re cnq from Fairholme Q3 investor report:
Since July, oil prices have dived and, since last winter’s peak, natural gas prices have imploded. Greed has turned to fear. While impossible to predict the depth and breadth of the crowd’s despair, we do know how to take advantage. Periods of volatility and stress sometimes allow what we buy cheap to become cheaper, creating unusual opportunity. Fairholme’s history includes many instances of short-term “embarrassment” leading to long-term victory.
This past quarter witnessed Canadian Natural Resources’ stock down from a peak of $65 to below $45, where we began backing-up the truck. With great owner-managers committed to shareholder value and a deeply undervalued asset base, Canadian Natural Resources has become Fairholme’s second $500+ million investment (after Berkshire Hathaway).
The era of cheap oil seems over, and whether the price is $80 or $40 in the short-term makes little difference to our thesis. World oil exports continue to be dominated by a handful of undemocratic countries, some with questionable stability and politics. Supply and demand are in much closer balance than was the case during the last downturn. And the final straw breaking the back of the cheap oil argument is the continued modernization and growth of both India and China, which will occur whether the West grows or not.
In the meantime, Canadian Natural’s strong balance sheet and cash flows have funded the Horizon oil sands project and supported the recent acquisition of Anadarko Canada at an opportunistically cheap price. Next year, much of Canadian Natural’s output is hedged at over $50 per barrel and in 2008, the first phase of Horizon (110,000 barrel of light sweet oil per day) comes online. The upside: the company is capable of tripling cash flows within the next seven years. The downside: ncreased production will counter-balance further price declines leaving us with today’s significant free cash flow yields. We like those odds.
Also 1/22/07 CNQ announced they were buying back up to 5% of the stock over the next 12 months beginning 1/24/07. |
