(WCTW) Don't Complicate Life, Just Own MEG Energy
If you want a low-stress way of investing in energy, I think owning MEG Energy is the answer. In this article, I will explain why you want oil prices to remain low for a while longer, and why it makes sense to not overcomplicate things.
Our history with MEG
We've covered MEG extensively over the years. We first started owning MEG Energy back in 2018, and we sold it when it received a takeout offer from Husky, which the firm promptly rejected. We then pivoted back to MEG in March 2020 after selling our CRC long position, and I wrote about that journey here in this MEMO.
In April this year, we sold most of our long energy positions including MEG. Since then, we bought back MEG as a trading position, but not as a core portfolio holding.
After you read this write-up, you will see why we are going to make MEG our largest position again.
The rationale for owning MEG
Energy investing is hard. It's brutal. But it's especially difficult when the energy companies you invest in have to deal with not only the oil price volatility but the changes in underlying reserves.
Similar to the real estate adage of location, location, location. Energy investing is just reserves, reserves, reserves.
The higher the quality of the reservoir, the easier it is for the energy company to make money. Just imagine Saudi Aramco for a second here, it has the highest quality reservoir in the world capable of producing a barrel of oil for less than $3/bbl.
But it's not just the economics of the reserves, but how long the reserve life is. Take US shale oil producers, for example, some producers in the Permian only have a reserve life of 11-13 years with the highest quality ones sporting ~15 years of reserve life.
In the case of MEG Energy, it does not have the same economics as that of Saudi Aramco, but it has 50 years of reserve life.
And even if you think that's too optimistic, the total proved sports a reserve life index of 30.7 years.
But that's not why we are advocating a meaningful long position here, it's what MEG is going to do with its free cash flow going forward that is meaningful.