How to Make Money In Energy – Can It Be Done?

February Newsletter 2025

Geopolitics is going to make investing much more fun in 2025.  There are so many possible outcomes by year end and no limit in how things could affect your portfolio.  I have been adopting defensive measures for the portfolio for quite a while now.  These include having up to 40 positions, and having significant international and Canadian exposure.  That being said, there are always more tweaks to be made as the market potentially gets nuttier.  

So, do I think that 2025 will be a down year?  If you read my last Newsletter, you know that it could go either way.  Most analysts are expecting a 10% return for 2025.  It’s my experience that the herd almost always gets it wrong. Coincidently, 10% is roughly the average return of the market over the long run… so analysts are playing safe again or in other words, they have no clue. 

From a historic perspective, it’s very rare that the market returns a picture perfect 10%; most years are either up big or down big.  Hitting the 10% average is unusual.  In my opinion, it’s going to be either a very big positive or negative year – up or down by 20% or more.  From a portfolio management perspective, I don’t want to miss a big up year, but I also don’t want to destroy my long term capital by being too aggressive.  It’s best to be in stocks, but also be safe.

Its About Lowering Risk

With the idea that times will be tricky, I continue to lower the risk in my portfolio (see lots of tweaks in the buy and sell table below).  A good way to do this is to invest in unloved sectors.  They fall in value much less than average should things go bad.  If things turn around, which they eventually do, then you can see some really positive performance.  The problem in this market is that there have been several loser sectors in the last year. Which sectors should you pick? And then, which stocks?

I am always looking for an angle. You know, the one that no one sees.  The one that can become a big winner out of the blue.  But is there a future winner among all the losers? In 2024 there were several low performing sectors, most notably Energy at 5.7%, Real Estate at 5.2%, Health at 2.6%, and Materials at 0%.  The overall market earned 23%, comparatively. Which loser would be a decent bet? Is there something we can overweight?  Let’s begin.

• Materials are cyclical and to most analysts, these stocks are in the middle of the cycle.  In other words, they are not a deal yet.  Things can get way worse for this sector.
• Health is worth an overweight but I have yet to find any bargains.  Give me time.
• Real Estate is tricky. Although a loser, my current position (CBRE) strongly outperformed last year.  But that means that this stock also got more expensive/riskier.  As a result I traded the position in for a much more affordable one (VICI), a specialty owner of properties in things like gaming. 
• Energy is much more interesting and is the subject of this Newsletter. It’s comprised of oil, gas, coal, renewables, nuclear, etc. If you have been following this newsletter, you know that I am already overweight in Energy on the nuclear side with Cameco (CCJ).  2024 was not good for the Energy sector, but my CCJ bet returned 20%.  That is a big win on the sector but this success has created a problem.  CCJ blew through the 5% self imposed maximum weighting of my portfolio, so it’s a good time to prune and diversify!

Marc’s Energy Strategy

My strategy is to sell some Cameco (CCJ) and diversify into other areas within the Energy sector. I plan to remain overweight based on the assumption that all energy sources will continue to see an increase in demand given enough time.  Specifically, I will invest in Oil and Gas as it’s the most unloved at the moment.  The approach is 2-pronged: 1) invest into a midstream company (pipeline), where dividend returns are the focus; and 2) when the price of oil falls to the bottom of the cycle, invest into a Canadian oil play, which seem to be the most unloved of all.

The strategy lowers portfolio risk overall by selling off some expensive (riskier) Nuclear stock and buying a boring but dependable pipeline ETF MDST that collects oil transfer fees like a toll booth (expect a 10-12% annual return).  In addition, it takes advantage of the cyclicality of the oil commodity (buy low and sell high).  The other advantage is that these stocks aren’t expensive relative to tech companies, which may crash hard at some point and destroy your future.

The Problems with My Strategy

• Diversification could lower returns, especially if you consider that Nuclear could be the best bet (no one really knows one way or another).
• A pipeline ETF like MDST will likely never be a big winner, just a constant earner, and could pull my average returns down in a good year (but conversely could increase them in a bad year).
• The ETF also has a MER of 0.8%, which will always be an annoyance and drag on returns.
• I may have to wait a long time to see oil prices decline enough to take a position on the second prong of my strategy.  When to get in and out is tricky and has potential for fumbles.
• The Energy sector is small (about 3% of the S&P500), so to get any meaningful effect I need to be overweight quite a bit. Currently, the portfolio is sitting around double (6% Energy weight), which seems right for now.

What About Renewables?

Yes, I know they are fashionable. I considered them, but they are generally expensive, and cause brain cancer in whales. That said, they do have good growth.  

Overall Demand – The Long Run

I always find the Energy Sector interesting.  Historically, I have not done so well trying to figure out which way oil demand will go.  However, Nuclear is much more game-able when you know that 100 nuclear plants are currently under construction.  I missed the early days of cheap renewables and have never held a position, but I am a big fan of the industry.  I do believe that demand for energy will continue to grow and that is why I am bullish on the entire industry.  Will AI require more power? What about crypto mining?  Maybe, I don’t know. But I do know that there’s a big developing world out there that aspires to increase their standard of living, just like us.  Not unlike all cyclical investing, Energy prices will gyrate up and down over time and for this reason it is necessary to pay attention to the cycle and not pay too much for a position.

The Short Run

President Trump has made it clear that he wants the price of oil to fall. He also wants to increase production domestically, which in turn will lower fuel costs and make people happy at the pump.  That’s nice.  The reality is that energy is a function of supply and demand, and willing the price to fall is rather difficult.  Maybe he can coerce OPEC to open the taps? Maybe not?  It’s hard to make a bet on that.  In any event, Energy trends are really hard to determine in the short run.  

So that concludes Marc’s Energy Strategy. More diversification, being overweight, and trying to time the cycle.

Bonus Question: What About the Market?

Everyone is asking me what to do with all the tariff threats and geopolitical news.  As a general rule, I tell people not to do anything.  Fear usually creates bad decisions.  Predicting the future is difficult but I generally like to have a probabilistic edge in how things will play out. At this point, there is no edge. It’s a 50/50 chance of things working themselves out versus everything going wrong.  Even if things do go wrong, it’s not clear what an investor should do.

The best defence is to have a diversified portfolio by sector, asset class, country, etc. That way, if something bad does happen, there will still be winners, or at least positions that do not get permanently destroyed within your portfolio.  With good diversification you will also have positions in Canadian Dollars, US Dollars, and indirectly, in international currency.  Having a bit of everything cushions any shock.  The Canadian and world economies could be pushed into a recession.  It’s not fun, but it’s usually not the end of the world.  Recessions were much more prevalent at one time, and in reality they are just part of the market cycle.  For the small investor, it’s best to keep an eye out for bargains as there will be many at the bottom of a recession cycle should one occur.

Marc’s Monthly Moves

Buy	Sell
GEV (added small amount)	CCJ (sold 1/3 position)
MDST (new position)	SHOP (sold 1/2 position)
GOOG (added small amount)	CSU (sold 1/3 position)
LMN.V (added small amount)	BRK.B (sold small amount)
VLGEA (new position)

Marc’s Portfolio YTD Performance

• Portfolio return: 3.6% (including currency losses)
• Portfolio return: 4.6% (without currency losses)
• S&P 500 return: 2.24%
• RSP ETF S&P equal weight return: 2.6%
• TSX return: 1.69%

The portfolio is over performing the S&P 500 by 2.36% points.