By: Jon Costello

I’m increasingly befuddled by the stock market’s continued strength.

I look at the risks building in the energy market, consider what prolonged shortages and higher fuel prices could do to the economy, and then look at market valuations that seem to leave little room for disappointment. I cannot reconcile the two, and it has been gnawing at me for weeks.

I’m not arguing that markets have to fall, or that I have weighed every risk correctly. But when I consider how much has to go right at today’s valuations—and how many troubling developments in the energy market would have to reverse—the market’s confidence gets harder to understand by the day.

My concern is that the longer the energy supply disruptions persist, the greater the risk that the damage spreads beyond oil and into the broader economy. At the very least, that possibility seems increasingly difficult to dismiss.

I want to explain what concerns me and, more importantly, how it is influencing my decisions. For now, I remain constructive on selective energy investments, comfortable holding cash, and focused on researching businesses I would want to own if a substantial decline creates better prices. I would rather decide what I want to own and what I would be willing to pay before falling markets make those decisions more urgent.

Less Room to Absorb Another Disruption

The oil market has less room to absorb another disruption than it did even a few weeks ago. Supply losses persist while the inventories that absorbed earlier disruptions continue to be drawn down.

Last week’s attacks shut Saudi Arabia’s East-West pipeline, a major route for moving crude to the Red Sea without transiting the Strait of Hormuz. Reuters reported that export-ready stocks at Yanbu could cover only five to seven days and that a persistent outage could put 4% of global supply at risk. By September 15, Reuters reported Saudi Aramco had canceled some European cargoes. The timing of a restart remains uncertain. Five to seven days is not much of a buffer, yet the market seems to be treating it as another routine supply headline.

The pipeline has been especially important because shipping through Hormuz remains constrained. Losing that alternative route makes it harder for Saudi Arabia to restore reliable exports even if crude is available.

On the inventory front, the IEA’s September Oil Market Report estimates that observed global oil inventories fell by 507 million barrels from February through August, an average draw of 2.8 million barrels per day. It forecasts 2026 supply averaging 100.7 million barrels per day, with Middle Eastern supply not fully recovering until 2027.

The SPR provided another important buffer, and much of that has now been used as well. The SPR held about 285 million barrels at the end of the week of September 4, down from roughly 398 million barrels at the end of April. That is a decline of more than 110 million barrels in a little over four months. Much of the oil was released through exchanges, which means those barrels must eventually be returned to the reserve along with additional barrels as a premium. While the exchanges helped relieve the immediate shortage, they did not create new supply. They simply shifted some of the burden into the future, while leaving considerably less oil in the reserve to respond to another disruption.

Industry leaders are highlighting these developments. Chevron (CVX) CEO Mike Wirth warned that the crude-oil buffers that moderated earlier price increases were largely depleted.

Taken together, these conditions leave the market with less ability to absorb additional supply losses without either a simultaneous supply recovery or higher prices that force demand lower.

Economic Risk Is Growing

Read more

By: Jon Costello

In 2024, I argued that Headwater Exploration (HWX:CA) deserved a steep premium to Tamarack Valley Energy (TVE:CA). I pointed to Headwater’s economics, operating track record, long-term growth prospects, and the management team led by Neil Roszell.

I bought Headwater in 2020, before the company had established the operating record investors would later come to value, and held it until 2024. The high quality of management was an important reason I was willing to invest that early.

The transaction announced on September 8 reverses that expectation. Tamarack is issuing the stock, Headwater is accepting a one-for-one exchange ratio, and the Headwater management team is moving to a new exploration company rather than running the combined business.

I remain constructive on Tamarack’s Clearwater assets. But the deal and the stock are separate questions. Tamarack got the better end of the transaction. As a combined entity, the shares are too expensive.

Read more

By: Jon Costello

GeoPark (GPRK) has changed considerably over the past year. Its operational outlook has improved, its growth opportunities have expanded, and the company’s potential value if management executes successfully is substantially greater than it was before.

The proposed acquisition of Venezuela’s Bare Block adds another dimension to that upside. Bare is a massive, already-producing resource with a relatively straightforward path to materially higher production over the next several years. Management believes the transaction could help take GeoPark from roughly $280 million of Adjusted EBITDA in 2025 to around $1.2 billion by 2030 at $75 Brent. Those numbers deserve to be taken seriously.

Despite the positives, more potential upside doesn’t necessarily make a stock easier to value.

The Old Valuation No Longer Fits

In January, I estimated that GeoPark shares could be worth roughly $21 if management delivered on its development plan, using a 3x EV/EBITDA multiple. At the time, I expected Vaca Muerta to be the company’s principal growth investment.

That framework no longer describes the company. On September 2, GeoPark agreed to acquire the remaining 95% of a holding company with rights to develop Venezuela’s Bare Block. The consideration is at least 42.1 million newly issued shares and could rise to 47.6 million, while Grupo Gilinski would emerge with more than 56% of the company and control it.

Bare could prove enormously valuable. But the transaction also significantly increases the share count, introduces a controlling shareholder, creates a new capital program, and adds a long-duration Venezuelan asset. I therefore no longer have enough confidence in my old $21 estimate to rely on it.

From Vaca Muerta to a Broader Capital Program

The broader scope of GeoPark’s capital program adds another layer of valuation uncertainty. Less than a year ago, the company’s growth plan centered on Vaca Muerta. In December, GeoPark projected $190 million to $220 million of 2026 capital spending, including $80 million to $100 million for Vaca Muerta.

Bare now adds another substantial, long-duration development program, and management has indicated that it may pursue further opportunities in Venezuela, Colombia and Argentina. GeoPark therefore has a broader—and potentially much larger—capital program than shareholders were evaluating less than a year ago.

Read more

By: Jon Costello

Editor’s Note: WOMM (What’s on My Mind) is a new weekly publication from Jon Costello.

A land grab is underway in Venezuela’s oil industry.

After years of sanctions, political instability, deteriorating infrastructure, and a hostile investment environment kept most foreign capital away, companies are moving back in. Chevron (CVX) is planning billions of dollars of additional investment. Eni has committed to a new heavy-oil development. Other international operators are pursuing opportunities, and the United States has backed an effort to redevelop 17 Venezuelan oilfields containing enormous quantities of crude. Venezuela currently produces only around 1.2 million barrels per day, compared with more than 3 million barrels per day in the late 1990s, so the opportunity to restore lost production is substantial.

It merits a look.

But I want to be clear at the outset: I don’t particularly like investing in land grabs unless I’m properly equipped to evaluate the risks or can participate with very little capital at risk. Those risks are most acute in the earliest stages of a land grab, which is where Venezuela appears to be today.

When capital suddenly rushes into a market that was effectively closed only a short time earlier, investors are being asked to make long-term decisions before anyone really knows what normalized conditions will look like. Asset prices, contractual terms, competition, regulation, and political relationships are all being established at the same time.

That is not an environment in which I find it easy to commit capital.

Why I’m Wary

The opportunity in Venezuela is especially complicated because the risks have very little to do with whether the oil exists.

Venezuela possesses some of the largest petroleum resources in the world. The bigger questions concern everything surrounding those resources: who ultimately controls them, what fiscal and contractual terms operators will face, how much capital will be required to drill the oil, rebuild the supporting infrastructure, transport it, and get it to export markets, how durable those arrangements will prove, and what protections investors will actually possess if conditions change.

These aren’t theoretical concerns.

Reuters has reported that aspects of the rapidly emerging Venezuelan investment framework are already raising concerns among major international producers, particularly around contract stability, legal protections, transparency, and the structure of recently negotiated agreements. ExxonMobil (XOM) and ConocoPhillips (COP), whose Venezuelan assets were nationalized in 2007, are among the companies approaching the country’s reopening cautiously.

That history is difficult for me to ignore.

At HFI Research, we have considerable experience investing in Latin American oil and gas companies. For my part, I have been doing so as an outside passive equity investor since 2008. Since then, Latin American names have been among the largest holdings in the funds I manage.

That experience has taught me that the region can offer extraordinary resources and tremendous investment opportunities. It has also taught me how quickly circumstances outside management’s control can overwhelm what initially seemed like a sensible business plan.

Governments change. Fiscal regimes change. Regulations change. Contracts can change. And these changes are rarely telegraphed in advance. They can arrive suddenly and completely alter the investment’s economics.

I like investing in businesses where I can develop a reasonable idea of what management intends to accomplish and then watch that strategy unfold over several years. In parts of Latin America, the chessboard itself keeps moving. A rational strategy today can become considerably less attractive because of an election, a tax increase, a regulatory decision, or deteriorating relations with the government.

My time horizon makes those risks particularly important. When I make an investment, I generally look out at least five years, preferably longer. I am therefore less concerned with whether conditions are favorable today than with whether I can reasonably expect the conditions underpinning an investment to endure through my holding period. The longer the horizon, the more opportunities there are for governments, contracts, fiscal regimes, and political relationships to change.

Venezuela takes that problem to another level.

Why Venezuela Is Different

Read more

By: Jon Costello

Please read: (Idea) Greenfire Resources - The Stock Is Undervalued

When I last wrote about Greenfire Resources (GFR) in July, I valued the shares at roughly C$14, or around $10 on the U.S. listing, and said I intended to subscribe for at least my pro rata share of the company’s coming rights offering once the final terms were known. Those terms are now final. I will exercise enough rights to preserve my ownership, but I do not intend to request additional shares.

That is a less bullish conclusion than I reached in July. The Connacher acquisition gives Greenfire a much larger reserve base, and the upsized rights offering leaves the company less leveraged than the original financing plan. But revisiting the numbers exposed a weakness in my earlier analysis. I did not charge Greenfire’s legacy assets enough capital to hold production flat, even as Hangingstone production continued to decline. A simplified year-end 2025 proved-reserve reference still gets me to roughly C$10.97 per share versus C$8.57 on September 3. That is enough value to keep me interested, but realizing much of it will require better execution than Greenfire has demonstrated so far.

Read more

By: Jon Costello

See the original 2025 write-up (public): (Idea) Our #1 Metallurgical Coal Stock Pick - Warrior Met Coal

See the July write-up: (Idea) Warrior Met Coal: One Of The Best Met Coal Names

I have been bullish on Warrior Met Coal for more than a year, largely because I believed the completion of Blue Creek would transform the company’s economics. I first published a long write-up on July 2, 2025. Since then, HCC shares have performed very well.

Given the price appreciation, the thesis is now being borne out. Blue Creek has increased Warrior’s production capacity, lowered its unit costs, and helped turn the company into a much larger free cash flow generator.

Yet I am less enthusiastic about the shares today than I was when I last wrote about Warrior in July. The reason is straightforward. The business has improved, but the share price has improved even faster.

Warrior recently traded around $105 per share, after having traded in the high $70s when I published my previous update. At the time, I wrote that the shares remained attractively priced relative to my estimate of their value. Since then, metallurgical coal prices have rallied sharply, sparking investor enthusiasm for the shares.

Read more

Since the start of 2026, I have written numerous times on the golden opportunities we are seeing in Colombia and Venezuela.

At the start of the year, the geopolitical scene was taken by surprise by the capture of Nicolás Maduro, Venezuela’s former president. Immediately following the news, I wrote a piece titled, “Venezuela Regime Change And The Impact On The Oil Market.”

This was followed by a piece a month later titled, “Venezuela’s Energy Sector Resurgence Is Happening Fast And The Investment Opportunities,” where I explained how the incoming law changes are very favorable for outside producers willing to take a chance on Venezuela.

Fast-forwarding to today, President Trump announced that the US has agreed to a deal with Venezuela on certain producing blocks.

The details haven’t been revealed yet, but based on recent press releases, some major players are about to get sizable producing blocks back (Chevron will be the most obvious first candidate).

Moving to Colombia, President Espriella took office on August 7, and he did not waste any time changing the makeup of Ecopetrol. The Ministry of Finance has called for an extraordinary shareholder meeting on September 15, and after an expected change to the corporate bylaws, Espriella will be able to nominate 6 additional board members, giving him total control of the board.

As the Ministry of Finance said in a post:

The National Government will present a slate of 9 names for the Board of Directors of Ecopetrol, with a clear mandate: produce more, regain trust, and advance the energy transition.

In order to achieve this mandate, Ecopetrol will need outside capital to 1) boost legacy oilfields, 2) unlock new reserves, and 3) improve efficiency. This wouldn’t be possible on its own, so this is essentially a call on independent producers to step into the fold.

Geopolitically speaking, Colombia and Venezuela are two of the more underappreciated areas in the energy sector (still).

Inflection Point

Read more

By: Jon Costello

Today, I want to focus on portfolio policy rather than new investment ideas or updates on existing holdings. Attractive investment candidates have become worrisomely scarce, and I have begun raising cash in the HFIR Energy Income Portfolio. This article explains why.

Portfolio Management Update: When the Opportunity Set Deteriorates

I am having difficulty finding stocks I want to buy. That does not mean my research process has stopped working. Rather, it reflects the state of my current opportunity set. Much of the market has risen to fair value or beyond, while many securities that still look statistically cheap are cheap for understandable reasons, including weak businesses, poor balance sheets, questionable management, or industries facing structural decline. A low multiple is not a margin of safety. Treating the two as interchangeable is how investors mistake apparent cheapness for genuine value.

Until recently, the opportunity set was much broader. Over the past year, I found and invested in attractive opportunities in offshore drilling, coal, chemicals, biofuels, healthcare, payments, retail and other areas. Today, I cannot identify a sector I know well that appears broadly undervalued. Company-specific opportunities have become scarce as well. This judgment reflects not only current valuations, but also the risks I see facing the economy, the broader market, and individual companies. Once I incorporate those risks into my intrinsic-value estimates, very few securities offer the margin of safety I require.

Deep-value investors—particularly those focused on cyclical industries—can become especially vulnerable when genuine bargains are scarce. Screens still produce apparently cheap names, but the quality of the available candidates is deteriorating. The temptation is to lower the hurdle, invent a catalyst, or make a short-term price movement the thesis. That pressure is especially acute for anyone writing publicly about investing. Eventually, disciplined investing can quietly become speculation. I have made that mistake before, and the lesson was expensive.

As long-time readers know, I prioritize investment returns above all else. My objective is to buy a business for less than a conservative estimate of its worth, with a credible path for that value to be realized and, ideally, increased over time—not simply to own whatever looks cheapest today. I am willing to own cyclical and out-of-favor companies and tolerate volatility and concentration, but those risks must be compensated by price, balance-sheet resilience, and favorable long-term economics.

What the Market is Pricing

I acknowledge that today’s bullish sentiment rests on genuine economic strengths. Corporate earnings are strong, supported by improvements in productivity, technology, and profitability. In early August, FactSet reported that the S&P 500 traded at about 20x expected earnings for the next twelve months—above its ten-year average—while analysts expected unusually rapid growth through the remainder of 2026. The bullish case is straightforward: pay a full price today because future earnings will justify it.

The problem is not that this outcome is impossible, but that much of it is already assumed. At elevated valuations, investors are paying for current earning power and the continuation of favorable margins, growth, financing conditions, and confidence. There is little room for disappointment. Strong businesses can be poor investments when their prices capitalize unusually good conditions too far into the future.

Profit margins make that assumption especially important. FactSet’s August 7 Earnings Insight put the S&P 500’s blended second-quarter net margin at 16.9%—the highest since its series began in 2009, versus 14.8% in the prior quarter and a five-year average of 12.4%. Alphabet and Amazon contributed unusually large EPS surprises, but excluding them still left a record 15.0%. The strength was broad: nine of eleven sectors exceeded their five-year averages, including Communication Services at 28.5% versus 13.0%, Consumer Discretionary at 16.4% versus 8.0%, and Information Technology at 31.6% versus 25.6%. High margins may persist, but paying a high multiple on record profitability offers less protection if competition, wages, input costs, taxes, or financing expenses press them lower.

After sustained outperformance, investors are tempted to capitalize today’s unusually high margins as though they will remain elevated indefinitely rather than revert toward historical norms. This creates a high risk of permanent capital loss. If margins—and perhaps return on invested capital—decline, earnings can fall as valuation multiples contract. Profitability and returns on capital may take years to recover to current levels, if they ever do.

Longer-term measures tell a similar story. Robert Shiller’s cyclically adjusted price-to-earnings ratio, which compares price with ten years of inflation-adjusted earnings, is near the upper end of its historical range.

CAPE is not a timing device; an expensive market can remain expensive. Its message is humbler: starting valuation influences the range of plausible long-term returns. Paying more makes the result more dependent on earnings growth actually arriving.

The CAPE series is volatile, and I do not treat it as a short-term signal. Still, rapid increases have often been followed by substantial declines. I am willing to forgo additional upside if doing so reduces exposure to a subsequent drawdown.

A Portfolio Decision, Not a Prediction

I do not pretend to know what the market will do over the next few years, and I am not positioning around a precise forecast. Expensive markets to not need to fall; they can move sideways while earnings catch up or continue rising. Nevertheless, today’s valuations and scarcity of company-specific bargains make outsized broad-market returns less likely, in my judgment, and a defensive posture rational.

I expect meaningful drawdowns at some point over the next eighteen months, although I cannot know their timing or cause. A surge in oil prices could be one catalyst; shifting interest-rate expectations, an earnings disappointment, or an unforeseen event could be another. The trigger matters less than the portfolio’s ability to endure it. A sound plan should not require advance knowledge of the headline that changes sentiment.

Meaningful declines are not infrequent over stock market history. Fidelity calculates that the S&P 500 experienced a drawdown of at least 10% in nearly half of all calendar years from 1980 through 2025. J.P. Morgan’s figures show that the index’s average intra-year decline since 1980 has been approximately 14% and its median decline 10%, even though stocks finished higher in roughly three-quarters of those years. Capital Group estimates that declines of at least 10% have occurred about once every eighteen months since 1954, while bear-market declines of 20% or more have occurred about once every six years. This history cannot tell us when the next selloff will begin, but it shows that drawdowns are a recurring feature of equity ownership.

Cash and high-quality fixed income should not be viewed merely as assets that failed to keep up with a bull market. They provide stability, income, and—most important for an active value investor—the capacity to act when prospective returns improve. Cash has option value without an expiration date, but only if one exercises it when fear returns and prices become dislocated.

Graham’s Useful Default

I recently re-read Benjamin Graham’s The Intelligent Investor. His policy for the defensive investor remains a useful starting point in today’s market. In the book, Graham proposed dividing funds between high-grade bonds and leading common stocks, normally about 50% each, while allowing stocks to range from 25% to 75% and moving bonds inversely. The framework was deliberately simple, designed to keep investors from becoming fully committed to stocks after a major rise or abandoning them after a major decline.

The policy’s enduring virtue is behavioral rather than mathematical. A 50%/50% allocation is not optimal for everyone, since tax circumstances, liabilities, and income needs vary by investor. Graham’s central insight nevertheless retains its force. Portfolio policy should impose discipline when emotion and recent performance argue for the opposite. Rebalancing requires an investor to sell some of what has become dear and buy what has become cheap.

In the current environment, the 50%/50% default strikes me as wise. It does not mean selling every stock, hiding in cash, or pretending bonds carry no risk. Asset allocation should respond to prospective returns and available opportunities, not fear of looking inactive. For individual clients, the exact mix must reflect liquidity needs, taxes, risk tolerance, and the durability of their capital. The principle matters more than applying the same percentage to every account.

Why I Reduced My Calumet LEAPS Positions

That framework helps explain a recent portfolio decision. Last week, I lightened up on a substantial position in Calumet (CLMT) LEAPS in client accounts, purchased when the common stock traded in the single digits. I have not sold any CLMT common-stock holdings and plan to hold the shares for the long term, as long as the thesis remains intact.

LEAPS can magnify returns, but they introduce leverage, time-decay risk, and a finite expiration date. As the underlying stock appreciates, a position initially sized for an asymmetric opportunity can become a much larger source of portfolio risk. Reducing that exposure harvested gains, locked in satisfactory returns, lowered time-sensitive leverage, and raised substantial cash for opportunities that may emerge in a selloff—including one caused by an oil-price shock—while preserving our long-term common-stock ownership. This was portfolio management, not an attempt to call the exact top in CLMT or the market.

The risk I care about most is permanent capital loss, not ordinary price volatility. LEAPS heighten that risk because they expire. An investment thesis may prove correct over time, yet the options can still lose money if the stock does not rise soon enough. Once a leveraged position has produced substantial gains, the risk-reward tradeoff changes. This is especially true when the position has grown large relative to the portfolio, prospective returns have diminished, and elevated market valuations increase the risk of a significant decline. Under those conditions, reducing the position is sensible risk management. The remaining upside must be weighed against expiration risk, the possibility of permanent loss, and the value of holding cash for better opportunities.

Preparing Rather than Predicting

For now, the work is straightforward, even if it is not exciting. I will monitor existing holdings and test whether their long-term economics and valuations remain intact. I will keep scouting for new ideas without relaxing my standards merely to put cash to work. I will also maintain a list of businesses I would own at lower prices, conduct deep-dive analyses on them, and establish valuation ranges before market stress can cloud judgment. My experience managing money independently since 2007 is that periods with few bargains are best used to strengthen portfolio resilience and prepare for a better pitch rather than swing at a bad one.

Attractive opportunities often arrive in clusters and remain available for short periods. A sharp crash can produce many bargains at once. A drawn-out bear market is psychologically harder because the first apparently cheap price may not be the last. It demands staged buying, patience, and the humility to accept that an investment may look worse before its value becomes evident. Either is preferable to manufacturing conviction in mediocre ideas because cash feels uncomfortable.

Patience is not a forecast that prices must fall. It is a refusal to let the market’s mood set our required return. The next compelling opportunity may come from an oil shock, a broad recession, a company-specific disappointment, or a long period in which prices decline more slowly than investors expect. I do not need to know which. I need liquidity, a researched watchlist, and the discipline to act when price and value separate.

The Risks of a Defensive Posture

A defensive posture carries risks. The most obvious is that the bull market continues and substantial cash and fixed-income holdings lag rising stocks. I am willing to sit out part of a continuing advance. Fortunately, the high returns our portfolios have generated over the past few years afford us the luxury of time to wait for better buying conditions.

Cash can lose purchasing power, and longer-duration bonds can decline if interest rates rise. With these risks in mind, I prefer to hold short-term liquidity in the iShares 0-3 Month Treasury Bond ETF (SGOV).

There is also the danger that patience hardens into permanent caution. If prices fall and prospective returns improve, I will redeploy capital into the opportunities that emerge rather than invent reasons to remain defensive.

The job is not to remain fully invested. The job is to allocate capital intelligently. When bargains are abundant, that means buying with conviction. When they are scarce, it means protecting optionality and waiting. Today, waiting is not the absence of a strategy, it is the strategy.

Link to HFIR Energy Income Portfolio on RunPlutus.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of the HFIR Energy Income Portfolio either through stock ownership, options, or other derivatives.

By: Jon Costello

Please read Part 1, “(Public) The Oil Shortage: The Market Is Still Underpricing, Part I.”

In Part I, I argued that the global oil market is considerably tighter than current crude prices suggest, with the shortage so far concealed by inventory withdrawals, strategic reserve releases, reduced Chinese imports and other temporary buffers. If that shortage persists, its consequences extend well beyond the price of oil.

In this second and final part, I examine four of the most important consequences I believe could follow from a prolonged disruption: a shift in power within the global oil market, a lengthy and potentially expensive process of rebuilding depleted inventories, the possibility of an oil-shortage recession, and the implications of such a downturn for the stock market. I then consider what these risks mean for investors and how I believe they should be approached.

Read more

By: Jon Costello

The following is an excerpt of a letter I wrote to investors in an investment partnership I manage. It is the first of two parts. The second part will address consequences to the oil and stock markets.

More than five months after the Strait of Hormuz was first closed, the global oil market is confronting a supply disruption unlike anything in modern history. Yet crude prices continue to reflect a market that appears remarkably unconcerned. I believe that complacency is misplaced. The shortage has so far been masked by massive inventory withdrawals, strategic reserve releases, sharply reduced Chinese imports and lower refinery runs—temporary buffers that are increasingly being depleted. In this first of two parts, I examine why I believe the physical oil market is considerably tighter, and the risk of substantially higher prices considerably greater, than current crude prices suggest.

The Largest Oil Supply Disruption on Record Is Underway

The closure of the Strait of Hormuz—the chokepoint through which roughly one-fifth of the world’s petroleum liquids normally passes—has produced the largest oil supply disruption ever recorded, well above the previous record of roughly 3.5 million barrels per day seen in 1974 during the Arab oil embargo.

The magnitude of the ongoing inventory draw is difficult to overstate. Saudi Aramco estimated on August 4 that the conflict had removed roughly 11 million barrels per day of liquid supply, with much of that loss temporarily absorbed through strategic reserve releases, commercial inventory withdrawals, and regional demand reductions.

More important for assessing the damage already done, Aramco estimated that rebuilding depleted inventories could require approximately 2.1 million barrels per day of surplus supply for up to 18 months. That implies a cumulative inventory loss of roughly 1.15 billion barrels. Because that depletion occurred over approximately five months, it equates to an average inventory draw of about 7.6 million barrels per day.

The scale of the disruption becomes clearer when contrasted with the largest oil supply deficits of the past half-century, presented in millions of barrels per day (mb/d).

Factoring in temporary offsets to the supply loss, the net effective supply deficit is roughly 3 to 4 million barrels per day, placing the disruption in the same range as the 1974 Arab oil embargo.

However, that comparison understates the risk. Much of today’s shortage has so far been absorbed through extraordinary withdrawals from commercial inventories and strategic reserves, along with reduced Chinese imports and other forms of demand management. Those buffers are finite. As they are depleted, even an unchanged or reduced supply deficit becomes progressively harder for the market to absorb. Unless additional production reaches the market or demand falls further, an increasing share of the adjustment will have to come through higher oil prices.

Why I Believe Oil Remains Underpriced

Oil prices remain well below the levels implied by the ongoing supply disruption. Oil futures prices reported in the financial media reflect market conditions almost exclusively in the here and now. Most contracts expire within a few months, so traders holding them are largely indifferent to market-moving events beyond that horizon. This structure explains how oil futures can trade as if the crisis were resolved while the physical market’s supply/demand balance tightens by the week.

While near-term futures prices can be a useful gauge of immediate supply and demand, oil’s “fair value” is more reliably gauged by the relationship between prices and inventories. That relationship is nonlinear, as prices tend to rise at an accelerating rate as inventories fall.

By early August, the global oil market had lost well over one billion barrels of inventory, depleting roughly 14% of the inventory that existed before the conflict. The supply deficit shows no signs of abating, while tankers and onshore oil infrastructure are now repeatedly being attacked across the Middle East. Yet WTI remains in the low-$80s—only about 20% above its prewar level. The disconnect between the physical oil market and oil prices remains remarkable.

Statistical fair-value models that I believe are reliable currently place WTI’s fair value above $100 per barrel, implying a gap between price and fair value of 30% to 40%, at the extreme of historical deviations. Moreover, as inventories continue to fall while prices remain in a narrow range, the gap widens.

Four visible factors explain why prices have been unable to mount a sustained rally.

First, governments have released large volumes of oil from strategic reserves. Those releases have been effective in offsetting supply losses. Consider that of the 62 million barrels removed from developed-country inventories in June, 44 million came from strategic reserves rather than new production. Strategic reserves are a finite resource, and their usable capacity is being rapidly depleted.

Second, computer-driven funds, which account for a large share of futures trading, reduce exposure automatically when volatility rises, regardless of the physical supply-demand balance.

Third, the market has repeatedly valued negotiations as though they had already succeeded.

The fourth factor is massive selling of crude futures by unidentified parties. Short positioning in the futures market is at historic highs even as the physical market is experiencing the most severe oil supply disruption on record. I have rarely seen such an extreme divergence in all my years participating in markets. One possible explanation is that government-affiliated funds are selling crude futures to suppress prices and limit the economic damage that would result if oil rose to levels more consistent with current supply risk and inventory-depletion trajectories. I want to emphasize, however, that this is my suspicion rather than a conclusion supported by direct evidence.

Suppressed prices have consequences. If oil prices are held below the level required to balance supply and demand, the effect can resemble a price control, since the shortage is not resolved, producer and consumer adjustments are delayed, and the eventual correction can become more severe.

During a supply crisis, high oil prices perform an essential economic function. They encourage additional production, discourage marginal consumption, and force conservation. Preventing that price signal from doing its work does not eliminate scarcity; it merely postpones the adjustment. If the current path continues, I believe outright physical shortages are increasingly likely.

A Deal Has Been Priced In Repeatedly, but Never Delivered

Oil’s underpricing has been repeatedly reinforced by U.S. jawboning since the crisis began. Over and over, threats of imminent military escalation have been followed by postponements, ceasefires, or claims of progress in negotiations, sending crude prices sharply lower and inflicting losses on traders positioned for a tighter physical market.

Since March, some version of the same jawboning sequence has occurred at least eight times:

• March 21–26: The U.S. threatened to “hit and obliterate” Iranian power plants unless Hormuz reopened within 48 hours. The strikes were postponed two days later amid claims of “very good and productive” negotiations, and the deadline was subsequently extended by another 10 days.

• April 7: The U.S. warned that “a whole civilization will die tonight.” Hours later, a two-week ceasefire was announced to provide time to conclude a proposed 10-point plan.

• April 21: The president said he expected the U.S. “to be bombing” if talks failed. Later that day, the ceasefire was extended indefinitely after mediators requested more time.

• May 17–18: The U.S. warned that “the Clock is Ticking,” then held off a major strike at the request of Qatar, Saudi Arabia, and the UAE, citing “serious negotiations.”

• June 11: The president said the U.S. would hit Iran “VERY HARD TONIGHT.” The operation was canceled hours later after another claimed negotiating breakthrough.

• June 14: The U.S. and Iran announced a 60-day framework that included a ceasefire, the lifting of the U.S. naval blockade, and the reopening of the Strait. Almost immediately thereafter, oil gave back its war premium.

• July 27: The bombing campaign was paused to give diplomacy another opportunity.

• August 1: The U.S. declared that it was “locked and loaded,” then canceled a planned attack after claiming that Iran had agreed to the parameters of a deal.

In the end, none of these threatened strikes, ceasefires or purported negotiating breakthroughs has produced a sustained increase in oil flows through the Strait of Hormuz. The details have varied, but the pattern has been remarkably consistent: a deadline is announced, military action appears imminent, negotiations are said to be advancing, and the deadline is then postponed. All the while, Iran has repeatedly disputed the suggestion that meaningful negotiations are underway. Even in July, when the two sides appeared closest to an agreement to reopen two shipping lanes, Iran’s senior negotiator publicly dismissed the prospect of a deal, saying, “Don’t even think about it.”

Iran continues to throttle oil flows through the Strait of Hormuz. At present, flows are running at less than 5 million barrels per day, down from more than 20 million barrels per day before the conflict and from a brief surge to roughly 15 million barrels per day in June. Much of that surge was attributable to Iranian tankers exiting after the U.S. temporarily eased its blockade of Iranian commerce.

More than five months after the Strait first closed, satellite tanker-tracking firm Kpler estimates traffic remains at just one-quarter of its prewar level.

Source: Rory Johnston, Kpler, X, Aug. 11, 2026.

Kpler’s estimates should not be treated as precise, and actual oil flows through Hormuz may be higher than the figures shown above. But the estimated shortfall is so large that I do not believe any plausible measurement difference could eliminate it. Even if Kpler is materially understating current flows, they would still have to be several multiples higher than its estimates to erase what remains a significant global supply deficit.

For the oil market to begin returning to anything resembling its prewar normality, flows through Hormuz will have to increase substantially from current levels.

Iran’s Demands Are Hardening

Which brings me to the present day. Iran’s negotiating position appears to be hardening, and its demands now go far beyond simply ending the conflict. Tehran is now demanding:

• The withdrawal of U.S. military forces from the region.

• A permanent end to the U.S. war against Iran.

• An end to U.S. military action against Iran’s regional allies in Lebanon, Palestine, Yemen, and Iraq.

• No further U.S. military threats against Iran.

• An end to the U.S. naval blockade of Iranian ports.

• The lifting of U.S. sanctions against Iran.

• The unconditional release of Iran’s frozen foreign assets.

• Full compensation for war damage.

Iran’s parliament is also considering barring ships from hostile countries, including the United States and Israel, from transiting Hormuz until those countries compensate Iran for war damage.

These are not the demands of a government urgently seeking a deal. They suggest Tehran believes its bargaining position is strengthening and that time is working in its favor.

My read is that Iran understands where much of that leverage comes from: oil. Hormuz does not have to remain closed indefinitely for Iran to benefit. Disruption merely has to persist long enough to tighten the market and push oil prices materially higher. The higher prices rise, the greater the economic cost imposed on Iran’s adversaries and the stronger Tehran’s negotiating position becomes.

The Strait of Hormuz Is Iran’s Real Deterrent

Iran’s greatest strategic victory may ultimately have little to do with the terms of whatever agreement ends the conflict. It may instead come from convincing the United States, Israel and the rest of the world that disrupting Hormuz represents a powerful economic deterrent. If military action against Iran credibly threatens sharply higher energy prices, oil shortages, renewed inflation and potentially a global recession, the cost of intervention rises considerably.

That possibility could force the U.S. and Israel to think much more carefully before undertaking future military action. In that sense, the ability to disrupt Hormuz could ultimately prove more valuable to Iran than a nuclear weapon, which would be extraordinarily difficult to use without inviting catastrophic retaliation.

Influence over a critical artery of the global oil market, by contrast, can be exercised in degrees, repeatedly and without crossing the nuclear threshold. Whether Iran can establish such a deterrent remains to be seen. Still, I increasingly believe that demonstrating the economic power of the Strait of Hormuz has become one of Tehran’s most important strategic objectives.

The Supply Disruption Has Spread Beyond Hormuz

The more recent problem is that the disruption is no longer confined to the Strait of Hormuz.

On July 20, the Houthis entered the conflict, opening a second front against oil flows through the Bab el-Mandeb Strait at the southern end of the Red Sea. This is particularly important for Saudi Arabia. With Hormuz impaired, the Saudis have been forced to divert more than 70% of their normal crude exports to the Red Sea port of Yanbu, from which barrels destined for Asia must travel south through Bab el-Mandeb. Saudi crude and refined-product shipments from Yanbu have averaged more than 4.5 million barrels per day since April, with roughly 70%—more than 3 million barrels per day—bound for Asia. The Red Sea route has therefore become Saudi Arabia’s principal means of maintaining exports. At the same time, Hormuz remains impaired, yet even these flows amount to only about half of the Kingdom’s pre-conflict output.

Houthi attacks and threats have now placed those barrels at risk as well. Kpler measured Saudi crude transiting Bab el-Mandeb falling from roughly 3 million barrels per day before the attacks to about 1.5 million barrels per day immediately afterward. I would therefore characterize more than 3 million barrels per day of Saudi supply as newly exposed to disruption or costly rerouting, with roughly 1.5 million barrels per day initially displaced. Those barrels are not necessarily lost. Some cargoes can be redirected north through the Suez Canal or around Africa, but doing so adds time, freight costs, and logistical constraints precisely when the global oil market has little remaining capacity to absorb another disruption.

The threat to oil supply has also spread beyond these two critical shipping lanes. On July 27, Iran-backed militias launched drones at Saudi oil facilities in the Eastern Province, including the Abqaiq area, home to the world’s largest crude-oil processing complex. Kazakhstan’s output was cut roughly in half in late July after drone attacks shut the Caspian Pipeline Consortium’s Black Sea terminal, removing approximately 900,000 barrels per day. Inside Russia, Ukrainian drones have struck nearly half of the country’s refining capacity at least once since April, while fuel rationing now affects roughly 50 million people. None of these disruptions would be resolved simply by an agreement between Washington and Tehran.

The significance for the oil market is cumulative. Each new disruption removes another layer of redundancy from the global supply system, forcing barrels onto longer routes and leaving less logistical capacity to absorb the next shock. With inventories already heavily depleted, even modest additional losses could disproportionately affect prices.

The Global Oil Supply Buffer Has All but Disappeared

Before the Iran war, global oil inventories totaled approximately 8.4 billion barrels. Still, much of that oil was working inventory required to keep pipelines, refineries, terminals and the broader distribution system operating.

Source: J.P. Morgan estimates.

Moreover, that headline inventory figure substantially overstates the cushion that was actually available when the war began. At the IEA’s current estimate of 103.3 million barrels per day of 2026 demand, 30 days of consumption amounts to approximately 3.1 billion barrels. But even that understates the amount of inventory effectively tied up in the system.

J.P. Morgan estimated before the war that only about 800 million barrels of the 8.4-billion-barrel total could be drawn without creating operational stress, implying an effective operating floor of roughly 7.6 billion barrels.

On this framework, global inventories have fallen from roughly 8.4 billion barrels before the war to approximately 7.25 billion barrels today. The table below shows estimated inventory depletion since the conflict began.

Sources: IEA, EIA, OPEC, Saudi Aramco, MUFG, J.P. Morgan, and Goldman Sachs.

That depletion puts the system below the roughly 7.6-billion-barrel level implied by J.P. Morgan’s estimate of how much inventory could be drawn before operational stress begins to emerge.

The remaining barrels are not equally available: much of the strategic reserve pool is constrained by policy and national security considerations, while commercial inventories include working stocks needed to keep refineries, pipelines and terminals operating normally. In other words, the market is no longer drawing primarily from excess inventory. It is increasingly consuming the operating cushion itself. That is why further depletion could have consequences disproportionate to the number of barrels lost, including greater regional tightness, logistical disruptions and more volatile prices.

What is clear is that if the current supply deficit persists for a few more months, the market will increasingly lose access to the inventory buffers that have so far prevented the shortage from being fully reflected in prices. Commercial stocks cannot be drawn indefinitely without approaching the minimum levels needed to keep refineries, pipelines and distribution systems operating. At the same time, the usable portion of strategic reserves will be exhausted well before the headline SPR balances reach zero.

As inventories approach those limits, futures prices can become less informative as a measure of immediate physical scarcity. Refiners and consumers ultimately need actual barrels, not paper contracts, and increasingly scarce physical supply can command premiums that are not immediately reflected in the futures market.

The result is a considerably more fragile market. The marginal barrel can no longer come from storage, leaving additional production or further demand destruction as the primary mechanisms for balancing supply and demand. If new supply cannot arrive quickly enough, prices will have to rise to levels that force that demand out of the market. The risk, therefore, is not simply that the present shortage continues, but that its effect on prices becomes increasingly nonlinear as the inventories masking it disappear.

China’s Return Could Tighten the Market Further

China has been one of the most important buffers preventing the physical oil shortage from becoming even more severe. Its crude imports averaged just 7.78 million barrels per day in June and July, compared with 11.99 million barrels per day before the conflict. In June alone, imports fell to 6.2 million barrels per day, their lowest level since November 2015.

China did not suddenly stop needing oil. It reduced imports, drew down inventories accumulated earlier, and curtailed refinery activity, effectively substituting stored barrels and lower consumption for roughly 4.2 million barrels per day of imports.

Source: Barclays Research, EIA, Kpler, July 27, 2026.

That strategy has bought time, but it cannot continue indefinitely. At a 4.2-million-barrel-per-day reduction in imports, every 100 million barrels of usable Chinese inventory offsets only about 24 days of purchases. Deferred demand is not destroyed demand. As inventories decline, China must eventually choose between deeper consumption cuts and a return to the seaborne crude market.

Signs of this process are already emerging, with Chinese crude imports recovering from their June low, as shown in the following chart.

Source: Vortexa, August 7, 2026.

This return could accelerate just as Western governments become less able to supplement supply from strategic reserves, intensifying competition for the barrels still available to the market.

If China continues restoring crude purchases toward pre-conflict levels, it could materially tighten an already depleted global oil market. Excluding China, global inventories are approximately 370 million barrels below their seasonal average, the tightest reading in five years. As China returns as a major buyer, competition for the marginal barrel will intensify.

China’s return could make the price response even more nonlinear. With commercial inventories moving closer to operating minimums and usable strategic reserves shrinking, the market has much less capacity to absorb additional demand or another supply disruption without an immediate price response. Price spikes and regional shortages therefore become more likely even if the headline global supply deficit does not worsen. The same supply deficit has a much greater effect when fewer stored barrels remain available to cushion it.

China’s return would therefore matter not because its demand is new, but because deferred demand would re-enter a market with far less inventory to cushion it.

Reduced Chinese refinery activity has also helped temporarily suppress crude demand. With Chinese runs sharply curtailed, global refinery runs are roughly 6 million barrels per day below year-ago levels in a market consuming approximately 103 million barrels per day. Yet demand for petroleum products has not fallen nearly as much. The result has been sharply higher prices for gasoline, diesel, and jet fuel while crude prices have remained comparatively subdued. These are observable physical developments, including in satellite data to which I have direct access. Oil futures prices do not yet reflect the degree of tightening visible in the physical market.

Taken together, these developments show how the market has managed the shortage so far: by drawing inventories, releasing strategic reserves, suppressing Chinese imports and reducing refinery runs. None of those responses can continue indefinitely. The more important question, then, is what happens as those buffers are depleted and the shortage begins to work its way more fully into oil prices, the economy and financial markets.

Conclusion

The key point is not that the current supply deficit must grow for oil prices to rise substantially. It is that the mechanisms that have prevented the existing shortage from being fully reflected in prices are being exhausted. Inventories have already been drawn deeply into the system’s operating cushion, strategic reserves are finite, China is beginning to return to the market, and the threat to supply has spread well beyond the Strait of Hormuz. As those buffers disappear, the same supply deficit can have a much greater effect on prices, making the adjustment increasingly nonlinear.

In Part II, I will turn to what that adjustment could mean for the economy and the stock market, and why an oil shortage of this magnitude could ultimately have consequences extending far beyond the energy markets.

Link to HFIR Energy Income Portfolio on RunPlutus.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of the HFI Research Energy Income Portfolio either through stock ownership, options, or other derivatives.

By: Jon Costello

See the original Transocean article from May 8, 2025. It is now public.

Transocean reported second-quarter results on August 5, and at first glance the quarter looked like a step backward. Revenue declined to $966 million from $1.081 billion in the first quarter, adjusted EBITDA margin fell to 32.2% from 40.7%, and backlog declined $396 million from the May update to $6.7 billion. The decline was offset, however, by a roughly $1.0 billion agreement with Equinor (EQNR), which remains subject to license-partner approval, that would increase backlog to approximately $7.7 billion.

Despite the weak headline showing, the shares rose anyway, from $5.14 when the results were released to $5.72 on August 12. That reaction makes more sense after looking underneath the headline numbers.

In my May article, I described the first quarter as the clearest evidence in years that Transocean’s operating leverage was emerging. Deleveraging was ahead of my expectations, and the forward contracting outlook was the strongest since I began covering the company. The second quarter weakened the operating-leverage evidence but left the balance-sheet improvement intact and strengthened the case for higher dayrates. Management also raised full-year revenue guidance to $3.90 billion to $3.975 billion.

The second quarter came down to revenue, backlog and margins. The first two are less concerning after examining what drove them. Margins remain a pivotal factor because higher utilization and dayrates still need to produce sustained earnings and free cash flow.

Read more

Please see 2025 write-up titled: (Idea) Hess Midstream - A Potential Acquisition Target For Chevron

By: Jon Costello

Last September, I wrote that I expected Hess Midstream (HESM) to be acquired by Chevron (CVX) within six to twelve months at approximately $40 to $41 per share. Lo and behold, no transaction has occurred, but HESM reached $41.44 earlier this week.

I was right about the price but wrong about how it would get there. Looking back at my earlier valuation, I placed too much weight on a corporate event and too little on HESM’s transition from a capital-intensive construction phase into a period of substantially higher free cash flow.

The shares sold off after the company reported second-quarter earnings on August 3, as the market appeared to treat lower minimum volume commitments beginning in 2028 as evidence that Chevron’s Bakken business is deteriorating. The quarter also included throughput declines across all five systems, including 18.9% for crude oil gathering and 14.6% at crude terminals.

The operating weakness is a real concern, but the table also captures the central attraction of the investment case. Adjusted EBITDA declined only 0.7%, while Adjusted Free Cash Flow increased 19.5% as capital spending fell 56.3%. HESM’s volumes are weakening, but its transition out of a capital-intensive construction phase is allowing substantially more of its earnings to reach shareholders.

Whether that improvement in cash flow is durable depends partly on how much revenue remains protected if throughput continues to weaken. That makes the structure of HESM’s minimum volume commitments central to the valuation.

Read more

By: Jon Costello

Note to readers: dollar figures are in Canadian dollars except where specified otherwise.

On Tuesday, August 4, Suncor Energy (SU) reported second-quarter results. The quarter featured some operational challenges, but the company’s performance was strong nevertheless.

The most significant challenge during the quarter was the weather. Fort McMurray received 50% more precipitation than its ten-year average, making it the wettest quarter in more than thirty years. Management estimates that the weather reduced bitumen mining production by 50,000 to 60,000 barrels per day.

Despite the reduced production, Suncor generated $5.329 billion of adjusted funds from operations, essentially matching the $5.345 billion record set in the second quarter of 2022, when WTI averaged US$108 per barrel. Adjusted funds from operations per share reached a record $4.52.

The quarter’s financial performance is impressive. It can be better appreciated when compared to the previous second quarters over the past few years.

In my previous Suncor article published in July, I raised the normalized 5-2-2-1 refining index assumption used in my valuation to US$35 per barrel and valued Suncor at approximately $97 per share. I also estimated second-quarter adjusted funds from operations of roughly $5.6 billion.

The quarter did not unfold as I expected. Upstream production fell 5.8% year over year, primarily because the planned turnaround reduced in situ bitumen production at Firebag. Higher production from Suncor’s oil sands mining operations, despite the unusually wet weather, partly offset that decline. Downstream throughput, meanwhile, reached a second-quarter record. Operating results relative to prior quarters are shown below.

The tables illustrate the benefit of Suncor’s integrated mode, as the mixed operating performance was still able to drive financial outperformance.

Chief Financial Officer Troy Little said downstream funds flow reached a record $2.3 billion. The company’s second-quarter report shows $2.299 billion, compared with $615 million a year earlier. The result was $172 million above the previous record in the second quarter of 2022 even though, after the renewable volume obligation, the New York Harbor 2-1-1 crack margin was more than US$10 per barrel lower.

Read more

By: Jon Costello

Note: All dollar figures are in Canadian dollars unless otherwise specified.

Obsidian Energy has built its entire investor pitch around three words: “Per share growth.” The phrase appears on its presentation’s value-proposition slide, reserves slide, and the “why invest” slide of its July 2026 presentation. It is the metric by which management wants the company to be judged by shareholders. The metric is both sensible and testable.

Results to date bear out that Obsidian has yet to demonstrate the per-share growth. Over the past three years, production per share, funds flow per share, and book value per fully diluted share have all been flat or have declined despite a 16% reduction in the share count.

The market’s skepticism is evident in the company’s market valuation. At $14.70 per share, Obsidian trades at roughly 45% of its stated proved-plus-probable net asset value of $32.35. The relevant question, therefore, is not simply whether the shares appear inexpensive, but what must occur for that discount to narrow and how much value should be assigned to the company before operating evidence materializes.

Read more

Please read previous CLMT write-up: (Idea) Calumet - Big Upside If The Market Prices The RIN Windfall

By: Jon Costello

I began buying Calumet (CLMT) in 2022 at approximately $14.21 and have held it as the largest position in the HFIR Energy Income Portfolio for most of the period since. In May, with the stock at $31.50, I estimated a probability-weighted value of approximately $50. The shares closed on July 28 at $41.48, up 32% since May and 144% over the past year, after running to a multi-decade high of $45.20 last week.

The appreciation alone does not make the shares overvalued, but it changes the position-sizing decision because the stock has risen much faster than the D4 RIN price, a principal driver of Montana Renewables’ earnings. The RIN peaked at $2.58 on July 7 and declined 11% over the next three weeks, while CLMT has gained 12% over the same period. The pricing divergence does not invalidate my thesis, but it indicates that the market is discounting continued strength in renewable-fuel economics. With the shares approaching my probability-weighted value and offering limited base scenario upside, the question is whether the expected return still justifies the position’s size.

Read more

Please also read: (Idea) Greenfire Resources - One Of Our Favorite Energy Names

By: Jon Costello

Greenfire Resources (GFR) has agreed to acquire Connacher Oil and Gas for approximately C$1.28 billion in cash. I own Greenfire and have followed the company closely from its 2023 public listing through the investment by Waterous Energy Fund and to the recapitalization completed last December. My investment thesis has been that the shares traded at a substantial discount to the value of Greenfire’s long-lived oil sands reserves, provided management could stabilize production and fund the next phase of development.

This proposed Connacher acquisition reinforces that thesis, but it also increases the amount of execution required to realize it. Connacher’s Great Divide oil sands project is a logical asset for Greenfire to own, and the combination of the companies’ assets creates a larger platform with meaningful operating and development synergies.

Source: Greenfire Resources Connacher Oil & Gas presentation, July 2026.

However, the purchase price already gives Connacher credit for a favorable commodity price environment and for successful post-acquisition execution by Greenfire’s management. Given the announced price, I do not consider the acquisition itself to be cheap, but I continue to believe Greenfire shares are undervalued from a long-term perspective after giving effect to the transaction and associated financing.

Connacher’s Trip From Insolvency to a C$1.28 Billion Sale

Connacher entered creditor protection in 2016. In early 2019, a C$113.5 million sale failed, and the company’s first-lien lenders acquired it through a credit bid that September. The former equity was canceled, and Connacher has remained private ever since.

The lenders who acquired the company through that credit bid are now selling the business for approximately C$1.28 billion. Greenfire has not identified this group, so I will not speculate about the returns generated from this deal. The relevant point is that Greenfire is not buying from a distressed owner. The transaction marks a full exit for creditors who controlled the asset for nearly seven years, which argues for a conservative evaluation of the acquisition price.

Connacher Is an Unusually Strong Strategic Fit

Connacher’s Great Divide in-situ oil sands project sits directly adjacent to Greenfire’s Hangingstone operation. Both assets are produced from the McMurray formation and use the same regional pipelines. In this deal, Greenfire will combine two neighboring SAGD assets, rather than entering a new basin or operating model, thereby roughly doubling the company’s scale.

Great Divide’s Pod One and Algar processing facilities currently support approximately 20,000 barrels per day and are reported to have brownfield expansion potential toward 30,000 barrels per day, as shown below.

Pod One is the stronger of the two facilities, with a steam-oil ratio of 2.6x compared with 3.5x at Algar.

Greenfire’s management team also has an unusually high degree of familiarity with the asset, having spent more than fifteen years in prior roles at Connacher. That history reduces integration risk, although it does not eliminate operating risk.

Management has identified approximately C$30 million in annual savings from midstream, marketing, and operating costs, and G&A, while the combined company will have roughly C$2.8 billion in tax pools that should enable it to defer cash taxes until after 2030. These benefits strengthen the strategic rationale for the transaction, though they do not by themselves establish that Greenfire is acquiring Connacher below intrinsic value.

The Reserve Valuation Is Attractive

Read more

By: Jon Costello

Suncor Energy (SU) reports its second-quarter results on August 4, and the quarter should be exceptional. WTI averaged approximately US$95.65 per barrel from April through June, while refining margins reached levels exceeded only twice before, both in 2022.

I estimate adjusted funds from operations of approximately C$5.6 billion, compared with the C$5.345 billion Suncor generated in the second quarter of 2022. My estimate falls within a relatively wide range of C$5.2 billion to C$5.9 billion, but anything above the low end would likely represent a record.

That result will generate substantial cash for debt reduction, dividends, and share repurchases. However, a single strong quarter does not determine Suncor’s intrinsic value. The more important question is how much of the company’s current earnings power should be incorporated into a normalized estimate of cash flow.

I last valued Suncor’s TSX-listed shares at C$70 in December, when they traded near C$60. That estimate assumed US$65-per-barrel WTI over the longer-term due to the outlook for a sustained oversupply. It also assumed refining margins modestly above management’s guidance. The shares have since appreciated sharply, closing at C$87.53 on July 16.

I now believe Suncor’s normalized earnings power is higher than my December estimate. However, the change is attributable to the macro outlook and not any structural change in Suncor’s earning power.

Read more

Occidental 2024 write-up (public)

Occidental 2025 write-up (public)

By: Jon Costello

The market continues to value Occidental Petroleum (OXY) as a heavily indebted company. That description is becoming obsolete faster than investors appear to recognize.

When I last revisited OXY in June 2025, I expected balance-sheet repair to remain the dominant issue through 2027, with larger repurchases and dividend increases beginning in 2028. I was too conservative. OXY ended the first quarter of 2026 with $13.3 billion of long-term debt, down from a post-CrownRock peak of $28.9 billion and only $3.3 billion above management’s near-term target of $10 billion. At sustained oil prices above the mid-$70s per barrel, the company should reach that target within months.

That timing matters because the oil market is pricing an orderly reopening of the Strait of Hormuz and a quick disappearance of the recent risk premium. That assumption strikes us as too complacent. OXY is one of the cheapest large-cap ways to express the opposite view, but the investment thesis no longer depends only on higher oil prices. It also rests on a balance sheet that has already improved substantially.

The Balance Sheet Changed Faster Than I Expected

The OxyChem sale closed on January 2, and management applied the proceeds to debt. Since December alone, OXY has reduced long-term debt by $7.5 billion. Total debt has fallen to $15.7 billion at the end of the first quarter from $25.6 billion a year ago.

The improvement extends beyond the headline debt reduction. OXY’s annual interest run-rate is approximately $845 million, roughly $550 million below the 2025 level. Near-term maturities are also modest, with only $415 million due through the end of 2029. The company no longer needs favorable capital markets to complete the remaining deleveraging.

The following chart shows OXY’s total debt at carrying value over the past five quarters.

OXY’s long-term debt position now supports, rather than constrains, the investment case for owning OXY shares.

At the oil prices used in my valuation, OXY should reach $10 billion of long-term debt in approximately three to five months. The relevant question is therefore no longer whether the balance sheet will be repaired, but how management will allocate cash once that target is reached.

Why the Discount Has Not Disappeared

Read more

By: Jon Costello

Please be sure to read:

(Public) Our #1 Metallurgical Coal Stock Pick - Warrior Met Coal

A year ago, I bought shares of Warrior Met Coal because I believed its Blue Creek project would transform an already low-cost producer into a much larger free cash flow generator.

The company has now completed the roughly $1 billion project ahead of schedule, within budget, and without adding funded debt, while the first quarter provided the clearest evidence yet that Blue Creek is lowering Warrior’s companywide cost structure.

Since then, the shares surged to $110 and have since pulled back into the high-$70s as elevated freight costs and weak price realizations have obscured the improvement in the underlying business.

In this article, I review what has changed since my original investment thesis, estimate Warrior’s value across several coal price scenarios, and explain why I believe the shares have become attractive again.

Rising Coal Prices Failed to Sustain a Higher Stock Price

Metallurgical coal has gone from glutted to tight in six months. The premium low-vol benchmark out of Australia fell below $200 per metric ton in the second half of 2024, spent most of 2025 between $170 and $200, and now trades in the mid-$230s.

Two supply-related disruptions drove the move.

The first came from China. After a May 22 gas explosion at the Liushenyu mine in Shanxi province killed at least 82 people, regulators halted 109 mines representing roughly 122 million tons of annual capacity. Chinese coking-coal production fell by an estimated 288,000 tons per day. By June 5, suspensions had eased to 59 mines, but the initial loss of supply tightened the broader coking-coal complex and lifted the seaborne premium low-vol benchmark that influences Warrior’s Mine No. 7 pricing.

The second disruption came from transportation. Since late February, the Iran war has sharply reduced traffic through the Strait of Hormuz, pushing dry-bulk freight costs higher. This matters because Warrior pays freight on High Vol A coal sold into the Pacific Basin on a cost-and-freight basis. Higher benchmark prices have therefore been partly offset by freight costs, compressing margins and contributing to the stock’s weakness.

Where the Thesis Stands

Read more

Neglect, dislike, or whatever you want to call it, investors in the energy sector are completely misreading the situation unfolding in Colombia. Following Abelardo de la Espriella’s victory on June 21, investors have seemingly responded to Colombian oil producers with a “meh”.

Read more