Category: Equity

Oil and gas cash flows

What a difference a few Iranian air strikes (coupled with UAV’ing the Russian refinery industry) has on the profitability of domestic oil and gas companies.

I am looking at Cenovus Energy’s Q2 financial statements and see approximately $5.4 billion in free cash flow generated in the first half. This is well above the $3.3 billion generated in the full year of 2025. The MEG Energy acquisition has resulted in a rounding error now on the balance sheet with most of the debt being paid back and shares repurchased almost to the point before the acquisition (about 25 million shares away). Clearly wrestling away this company from Strathcona Resources was a strategic masterstroke. The refinery business has turned around, from generating a $706 million loss in the first half of 2025, while generating a $1,374 million income in first half 2026. This is one hell of a swing, mainly due to crack spreads trading at elevated values.

Annualized, the company is on track to generate about $5.90/share in free cash flow, which puts it at around 7x free cash flow, or a total yield of about 14.5% on the current CAD$40.60/share price. Valuation-wise, I can see why management continues to dump excess cash into the stock rather than accruing it for a special dividend.

However, always be cautioned that this is subject to the cyclical whims of the marketplace – many a dollar has been lost investing in cyclical companies at low price to earnings multiples. My gut has this as a “too cheap to sell, too expensive to buy” situation although if you can model the situation going on in the middle east correctly, you will stand to make a small fortune. I was eyeballing adding to some CNQ at the end of June/early July valuations for some idle cash deployment but was too lazy on the switch.

It has been noted that the US’s strategic petroleum reserve‘s balances have dwindled to record lows not seen since the early 1980’s – once this tap shuts off, this artificial amount of supply will shut with it and domestic crude prices stands to marginally rise – let alone the demand increase if the government wishes to refill it. The SPR is filled with both light and heavy crudes and North American demand will rise as a result if the reserve is ever to be refilled.

Finally, I note the crude oil curve remains extremely bent – a barrel in September 2026 is US$84.75, while a barrel in December 2027 is US$70.00 – a 17.4% discount for 15 months’ time. Short today, cover tomorrow – if you can find the supply.

Smallcap time: Vital Farms (VITL)

In my quest to dredge out smallcap companies, I stumbled upon Vital Farms (VITL on the Nasdaq). This was a pretty interesting case study. I’ll keep the analysis to short sentences.

Vital Farms’ niche in the business world is selling premium-branded eggs. You can imagine the marketing with pictures of farmers, and free-roaming chickens, and talking about ethical sourcing and so on. Predictably, they have supply contracts with the likes of Whole Foods. They were going into the premium-branded butter market as well but they have recently discontinued this business (indeed, dairy is a significantly different business than egg farming).

Vital went public in the start of the Covid crisis 2020 and the stock regressed until about 2023 before rocketing up again in 2024.

The reason why they rose so quickly was due to margin tailwinds concerning cost inputs (grain feeds and the like), and a perception that their total addressable market would expand further. A typical extrapolation to the max story.

Net margins after taxes for calendar year 2024 and 2025 were just under 9%, which for a commodity industry is impressive. Headline diluted EPS in 2024 and 2025 was $1.18 and $1.44, respectively, and the stock had a growth valuation accordingly – well beyond that typically afforded of most consumer staple producers.

By the end of 2025 there were some significant storm clouds approaching. One was that the company had embarked on a significant capital expenditure program which would suck up most of the money it raised from its IPO. This project (an egg processing plant in Indiana) was announced in the middle of 2024, started in the middle of 2025, and based on the economics back in 2024 – needless to say, those economics have changed.

In 2025 we had the avian flu, egg supplies in the USA had plummeted and prices started to skyrocket for eggs. The backlash of this we are starting to see with excess capacity. Blowing a hundred million on capex to expand into something that is over-supplied was not a decision that aged well.

Fast forward to 2026 and basically the bottom fell out of the company after the February 2026 reporting of annual results. A quarter later, they had reported their first loss, decreased revenues, decreased gross margins, and essentially had relegated themselves to all the characteristics of what is fundamentally a commodity business.

A social media report from a rival competitor (in January 2026) that showed that their premium eggs were not that different than typical store-brand eggs did not help their cause.

The kicker is that in Q1-2026, VITL had spent $20 million repurchasing their stock at a price which is now trading 45% under what they paid for it, and in the most recent quarter conference call, stated that they are aware with the completion of their capital projects that they will have to tap into a line of credit because they blew so much cash.

It was pretty evident from conference call transcripts that management had been drinking the coolaid (or perhaps a better analogy would be eating too much of their own egg yolks) of the perceived historical strength of their business.

While I am looking at more agricultural-oriented companies, this one isn’t going to fit the bill for me. The “regression to the mean” investment scenario should discount what happened to them in the 2024-2025 calendar period, although if you believe those days will come back, perhaps this stock might be right for you. For me, I will be looking elsewhere (including the type of eggs that I purchase at Costco!).

Andrew Peller – liquidated by Fairfax

Back on August 31, 2025 I wrote a post about Andrew Peller (TSX: ADW.a and ADW.b) characterizing it as a “low risk, medium reward” situation. Adjusted for dividends, the non-voting stock was trading around $5.10/share.

Fairfax announced yesterday that they made an agreement with the majority voting shareholders (John Peller and the Peller Family Enterprises entity, combined owning about 3/4 of the voting stock of the company) a takeover bid for $8/share cash for ADW.a and $12/share cash for ADW.b, with John Peller graciously receiving a private “rollover” provision with Fairfax, presumably to blunt the impact of any capital gains taxes going forward.

This deal was at a considerable premium to market at the time and is quite probable to be accepted with a 2/3rds vote required by both classes of shareholders and also a majority of Class B shareholders that are not represented by those that get a rollover provision or otherwise exempted by the MI 61-101 rules.

Right now, it is not clear to me whether a significant shareholder (the Peller Family Enterprises Inc. entity owning just under 50% of the Class B shares) is excluded from the majority vote. I will read the information circular when it comes out. If it is excluded, then the public shareholders (about 25% of the Class B stock) is voting on the deal which creates an interesting dynamic if it occurs.

By all means this trade should be considered a victory, but it leaves me with a couple bittersweet feelings.

The first bittersweet feeling is that the Class A shares are mildly undervalued by Fairfax – albeit there is no obligation for Fairfax to give Class A shareholders any sort of deal at all (they could have just taken control of the entity by purchasing the majority stake from the Pellers), they did short-change the Class A shareholders about 75 cents from the midpoint of the “valuation” alluded to in the press release.

This is no stranger to Fairfax (and other companies) that do this to minority holders of smallcap companies – one of the big risks of smallcap investing is that when you do get a takeover offer, they are sometimes at unfavourable terms. I felt the same way after Cervus was taken over (have to go back to August 2021 for this post).

Andrew Peller is in way better shape today than it was a couple years ago when I started to purchase shares. For the fiscal year ended 2026, they reported a diluted EPS of 61 cents per share – so at the $8/share that Fairfax is paying for non-voting stock, that’s a P/E of 13, not a bad price. Balance-sheet wise the company owns a lot of physical infrastructure, and the marketing/distribution know-how and incumbent contracts consisting of about 10% of the Canadian domestic wine market, but they also own a strip of land in Port Moody, BC, which they will inevitably liquidate and realize a healthy gain from (book value is about $6 million, market value of land is assessed at $50 million). Factoring in these off-balance sheet assets, Fairfax is getting a fairly good deal, hence some resentment.

There are a couple headwinds, however – about $26 million of the revenues comes in the form of a federal/provincial subsidy (read Note 17 of the financial statements – not a revenue accounting-wise but an offset to costs, but either way, it is 100% pure ‘margin’), and coupled with the VQA revenues of about $17 million, all of which considerably overstates the company’s profitability if these subsidies were to be tapered away for whatever political reasons. The other headwind is the nature of the market – in general, alcohol consumption is on the decline.

The second bittersweet feeling is that I have been really struggling to find reinvestment candidates. Andrew Peller was the type of company (similar to Rogers Sugar when it was reasonably priced) that you can just purchase and forget about entirely since the industry itself was so mature and stagnant. My portfolio, which is cash-heavy, is going to become more cash heavy as a result of this takeover. I have been really struggling for reinvestment options that I have considered acceptable.

I have a cliche which is that every good trade you make you wish you had doubled it when getting into the position. Considering the cash-heavy nature of my portfolio since 2023, this is especially true with Andrew Peller. However, by all means I should instead be purchasing a bottle of $10 red wine (perhaps upgrade to the $20 stuff given the one-time nature of this takeover bid) and count my blessings before sobering up and hitting the stock screener for the next opportunity.

Accord Financial – or why small finance firms are difficult to measure

I noticed that the debentures of Accord Financial (TSX: ACD.DB) has fallen off a cliff:

There should have been a hint of what was going on earlier this year when they extended the debenture term and increased the coupon rate (to now 12%) but the firesale of assets has made it quite clear that the subordination of the public debentureholders is not placing them in a very good position to negotiate – let alone getting payment on maturity.

Is it really that much of a train wreck? Let’s quickly examine things. Their March 31, 2026 balance sheet:

We have $21M in cash, and $138M in “finance receivables”.

This is what is needed to pay off notes 7, 8, 9 and 10 (the debt capital used to issue the loans).

Note 8 is a non-recourse loan. Note 7 is the primary credit facility with the bank (extended to June 19, 2026… they’re doing things nearly in monthly increments, never a good sign!). Note 9 is for notes payable, linked with the maturity date of the bank loan from a related party (the related party keeping the corporate entity afloat… for now). Note 10 is the $20.65 million in publicly traded debentures and $5 million in non-listed debentures (same terms). They mature on July 31, 2026.

When doing the math, you have about $159M in financial assets that are going to pay off $127M in loans and debts. That’s nearly $30M leftover, so surely paying off those debentures is going to be no problem, right, right??

The finance receivables are the lion’s share of assets and they are primarily structured to within 1 year of repayment:

Looks good, right? What’s the issue?

SICR is a “significant increase in credit risk” measurement.

So it turns out that about $41 million in loans are at risk. This makes the threshold for repayment much more narrower. Coupled with the fact that the corporation is loss-generating (specifically the interest expenses and G&A is well higher than the interest income being generated by the loan portfolio), the trading price of the debentures is not surprising.

Finally… the irony wasn’t lost on me when looking at the first page of their quarterly report:

Rollercoaster

Avis/Budget Group’s stock over the past month has gone fully psychotic:

It is almost as if somebody set an infinite dollar buy program to accumulate shares at increasing prices and then two days ago realized their computer program was broken and pulled the plug on it.

Skimming their financial statements, the explosion in the stock (going both directions) surely isn’t due to them being a hugely profitable entity. They are in a completely miserable industry.