Category: Canada

I have taken a small equity position (roughly 2.5% each) in two Canadian natural gas producers. I’ve exhaustively looked at the (not obviously insolvent) producers that are at least 75% natural gas boe equivalent and chosen the two companies I’ve deemed ‘best’ in lieu of just making a home-brew index of all of them.

This is not a particular call on the natural gas industry in general – right now the economics are absolutely horrible for Canada. There have been some days where spot pricing has been such that you have to pay to give away your natural gas! The federal government is hell-bent on destroying the fossil fuel industry. The USA has shale gas coming out of their… well, you know. There’s no hope and only despair!

Sounds like a good time to invest.

However, run the thought experiment on every company you look at: “Let’s pretend you could acquire 100% of the company’s equity for ZERO, but had to take a personal guarantee on their outstanding debt. Would you take them over?”

Under the right conditions, a lot of these companies will double, triple or even quadruple their equity prices. The timing is unclear, but we will see. I remember getting into oil and gas for a short-lived foray in 2014 that exhibited a colossal amount of stupidity, but will this time be different?

This headline passed by my radar: Japan Tobacco Wins Court Protection in Canada Over Smoking.

In both US and Canadian jurisdictions, governments have been engaging tobacco companies in civil litigation over the undisclosed risks of smoking. The majority of drama settled in the late 90’s in the USA, but things in Canada have taken longer.

According to the article:

The lawsuits were in favor of smokers seeking damages for addiction and smoking-related diseases, who argued they were never warned of the risks.

There are no longer any Canadian publicly traded companies that deal with the tobacco industry, although you can invest in Philip Morris (most associated with the Marlborough brand) in the USA.

However, this gets me thinking – 20 years down the line, when rampant consumption of marijuana is determined to be a cause of the breakdown of the brain’s normal functioning in older age, will governments decide to go after marijuana companies for not disclosing this hitherto undisclosed risk of consuming too much THC? What about second-hand smoke, which is more abundant than ever on the streets now that marijuana is legalized?

I try not to allow politics or morals interfere with objective investment analysis, but the double standard that is applied between tobacco and marijuana is amusing, to say the least. When marijuana is no longer in favour, watch out!

I note the TSX index is down about 7% year to date.

The interest rate rises are finally starting to hit the markets with asset price drops. Some items are finally hitting my radar in terms of the watchlist and my research queue.

In particular, what has caught my attention are the drops in equity prices in certain REITs.

There is a double-whammy: higher interest rates result in higher interest expenses (when firms have to refinance debt or pay floating rates) and because of higher costs of capital, asset prices will decrease (which also get reflected in balance sheets due to IFRS fair value adjustment rules – rules that make income statements appear even more un-readable for untrained eyes).

I also don’t know whether this is correlated in anyway to the plummeting in oil prices, but as a consequence, most oil stocks have gotten killed in the past month. This is reminding me of what happened to a lot of companies in the December 2015 to February 2016 meltdown that took some Canadian preferred shares to double-digit yields. The environment is a lot different, however. Making money on asset appreciation is much more difficult in an environment when the cost of capital is rising and money is being drained out of the system at an increasing pace. The most similar analogy is trying to make head-way on a sailboat when the winds are blowing against you at increasing speeds – it is still possible to move forward, but you have to zig and zag to get to your upstream destination.