WHAT IF THERE’S A THIRD WAY?
In November, we liquidated selectpositions in DM Canadian Equityfor tax-loss purposes and usedthe resulting funds to increaseweights in Suncor and CanadianNatural Resources. Elsewhere, weused accumulated cash to boostour allocations to Middleby Corp.and Nutrien Ltd.
FEATURE STOCK HCA Holdings Inc. (HCA)
With 185 hospitals and 119 surgery centers, HCA is the largesthealthcare facility operator in theUS. We first acquired the stock inmid-2015 and, since then, it’soutperformed the broad S&P 500by more than 2% annually. Shareprice appreciation has been driven by earnings growth, which hasflowed from astute capital management by the company. In2019, for example, HCA will generate roughly $6.5bn in cash flowfrom operations. Ordinarily, itspends in the range of $1.8-2bnon “run of the business” capitalexpenditure; this year, however,CAPEX will total about $3.7bn, withexcess disbursement focused onincreasing bed capacity in the keyFlorida and Texas markets. Suchtargeted investment has helpedto drive best-in-class organicearnings and cash flow growthover the past several years. Inearly October, we added to ourposition in HCA when the stocksagged on fears of increasedhealthcare regulation. Since then,the stock is up 22%, prompting usto trim its portfolio weight.
WHAT IF THERE’S A THIRD WAY?
The recent federal election might have been the most divisive in our history, with the political map almost perfectly cleaved at the Manitoba/Ontarioborder. No topic separated attitudes more than the fate of our energy as-sets, with one side dug in for jobs and revenue, and the other countingthese benefits as insignificant relative to our collective responsibility forthe environment. What if these positions aren’t mutually exclusive,though? What if the case for Canadian energy development and the bestintermediate course for the global environment were one and the same?The chart below shows world oil consumption over the past decade, whichwill soon pass 100m barrels/day for the first time:
If both sides could agree that this demand profile will only be altered bychanges in consumer habits, and not by what one country does or doesn’tdo with its undeveloped reserves, the discussion might then become moreconstructive. Consider this: in 2018, Canada was the world’s #4 crude oilexporter, with Saudi Arabia, Russia, and Iraq sitting above us on the listand the spots below occupied by nations like Iran, Nigeria, Angola, Libya,and Venezuela. Within the top 10, no country was even close to Canada inits care for the environment (as per the Yale/Harvard Environmental Performance Index) and, for good measure, we also ranked first in terms ofhuman rights (according to the Cato Institute) and were by far the leastcorrupt (as judged by Transparency International).
Removing or diminishing Canada as a supplier would have at least twoeffects: first, it would cause demand to be filled by one of more of the sec-tor’s less ecologically responsible producers and, second, it would almostcertainly, raise prices. Unfortunately, both of these outcomes would resultin a significant wealth transfer to the world’s worst actors. Increasing Ca-Canadian energy output and revenue, on the other hand, would provide moretax dollars for us to direct toward innovation and environmental stewardship, while simultaneously edging out dirtier (and less ethical) production.If our energy industry continues its march toward ever cleaner barrels andthose presently opposed to the sector take a harder—and more dispassionate—look at the ends they’re actually trying to reach, this might inspire a national strategy that calls for more, not less, Canadian oil and gas.