Sunday, Jul 31st 2022Investor Update
The impetus for our Opportunities and Offshore strategies has been to provide investors with the ability to not only diversify but to also take advantage of market dislocations.
Months into one of the largest energy crises in modern times, we believe there are opportunities throughout the energy sector that may lead to significant upside over the medium term. We made several trades in our Opportunities and Offshore strategies on Friday in an effort to add weight behind our top ideas, broaden our energy exposure and manage our risk. Let’s dive in.
Initiate: Consol Energy Corp (CEIX)
Add: Canadian Pacific (CP), Alliance Resource Partners (ARLP)
Trim: Denison Mines Corp (DNN), NexGen Energy (NXE)
Exit: Cargurus (CARG)
Initiate: Crescent Point Energy (CPG), Suncor (SU), Cenovus Energy (CVE)
Add: Canadian National Railway (CNI), Taskus (TASK), Visa (V)
Trim: Cameco Corp (CCJ), Sprott Uranium Miners (URNM)
Exit: Sea Limited (SE)
TLDR: We reduced our concentration and broadened our energy positioning by trimming uranium-exposed holdings while adding to alternative energy companies that may benefit from a once in a generation super cycle.
Our thesis around the long-term growth of nuclear energy continues to track ahead of our own expectations, catalyzed by the aforementioned energy crisis, with all uranium-exposed holdings moving higher by more than 20% over the last month.
In an effort to reduce concentration and broaden our energy positioning, we have taken the opportunity to trim our Uranium exposure across both strategies. We used the proceeds of these trims to fund new investments into Cenovus Energy (CVE), Crescent Point Energy (CPG), Consol Energy (CEIX), and Suncor Energy (SU).
Cenovus Energy (CVE):Functioning as the second largest Canadian-based crude oil and natural gas producer and the second largest Canadian-based refiner and upgrader, Cenovus has benefitted from their transformative acquisition of Husky Energy in January. Trading at a relative discount to U.S. peers, a starter position allows us to broaden energy exposure amidst the market dislocation.
Crescent Point Energy (CPG): CPG is an oil and gas exploration, development, and production company with a strong track record of dividend growth and efficient capital allocation. The industry has under invested in their capabilities over the last decade, and as a result, we’re faced with a structural supply deficit.
Consol Energy (CEIX): As the cost of natural gas continues to spike, countries around the world are scrambling to ensure sufficient energy resources for the winter. Coal has emerged from the dead as an attractive alternative energy source, which has enabled Consol to sign multi-year contracts at highly favorable pricing. We’ve underwritten that earnings may more than double over the next 3 years, and to be clear, this is not an investment we plan to hold forever.
Suncor Energy (SU):Arguably the most physically integrated of the Canadian Oil Sands, the Alberta based company captures the entire energy value chain: production, wholesale trading, storage, logistics and direct sales. Elliot Management, an activist fund, agrees with our perception of value - Suncor’s starter position rounds out our Offshore energy positioning.
Alliance Resource Partners (ARLP): ARLP has been a major beneficiary of rising commodity prices amid global supply dislocations. The company has capitalized on the strong demand environment and sign multi-year contracts at prices 3-4x higher than in prior years.
Canadian Pacific Railway (CP): Following solid second quarter results, all of our major sign posts have shown that our thesis continues to track according to our models. CP’s recent acquisition of KSU is expected to close in the coming months, and we believe this dominant rail franchise is in the early innings of delivering transformative growth.
Canadian National Railway (CNI): CNI delivered one of its best quarters in years in Q2 with a clean beat across the board and signs that its strategic turnaround may be gaining traction. Demand for rail capacity remains strong with momentum extending into July despite slowdown fears.
TaskUs (TASK): Against a backdrop of rising labor costs, we elected to increase our investment in Taskus by 0.25% as we continue to believe the company stands to benefit as a cheaper alternative for companies looking to optimize content moderation expenses.
Visa (V): Earnings season has confirmed strong pent-up demand for consumer travel with V’s cross-border volumes surging past pre-pandemic levels. Given that international take rates can be as much as 6x higher than standard domestic volume take rates, accelerating cross-border travel volumes may provide a strong tailwind for Visa earnings growth.
There’s no question that July has been a great month for most stocks (particularly beaten up growth stocks), and it's always funny to see how quickly price action can change the narrative. In the face of continued macro headwinds, we took the opportunity to derisk and exit some of our more volatile positions. These are names we plan to revisit in the future, but this current market regime will not be kind to these companies, in our eyes.
CarGurus (CARG): Uncertainty in the wholesale market and rising interest rates gives us pause. Advancing meaningfully off its 52-week lows, selling our small stake in CARG feels prudent here.
Digital Turbine (APPS): Our thesis in APPS has been tracking well with the main pillar being its SingleTap growth engine continuing to fire on all cylinders. However, despite the fundamentals remaining very strong, heightened recessionary fears have lead to subsequent slowdown in global ad spend, which leaves the company susceptible to multiple compression, in our eyes.
Sea Limited (SE): One of our highest beta names in Offshore and up ~11% over the last month, we have taken this market movement to sell out of this tech conglomerate.
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