Q3 Review Part 1: Oil & Gas

Disclaimer: Past returns are no guarantee of future performance, and investing in anything, especially commodities, carries significant risks of total loss. By continuing to read you agree that this is for entertainment only, and that this is the log of a schizophrenics thoughts about things much larger than he is, being geopolitics between superpower countries on Earth. I am not qualified to give financial advice or assist with financial planning in any way, shape, or form. I am literally a schizophrenic gambler that has been blessed by the gambling Gods (thus far) and I personally expect to lose everything imminently, since I’m trying to go too fast, and the universe tends to dislike people who try to go fast. Thus, it is reasonable that you assume everything I say is wrong, and in fact, you agree to assume everything I say is wrong if you continue reading.

Before I start this, I just want to warn everyone against margin utilization or large positions held primarily through options. Everyone hopefully know the saying, that the market can remain irrational longer than you can remain solvent. It’s literally true, and here, the market is being irrational, but it’s also the case that many of the most powerful governments on earth want cheap oil. Oil will inflation adjust itself eventually, locking in a permanent price floor above $100 WTI, but that may take years of battling against the man. Just look at the poor gold bugs, I don’t think any of them made it out with their sanity intact, despite outperforming the S&P500 over the last 20!!! years. So keep that in mind, just go long, and be happy, don’t use margin or options, which both force you to be right about when the thesis plays out, as well as force you to obviously need to be correct in addition to being right about the timing.

It’s much easier to put money into quality companies every pay check and compound over years, and eventually be proven correct, that it is to go all in with debt (or options) and have a literal date that you necessarily must be correct by. Just don’t do it.

Well, I am insane. Quite literally. And for some reason, I live to see how far I can go, and a large part of that is that I want to start CEOing and developing tech to help push the frontier of civilization. I’m arrogant enough to think I can compete with the hotshot CEOs you know of and think of, and do a better job than them. So for me, this is a journey from peanut net worth, to large enough net worth that I can have control over the direction of my future companies without having shareholder pressure force me to do anything stupid.

Honestly, I believe I’m about to blow up, get margin called and lose it all, and then you guys get to buy the dip in my stocks as I’m liquidated. Nonetheless, I’m going to keep pushing for the time being, and see what happens next, it just feels like the right thing to do.

Due to the fact I’ve become the most busy I’ve ever been, which is hopefully just a temporary spike, I’ve decided to divide my Q3 review into three portfolio updates. The first is oil & gas, where I will talk about the key oil & gas companies that I believe are undervalued, and the macro set up.

To follow, I’ll either release one or two more reviews, where I cover precious metals and war metals, and the miners I believe are best positioned with good risk/reward ratios. Overall, my pms portfolio hasn’t really changed, I’m still a huge Minera Alamos (now Mining Americas) fan, but I’ll leave that update to the next write-up.

A fast summary of macro. I remain confident that Trump has kicked the hornets’ nest, and his job remains as complicated as putting the hornets back into the nest by hand, without being stung. The Iran situation actually looks the worst that it has looked this entire time, the Iranians are either aggressively bluffing, or truly posturing here to try and regime change Trump (Jimmy Carter 2.0). As everyone knows, I’ve talked about this at length and it’s been my belief since this all started, so I’ll leave in depth discussion about Iran for another time. For now, assuming no near-term TACOs, which I’m not even sure are possible, I think oil is back above $100 WTI before midterms.

I recently tweeted that I think America and Israel killed the strong men in Iran, and I think this is true. I think the current ones didn’t get their positions based on merit, and I think even in negotiations, they’re out of their league outside of correctly picking up on the fact that Trump is desperate for a deal. This makes me think war is more likely, because weak men always cause and call for wars.

In Russia, things are fucked. Ukraine are totalling their oil infrastructure, from oil depots, to refineries, to oil tankers, they’re all taking hits. That leaves one thing left: Russian oil pipelines exporting to China. It’s my belief that Ukraine will hit one of these, and when they do, oil prices will mushroom cloud because China will panic slam the buy for any and all oil cargos they can get their hands on, as it’s likely Ukraine hits a pipeline while Iran vs USA is ongoing.

The biggest surprise (to me) has been that Ukraine has started hitting Russian VLCCs. We’ve all seen multiple disruption headlines, where Kazahkstan has shut down their CPC export terminal, and the reason was literally that Ukraine kept hitting the engine rooms of tankers leaving the port (carrying russian crude, or products). This is why I’m confident Ukraine is starting to dream about hitting a Russian pipeline. It’s the single easiest way they can fuck Russia’s free cash flow. Will it happen? I don’t know, but the set up is now there. Ukraine are out for blood, and you can’t defend pipelines, they’re too long.

I wrote when the Iran war started that Ukraine would be the black swan to cause the oil price surge, and I continue to believe it.

It’s worth dispelling a myth quickly here, that there isn’t enough global refining capacity. This is incorrect. We still have a few million extra barrels worth of refining capacity for crude above daily crude product demand globally, which means the current refining capacity is significantly above current crude oil supply (since OPEC exports are down >8mil barrels vs pre-war levels alone this August!). The point is: refiners could be overvalued here, they’re at the mercy of China deciding to ramp up throughput to >95% at their refineries. Nonetheless, I remain an extreme CLMT bull for reasons explained below.

To spice it up, El Nino is reducing Panama Canal water levels, and that means less tanker transits. We may soon have tankers circumnavigating both Africa (due to the Houthis shutting Bab-al-mandeb) and the Panama Canal having lowered transit capacities simultaneously. It would be a historic “oh shit” moment.

The last piece of relevant macro is a prediction I made that’s now coming to fruition: countries are mandating increased barrels of crude to be held by commerical refiners, and also mandating new SPRs. This was talked about in my last article, but I think it’s important to keep thinking about and watching. Parliaments around earth keep discussing signing new SPR capacities into law. This is HUGE future demand for oil, that’s arising out of this crisis. I think no one is paying enough attention to it, because governments are retarded, and thus are price insensitive buyers. They’re all mandating SPRs and now competing with eachother to bid over the rare barrels that are available. The set up for an oil squeeze is here. If just one last piece of serious oil infrastructure gets destroyed, WTI will set new all time high records, and it won’t be a spike, it will be sustained, substantially higher prices for much longer than ever before seen.

To begin, I’ll focus with my still favourite risk/reward oil producer in Canada.

Rok Resources ROK.V (CAD) ROKRF (USD). I’ve been pounding the table on this name since 27 cents/share, because it is simply a no-brainer lottery ticket with great odds of winning. At the time, they had about 20mil CAD cash and 11mil CAD worth of liquid assets, being EMPS shares, and now it’s about 9mil CAD cash and 11mil CAD of EMPS, with the cash down because they’re drilling all out, quite literally as fast as they can, to spend 20mil CAD on growth capex this year. They’re hoping to aggressively drill 10-12 new wells this year.

Their last 3 wells are still ramping up, peak production for these wells occurs after a cleanup phase that takes about 90 days, so the fact they reported >400boe already from just 3 wells is a huge deal. We have yet to see the peak production rates, but posting these kind of numbers while oil is above $80 basically means within 8 months these wells will have paid for their own capex, and then they will free cash flow for about 5 years for relatively low OPEX (since it’s priced in CAD and CAD is going to 0 just like the country Canada is in the global quality of life rankings).

I have a tiny bit more speculative information here. I met a retired oil CEO who used to drill the Pinto (where ROK is drilling) and after telling him they were significantly net cash, with >3000 boe production, and showing him their drilling plan (which he approved of), he proceeded to buy 1mil shares right in front of me. I don’t know his net worth, but he was stoked about their drilling plan and figured it’s likely this company will multibag.

Take it as you will, they’ve already drilled 7 wells year to date, and if all 7 are hits this is going to re-rate significantly once that data is reported. We’ve already got 3/10 wells hitting which derisks the capex plan by a bit, but for this to really launch and be the dream smallcap lotto ticket all commodity investors salivate over, we obviously want to see all 10 wells hit, and oil get back over $100.

I think this company gets over $1 CAD by the end of the year, but there’s obviously geological gambling risks here. If we see something like $150+ oil, this company will mint its entire market cap in profits in mere months. This is because they sell for WTI -$3, but they are a Canadian stock, with a CAD market cap. Again, I expect CAD to weaken because everyone who can is fleeing the country (why live somewhere you now lose 65% of your income to taxes). On top of this, their legacy wells have low, 16%/yr decline rates. If some of these new wells decline this slowly, it’s hard not to imagine this stock getting over $2.5CAD as they begin share buybacks. That’s almost a 10x.

The reason I love the risk reward is primarily the high cash on hand and lack of debt gives them optionality. They can take on debt and keep growing, at a rate that’s 30% of their market cap per year spent on hiking barrels/day of light oil output that sells basically for WTI prices (not Western Canadian Select, which often has more than a $10 discount to WTI). Anyway, I own tons of ROK, and I’ll look to buy tons more if they pull this drilling program off with every well hitting.

If I had to summarize why I like it in a sentence, I think the management will execute & I love the fact it is debt free and net cash, with additional liquid assets on top. This latter point isn’t priced in whatsoever.