Back to the Future!

Markets were true to form for the first half of 2016, fluctuating wildly with every news bit and then calming down with market data. The US’ S&P 500 was down by nearly 11% in February, yet finished the first half up 3.8%. The international EAFE index (Pendo’s benchmark) was even more volatile, falling nearly 13% at one point in the first quarter and rebounding somewhat to end the half down 4.0%. 

The Pendo International Strategy followed a similar pattern, falling by nearly 9% in February, and recovering to finish the first half of 2016 up 5.5%. 

On June 23rd, a 52% majority of Britons (with a 72% turnout; the highest since the 1992 general election) voted to leave the European Union and reclaim their sovereignty. Armageddon was nigh; markets crashed and pundits cursed the great unwashed who foolishly voted counter to how the Brussels bureaucrats requested. But then a funny thing happened as people headed for the Brexit. Nothing. 

Perhaps it is market fatigue from so many “events;” Grexit, interest rate scares, central bank intervention, stimulus, easing, dovish, hawkish, etc. After an initial over-reaction to what was deemed a surprise outcome (and unlike children, adults seem to consider all surprises bad), cooler heads prevailed and markets corrected. It is also interesting to note that markets hit new highs on the day that a new conservative party Minister, Theresa May, was named and quickly promised to honor the Brexit vote.
Previously, there was an outside chance that the original vote would not be honored. Now-former PM David Cameron had originally vowed to stay until October; the vote itself is non-binding; numerous petitions were drawn up protesting the outcome and gathering nearly 4 million signatures. Parliament is required to respond to any petition with more than 100,000 signatures; though also non-binding. Theresa May, the conservative then-Home Secretary, was a pro-stay Tory. Despite a variety of breaking news stories, markets continue to maintain new highs as this is being written. 

Canadian Natural Resources (NYSE: CNQ), a Canadian company, is an independent oil and natural gas exploration and production company based in Calgary, Alberta. It operates in Western Canada, the North Sea and Offshore West Africa. For the last five years, its average ROE was 8.8%. It expects EPS to grow at 44.6% this year, more than two-and-a-half times that of the rest of the industry at 16.2%.  CNQ was the largest contributor to our overall performance. 

The company is well-financed with a very prudent management team that is using internal cash flow to bring new production on line. When oil prices were down 60% from their 52-week highs, the financially sound industry participants were likeliest to be the last ones to take production off line. However, most, if now all, did reduce their expansion plans. 

Since the $28/barrel low in the beginning of the year and a June closing price of $50/barrel, oil prices gained back 78%. Any gain in the price of oil has a direct relationship with CNQ’s cash flow. In fact, after two years of repeated decreases in capital expenditure programs, CNQ has finally announced a small increase in their capital expenditure program. This implies that management believes that oil prices are more likely to go up or stay flat than to go down. CNQ is not the only company that has increased their capital budgets.