by William and Cole Smead, Smead Capital Management
Robin Williams starred in the 1989 classic movie, Dead Poets Society. The story is about Williams’ character, John Keating, who comes to teach at his alma mater, which is an all-boys preparatory school. Keating uses unorthodox teaching methods to inspire his students to explore the possibilities. He opens with “Carpe Diem” as his maxim for the class.
Rather than study dead poets, we study history’s successful investors. We seek to learn from their style, much like you study the prose of a writer or artist. You are learning to learn and seek opportunities because while we can’t predict the future, the outcomes of the past can help frame and ground us.
We have a truly inspiring corporate leader among the companies in our portfolio. We don’t believe the global equity markets have realized it yet. In recent calls with top energy analysts, we’ve discussed how the energy business is in need of a strong capital allocator. Many of the companies in the oil and gas business need leadership that will exact their plan with aggression to the opportunity today. These companies need a financier or investor at the top, not an operator. Most investors are staring at spot oil prices and trading these stocks like oil futures.
The investors of Smead Capital Management see these oil companies as wonderful companies that produce low to mid-teens return on investment capital (ROIC) and trade for total invested capital or less. It’s about the returns on capital, not the current spot oil price.
Back to our remarkable teacher. His name is Adam Waterous, and he comes at this with an unorthodox approach in the oil business compared to the past. Oddly enough, Adam could be considered a Robin Williams doppelgänger.
Adam doesn’t believe he can operate oil and gas assets better than others. He is a former M&A advisor who eventually ran the investment bank at Scotia. Just those words are a vast departure from the petroleum engineer or oilman history of the executive ranks of the energy industry today.
He believes in his ability to allocate capital and is return on capital focused. He wants to counter-cyclically invest in the industry. He began building Strathcona (SCR CN) in 2017 via his private equity business, Waterous Energy Funds. Strathcona went public in 2023, shortly after we became investors, as we believed we were dealing with a unique teacher.
Fast forward to the spring of 2025. Professionals and investors couldn’t agree more on one thing: oil prices were going to be bad for a while and natural gas prices had a solid bid from the electricity demand created by the adoption of AI. What the other teachers were saying as orthodoxy, Adam chose to bet against. In May, he sold Strathcona’s Montney gas assets, which caused about 40% of the company’s market cap to come back to Strathcona in cash over the following two quarters. This left Strathcona with only its heavy oil assets. Bitumen is what you can call this. It’s the same type of oil you can find referenced in the Bible. The next day, when they reported earnings, Adam announced that he was making a hostile takeover of one of our other large heavy oil positions, MEG Energy (MEG CN).
Shock and awe took place. No one believed that someone would want to take risk in oil markets at that moment. Some large investors had just got done selling down their positions in MEG. Adam was very happy to purchase their stakes at prices in the low to mid 20s collecting up to 10% of the shares of MEG. His offer was 85% stock and 15% cash for the other 90% of MEG.
Investors can’t believe someone thinks they can do this and have success. It’s the same problem that John Keating ran into in Dead Poets Society. “This is just not how you do things,” is what the administrator in that story thought. In the movie, Keating had the students tear out pages of their textbook. Adam Waterous is tearing up the script of what you do in the oil and gas business.
Why spend so much time explaining this event for investors in the strategy for the 2nd quarter? If this deal closes as of the current offer terms, it would become 12% to 13% of our portfolio because of MEG and SCR’s size in the portfolio. As Buffett has often quoted Mae West, who said, “Too much of a good thing could be wonderful.” We agree and think this is a wonderful thing, and we could be at the beginning of teaching the industry how to operate and allocate in the oil business.
We believe it will be even better. The market is implying they will need to pay 10-15% over their first offer for MEG. We think it will be 15%-20% over to seal a deal. The best part is that we are being handed a skilled capital allocator who has a large portion of his net worth sitting alongside of us as investors. The current executive team at MEG is orthodox in energy. They don’t own much.
In one of the climactic scenes of Dead Poets Society, the shy Todd Anderson (played by Ethan Hawke) watches as his teacher John Keating is about to be ushered out of the class and relieved of his teaching, due to the impact his teaching proxies had caused for his students. At that moment, Todd stood up on his desk proclaiming, “O Captain! My Captain!” While we can’t claim that the shy investor is now proclaiming their passion for the oil business and the return framework that Adam is laying out, we are inspired. While we wait to receive our reward in this space with our captain, we will ruminate on timeless investing principles inspired by Adam Waterous while reading our books about Buffett, Templeton, Dreman, Carrett and T. Rowe Price. It makes our customers and us the “Dead Investors Society.”
Play the Long Game,
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The information contained herein represents the opinion of Smead Capital Management and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
Smead Capital Management, Inc.(“SCM”) is an SEC registered investment adviser with its principal place of business in the State of Arizona. SCM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which SCM maintains clients. SCM may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Registered investment adviser does not imply a certain level of skill or training.
This newsletter contains general information that is not suitable for everyone. Any information contained in this newsletter represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. SCM cannot assess, verify or guarantee the suitability of any particular investment to any particular situation and the reader of this newsletter bears complete responsibility for its own investment research and should seek the advice of a qualified investment professional that provides individualized advice prior to making any investment decisions. All opinions expressed and information and data provided therein are subject to change without notice. SCM, its officers, directors, employees and/or affiliates, may have positions in, and may, from time-to-time make purchases or sales of the securities discussed or mentioned in the publications.
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