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Waterous broke the mould by taking a value investor’s approach to Canadian oil and gas. This appealed to a particular kind of backer, whom Waterous calls free-thinking investors.

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Many of them are ultra-high-net-worth individuals rather than institutions following the herd.

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Benjamin Graham, the late Columbia University professor and Wall Street financier who famously mentored a young Warren Buffett, first laid out the value investing philosophy in his Depression-era textbook Security Analysis.

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To Graham, the intelligent investor buys only when the price sits well below an asset, or company’s intrinsic value. That gap is the margin of safety, which protects against errors in judgment and bad luck.

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To Waterous, value investing in a Canadian energy context boils down to two things when identifying margin of safety in a takeover target.

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The first is the price per barrel needed to cover all the necessary costs to hold production steady. The second is the size and durability of its reserves.

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To Waterous, “everything else is a distraction.”

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He likes to use real estate investing as an analogy. “Find a good neighbourhood, find a good street, find a house, then buy the block,” Waterous said. “We missed the diversification memo in business school.”

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His Waterous Energy Fund first put its consolidation strategy to work at Strathcona Resources, a heavy oil producer it began building in 2017.

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Strathcona took its current form in August 2020, when two portfolio companies, Strath Resources and Cona Resources, combined.

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From there, the company expanded by acquiring neighbouring assets in the same heavy oil regions.

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In 2022, Strathcona bought a thermal oilsands project from Cenovus Energy for $800 million.

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Later that year, the company acquired Serafina Energy in Saskatchewan’s Lloydminster heavy oil region for $2.3 billion, its largest purchase at the time.

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Strathcona went public on the Toronto Stock Exchange the following year and now has a market value of nearly $6 billion. The company produces about 120,000 barrels of oil equivalent a day, making it Canada’s fifth-largest oil producer.

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Focusing on heavy oil was a deliberate choice. To Waterous, the business case for Canada’s natural gas holds less appeal given the commodity’s persistently low price.

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Strathcona sold its natural gas position last May to the region’s three biggest gas producers.

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“You have to be a giant in natural gas,” Waterous said. “We voted [on that commodity] with our feet.”

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That said, Waterous’ new fund will still have a broad Canadian energy mandate. “It will target regions away from where Strathcona and Greenfire operate,” he said.

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It will also deliberately stay out of the United States.

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In January 2020, he wrote an op-ed for an institutional investing magazine arguing American oil output was near its peak. It was a contrarian view.

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U.S. production had nearly tripled from about five million barrels a day in 2011 to 13 million in 2019, and many forecasters expected it to reach 20 million. Instead, it has hovered around 13 million barrels a day since.

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Canada’s reserves, on the other hand, are likely to matter more to North American supply as U.S. fields age and shale becomes costlier to drill.

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Energy data firm Enverus estimates Canada could keep producing low-cost oil at current rates for nearly 53 years without new discoveries or technological gains, compared with 17 years in the United States.

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Nine years after Waterous launched the first fund, the number of available takeover targets has fallen.

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“We’re in the bottom of the ninth inning of consolidation in the Canadian oil sector,” he said. “It was a great idea in 2017 to do what we did. But you can’t start from scratch now.”

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