Crude oil is down the biggest percentage I have seen in my investing history – West Texas Intermediate (WTI) currently down 20% (from a close at US$41 to US$33 presently). Brent is about US$37. There is no way to describe this other than a crash.
Canadian oil has been trading at a heavy differential, with Western Canadian select closing last Friday at US$28/barrel.
Needless to say, this is going down on Monday, probably to around US$22/barrel if we keep things at a 20% discount to WTI.
There is no Canadian oil company that can survive at this price level. Even though there are some companies where this is under the marginal cost of extraction (e.g. looking at CNQ’s last year, they had a CAD$12.41 marginal cost of extraction for their North American production, not including royalties) you still have costs associated with drilling and financing to pay off, and a US$22/barrel model completely destroys this.
Some obvious implications are that capital spending is going to decrease to the bare minimum, even more so than what has previously been announced. High cost production is going to be shut down, and we will be seeing another wave of insolvencies in the energy sector. Not pretty at all.
In these high-volatility situations, there is always money to be made by correct timing and correct decision-making, and right now the winners are those that don’t have a single barrel of crude oil in their portfolio. There will be spillover, however, plenty of it.
For example, geopolitically, countries that are heavily reliant on crude imports can’t continue to function for very long. Iran, for instance. Rock-bottom crude oil prices will have ripple effects that are not immediately obvious on a first order level of thought.
Birchcliff p/s Series C will be interesting in the next quarter. The company can convert them into c/s at the higher of 95% of market or $2.00 on June 30. If converted, those p/s holders are facing a massive loss.
This is correct. Fortunately I sold my Cs when they were trading above par last year.
If this happens (and BIR doesn’t need to crush their equity so I doubt it will), there will be a 5% cushion for holders to sell in the market. Granted the price could drop substantially if everyone rushes for the exit at the same time.
Sacha, Can you explain what Michael is saying in more detail and why June 30?
Thanks.
BIR.PR.C can be converted at the company’s option, after June 30, 2020 into shares of BIR at $2 or 95% of the trading price (whichever is greater). At BIR’s closing price today of $1.10, it would mean a BIR.PR.C holder would receive $13.75 in equity which is a lot less than the current trading price of about $20… BIR retains this conversion right if a preferred shareholder opts to redeem.
A conversion would represent a 9% dilution to the equity, so they might just choose to dip into the credit facility to pay it off.
Hi Sacha
Always appreciate your quick replies, but can you explain this in really, really simple layman terms. I don’t understand the math or the formula. How does 1.10 relate to 13.75, where does the 95% and or $ 2.00 work into the equation. Sorry for my ignorance.
Par value is $25.
So at $2/share, you get 25/2 = 12.5 shares of BIR per BIR.PR.C if they opt to convert and the stock price is less than $2.
The 95% kicks in if BIR is over 2/0.95 = 2.11/share, so if BIR was at $2.50 the conversion would take place at $2.50 * 0.95 = $2.375/share or 10.53 shares of BIR per BIR.PR.C.
Forgot to thank-you Sacha