Canada – Page 23

Reviewing underperforming Canadian oil and gas producers

One observation: It is abundantly clear that oil and gas producers in North America are going to be trimming their 2015 capital budgets. This will disproportionately affect the service companies, but most of this has already been baked into equity prices.

I have no idea where oil prices will be going in the short term. There is plenty of incentive for those that have already sunk a boatload of costs into their wells to keep them flowing. In the short term you might see some price shocks, but in the medium and long term, I cannot see oil losing too much demand relative to supply levels. While getting into my vehicle and experiencing heavy traffic is hardly a statistical sample that you can extrapolate across the world, intuitively I do not think electrification of transportation is going to be an imminent threat on crude oil (or natural gas) as being the transport fuel of choice. Nor do I see the requirements for plastics or any derivative products of crude being replaced anytime soon.

The point of the preceding paragraph is that crude oil is not going to disappear off the map anytime soon (unlike its predecessor, which was whale oil).

With my very generalized valuation theory on oil and gas producers that “oil prices are a reasonable proxy for company performance plus financial leverage effects”, I note that WTIC (West Texas Intermediate Crude) reached the US$80/barrel level back in June of 2012:

A very simple theory is that oil and gas producers that are trading below what they were trading in June of 2012 should be given a second look to see what caused their relative dis-valuation from present oil levels. A surprisingly large number of Canadian oil and gas companies are trading well above their June 2012 levels despite the oil price difference.

One reason is simply due to good (or lucky timing!) hedging strategies.

Another is due to the mix of oil (and the different types of oil), transport issues, and the percentage of natural gas and natural gas liquids in the revenue mix of a company – in general, while you aren’t suffering pure hell at US$2.50/GJ back in June 2012, your typical gas driller hasn’t been wildly profitable compared to the good ol’ days back in 2008 when you were at US$10.

There’s also the simple reason of having excessive financial leverage and not being able to finance the corporation at revenues obtained at current prices.

There’s plenty of reasons why an oil and gas company would be trading lower today than in even worse price environments seen in June 2012.

So given everything trading on the TSX, I’ve done some homework as a starting point and gone through the companies with the following criteria:
– Share price over CAD$2
– Market cap over $1 billion
– Not a foreign entity (although they can have foreign operations).
– Trading lower today than they generally were in June 2012.

We have, in descending order of market cap:

CVE.TO
TLM.TO (not that they’ve been having difficulties lately!)
BTE.TO
PWT.TO
PGF.TO
TET.TO
BNP.TO
LTS.TO (I was a prolific writer that commented on its ridiculously high valuation when it was known as Petrobakken).

I note that Canadian Oil Sands (COS.TO) is trading barely above what it was in June 2012. This is probably the most purest equity play on WTIC possible beyond putting money in USO (not advisable).

Any thoughts? Comments appreciated.

Canada issues 50 year debt

The government of Canada today issued $1.5 billion in debt with a 50-year maturity. The yield to maturity is 2.96%. For the duration these are amazingly low interest rates. If the Bank of Canada can actually keep the inflation target pinned at 2%, the real rate of interest is less than a percentage point.

Suffice to say, I think this is a prudent move by the government. I wonder when Canadian banks will come up with mortgage products that will let consumers lock in insured 30-year mortgages for 150 basis points above government rates. They do this in the USA, why not here?

I’m also curious to know how much debt the government can issue with these terms before the public market starts to vomit on this much debt. For every seller (the government), somebody out there must want to be long this debt. There is a financial argument about hedging against market volatility (typically bond prices will rise with a reduction in equity prices) and generating some higher semblance of income compared to 1%-yielding cash, but locking yourself in at 2.96% for 50 years? Unreal.

In a very abstract level, the taxpayers of Canada win in this scenario – as long as the pension fund that is buying the debt isn’t the one paying your future defined benefits.

The decline of the Canadian dollar

There have been drawn out periods where I have done literally nothing and 2014 has had that kind of start for me. Writing about how I am twiddling my thumbs is very unexciting, so I will talk about something which has caught my radar: The Canadian dollar.

Just like any patriotic Canadian, cross-border shopping (and just generally enjoying recreation in fantastic and not-too-contaminated by mass population areas like the Oregon Coast) is something that is easily accessible due to the relative strength of the Canadian dollar.

As you can see from the chart above, our purchasing power has just eroded by about 10% over the past year, which is mildly disturbing and makes inexpensive vacation prospects slightly more expensive. When something makes my recreational agenda more expensive, I take notice.

Not helping was today’s announcement by the Bank of Canada, declaring that inflation is “further below” their 2% target, which creates more pressure that interest rates are not going to be rising anytime soon, ergo the currency drops to the USA, which is starting to see signs of their short term rate increasing:

The thoughts swimming in my head is whether the drop in the Canadian currency is a predictive indicator of what is going to happen to the Canadian economy and equities as a whole (adjusting for the impact that they are now cheaper to purchase with US funds!)?

We will see. My market exposure is relatively low and I have not been inspired by anything I have seen out of the marketplace. It might be some time before I write again given this “do nothing” stance.

Financial highlights of 2013 – currencies

Other than the usual stuff about the S&P 500 being up a huge amount for the year, perhaps the unexpected financial highlight for most Canadians is in the following chart:

Looking at the other major currencies, the Euro has appreciated slightly against the USD over the year (from US$1.32 to US$1.38 per Euro), while the Yen has weakened considerably, with 87 Yen being one USD at the beginning of the year – now this is 105!

The Chinese Yuan strengthened against the USD of the year, 6.23 CNY per USD, while today it is 6.07. This continues a very slow trend of appreciation for the Chinese currency since they changed their monetary policy since 2010:

Some questions for 2014 will be:
– Will the Canadian dollar continue to downtrend?
– How low will the Yen go before Japan collapses its economy?

Canadian Interest Rate Expectations

Today, the Bank of Canada announced it was keeping the target short-term interest rate steady at 1%. This was not a surprising announcement. The big concern on the minds of the bank is the escalation of household credit. It will blow up eventually (especially whenever interest rates rise again) but in the meantime, conditions continue to be very ripe for future borrowing.

I guess the financial tip of the day is to make sure to start deleveraging before everybody else does!

Month / Strike	Bid price	Ask price	Settl. price	Net change	Open int.	Vol.
Open interest: 651,369				Volume: 128,687
March 2013	98.715	98.720	98.720	0	87,081	3,000
April 2013	0	0	98.705	0	0	0
May 2013	0	0	98.720	0	0	0
June 2013	98.750	98.760	98.760	0	117,907	18,450
September 2013	98.800	98.810	98.800	0.010	140,414	30,685
December 2013	98.810	98.820	98.810	0.010	126,676	26,022
March 2014	98.790	98.800	98.790	0.030	85,272	21,108
June 2014	98.750	98.760	98.750	0.010	53,319	16,547
September 2014	98.690	98.700	98.690	0.030	17,236	8,173
December 2014	98.610	98.620	98.610	0.010	13,242	2,706
March 2015	98.520	98.540	98.530	0	5,555	1,051
June 2015	98.430	98.450	98.440	0.030	1,559	566
September 2015	98.340	98.350	98.350	0	1,723	149
December 2015	98.250	98.280	98.270	0	1,385	230

BAX Futures state that rates are not going to rise again for the remainder of 2013, and there is the expectation of a chance (but not certainty by any means) of a quarter-point hike around March 2015.