PEY – Divestor

Tax loss selling candidates, 2019

Below are 29 companies that are trading lower than 40% year to date on the TSX, that have a market cap of above $75 million. I’ve also restricted the share price to greater than 50 cents.

TSX tax loss candidates

August 30, 2019 closing prices
Last trade > $0.50
Market Cap > $75 million
YTD change -40% or worse

Item	Symbol	Name	Sector	Last	YTD %Chg	MktCap ($M)
1	TH-T	Theratechnologies	Bio	4.98	-40.14	394
2	AVCN-T	Avicanna Inc	Cannibis	3.66	-41.25	88
3	IDG-T	Indigo Books & Music Inc	Retail	6.6	-41.49	180
4	BIR-T	Birchcliff Energy Ltd	Energy	1.77	-41.78	503
5	SOY-T	Sunopta Inc	Food	3.07	-41.86	275
6	SOX-T	Stuart Olson Inc	Engineering	2.89	-41.97	82
7	ATH-T	Athabasca Oil Corp	Energy	0.57	-42.42	303
8	ADVZ-T	Advanz Pharma Corp	Bio	14.7	-42.93	673
9	CFX-T	Canfor Pulp Products Inc	Forestry	9.08	-43.99	574
10	UNS-T	Uni Select Inc	Auto	10.79	-44.41	456
11	MDF-T	Mediagrif Interac	IT	5.23	-45.29	81
12	MPVD-T	Mountain Province Diamonds	Diamonds	1.04	-46.67	223
13	HNL-T	Horizon North Logistics Inc	Energy Service	0.95	-47.22	155
14	IMV-T	Immunovaccine Inc	Bio	3.58	-47.89	186
15	DII-B-T	Dorel Industries Inc Cl.B Sv	Retail Wholesale	9.1	-48.41	292
16	LGO-T	Largo Resources Ltd	Metals	1.37	-51.59	728
17	PONY-T	Painted Pony Energy Ltd	Energy	0.68	-54.36	114
18	PEY-T	Peyto Exploration	Energy	3.2	-54.8	554
19	BNP-T	Bonavista Energy Corp	Energy	0.54	-55	149
20	DR-T	Medical Facilities Corp	Hospitals	6.74	-55.19	211
21	NVA-T	Nuvista Energy Ltd	Energy	1.61	-60.54	370
22	MAV-T	Mav Beauty Brands Inc	Beauty	4.11	-61.52	155
23	SNC-T	Snc-Lavalin Sv	Engineering	16.41	-64.26	2,858
24	OBE-T	Obsidian Energy Ltd	Energy	1.27	-64.43	97
25	TRST-T	Canntrust Holdings Inc	Cannibis	2.3	-64.99	335
26	JE-T	Just Energy Group Inc	Energy Retail	1.46	-67.63	227
27	TRQ-T	Turquoise Hill Resources Ltd	Metals	0.58	-74.22	1,187
28	ZENA-T	Zenabis Global Inc.	Cannibis	1.06	-82.33	214
29	PLI-T	Prometic Life Sciences Inc	Bio	11.6	-95.54	280

Comments:

1: A bio company with an FDA approved small scale HIV medication (used in cases where mainline HIV treatments do not work), and a new product that is used for something called hard belly – which is a symptom in some long-term HIV patients as a side effect of the anti-retroviral drugs that they take to keep viral loads down. Stock is down because sales aren’t exactly going anywhere and those sales and marketing expenses are indeed quite high. Market cap is trading as if the company will get sold off (drug companies don’t capitalize their R&D expenses it takes to get a drug to market, so there is a bunch of hidden balance sheet value in the drugs, despite the relatively little revenues they get from them).

2, 25, 28: Are Marijuana companies, and I have no interest in analyzing them.

3: Indigo is a typical retail story. Their stock chart in the past 18 months is a straight line down. Aside from their lease commitments, their balance sheet isn’t in terrible shape and management has some time to decide what to do, but they are bleeding money at a frightening pace.

4, 7, 13, 17, 18, 19, 21, 24: Canadian oil/gas extraction companies, so I do not need to write further why they are trading down. 13 is an energy service company. My big surprise here is why there aren’t more companies on the down 40% list (doing some quick investigation, it is because most of them already got hammered in 2018 so the losses in 2019 relatively speaking isn’t as big).

5: A low margin food producer with a ton of debt on the balance sheet and bleeding cash. Not looking pretty.

6: Engineering firm impacted somewhat by oil and gas-related spending. Income statement shows they are treading water. They were able to raise financing from Canso at 7% for unsecured debt (rolling over an existing debt issue) and the balance sheet is not in terrible shape. May be a good possibility for a turnaround – given its market cap of $80 million in relation to its overall size (revenues will be roughly a billion in 2019), something to watch. Has a similar feel to IBI Group.

8: The old Concordia Pharma. Classic case of what happens when you over-leverage cash flows too much. They make a ton of cash, but they have a ton of debt and a ton of interest expenses.

9: Lumber has been killed for various reasons. Despite being from British Columbia, I should know more about the industry. Just a year ago it was trading at $27 and today it is nearly $9. The stock graph looks like a normal distribution curve. Despite the fact that their cash flows has been decimated year-to-year, they don’t have any debt and look like they can survive the cycle. Jimmy Pattison trying to take over Canfor Corporation (not the pulp subsidiary) for $16/share seems to be a case of trying to take them on the lows. Canfor owns 55% of Canfor Pulp.

10: I know less about automobile companies than forestry products. Skimming the financial statements, they just appear to be losing profitability and racking up debt.

11: A small IT firm that is undergoing a strategic change and also still looking for a new CEO. Still profitable, and with a relatively blank canvas balance sheet.

12: Owners of a 49% interest in a diamond mine in the N.W.T., and barely making enough to pay off their bank lenders. Will pass.

14: Early clinical stage biotech working on some cancer therapies, P2 studies have samples of less than 20 patients, and skimming the science, looks questionable.

15: Legitimate larger company that has been in a slow straight-line descent for the past three years. Three major product lines (babies, sports and furniture) are sold to major retailers worldwide. Management (Schwartz – family-controlled dual-stock corporation) has been around for a very long time, albeit they seem to be highly overpaid. They resolved an upcoming debt maturity last June with a 7.5% unsecured debt note (not convertible) and this will buy them time to figure out how to improve margins. Cash flows from operations have been diminishing, and they already once cut their dividend, and it is due for another cut. However, given the ~$300 market cap and $2.5 billion in revenues, the potential for a turnaround here is reasonably good, except for this looming worldwide recession coming which would surely impact this company’s fortunes!

16: They mine a commodity I know nothing about (Vanadium), in a country I know very little about (Brazil).

20: This one is interesting. A company that owns majority or near-majority stakes in a few hospitals in the USA and distributes most of its free cash. The only problem being that in the past few quarters, they have really underperformed. If they can figure out what they did wrong and reverse it, then the stock is an easy double from their depressed price. It was bond-like until the bottom fell out of it in the May and August quarterly reports. If there was a candidate for year-end tax loss selling, this one would be it. Another interesting quirk is that their distribution rate on a historical basis is now at a 17% yield. This distribution was below their cash generation in prior years, but not from the first half of this year. It’s likely they’ll cut this dividend unless if they think the past couple quarters was temporary. Knowing about the US healthcare industry, especially in the states that DR operates in, coupled with competitive dynamics of healthcare and competitors will help.

22: Cosmetics company that went public in July 2018 for CAD$14/share (proceeds to pay down debt with IPO). Now it is trading at $4.11/share, which is a fairly good 70% negative return on investment. The company is now barely profitable, but still isn’t at the level which supports the debt on its balance sheet. Still, cosmetics is a pretty high leverage industry to be in if your revenues start to take traction – and their revenues are growing. Might be interesting, considering that beauty products sell in any economic climate! Unfortunately, you won’t see me wearing any…

23: SNC. Enough said. There’s tons of industry analysts out there looking at this one. Their partial sale of the 407 freeway around Toronto will buy them a lot of time to get their act together, but in the meantime, their operations are a total mess. There will probably be a time to buy this one but it will take awhile, and likely more corruption from the federal government is required for a positive outcome (i.e. if Trudeau gets re-elected, it would be a positive for SNC for sure).

26: Balance sheet is a train wreck, company is exploring a recapitalization, and the business model itself is highly broken. Good luck!

27: Another mining company working in a jurisdiction I know hardly anything about (Mongolia), let alone I can’t even pronounce the name of its main flagship mine. Don’t have any more insight than that, sadly.

28: The big loser in the TSX is due to a debt-to-equity recapitalization and a 1:1000 reverse stock split. After the recap they did get rid of a bunch of debt on the balance sheet and raised some cash, which they need in order to bide their time to get FDA approval for their lead product. They burnt about $50 million cash in the first half of the year and have about $80 million left on the balance sheet, so looks like they’ll have to raise more financing…

Canadian natural gas stocks

Birchcliff Energy (TSX: BIR) and Peyto (TSX: PEY) are two producers that have been able to be consistently profitable (or nearly so) despite horrible economics – in the case of Birchcliff, they have been able to do some degree of vertical integration, and in Peyto’s case, they operate organizationally very lean.

Investors that bought at the relative peaks of 2016 are sitting on losses of 70% and 85%, respectively.

These are the charts of despair that I like looking at, but when looking at natural gas economics, it is simply a story of a huge supply glut. The primary driver is AECO pricing:

(Charts courtesy of GLJ Petroleum Consultants)

AECO at USD$1 vs. Henry Hub at USD$2.75 is a gigantic difference. There’s no point to mining natural gas at USD$1/MMBtu rates – only companies that can get rid of the supply at “proper” rates will have any chance in that pricing environment.

Even worse yet is that you can sell the same commodity to Japan in LNG form for about US$11/MMBtu at present. Although construction on LNG Canada is progressing, it remains to be seen whether regulatory roadblocks will put a halt to the project in some shape or form.

A few bargains – Oil and Gas

I’ve been examining the wreckage of the market carnage over the past few days (these types of high volatility situations tend to create opportunities) and in general I have not been too impressed with what I have seen. Either that, or what I have been examining has been unfruitful material.

The big exception: the oil and gas sector.

The reason why they have cratered is because of this chart:

Then I start scouring the list of TSX oil and gas sector companies that are over a market capitalization of a billion dollars. The TSX maintains a comprehensive list of listed companies which I find to be of surprising value when I look for quick lists of companies. I generally don’t tread below a billion in capitalization for resource firms since companies of that capitalization are dominated by insider information where a good drilling result will make the difference between life and death and the last person to get this information will be the outside public.

Larger capitalization companies also receive the benefit of financial economies of scale as they will be able to raise capital in meaningful amounts at lower costs – just imagine if you were a bank lending to a $10 million microcap exploration company versus lending to Suncor – a world of difference.

I also exclude anything international (e.g. CNOOC) as my comfort level with companies with international operations (outside Canada/USA) is quite low. There are some Canadian companies with international operations (e.g. Husky) but I have not excluded them from the list.

This leaves the following:

Name	Root Ticker	QMV(C$) 31-August-2014	O/S Shares 31-August-2014	Price Aug 31	Price Oct 17	Diff
Suncor Energy Inc.	SU	65,392,529,963	1,465,214,653	$44.63	$37.43	-16.1%
Canadian Natural Resources Limited	CNQ	51,752,147,469	1,092,047,847	$47.39	$38.64	-18.5%
Imperial Oil Limited	IMO	49,042,078,776	847,599,011	$57.86	$51.56	-10.9%
Husky Energy Inc.	HSE	32,835,380,634	995,641,711	$32.98	$27.89	-15.4%
Cenovus Energy Inc	CVE	26,251,047,328	756,950,615	$34.68	$26.44	-23.8%
Crescent Point Energy Corp.	CPG	19,054,037,160	423,423,048	$45.00	$37.80	-16.0%
Encana Corporation	ECA	18,575,904,053	740,961,470	$25.07	$20.99	-16.3%
Talisman Energy Inc.	TLM	11,519,723,579	1,044,205,268	$11.03	$7.41	-32.8%
Canadian Oil Sands Limited	COS	11,349,573,179	484,610,298	$23.42	$17.97	-23.3%
Tourmaline Oil Corp.	TOU	11,093,225,024	201,438,624	$55.07	$46.15	-16.2%
ARC Resources Ltd.	ARX	9,961,515,096	316,942,892	$31.43	$28.70	-8.7%
MEG Energy Corp	MEG	8,663,315,635	223,684,886	$38.73	$29.03	-25.0%
Baytex Energy Corp.	BTE	8,074,310,078	166,069,726	$48.62	$36.10	-25.8%
Vermilion Energy Inc.	VET	7,547,863,325	106,713,747	$70.73	$64.36	-9.0%
Paramount Resources Ltd.	POU	6,310,684,139	104,654,795	$60.30	$51.77	-14.1%
Peyto Exploration & Development Corp.	PEY	5,921,706,832	153,690,808	$38.53	$34.20	-11.2%
PrairieSky Royalty Ltd.	PSK	5,135,000,000	130,000,000	$39.50	$34.00	-13.9%
Enerplus Corporation	ERF	5,108,169,000	205,229,771	$24.89	$17.15	-31.1%
Whitecap Resources Inc.	WCP	4,521,895,736	245,621,713	$18.41	$14.98	-18.6%
Penn West Petroleum Ltd.	PWT	4,182,765,734	495,001,862	$8.45	$5.51	-34.8%
Pengrowth Energy Corporation	PGF	3,938,186,665	531,408,321	$7.41	$4.90	-33.9%
Athabasca Oil Corporation	ATH	3,181,210,140	401,667,947	$7.92	$4.46	-43.7%
Trilogy Energy Corp	TET	3,034,453,657	105,071,110	$28.88	$20.80	-28.0%
Bonavista Energy Corporation	BNP	2,991,583,651	201,861,245	$14.82	$11.61	-21.7%
Africa Oil Corp.	AOI	2,120,742,964	312,333,279	$6.79	$4.14	-39.0%
Bonterra Energy Corp	BNE	2,112,574,633	32,086,492	$65.84	$53.82	-18.3%
Gran Tierra Energy Inc.	GTE	2,003,447,146	274,821,282	$7.29	$5.37	-26.3%
Raging River Exploration Inc.	RRX	1,980,564,289	180,051,299	$11.00	$8.14	-26.0%
Birchcliff Energy Ltd.	BIR	1,969,417,138	150,796,625	$13.06	$9.16	-29.9%
Freehold Royalties Ltd.	FRU	1,925,524,146	74,058,621	$26.00	$21.48	-17.4%
Northern Blizzard Resources Inc.	NBZ	1,914,042,495	101,810,771	$18.80	$15.85	-15.7%
Surge Energy Inc.	SGY	1,889,478,484	217,681,853	$8.68	$6.54	-24.7%
Parex Resources Inc	PXT	1,877,462,466	126,287,061	$14.87	$10.73	-27.8%
Kelt Exploration Ltd.	KEL	1,731,091,845	126,727,075	$13.66	$10.55	-22.8%
Bankers Petroleum Ltd.	BNK	1,721,811,689	260,880,559	$6.60	$4.67	-29.2%
Bellatrix Exploration Ltd	BXE	1,611,292,542	191,364,910	$8.42	$5.59	-33.6%
NuVista Energy Ltd.	NVA	1,583,757,118	135,944,817	$11.65	$10.05	-13.7%
Legacy Oil + Gas Inc	LEG	1,563,886,292	199,730,050	$7.83	$5.06	-35.4%
TORC Oil & Gas Ltd.	TOG	1,362,827,028	93,344,317	$14.60	$11.29	-22.7%
Painted Pony Petroleum Ltd.	PPY	1,362,274,683	93,627,126	$14.55	$11.38	-21.8%
Crew Energy Inc.	CR	1,359,860,601	121,960,592	$11.15	$7.90	-29.1%
Oryx Petroleum Corporation Limited	OXC	1,296,506,662	119,825,015	$10.82	$9.47	-12.5%
Lightstream Resources Ltd.	LTS	1,257,107,698	200,176,385	$6.28	$4.08	-35.0%
Advantage Oil & Gas Ltd.	AAV	1,228,830,837	170,651,966	$7.20	$5.10	-29.2%
Long Run Exploration Ltd.	LRE	1,097,545,166	194,204,965	$5.65	$3.58	-36.7%
Spartan Energy Corp.	SPE	1,096,574,094	262,338,300	$4.18	$3.22	-23.0%
RMP Energy Inc.	RMP	1,068,310,163	122,092,590	$8.75	$6.30	-28.0%

A cursory look reveals that the quoted market price of all of these corporations are significantly less than what they were from August 31st, however, some got hammered more than others.

Whenever one invests in a resource company, there is always the implicit assumption that you believe the commodity price underlying the resource will rise. There is absolutely zero point in investing otherwise unless if there is a very special situation to warrant it (e.g. the firm in question has a huge hedged position on the resource that will allow it to economically outlast its soon-to-be bankrupt peer group).

Ideally you want to invest in a company with a cost structure that is at the marginal point of profitability and that has the market pricing the company assuming it will make little money in the future, and then have the commodity price increase. The embedded leverage in these high cost producers is significant – and I will keep on repeating this – under the assumption that the underlying commodity price increases.

Looking at the “least and most killed” list, we have two companies that I consider to be the cream of the crop in the Canadian oil and gas industry, ARC Resources (TSX: ARX) and Peyto Exploration (TSX: PEY) that are scratched – about 9 and 11% losses, not too bad considering the drop in commodity prices. These two companies have quite good managements and they are very focused on financial return on investment. I actually consider it too bad they did not get a 25 or 30% haircut as they are reasonably good “grandmother and grandfather” type equities that should be able to weather the full storm of a commodity cycle.

On the “ripped to shreds” list, we have Athabasca Oil Corp (TSX: ATH) that I will not touch because they simply have the incorrect economic structure (this can be saved for another post although you can read me correctly passing up on their IPO on this post).

Working the way down the losers list, a few names caught my attention. Lightstream Resources (TSX: LTS), formerly Petrobakken (TSX: PBN) is an entity that I will not be investing in, but I amusingly note that it is finally reaching what I would consider to be a fair value. There was a very dedicated individual out there that was deriding my analysis on its over-valuation which the market finally appeared to have corrected. (Feel free to read these articles here).

However, a couple old titans from the income trust era, Penn West (TSX: PWT) and Pengrowth (TSX: PGF) caught my attention. Penn West notably went through an accounting scandal when they changed top management and the subsequent audit resolved some issues pertaining to the capitalization of what should have been operating expenses. This involved the inflation of the net income line. Having the commodity oil market fall from underneath them did not help either. PWT made the unfortunate mistake of going to natural gas development at precisely the wrong time, but they hold a bunch of other more conventional oil assets which firmly put them in the ordinary category.

Notably they are trading at about a third of their stated book value. One would have to ask themselves if they were to start up that company from scratch how much would be paid to do so. Even when dumping goodwill and accumulated exploration assets (money already spent to do exploration work), there’s still about $4.9 billion in equity on the balance sheet while the market cap is around $2.7 billion today. Just from a fundamental value perspective, while previous investors got hosed, it may be a better entry point than not. The stock is likely to face tax loss selling pressure between now and the rest of the year so there’s not likely any rush to get in on a retail level.

Pengrowth is also going through an ambitious capital plan with the development of a heavy oil resource (their “Lindbergh” project) that apparently has good economics, along the lines of a Cenovus project. There is obvious execution risk with this project as many oil and gas companies have touted the promise of heavy oil while being able to produce nothing. The couple differences I see here is that Pengrowth has been in the game long enough (they’ve been public since 1989) that they should by now know what they’re doing, and also they’ve successfully executed on a pilot project that has dredged up a not trivial amount of oil from the ground already. Time will tell.

Dumping goodwill and exploration assets from PGF’s balance sheet leaves $2.4 billion in book value, while market value is about $2.6 billion presently. On its face it does not appear to be as good a value as PWT, but it appears relatively cheap from a valuation perspective.

Notably, Penn West’s equity is trading with incredibly high implied volatility – about 85% on the January series for an at-the-money option. Pengrowth’s volatility is muted (around 35%). Liquidity in their option markets is garbage, plus trading options on Canadian exchanges is a very expensive process in terms of trading costs.

Both firms give out dividends and are roughly at 10% yield at present market value. Yields might be compromised in the future if oil prices continue to decline. At least investors here clearly are not paying any premium for yield since I think most of them have been scared away from the common stock when they stare at their capital losses – a few months ago they were paying for a 5% yield and while they received that, they got a 50% capital loss in exchange.

The last time oil was at around US$80/barrel was in June 2012. Both companies’ equities were trading at significantly higher levels than they are now, plus they have the advantage of the Canadian dollar being about 10 cents lower than what it was a couple years ago.

Do I have any clue where oil is going in the future? No. However, if you believe things have stabilized, certain oil and gas producer stocks seem to have been sold off disproportionately and would probably make a decent entry point.