(Public) Year In Review 2025
By: Jon Costello
2025 was a year of extraordinary opportunity for contrarian-minded value investors. With the results now in, I’m pleased to report that funds exclusively under my management had a good year. My investment partnership ended the year up 66.1%, while my separately managed accounts were up from 77.2% to 97.6%. The following investments drove the gains. I published articles on each around the time I made the investments.
The Wins
The year started out strong with Whitecap Resources’ (WCP:CA) acquisition of Veren, my largest holding at the time. The acquisition occurred when oil-related stocks were cheap. Shortly after the acquisition was announced, I sold some Veren shares to buy other, more beaten-down stocks. I kept the remaining shares and now have a large position in Whitecap.
The next big opportunity was to buy bargain-priced stocks aggressively during the Trump tariff selloff. While the rhetoric at the time was scary, I didn’t believe Trump was going to crash the global economy. I was familiar with Trump’s negotiating style and didn’t believe that the obscenely high tariffs initially proposed would stick. And after all, they could always be rolled back if they sparked an economic downturn.
Furthermore, the U.S. economy didn’t have major structural imbalances that threatened a deep recession, so I figured that any recession caused by tariffs would be mild. The cheap stock prices on offer added to my conviction. Prices fell to attractive buying levels even if a recession came to pass, so I loaded up.
My largest purchase during this period was Calumet (CLMT). Calumet became my largest holding throughout the year. I was attracted to the legacy business’s resilience during recessions, which was underappreciated. I also liked the policy-dependence of its main growth project, Montana Renewables. Montana Renewables can perform well in a recession as long as refiners are required to purchase its products in large enough volumes. Calument was also set to benefit from several catalysts over the two years after the purchase.
To be sure, the company faced risks due to its high leverage. However, I was convinced that Montana Renewables (a) was very valuable, and (b) could be sold in short order if the need arose.
My second largest buy at the time was Valaris (VAL). Valaris was the most conservatively positioned offshore driller, particularly from a balance sheet perspective. The shares were an attractive buy at $31. I believed then—and still believe—that offshore drillers offer more upside than E&Ps in an oil bull market, and that they are the best way to benefit from the higher oil prices I expect over the next three to five years.
I was probably the heaviest buyer of Cardinal Energy (CJ:CA) warrants during the tariff scare. The warrants give their owners the right to buy Cardinal Energy stock at C$7.00 per share. They expire on January 3, 2028.
The warrants sold off sharply, offering an attractive long-term buying opportunity in the low-C$0.40s. Cardinal was developing its Reford SAGD project and future smaller SAGD projects to shift from its older, lower-quality conventional assets toward higher-quality oil sands assets. My plan was to switch from buying the warrants to also purchasing Cardinal shares if the dividend were cut. However, this never happened, and the shares and warrants quickly recovered.
My next major buy was Warrior Met Coal (HCC). This was a high-conviction position that I made 20% across the portfolios. From a macro perspective, I believed coal prices had fallen to unsustainably low levels. Prevailing prices at the time threatened to put Warrior’s higher-cost, leveraged global peers out of business. It was therefore only a matter of time before prices rebounded to more favorable levels for Warrior.
Warrior stands to benefit from the low-cost coal production of its new Blue Creek project. The project is expected to ramp up in 2026, increasing the company’s capacity to generate cash flow. Its multi-decade reserve life will enable it to do so for a very long time. I trust that management will make intelligent capital allocation decisions, so I expect to hold the shares for many years.
The final big move was the switch from Valaris to Transocean (RIG). At the time, Valaris shares were trading at $51, while Transocean shares traded at $3.08. The switch made more sense as I came to appreciate the importance of a high-spec fleet in maximizing an offshore driller’s cash flow upside.
Transocean shares declined mainly because of concerns about the company’s balance sheet. Although these concerns were valid and the risks real, I believed the company’s ability to contract its fleet was much stronger than its competitors’. The cash flow would more than adequately meet its debt service requirements.
After the Transocean buy, the company announced an equity raise that took me by surprise but ended up providing the company with additional breathing room if the mid-cycle downturn in dayrates were to persist.
In addition to these big wins, smaller holdings like Tidewater (TDW) and Genesis Energy (GEL) also contributed positively to performance.
The Losses
My biggest loss in 2025 was on a long position in Sable Offshore (SOC). Fortunately, this was a small position. Otherwise, I didn’t have big losers during the year.
My most gnawing regret was not buying Borr Drilling (BORR) stock. That opportunity should have been obvious, but it flew right by me. I even published an article stupidly recommending that investors stay away from Borr shares. I let the balance sheet risks cloud my perception of the company’s significant potential amid a stabilizing jackup market. Borr successfully navigated a tricky situation, both operationally and financially. I believe it is set up nicely for long-term success.
Energy Income Portfolio
In previous years, I had more income ideas than non-income ideas, but that certainly wasn’t the case in 2025. None of the opportunities above was appropriate as an energy income investment. I manage the HFIR Energy Income Portfolio with an emphasis on income safety and growth. Due to the lack of equity income opportunities that were more attractive than our portfolio’s holdings, I held the positioning steady. All the portfolio holdings’ investment theses continue to track as expected, while superior alternatives remain scarce.
Peering into 2026
I prefer out-of-favor sectors ripe for recovery over the next 1 to 3 years. Several fit the bill heading into 2026, such as housing, chemicals, financials, and consumer-facing businesses. Some stocks within these sectors offer big returns for investors willing to hold for several years. For example, I’ve written about how commodity chemical manufacturers outside of the olefin value chain are attractively priced.
I won’t venture to name a favorite stock for the year because I don’t have any expertise in predicting the near-term future other than making occasional high-level macro judgments like the view that current oil prices are unsustainably low. I also don’t want to delude myself—or worse, others—into thinking that I know which stocks will perform best. If 2026 is like every other in the past, the best opportunities will be a surprise looking back one year from now; that was certainly the case in 2025.
As for what I don’t like, the outlook for the energy sector, my wheelhouse for several years running, is complicated. For the first time, energy stocks aren’t hated during a bout of low oil prices. Energy stocks trade at higher multiples than they have since I became heavily concentrated in the sector in 2015. Consequently, the sector has become like the other sectors in my circle of competence, offering pockets of bargain opportunities but nothing widespread across the entire sector or major subsectors.
I don’t like the natural gas/LNG/electric power/etc. theme. This is currently an area of intense interest for many investors. But it’s too difficult for me to make sufficiently good judgments to obtain a leg up in understanding an investment’s value and determining whether it’s underpriced. Only the midstream natural gas part of the theme makes sense to me. Since I prefer to avoid areas that attract scrutiny from many investors, I’m staying away. There may be opportunities, but I’d rather prospect in out-of-favor and under-covered parts of the stock market.
I’m somewhat concerned about the oil market’s outlook. Consensus expects a big price recovery in the latter half of 2026. If a recovery fails to materialize, however, oil-related stocks are likely to get crushed. However, sustained low oil prices would benefit the broader economy and support economically sensitive sectors of the stock market. I think energy investors should diversify their portfolios outside of energy in case oil prices remain low beyond the first half of the year. If energy stocks were to sell off to levels that reflect low prices, they could sell the non-energy holdings and add to bargain-priced high-quality energy names.
Other areas of concern to me are also obvious to most investors: runaway government spending, the possibility of a surge in interest rates, and the risk of a crypto crash, among other general risks. I think it’s wise for investors to keep some cash on hand in case any of these become a greater threat.
Conclusion
Now it’s time to focus on 2026. Subscribers can rest assured that I’ll be working my hardest every day to find the cheapest stocks with the best long-term prospects. Looking forward to the next idea!
Analyst’s Disclosure: Jon Costello has a beneficial long position in the shares of WCP:CA, CLMT, VAL, CJ:CA, HCC, RIG, TDW, GEL either through stock ownership, options, or other derivatives.