What’s left of Canadian oil?

A short post, the market capitalization changes of the various Canadian production majors (define this as anybody over $1 billion) by market cap to present:

27-Mar-2020: TSX Oil Producers

NameRoot
Ticker		MktCap 31-Jan-2020 ($M)MktCap 27-Mar-2020 ($M)Loss
Suncor Energy Inc.SU61,97325,17259.4%
Canadian Natural Resources LimitedCNQ44,18215,81164.2%
Imperial Oil LimitedIMO23,3439,81657.9%
Cenovus Energy Inc.CVE14,1552,88779.6%
Husky Energy Inc.HSE9,2303,22665.0%
Tourmaline Oil Corp.TOU3,6172,11641.5%
Vermilion Energy Inc.VET2,98558780.3%
ARC Resources Ltd.ARX2,4861,33546.3%
Crescent Point Energy Corp.CPG2,30848179.2%
Seven Generations Energy Ltd.VII2,22248878.0%
MEG Energy Corp.MEG2,02436582.0%
Whitecap Resources Inc.WCP1,97438780.4%

Notes:

1. Suncor alone can purchase the equity of all the remaining survivors with about half of its market cap. Note this isn’t a great comparison since all of these other companies have huge amounts of debt and companies with decent capitalization such as Suncor or CNQ can be patient and wait for them to go on the auction block during CCAA proceedings;

2. ARX presumably is less hit because it is very roughly half gas, half liquid. AECO has held up reasonably well. Likewise, TOU is majority gas and has done the best, relatively speaking.

3. What happens when spot oil heads to single digits? Oh wait! It already has in Canada. What happens when spot oil heads to negative values? Uh-oh!

There are 7 companies remaining with a market cap over $1 billion. Commodities boom and bust, and this is the worst bust since the late 90’s when oil was still trading in the low teens.

One last cigar butt puff – Gran Colombia Gold notes

There is a phrase that was associated with Warren Buffet, and that was the investing concept of grabbing a cigar butt off the sidewalk and giving it one last puff before throwing it away.

TSX: GCM.NT.U announced:

Approximately US$0.33095042 per US$1.00 principal amount of Gold Notes issued and outstanding representing a redemption price of US$0.30 for each US$1.00 principal amount of the Gold Notes plus the Applicable Premium, as defined in the Gold Notes Indenture, of approximately US$0.03095042 per US$1.00 principal amount of Gold Notes. The aggregate amount of the cash payments on the Payment Date will be approximately US$21,139,458, of which US$19,162,500 will be applied to reduce the aggregate principal amount of the Gold Notes issued and outstanding and the balance represents the Applicable Premium.

This works out to a redemption call of $1.103 per $1 of notes, a relatively large premium considering I paid a penny above par for these notes in what felt like an eternity ago.

With the remaining US$44.7 million in notes, another $4.875 million gets amortized on April 30, 2020. However, because the amortization is linked to the sale of a fixed amount of gold, the residual value over a gold price of US$1,250 is going to be disproportionately high – at the current gold price of US$1,650 that’s going to be about a 22% coupon return (8.25% interest plus the gold redemption). It is virtually certain that these notes will be called off on April 30, 2021 at 104.13. These notes are first in line on GCM’s capital structure and are secured by the Segovia mining operation. So if you want to take one last puff at the cigarette, see if you can get some liquidity. Even if they shut down the mine for a month or two due to Covid-19, GCM has the capital to pay the notes down to their amortization maturity – October 2022. Even though the notes on their face mature on April 30, 2024, the company is required to redeem $4.875 million a quarter at par. If they choose to do that and not call off at April 30, 2021, then the residual notes will receive insanely ridiculous gold payments at present gold levels.

(Subsequent note: The future amortizations will be reduced by 30% to account for the early redemption, so the assumption in the above was incorrect… this makes the April 30, 2021 redemption to appear to be ‘possible’, but not ‘virtually certain’)

I already have a healthy position in these notes (less after the upcoming redemptions) but am deploying elsewhere. I am content to let my position ride until maturity or redemption.

Atlantic Power – Tender Offer

Atlantic Power (TSX: ATP) announced yesterday they are doing a dutch auction tender for up to 12% of its shares (US$25 million) between US$1.95 to US$2.20/share.

If they gave it out as a dividend it would be approximately 23.7 cents per share.

During the tender period (which expires on April 30) they are prevented from buying back stock on the open market or buying back convertible debentures. They are still free to purchase preferred shares, however, which I suspect they are still buying back to maximize the NCIB.

Atlantic Power, by virtue of the nature of its business and contracted cash flows, has ample amounts of disposable cash in addition to being able to pay off its term facility.

This tender offer is right in the middle of the CoronaPanic and I’ll have to commend management for striking while things are at a panic low. They clearly were bored of buying shares on the open market.

Up until March 24, 2020, year-to-date they bought back 2.63 million common shares and 564,159 preferred shares (all classes, so $14.1 million par value). At the mid-point this tender offer will retire another 12 million shares.

This is a constructive dividend – shareholders that want to tender can cash out and receive capital, while those that remain on will own about 12% more of a company. It will also likely serve as a floor for the common share price until the end of April.

GFL Environmental Units

(Please note I wrote this a couple days ago when prices were different but didn’t get to hitting the ‘publish’ button until now)

GFL (TSX: GFL, also NYSE: GFL) is the fourth largest North American solid waste (garbage) collection companies, behind (Waste Management, WM; Republic Services, RSG; Waste Connections, WCN). GFL vomited out its IPO after a couple false starts in early March, just before the CoronaPanic really reared its ugliest days.

(GFL Prospectus from IPO)

If there is one guarantee on this planet, it is that waste collection will continue to be a viable business that can attract customers, and also be inflation-adjusted. There will be competitive cyclicalities that will cause margin compression, but the field also contains geographical barriers to entry that also will protect said margins, in addition to having captive customers (who the heck doesn’t produce waste?).

Financially, they have been operating as a roll-up operation; there is a lot of goodwill and intangibles on their balance sheet to reflect this history of acquisition (well beyond the equity line on the balance sheet). Patrick Dovigi is the founding CEO (from 2007) and retains a 3.7% economic stake and 27.7% voting stake in the company after the IPO – he’s also still very young – at the age of 40, he is still managing the empire.

At the beginning of March they went public at US$19/share, and the proceeds were primarily to reduce debt. They had a lot of it – about $7.7 billion, but this will be reduced to around $4.4 billion after the offering.

Financially, the operation makes money, especially when using the somewhat flawed EBITDA metric (approximately $800 million in 2019), but the “I” and “DA” amounts are significant – the company’s financial leverage was high, and garbage collection is intense on capital expenditures. They have been growing at such a large rate that they got overextended, and hence were forced to vomit this public offering out. They are going to enter a stage where they will become more efficient, and that should justify metrics that are closer to their counterparts (the companies listed in the first paragraph on this post).

(Prospectus for Tangible Equity Units)

They also sold “Tangible Equity Units” which trade as GFLU, which consist of 2.6316 shares of GFL plus US$8.5143 of a subordinated note. The units will be converted into shares on March 15, 2023 or earlier under some circumstances. The shares given will also be reduced to 2.193 if the shares of GFL trade above US$22.80, and it is a sliding scale between US$19 to US$22.80 (note that this represents US$50 of equity per unit). The subordinated note component has interest of 4%, and is amortized over a three year period with quarterly payments (consisting of roughly US$0.75/quarter per unit).

GFL currently trades at US$14/share and GFLU trades at US$41, or about a US$4.35/share above its immediate value and $17.51 if you assume full realization of US$50 of equity (which is currently worth US$36.84 at a US$14 equity price). Considering this as a hybrid instrument, you get a clean amount of upside for the first 36% of equity appreciation, and then this is effectively subject to a sold call option, until a further 20% appreciation from the US$19 par value.

An interesting hybrid instrument that I have taken a tiny stakes in, and no more.

Canadian oil

Did I mention that Western Canadian Select is trading at under US$10/barrel right now?

Only the most solvent are going to survive this, but pick the right survivors at the right time (likely nearing the end of this year or perhaps the beginning of 2021) and when US shale supply finally starts dropping to the point where light oil exports start to decline, it bodes fairly well for Canadian heavy oil to be imported into the USA, even with an oil-hostile administration such as the Liberals.

Heaven forbid, if Trans Mountain ever gets constructed (don’t hold your breath), there will be even more of a bounce. Keystone and Enbridge Line 3 will be providing a larger pipe to US heavy oil refineries, and if TransMountain is finished, then that will allow for another competitive outlet.

But for now, there is still too much US domestic supply, especially since demand is in the dumpster. The shale producers though will stop most capex, and there will be heavy declines.

Here’s another fun chart – US Gas Prices – Go to Sam’s Club (Walmart’s second-grade competitor to Costco) in Oklahoma and you’ll see them selling gas for US$0.99/gallon! I’ll save Canadians the currency and metric conversion – that’s CAD$0.37 per litre.

If I was on the retail side of things, if there was any mechanism where you can buy at retail your anticipated future level of gasoline expenditures for the next 20 years for 99 cents per US gallon, I’d be hedging at these prices. When that time is done, chances are electric vehicles will be much more prevalent.

May 2020 crude: US$23.07
December 2020: US$32.98
December 2021: US$37.07
December 2022: US$39.42
December 2023: US$41.10 ($1.40 bid-ask spread so midpoint price here).