2025 Energy Portfolio Review
Investment Framework
The investment framework for my energy sleeve is boring, but it has been effective thus far. The strategy is to buy companies with the following traits and take gains when valuations become overextended:
- Low cost of supply (with a focus on future inventory cost)
- High-quality, long reserve life
- Consistent cash flow per share growth
- Prudent return-of-capital structure
- Discounted cash flow (DCF) valuation offering a margin of safety at mid-cycle price assumptions
Portfolio Performance
The goal of my energy sleeve is to provide inflation-protected, positive returns with low correlation to the broader market (SPY). However, being competitive, I also expect to outperform the sector benchmark (XOP). Otherwise, why not just invest in the ETF?
I successfully outperformed the sector benchmark (XOP) in 2025. While I do not expect my energy sleeve to consistently beat the S&P 500, the portfolio delivered returns well above inflation and exceeded the S&P 500 historical average annualized return of approximately 10%. I view this as a success given the year’s weak commodity pricing.
While historical performance is important, it is prudent to remain forward-looking. Positions that have experienced significant price appreciation may not be positioned for future performance if those gains were driven by multiple expansion rather than fundamentals.
I am of the opinion that the Energess portfolio currently offers a better risk/reward profile compared to the broader market. This view is based on current valuations, elevated market earnings expectations, and commodity price projections relative to mid-cycle assumptions.
2025 Activity
The primary theme for my 2025 purchases was buying into fear. During the tariff sell-off, I lowered my cost basis on Tourmaline and Canadian Natural. When Whitecap and Viper sold off on merger news, I initiated positions. I do not believe I can time the market better than anyone else, but these events provided entry points into companies that offer asymmetric upside over the next 5+ years.
Position Review
Canadian Natural (CNQ)
Relative to the current 12-month forward strip, CNQ is expensive. However, when assessed against my expected mid-cycle pricing, it is undervalued with clear upside potential. A major advantage is that the heavy lifting on required capital expenditure is largely behind the company, which lowers its forward cost of supply. Despite being widely owned and offering fewer news-driven catalysts, CNQ maintains a culture of shareholder alignment and has a long runway for capital returns. I initiated the position in 2024 and added during 2025 when tariff fears created a valuation gap.
Tourmaline Oil (TRMLF)
Tourmaline fits almost every covenant I prioritize. It features a massive resource base, a very low-cost structure, and a founder-led team that backs their conviction with significant personal capital. The core thesis here is LNG. I believe global arbitrage will increasingly drive value, lifting the long-term floor for North American gas above the historical weather-driven regime. I initiated the position in 2024 and added during weakness in 2025. It is now my largest natural gas holding.
Viper Energy (VNOM)
Viper offered a compelling entry point in 2025, allowing me to own the Permian without assuming the direct risk of operating cost inflation. I view the Permian as a stable but maturing basin where incremental efficiency gains from operator ingenuity will eventually be outweighed by degrading rock quality. The royalty model offers a structural hedge against rising capital intensity and increasing operating expenses, such as produced water handling. I am also constructive on Permian gas pricing beyond 2026, as increased pipeline capacity to the Gulf Coast should help compress the Waha discount.
Whitecap (WCPRF)
Whitecap was a valuation-driven purchase. The stock traded at a discount due to the Veren merger situation and tariff fears, but my DCF models highlighted meaningful undervaluation. While it is a solid operator that has outperformed my expectations, it does not fully satisfy my ideal investment criteria regarding cost structure and reserve life. I also view the base dividend as higher than optimal, though it is likely sustainable with WTI into the mid-$40s. The rationale for initiating a position in 2025 was that Whitecap traded significantly below intrinsic value, and I believed management would make the Veren merger accretive.
ARC Resources (AETUF)
ARC is another large-resource, low-cost Canadian operator where the key differentiator is condensate. Their production serves as valuable diluent for Canadian bitumen, and it typically commands better pricing than comparable U.S. condensate. However, their Attachie asset has been disappointing. Expectations were high, but actual performance and the most recent forward guidance have been lackluster. Consequently, my updated DCF models suggest I overpaid for the position relative to its revised outlook. I remain invested because ARC is still a low-cost operator. However, the cost structure of their future inventory has been degraded in my view until they can prove otherwise.
Expand Energy (EXE)
Expand Energy was a position I added during the final trading days of 2025. My modeling suggests that North American natural gas E&Ps are currently cheap relative to strip pricing. While the Haynesville does not offer the lowest cost structure, Expand possesses significant scale and leverage to natural gas prices. I believe the market overreacted to bearish weather models in late December and that Expand is positioned to benefit from this dislocation. Furthermore, I expect them to achieve higher price realizations than peers in the Permian or Appalachia in the near-term due to regional egress limitations. This position aligns with my broader thesis that incremental LNG capacity will set a higher price floor compared to the historic weather-driven model. Although the company has a limited history in its current form, their outlined capital allocation strategy appears prudent if they follow through with execution.
Looking Ahead to 2026
My goal for 2026 is to own high-quality resources that can endure volatility and compound value. While the sector is cyclical, the demand for energy is structural. I will continue to anchor my decisions to DCF valuations and focus on acquiring good assets when the market puts them on sale.
