survived the valley that the oil market just went through and if the market wants to keep letting energy stocks trade with free cash flow yields of 15-20%+ at current prices, I'm quite okay with owning them, especially given that I think oil is heading higher over the next 6-12-18-24 months. There may be violent dips and rallies along the way, but at this point, I'm flat-out a buyer of oil stocks on dips if those dips aren't caused by something that dents my thesis. I'll likely steer clear of oilsands, but everything else is fair game for me.

Look, trying to get to some kind of "net zero" economy is going to be like launching a rocket into orbit. Once you get to orbit, it feels a bit like perpetual motion and the required energy input is low, but boy does it ever take a lot of rocket fuel (energy) to get you there. Oil is that rocket fuel for the world's transition to a green economy (i.e., we have to use the energy we've got to build the energy system of the future), so if "going green" is the plan, then oil is going to just as necessary as copper or lithium to get there in the near term, full stop.

Now consider that the price of oil, at around US$60 for WTI right now, is about $10/barrel over what would be considered "life support pricing" for most of the industry despite whatever brave face individual companies might put on. When I was commenting on oil just three months ago (when Brent was at $48) I said, "with some bold forecasters calling for $60 Brent in H2 2021". Well, here we are just three months later and Brent is $64/barrel. Let that sink in a bit. When I wrote that, it seemed very optimistic, so now that I'm seeing articles wondering about a return to $100 oil, you have to wonder a little about what's coming. We absolutely need this fuel to even try to launch our green rocket... and the price of it just went up so fast that my head is spinning... and the market has finally started to notice. Sure, there are some inventories to work through out there, but demand was 100 million barrels per day pre-Covid and it's going right back to 100 million barrels per day by what, Q4 give or take? If the idea is that electric cars are somehow going to meaningfully dent oil demand in the short term, I beg to differ.

All of the electric cars ever produced in the world total up to about 1% of the global one-billion-vehicle automobile fleet. Yes, that number is growing, but the sales of these cars are still limited to only the most affluent of the world's population and most EV drivers are not people who are driving 200 miles a day or more. Also keep in mind that developing economies represent the source of oil demand growth that is projected to continue until 2030, give or take. These are countries where people have bigger fish to fry than spending 5 or 10+ years of wages buying electric cars in regions with unreliable electricity grids... their hierarchy of needs is based on more tangible, immediate concerns. Yes, oil will slowly be displaced from the global transportation fuel equation, but slowly is the operative word. Despite reports of oil's demise, it is most certainly not "dead"... and if you thought it was dead, I think it's about to claw its way back out of the grave.

Not convinced? You could look at the chart of just about any oil company right now and you'll see why I'm writing about this today. Remember that market that no one thought anyone would come back to? Well, they're back. Plot a one-year chart on any oil stock and it will likely have at least doubled off its lows. The stocks have done so well recently that the market signal is hard to ignore. Most of these stocks are coming out of absolutely-dead-to-the-market lows. The charts may look overbought/extended on a one-year basis, but try pulling up a 10-year, or 15-year chart on your favourite oil stock that you thought you would never want to own again. A feeling of unease or optimism may set in soon after; depending on whether or not you own oil stocks. I suggest looking at those long term charts because when you are in the fog of market disinterest, it's hard to imagine the market thinking any way other than the current way. Charts tell stories about past mindsets and they are important reminders that market narratives change over time, sometimes over longer cycles than you'd think if all you do is look at short-term charts. It's seems almost ludicrous to think of people wanting to own oil stocks because of their impressive dividend yields and share buybacks, right? And yet, the free cash flow yields showing up in broker reports don't lie. Hmmmmm. Decisions, decisions. I've got one foot in the proverbial oil pool through a handful of names, but I'm being patient as I see potential near term risks to the oil price via currency markets, jet fuel demand, inventory levels, and OPEC+ (their next meeting is on March 4th). If oil keeps ripping, yay. If not, I've got my shopping list ready if it falters.

I talked to a friend of mine recently about my oil view and he was fairly lukewarm on the concept, which has only emboldened me in my thinking, because the numbers look really good for a lot of these companies already and people still doubt the sector. Sometimes I find it's best not to overthink simple ideas, so I don't. A little over a year ago (pre-covid), this was all I had to say about a couple of my favourite copper stocks... both are up ~300% since that time:

"Copper Mountain (CMMC.TO, last at $0.75)
Capstone Mining (CS.TO, last at $0.77)

These are part of my copper basket. Both are producers, both are cheap on NAV and projected earnings/cash flow metrics. I don’t have a lot to say on them other than the fact that if copper goes higher, these stocks should obviously benefit. Both have moved up off their lows and I’ll stick with them as long as the charts look friendly."

I'd say the same about oil stocks today. If oil goes up, the oil stocks should follow suit. Really insightful right? Short term, I don't know what oil does, but if I can have half my stock in the boat now with the idea of buying the other half if the stocks come back and have a look at their 50- or 100-day moving averages, then I'm good either way. This hasn't been a hard sell for me after consistently seeing projected free cash flow yields of 15-20+% on the industry comp sheets. Almost all of the mid-to-small cap oils are trading a healthy discounts to NAV and historically low earnings/cash flow multiples relative to their long-term ranges (that was exactly the set up on copper last August, right before the copper stocks doubled/tripled). That doesn't mean that I think the oil stocks are going to keep rallying straight up tomorrow, but I don't rule out the idea that they could. I don't think that a year ago when it was trading at $2.50/lb, many people thought that copper would be over $4/lb a year later ("props" to Frank in our office for being one of them), and yet here we are.

Looking at a one-year Copper Mountain Mining chart right now is certain to invoke emotions depending on whether or not you owned it. On paper, oil stocks today are as attractive to me as copper stocks like Copper Mountain were a year ago, and while I still very much keep a candle burning for copper, I think the easiest money has been made (for now), so I've rotated some of my copper exposure into my favourite small-to-mid cap oils, which is a basket of maybe ten names spanning a range of jurisdictions and market caps. They say a picture is worth a thousand words. They also say that charts don't lie. Follow my thinking from the following series of charts on Copper Mountain (CMMC.TO, last at $3.15) and Baytex Energy (BTE.TO, last at $1.23). I'd argue that Baytex is kind of like the Copper Mountain of the oil industry. At current prices, the debt that might have been of concern a year ago looks a lot less daunting now and BTE's discount to NAV, strong cash flow potential, and stabilizing-to-positive outlook make it into a very levered option on the oil price... the same way Copper Mountain was a levered option on the copper price six or seven months ago. Look at the charts below to see what kind of Kool-Aid I've been drinking lately:

One more bit of food for thought can be found in the Whitecap Resources chart (WCP.TO, last at $5.69). If I had a dog, it could draw the grey support/resistance line that I've drawn on the chart below. While WCP might look extended on a 1-year chart, I think the 10-year chart shows just how much headroom there is if the stock can clear the critical $6 level. This is something that I'll be keeping a close eye on in the days, weeks, and months ahead because I think that if WCP can move through the $6 level definitively, the chart suggests it could be going to have a look at the $9-10 range before I have to think about it too much again. At the current share price, with its ~1.5-cent monthly dividend, WCP has about a 3.2% yield, and management is regarded as one of the best teams in the business.

By now, this note has run far longer than my initial intentions, so I'm going to saw it off here. Regardless of what oil and oil stocks do, I think I'm going to enjoy reading this in six months. It is just so easy to avoid oil right now given the absolute lack of interest in the sector, but the numbers don't lie and the charts are universally encouraging. I do think that oil may be extended in the short term, but that's why I'm looking to be a buyer on dips at this point in time. When the world restarts and we start building our green energy machine as part of the Great Restart, it's all going to be built on the back of oil -- and that's something that makes a person wonder like me wonder if oil is really dead after all...

Time will tell.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long ORO.V (Image credit to Seth Schweit on Unsplash)

I've been thinking about writing something lately and this seems like as good a day as any to do it. I'm a big fan of knowing what I own and why I own it, so days like today in the commodity sector don't bother me much. Today, I know that if I hold cash in my portfolio, its free cash flow yield is precisely zero. Meanwhile, I know that the energy stocks in my portfolio have free cash flow yields of anywhere from 15 to 50%. I know that gold companies are trading at their widest discounts to NAV, and their lowest cash flow/earnings multiples, in quite some time. Likewise for base metal producers. Hmmmm... not a tough decision in terms of what I think I'm better off holding these days, but hey, that's just me. Commodities and the companies that produce them do bob up and down like buoys in the market ocean, but the "tide" is where I try to focus my attention. For today, the tide of the falling dollar is ebbing, but I don't see the metals and energy markets being significantly different today than they were yesterday. I'd actually argue that action like today is a gift to traders, or perhaps to those who were a little slow off the mark when it came to recognizing the inherent value being offered by the commodity sector in this market. But don't just take my word for it... Paul Tudor Jones lays out his thinking on the topic of "inflation trades" in this video, which I think folks should seriously consider. Pay particular attention to his points re commodity asset allocation relative to what might be considered "normal". Then consider that there is absolutely nothing normal about The Great Restart and the trillions of dollars behind it... and ahead of it. I listened to all of Chairman Powell's comments and question and answer period after the FOMC meeting yesterday and the message was that "the inflation you're seeing is transitory". The market seems to have taken that at face value. I'd ask people, "What else could he have said?" Imagine if when asked about inflation concerns, Powell's answer was "Yes, we are deathly afraid of it, we are tapering our bond purchases immediately, and we are looking to start increasing rates in Q1 2022." Even acknowledging that inflation is of any concern could cause market mayhem, especially in the bond market, where the scariest part of the current balancing act lives. Instead the message was (and this is me paraphrasing): "We don't care how hot inflation runs... it could run hot for 12-18 months, but then we think it'll relax." Okay, sure, that's a view, but it's a guess (and Powell openly admits there is no playbook for this)... and during those 12-18 months, while we "run hot", is the market going to just to brush that off? Bah. I don't think the market has the fortitude to do that for long in the face of what will continue to be some hot economic numbers (and seemingly persistently constrained supply chains). Sure copper was overbought short term, so maybe it could drop into the mid-$3's as China steps away from the market (and actively tries to manage prices... good luck...), but how can anyone argue with the long term theme given the Green New Deal narrative out there? It's a lot to chew on, but in a nutshell I'm unfazed by days like this.[urcr_restrict]

Now, to the news of the day from New OroPeru (ORO.V, last at $1.99). Regular readers will know that this has been a favourite special situation of mine for years... and today, there is a well-chosen changing of the guard underway. First Light Capital (XYZ.V, last at $0.47), a shell which includes Jim Currie (former COO of Equinox Gold), Steven Botts (Peru-based, previously at Tahoe), and Marshall Koval (Lumina Gold, Equinox), is bringing a $20 million investment into New OroPeru, at an effective price of ~C$2.33/share once you follow the prices and ratios. The quality of the people coming in (Jim Currie will be the CEO) is well-known in mining circles, and their endorsement of the project is sure to catch more than a few eyeballs.

One of those eyeballs will likely belong to Boroo, who recently closed its deal on the purchase of the nearby Lagunas Norte mine from Barrick. If Boroo thought that Tres Cruces was just going to sit and wait for them, then today's news should serve as a kind of wake-up call. When a team of this pedigree validates an asset of this quality, literally on your doorstep, you take immediate notice... unless you are actually comatose. The value of Tres Cruces to Boroo is literally undeniable. The Tres Cruces resource has been well-defined by drilling (371 holes, totalling >73,000 metres) and weighs in with an indicated resource of around 2.5 million ounces, at an average grade of 1.65 g/t Au. That resource includes 630,000 ounces of leachable gold (425,000 ounces of that being oxides at ~1.4 g/t, with the balance being leachable sulphides) which could be leached at the Lagunas Norte facility for the cost of a sandwich and a bag of chips. Well, not quite that cheap, but for the cost of building a haul road and and maybe $5-10mm of pre-stripping (you could probably use the stripped material to build the haul road...) you're up and running. New OroPeru's Tres Cruces deposit is about 10-12 km from Lagunas Norte and the leachable ore could be processed with the existing Lagunas facilities, as is, as soon as you could start stacking it. To quantify it, just the very top of the Tres Cruces deposit represents some 500,000 ounces of (leachable) recoverable gold; and those ounces would be expected to have some of the lowest cash and operating costs in the industry (thanks to the low strip ratio and high grade). At US$1500 gold, margins are likely to be in the $900-1000/oz range. That's US$400-500 million in undiscounted cash flow sitting on the table, with absolutely minimal front-end capex. There is, and I mean this literally, no better way to jumpstart Lagunas Norte than with a Tres Cruces bolt-on. Anacortes Mining, as the new company will be called, will have a pro forma enterprise value of ~CDN$76 million (CDN$96 million market cap with $20 million in cash). For those keeping score, from Boroo's perspective that's half a billion in USD cash flow trading in the market for CDN$76 million. Coincidentally, that's about the amount of cash flow you'd want to build a combined ("full meal deal") operation at Lagunas that could run for decades. Decisions, decisions. First Light and its backers might be some of the most opportunistic people on the planet. I love this move.

I could go on at length about the ORO story, but I think my point is clear. The interest of First Light's management team is an undeniable validation of the quality of the Tres Cruces asset, while the value of the asset to Boroo is equally undeniable. I'm not sure what kind of new chemistry might precipitate on the back of this news, but I'll be watching with interest. Without question, the incoming team has the skill sets, the experience, and the financial connections to take Tres Cruces down the path of development -- similar to what has happened with Prime Mining (PRYM.V, last at $3.99). New OroPeru can now viably go it alone, or it can make a deal with Boroo, but now New OroPeru is no longer subject to the whims of Boroo; and that's a big difference... to me, that's the kind of landscape shift that gets you a re-rate.

I don't want this note to run too long, but I haven't even touched on the ~2 million ounce sulphide resource grading ~1.8 g/t Au that sits underneath the oxide "cream" on top, and I'd be remiss if I didn't. In particular, there are undrilled high-grade feeder zones at depth within the Tres Cruces deposit that have never been followed up on... this includes hits like 19.5 metres of 11 g/t Au at depths of just 210 metres (bottoming in mineralization); with accompanying rock textures suggestive of potentially significant remaining vertical extent in this fully preserved epithermal system (this deposit is a beauty). These feeder-zone targets offer significant high-grade exploration potential that most people don't even think about. High-grade upside targets aside, the broader sulphide resource could be processed one of two ways in development: 1) build a sulphide processing facility at Lagunas and run the combined ~7 million ounce sulphide resource through it, or 2) produce a pyrite-gold concentrate, transport it to the port at Trujillo (3 hours by paved highway), and process the concentrate off site. That's $3 billion of gold in the ground that the market values at zero. Hmmmm... decisions, decisions.

As you can probably tell, I've spent a lot of time thinking about New OroPeru. I'm a happy shareholder today. I see this changing of the guard as profoundly positive from the standpoint of "validation" and "ability to execute", and I see a PRYM-like re-rate coming here as the new team lays out the story for the market (after all, I'm just a guy with a blog). Something that I've always talked about is how complementary the Tres Cruces deposit is to a full-scale integrated (re)development of Lagunas Norte. Today that option is as alive as it has ever been... and now, with this new management team, I think the "go it alone" option is truly viable (think PRYM)... because when you can truly say that you have the option to build or sell a deposit, you are beholden to no one for the approval of the path you choose.

Happy hunting.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long AAV.TO, ARX.TO, ATU.V, BIR.TO, CMMC.TO, TAO.V, TOU.TO, and YGR.TO (Image credit to Amol Tyagi on Unsplash)

With a textbook correction in a lot of energy and materials stocks now complete (knock on wood), I've been looking around for opportunities in new and old names alike. Stocks like Arc Resources (ARX.TO, last at $9.01) and Copper Mountain (CMMC.TO, last at $3.26) had pretty much straight-line corrections to their 200 day moving averages, even piercing them briefly, with RSI levels getting into the mid-to-low 20's in the process... and I could say the same about a lot of names in the resource sector. For now, those recent lows are the levels that I'll keep an eye on in the weeks and months ahead, since they "should" set the low water mark if the primary uptrends of these sectors/stocks are to remain intact. During their corrections, a lot of resource stocks went from what I would consider "low fair value" to something more resembling "cheap". That's what market digestion/consolidation feels like -- the idea is that it creates good entry points for new money as early big-gainers take profits, thus setting the stage for the next leg higher as long as market winds are still favourable. With that in mind, I think it makes sense from a fundamental standpoint (in terms of trading multiples/free cash flow yields) that support came into the resource stocks where it did. Now it's all about the road ahead and the market's view on monetary policy, government policy, and the economy. Tapering of the Fed's insatiable asset purchasing program is a given at this point, but now all eyes are on interest rates. Powell has signalled that the timing of liftoff for interest rates will be subject to more stringent tests, so as not to repeat past mistakes of moving too soon. For now, that means that market interest appears to be back for commodities, and maybe even gold, going into Q4.

I can't predict the prices of copper or oil any better than the next guy, but both appear to have underlying dynamics that suggest to me that neither commodity is in a short-term spike. For copper, it's the electrification/green energy theme, while for oil, it's the mantra of asset divestiture by the majors, debt repayment, share buybacks, and return of capital to shareholders -- as opposed to production growth at all costs. It's been so long since there has been relatively broad interest in commodities that it's almost hard to remember what it feels like when things really get rolling... and while there was a nice wake-up-and-smell-the-coffee run in the energy and mining stocks, I've yet to see any signs of sector euphoria, with a large swath of, liquid, free-cash-flowing businesses trading at rock-bottom multiples (and very high free cash flow yields) relative to their historical ranges. In a nutshell, I smell value out there, so as long as copper and oil prices don't implode, I think I'm good to play in the commodity sandbox with an eye towards quality and special situations. Lithium, nickel, and uranium are all on the list of "things I still want to have exposure to" and I'm sticking with the same names as I have before.[urcr_restrict]

Advantage Energy (AAV.TO, last at $5.25) is finding new highs lately as its Entropy subsidiary (90% owned) readies for a capital raise that will peg a value on it for the first time. For those who are interested in seeing what Entropy "could" be worth, trying googling Aker Carbon Capture ASA. That company recently raised ~$100mm overseas at a $1.2B valuation despite having only $9 million in revenue... and, as I understand it, Entropy's technology appears to be far superior on paper. Point being, the implied option value of Entropy that is embedded within Advantage remains attractive, especially in light of what natural gas prices have done recently. Natural gas prices have been on a tear, which is making a lot of the gas leveraged stocks look cheap. ARX, BIR, and TOU round out my favourite gas-levered stories, with an honourable mention to fairly-gassy YGR, which I still think will starting turning some heads once its Q3 report comes out in late October.

Lastly, Altura (ATU.V, last at $0.19) became a new "special situation" for me yesterday. I've always liked Altura for its 400 million barrel OOIP Leduc-Woodbend pool just outside of Leduc, Alberta, but it's hard to get the market interested in a 1,000 boepd producer, even if it is profitable and hasn't issued a single share since its inception. ATU's Leduc-Woodbend wells are getting longer again, with more fracs, and are seeing better economics as a result. ATU's latest iteration has wells boasting triple digit IRRs and payouts of around 9-10 months. But right now, those are just details, because a new management team is rolling into ATU, led by none other than Anthony (Tony) Marino, who was most recently CEO of Vermillion Energy. Mr. Marino's connections within the industry, both domestically and internationally, would be about as good as they come, so when he says that the goal is to build a 100,000 boepd producer over the next 5 years through targeted acquisitions in the $100-500 million range, I think it's probably wise to pay attention. I have seen this kind of recapitalization story play out multiple times in the past and I'm always happy to play alongside a new team bringing fresh money and ideas to the table. The last time I saw this situation was about a year ago, when Abby Badwi and his team joined Tag Oil (TAO.V, last at $0.37) when the stock could be had for 17-18 cents.

I'd argue that ATU has virtually zero promote value in it right now, but I don't expect that will be the case forever. In its new form, ATU will still have a very nice piece of business on its hands at Leduc Woodbend -- and that's an asset that will benefit from a bigger balance sheet -- but this now becomes a story of acquisitions when it comes to the sizzle factor. To be clear, ATU can still (and will) drill wells with 9-10 month payouts at Leduc Woodbend while Mr. Marino hunts for new business abroad. These are exactly the kinds of setups I look for in junior energy stocks. Before yesterday, ATU was a very clean business with low debt and sustainable cash flow; a great vessel for capital deployment, but it was light on capital with which to grow aggressively. Now ATU has both fresh capital and an action plan, and I'm riding along at the same price as the new insiders. I think it's really hard to ask for more than that when it comes to talking about stocks that trade for less than two dimes. It's really not a lot more complicated than that for me. I sincerely doubt that the new team has decided to come into Altura in order to clip salaries without making any money on their new investment, and now I can take comfort in owning a well-positioned business while I wait for the future acquisitions to surface. ATU is expected to make an initial asset purchase before the end of the year which should/would be the next big catalyst for the story. In a nutshell, I'm a happy ATU holder and have added significantly to my position on the back of the recent news. As a friend recently said to me, "Sometimes the asset that you are buying a company for isn't even in the company yet".

To be sure, my mindset on Altura requires a leap of faith, but it's not a big leap for me at this point. ATU trades at less than half of the implied value of Leduc Woodbend based on the company's recently completed sale of a 12.5% interest in the asset for cash proceeds of $7 million. Using that figure -- and absolutely zero imagination -- ATU's remaining 87.5% interest in Leduc Woodbend is worth $49 million on its own, relative to a current enterprise value of just over $20 million. ATU expects to close its recapitalization plan in early October. Between now and then, I expect that the following for ATU will continue to grow as it searches for that elusive (and often lucrative) transition from obscurity to the mainstream. Time will tell.

Happy hunting.

[/urcr_restrict]

Disclosure: The following represents my opinions only. I am long ATH.TO, ATU.V, B.V, BTE.TO, CJ.TO, CPI.TO, DCMC.V, ERF.TO, FOM.V, GIII.V, MEG.TO, NTR.TO, NXE.TO, TAO.V, TECK.B.TO, TGL.TO, TPL.V, TRP.TO, U.TO, VONE.V, WCP.TO, and YGR.TO (Image credit to Michal Parzuchowski on Unsplash)

A little over a year ago, I invoked the great wisdom of Chumbawamba ("I get knocked down, but I get up again...") after a disappointing 2019. I guess that you can analyze markets and stocks all you like, but sometimes you also need to listen to whatever theme song your inner DJ puts forth. Well, after some insane action in 2020 that turned out pretty well -- through luck, skill, or a little of both -- lately the spirit of Kenny Rogers' The Gambler has been rattling around my head...

"You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
You never count your money
When you're sittin' at the table
There'll be time enough for countin'
When the dealin's done"

While most people were whipsawed in one of the most brisk and violent market corrections in history in 2020, as long you got back up on the horse by summer time, most unwarranted market wounds have likely been healed by now -- and then some. In sticking with my ox-like nature for 2021, I've shifted things around a little here and there, but generally I'm a broken record. Energy and materials remain front and centre in my holdings and I'm seeing good volume and price action in a lot of things. It's been a long time since I've felt a market like this for these sectors. This is the kind of market that tests your ability to remain objective about valuations, and trying to remember a forgotten time when resources were cool and didn't trade at nobody-cares-about-this-sector multiples. I think this is why Kenny Rogers keeps popping into my head. If you know what you own, why you own it, and what you think fair value is; you're ahead of a huge percentage of the market in terms of knowing if you still want to hold it. Typically, buying stocks that trade at 50-200x earnings (that's me knocking a lot of the tech sector) is typically not a path to long-term wealth creation, because when the sh*t hits the fan -- and it always does eventually -- those are often the kinds of positions that crumble under a stampede of panic selling. Call me old school, but I think that the word "value" should at least be considered in the context of any position. So to bring it back my inner DJ's song choice, how do I know when to hold 'em and when to fold 'em?

Honestly, I don't. You never sell it all at the top and you never buy it all at the low, well almost never, but you get my point. All I can say now is that copper stocks have had HUGE runs over the last year. If all you did was buy and hold Freeport (FCX.US, last at $38.90) during the 2020 market implosion, you'd be up ten times on your money. Same with Capstone (CS.TO, last at $5.33) and Copper Mountain (CMMC.TO, last at $3.90) here in the Canadian market. Companies that looked like questionable going concerns a year ago are now printing money, and the copper price is nearly $4.50 per pound. Oh how times have changed. Can you hear that? In my own tone, there's a sense of high spirits and big wins when I think or talk about copper. That tells me that we are well-advanced in the copper trade. I've read that "copper is the new oil"... and when I start reading catch phrases like that, I know that the generalists have arrived and are buying names like those mentioned above for the first time.[urcr_restrict]

And why wouldn't they? Copper is going to be critical for the coming Green Revolution, right? Absolutely. Copper could be $6 a pound tomorrow and it wouldn't change copper supplies next year very much (mine supply takes time to respond), but boy would it ever pile up the cash on the balance sheets of copper producers. Heck, $4.50/pound is so far in the money for even the most marginal copper producer that very little doesn't work at these price levels. Given the newfound nature of the copper miner's windfalls, I haven't seen much M&A yet in the mining space yet, but with the equity valuations of the copper producers creeping higher and interest levels still increasing, I'm starting to become more interested in pre-development and exploration stories. Given the outsized wins I've had on names like CS and CMMC, I've scaled those big winners back... they used to be dirt cheap, now they kind of look like fair value to me; but that's not to say that the market can't overshoot fair value to the upside (but that's a different bet than them buying/holding cheap when not many cared). With some of that cash, I've added a little to smaller names (like Foran Mining, FOM.V, last at $1.36 and Dore Copper, last at $1.23) that I think are well-positioned and have taken the rest of the money and moved it up-cap into boring things like Teck (TECK.B, last at $26.50), Nutrien (last at $70.50), and TC Energy (TRP.TO, last at $61.30) while I survey the table a little more.

Oil is a slightly different story for me. While some of the oil stocks have had big moves off their lows, it still feels very early on the energy trade to me. Yesterday was the first day that I saw what looked like "tidal" money flows coming into Canadian energy stocks. This comes on the back of continual investment bank upgrades with respect to their outlooks for the energy sector. Anecdotally, it seems that most money managers and retail investors alike have little or no "traditional" energy exposure, which says something about what inning I think I'm in on the trade. I think that energy is lagging around 9 months behind copper and if that's the case, it could be quite a year ahead. I've increased my energy exposure recently and am a broken record when it comes to the names I like. AAV, ARX, ATH, ATU, BTE, CJ, CPI, ERF, GIII, MEG, TAO, TGL, TPL, TOU, TVE, WCP, and YGR make up most of my energy exposure. That's a lot of ground to cover, but I can quickly frame all of them, so here goes:

Advantage Oil and Gas (AAV.TO, last at $3.31)

A low-cost, best-in-class Montney gas producer in Alberta. Relatively gassy with leverage to AECO and a disciplined hedging program. Trades at an average multiple relative to peers, but recent news has guys in the office thinking that there's a big embedded call option within Advantage. Advantage's new, wholly-owned subsidiary called Entropy, has developed a carbon capture technology that generates a positive return at a $50/tonne carbon price, a significant industry breakthrough. Given the importance of carbon sequestration initiatives within government policies at home and abroad, the potential applications/implication for Entopy's modular carbon capture solution are far reaching. Advantage plans to release updates on Entropy's progress periodically in the future, independent from the company's usual corporate updates.

Arc Resources (ARX.TO, last at $7.87)

Having closed its merger with Seven Generations Energy, ARX now trades at a discount multiple relative to peers despite having significant scale, free cash flow potential, condensate exposure, and leverage to energy prices. Value players tend to like ARX and will likely find little fault with it here.

Athabasca Oil (ATH.TO, last at $0.72)

Ninepoint's increasingly-in-demand Eric Nuttall set this stock on fire on Friday by making it one of his top picks... and he can tell it better than I can, so here's a link to the show (ATH is discussed near the end). In a nutshell, ATH is a "super-call" on oil... a.k.a, the leveraged bet.

Altura Energy (ATU.V, last at $0.18)

My penny hopeful. With a circa 400 million barrel OOIP resource just outside of Leduc, Alberta, ATU is like a snake that ate a deer (i.e., small company, big asset, loads of running room, but it takes time to get moving). I'm not sure what gets ATU lit this cycle, but this is a bet on management and oil prices for me. ATU's well economics at Leduc Woodbend look pretty attractive at current prices.

Baytex Energy (BTE.TO, last at $1.56)

I didn't know that BTE had entered the Clearwater play, so that's a nice recent bonus. BTE screens as having one of the highest free cash flow yields on comp sheets at current prices. I own a little of this one as part of a shotgun strategy. Nuttall covers the relevant bases as well as anyone in this video from his recent BNN appearance (I keep posting the full video link because anyone serious about energy should be listening to Nuttall and his ever-sharp focus right about now).

Cardinal Energy (CJ.TO, last at $2.95)

CJ is juuuuust getting to its end-of-the-world December 31, 2020 1P net asset value. If you ran the reserve report again with the current strip, I think you'd find that CJ trades at at little over half of its NAV (just look at its YE 2019 reserves values if you don't believe me). Nuttall likes CJ as well, and we both seem to like the idea of riding shotgun with Murray Edwards, so let the band play on and here's hoping oil keeps going higher. CJ still screens as having one of the best free cash flow yields out there and this could be a tuck-in acquisition for someone or it could be on the road to Dividendtown. I'm okay with either.

Condor Petroleum (CPI.TO, last at $0.46)

With a focus on Uzbekistan, Kazakhstan, and Turkey, Condor doesn't exactly attract a lot of attention, but I mention this one only because I remember the Hurricane Hydrocarbons story back in the day and I think the Uzbek deal that CPI is working on could be Hurricane-like. If you know what Hurricane Hydrocarbons was, that might get you thinking about getting up to speed on CPI. If not, don't worry, most of the market is in the same boat, but at least you'll have heard of it. I have no idea on timelines here, but I'm thinking sometime this year for an Uzbek deal if it happens (it would be a field revitalization project, and would be a critical piece of business for the nation, so this isn't small potatoes they are going after).

Enerplus (ERF.TO, last at $6.80)

North Dakota Bakken producer. Gobs of free cash flow at current prices. Historically regarded as a premier company with a premier multiple, but right now, it's cheap, with one of the highest free cash flow yields in the sector. Again, Nuttall lays it out perfectly in his BNN appearance.

Gen III Oil (GIII.V, last at $1.80)

After following this for years and never caring, I started watching as the story started building momentum several months ago. This is an oil recycling story, but Gen III's secret sauce gives them a high Group III oil yield, which is a high value product. Yesterday, GIII inked an offtake agreement for its planned 5,600 bopd facility with a "supermajor" who shall remain nameless for now, but presumably not forever. This obviously has ESG appeal and comes with a potential significant carbon offset credit call option. I own a little because it's neat story, but this is a pure speculation for me and I only mention it because it's nice to see new technologies focused around recycling used oil. I can't speak intelligently to valuation on this one yet, but I've got a toe in the water and will see how it goes.

MEG Energy (MEG.TO, last at $7.29)

With billions in tax pools and some of the best leverage to WCS pricing that I can think of, MEG is starting to look pretty juicy as a takeout target. There are plenty of operating oil and gas companies that could use MEG's tax pools, take on MEG's debt, and mint sweet free cash flow at anything resembling current oil prices, never mind $5-10-15-20/barrel higher. A leveraged bet with a target on its back. That's the view on MEG from my perch.

Tag Oil (TAO.V, last at $0.29)

Nothing new here. Ramadan ends on May 12th, so I expect that if something's going to happen, it will be after that. Backed by some 19-20 cents per share in cash and with a cast of characters that I like very much, I am very content to wait and see what TAO blossoms into. I think their timing will be perfect.

Transglobe Energy (TGL.TO, last at C$1.95)

I've pounded the table plenty on this name, so I won't do it again, but feel free to go back and read my previous posts on this one. The next big catalyst for the stock should be ratification of the new PSC terms disclosed in December of 2020 (that would double netbacks and bring 200-300% reserves upside into play, retroactive to February 2020). The timing of Ramadan is a factor here also, so ratification in late May/June would seem to be a reasonable assumption (Ramadan runs until May 12th this year). TGL is still dirt, dirt, cheap in my books (I have it trading at less than 1.5x EV/CF under the new PSC terms at $60 Brent) and will generate a lot of free cash flow at current prices. It screens among the cheapest energy stocks on any comp table, and the one you're most likely to find it on is that of Charlie Sharp out of the Canaccord UK office. Charlie has a 245p target on TGL/TGA, which equates to CDN$3.95 or US$3.20.

Tethys Petroleum (TPL.TO, last at $0.67)

The old international energy analyst in me just can't forget about TPL. Probably one of the weirdest international energy companies on the Canadian market, TPL has a storied past of management that couldn't seem to get the job done (that's me being kind) despite modest drilling success over the years. I checked in on TPL again a while back when their new Klymene oil discovery in Kazakhstan hit the newswires. TPL is effectively controlled by Pope Asset Management and I'm cheering for them on this one, but it's a roll of the dice here. This is what Tethys had to say about a recent reserve report prepared by McDaniel on Klymene: "Tethys has received a resource report and reserves assessment from McDaniel on the Klymene field. This report was prepared in compliance with National Instrument 51-101 -- Standards of Disclosure for Oil and Gas Activities, and the Canadian oil and gas evaluation handbook. The summary of mean reserves is estimated to be approximately 94.8 million barrels of crude oil, with a P90 low estimate of approximately 35.8 million barrels and a P10 high estimate of approximately 174 million barrels." Clearly, TPL has some oil on its hands, but getting it out of the ground (and getting paid a fair price for it) is another matter altogether in Kazakhstan. TPL plans to drill a few more wells into Klymene, with the cash flow from early production tests "hopefully" funding the costs of the wells themselves. This is the definition of bootstrapping in international oil and gas, but given the market cap, and the fact that this seems like a classic target for any player in the region, I own a tiny, tiny, bit and mention it only to point out what strange things lurk in the dark corners of the market if you look. Liquidity is terrible and TPL is hanging on by its fingernails, but the Klymene tests to date have been impressive enough to keep me in the peanut gallery.

Tourmaline Oil (TOU.TO, last at $27.60)

TOU consistently comes up as one of the the "go to" names for gas exposure in Canada, full stop. TOU also has good leverage to the California natural gas market, which is looking like it could be in for higher prices this year as drought in the Western U.S. reduces output from hydroelectric sources this summer.

Tamarack Valley (TVE.TO, last at $2.71)

TVE has been a busy acquirer as of late and now boasts positions in two of the most economic oil plays in Canada... those being the Clearwater and Charlie Lake. Given the level of attention that it's getting in the market, I've got this in my oil basket, but I am wary of TVE choosing to grow production instead of returning capital (aka free cash flow) to shareholders through buybacks and/or dividends. If oil prices keep going, I think that TVE (along with many of its peers) would likely be able to do both.

Whitecap Resources (WCP.TO, last at $5.41)

Whitecap trades at a bit of a premium to its group average, but I think that's warranted given its standout presence in the carbon sequestration business. Whitecap actually stores more carbon dioxide than it emits through all of its operations via its world-class carbon sequestration project (CO2 flood) in the Weyburn oilfield in Saskatchewan. WCP has been lagging some of its peers a bit lately, but I think this story will appeal to managers that may want to cover their ESG butts by owning a "net carbon negative" oil producer.

Yangarra Resources (YGR.TO, last at $1.20)

I still like this very much as a small cap Cardium oil play that will generate its market cap in free cash flow in a couple of years at current oil prices. YGR's stated goal is to return free cash flow to shareholders through special dividends, perhaps starting around Q2 of next year, after it pays down some debt in 2020. Insider ownership and shareholder alignment is high with this one and YGR will see its cost pressures somewhat insulated by all of the equipment it owns. The company is among the cheapest out there on the broker comp sheets.

Man, that's a lot of reading already, so I'm not going to ramble on too much more. Overall, I'm channeling my inner ox (head down, plowing ahead) when it comes to energy and materials with a dash of special situations involving select exploration stories and deposits. On the zero-carbon energy front, uranium looks set to rip higher (read that link) and I think that Nexgen (NXE.TO, last at $5.05) and Uranium Participation Corp (U.TO, last at $5.30) are two relatively low-stress ways to play that sector. Vanadium One Iron Corp (VONE.V, last at $0.25) has my attention as a junior resource player in the red-hot iron ore space... I think that VONE will be talking about close to a billion tonnes of high-quality iron ore in a good area in Quebec once it updates its Mont Sorcier resource estimate. Will anyone care? I'm not sure, but the market cap is low enough for me to take a punt given how hot iron ore is right now and the fact that Largo Resources alumni Mark Brennan is involved. Generally speaking though, I'm trying not to get distracted by too many shiny trinkets as I make my way through this market, but a few fliers always seem make their way into the basket. The smallest of the fliers is tiny little BCM Metals (B.V, last at $0.20), which shooting for the moon in Utah at its "blind" (covered by gravel) Thompson Knolls porphyry target (Quintin Hennigh does a great job of telling the story in this video). It's a real treasure hunt with a suitable amount of intrigue, but it is exceptionally high risk. I want to track targets like this though (just in case they hit), especially given the scale of the target, the share structure, and the market cap.

Given that the world has just barely started taking the covid cuffs off, I'm optimistic about what the coming months and years could bring, so I'm mostly sitting on my hands, with some adjusting of positions here and there based on valuation. Being right and sitting tight is sometimes hard to do because it takes conviction, but if what's happened to copper is any indication of what's to come for energy, things could get really interesting. I say that because some of the copper stocks appear to be trading a lot closer to what might be considered "fair value", but most of the oils are still really, really cheap. I don't think anyone thought that lumber would smash through $1500 per thousand board feet a year ago and right now I'd ask how many are calling for $100 oil a year from now? Now that's something to think about as the words of Kenny Rogers rattle around in my head...

Happy hunting.

[/urcr_restrict]