Even though Warren Buffett gets all the attention, I have to admit I’m a little partial to Charlie Munger, Berkshire Hathaway’s right hand man.
After meeting Buffett at a dinner party in Omaha in 1959, it was eventually Munger that convinced Buffett to drop his strategy of buying undervalued “cigar butt” stocks for something a little closer to the style Berkshire uses today. After Munger spent years managing his own partnership, he became Berkshire’s vice-chairman in 1978.
Now that Munger is comfortably past 90, he doesn’t make a whole lot of public appearances. But he’s still the chairman for the Daily Journal Corporation, a newspaper based in Los Angeles. Each year the company’s annual meeting resembles Berkshire’s, albeit in a much smaller place. Investors lob questions at Munger and he answers, usually pretty directly.
2014’s meeting happened a couple of weeks ago and Munger weighed in on all sorts of topics. Let’s focus on his opinions on energy.
I’m paraphrasing, but Munger repeatedly stressed using the “other guys” oil. He thinks the U.S. shouldn’t ban the export of crude, but import all the supply possible. He thinks once all the easy oil has been produced, future U.S. reserves will be an incredibly important resource.
But even now?
With oil at $50 per barrel and headlines warning about a possible supply glut, it’s hard to take Munger very seriously at this point. North America is awash in oil.
But back in 2007-08, different headlines were appearing, warning about oil running out. Investors everywhere were buying up the commodity, convinced that the lack of supply would become a real issue. Goldman Sachs famously predicted oil would hit $200 per barrel.
This presents an opportunity for investors. Sure, it might take a long time to play out, but the thesis is simple. Just buy oil reserves when the price of the commodity is depressed and then sell them when crude becomes the hottest investment on the street. I can’t say for sure, but I’d be willing to bet Munger would approve.
Buy the oil sands
For Canadian investors, I think it’s an easy choice. If you’re looking for a cheap way to buy oil reserves, Canadian Oil Sands Ltd. (TSX:COS) is the way I’m investing in this.
Based on the company’s 2015 forecast, its share of the Syncrude oil sands project is expected to be about 100,000 barrels of crude per day. Based on proved and probable reserves of 1.6 billion barrels at the end of 2014, there’s enough oil left in the ground for the company to keep on pumping until about 2060. And that doesn’t even include the contingent resources, which will probably be able to be produced in the future. That’s an additional 1.7 billion barrels.
In short, that’s a lot of oil.
It’s also fairly cheap for an investor to acquire their share of it. The company has a current market cap of $5.2 billion. Add on the $1.9 billion in debt and we get an enterprise value of $7.1 billion. Based on just the proved and probable reserves, investors are paying just $4.43 per barrel in reserves.
The infrastructure is already in place to produce these reserves; it just needs to be maintained. Production costs will come down as the slump continues and management has already slashed the dividend to conserve cash. These are all smart moves to better position the company for better times. After all, buying reserves at a discount price doesn’t help anyone if the underlying company goes bankrupt.
I’m not even sure if Charlie Munger knows Canadian Oil Sands exists. But if he’s a fan of buying up cheap oil reserves, it’s a pretty good stock to start with. Assuming it can weather the storm, it’s a company you want to own when things return to normal.
