A dividend-paying 'vending machine' - this oil stock weathers tariffs and OPEC

MW A dividend-paying 'vending machine' - this oil stock weathers tariffs and OPEC

By Charlie Garcia

Charlie Garcia responds to readers about an underfollowed stock with a long history of rewarding shareholders

Editor's note: Columnist Charlie Garcia shares select emails from his virtual mailbag every Friday.

Dear Charlie,

Your ability to make the case for Canadian energy while simultaneously explaining why most investors are too scared to touch it is exactly why I read your column. You don't pander, and you don't pretend complexity doesn't exist.

That said, I have two concerns you didn't address that I think matter considerably to the Canadian Natural Resources (CNQ) thesis:

-- First, Trump's tariff wars. The man treats trade policy like a game show, and Canadian energy exports aren't immune to his whims.

-- Second, OPEC's push for lower prices. They've crashed markets before to kill competition, and Canadian tar sands are expensive to produce relative to Saudi light crude.

Also worth noting: Warren Buffett did invest in Canadian tar sands but long since exited that position. Not sure if that validates or contradicts your thesis, but it's worth mentioning.

Looking forward to your thoughts.

Will

Dear Will,

Thank you for reading, and thank you for the intelligent pushback. You've identified exactly the risks I didn't mention - which means either I'm lazy or they matter less than people think. Let's call it a tie.

On Trump's tariff wars: Fair concern. Trump talks about tariffs the way my uncle talks about conspiracy theories - loudly, frequently and without regard for consequences.

But here's the problem with levying tariffs on Canadian oil: America needs it. Canada supplies 60% of U.S. oil imports - 4.3 million barrels per day. You can't tariff your way out of dependency when your own refineries are designed to process heavy Canadian crude.

Trump tariffed Canadian steel and aluminum. He threatened tariffs on Canadian lumber, dairy and cars. He never seriously threatened oil because his own energy companies would've revolted. Gulf Coast refineries were built specifically for heavy crude. You can't just switch to light sweet crude from Texas without billions in retrofitting.

Could he try? Sure. The man tariffed washing machines once. But tariffing Canadian oil would spike gasoline prices in swing states, which is how presidents lose midterm elections. Even Trump understands that voters care more about $5 gas than about trade policy.

Risk? Yes. Likely? No. Politically suicidal? Absolutely.

On OPEC: OPEC doesn't push for lower oil prices. They push for market share - which sometimes means flooding supply to kill high-cost producers. They tried this in 2014 and 2020. Weak producers died. CNQ didn't.

The smartest oilman I know once told me that the low-cost producer always wins. CNQ's operating costs? $10-$12 per barrel. When OPEC crashes prices, CNQ keeps producing, gains market share, and buys distressed assets. Price wars don't kill CNQ - they kill CNQ's competition.

Yours in managed uncertainty,

Charlie

P.S.: Buffett through Berkshire Hathaway $(BRK.A)$ $(BRK.B)$ bought Suncor Energy Inc. $(SU)$ in Q2 2013 - 17.8 million shares worth $524 million. Suncor is a Calgary-based oil sands producer. Buffett made money for seven years, then switched to Chevron $(CVX)$ and Occidental Petroleum $(OXY)$ in 2020-2021 when Suncor cut its dividend by 55%. You know which company didn't cut its dividend during the COVID-19 pandemic? CNQ. They kept paying. Buffett wasn't rejecting Canadian oil - he was rejecting dividend cuts and buying two American integrated majors instead. There's a difference. One is a sector call. The other is common sense.

You're complaining that the vending machine looks old while it drops hundred-dollar bills.

Dear Charlie,

I looked at the stock chart. CNQ's gone nowhere since 2023. Why would I buy something that's dead money?

Gary

Dear Gary,

You're complaining that the vending machine looks old while it drops hundred-dollar bills.

If an investor bought 10,000 shares of CNQ at $10 in early 2020 - a hundred grand - and had the discipline to reinvest dividends instead of blowing them on boat payments, here's what would have happened:

Today: 23,800 shares worth $779,298. Annual dividend: $46,648.

That's 47% yield on original cost. Every year. And it's tax-free in a Roth account.

The stock is flat because the money left the price and went into his account. CNQ returned capital to shareholders through dividends and buybacks rather than retaining earnings for growth. When a company pays out its free cash flow, that value exits the stock price and arrives in shareholder accounts as cash.

CNQ generated $5.9 billion in free cash flow and returned every penny to shareholders. Twenty-five years of 21% annual dividend growth - through negative oil prices, the COVID pandemic and every market panic.

The share count increased 138% because our investor reinvested every dividend to buy more shares. He started with 10,000 shares and ended with 23,800 through compounding.

Dividends grew from $8,500 to $46,648 annually because: (1) he owned more shares through reinvestment, and (2) CNQ raised the per-share dividend 21% annually.

The portfolio grew 780% while its stock price stayed flat. The flat price caused superior returns - value flowed from stock appreciation into dividend income and share accumulation. Total return: 780%. Stock price return: flat.

The flat price isn't a problem. It's an opportunity. You're buying dividend growth at a discount because everyone else is chasing momentum.

"Dead money" doesn't pay 47% annually.

Charlie

P.S.: Price is what amateurs watch. Yield on cost is what gets deposited. One makes you feel smart. The other makes you rich.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more. He holds shares of Canadian Natural Resources (CNQ).

Agree? Disagree? Share your comments with Charlie Garcia at charlie@R360Global.com. Your letter may be published anonymously in Friday's "Dear Charlie" reader mailbag. By emailing your comments to Charlie Garcia, you agree to have them published on MarketWatch anonymously or with your first name if you give permission.

You understand and agree that Dow Jones & Co., the publisher of MarketWatch, may use your story, or versions of it, in all media and platforms, including via third parties.

Tiger Brokers

A dividend-paying 'vending machine' - this oil stock weathers tariffs and OPEC

At the request of the copyright holder, you need to log in to view this content

Most Discussed