A Tale of Two Markets

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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.

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.


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.


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.


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.