Divestor – Page 180 – Canadian Finance and Economics

Canadian taxable deadline for capital gains/losses

Canadian investors have until mid-day on December 24th to book capital gains and losses for the year. As there is a three-day settlement period for stock trades and since December 25 and 26 are statutory holidays in Ontario, the trades will settle in the 2015 calendar year.

If you are selling US equities, the deadline is December 26th.

This is one of those tax rules where the CRA and IRS differ – the IRS will consider a disposition on the 31st of December to be valid for the 2014 calendar year.

There is some element of psychology that goes on in December – fund managers will not want to be seen (embarrassed) with certain holdings on their year-end statements, and investors have some tax incentive to ensuring that they book losses before year end to offset income taxes. This creates supply pressure on a reasonable number of stocks that experience declines throughout the year. Clearly the theme in 2014 will be the declines experienced in oil and gas producers.

Oil’s dead cat bounce, or the phoenix rising from the ashes?

Most of the oil and gas market has exhibited a two-day price rally from the previous month’s carnage in what can be considered a “dead cat bounce”. This is probably in recognition that Talisman’s acquisition implies that the rest of the oil that is stuck in the ground also has similar value despite the commodity price being lower than the cost to get it above the ground.

Some companies have reduced their capital budgets already – Canadian Oil Sands, Penn West, etc., have already announced capital expenditure reductions and dividend cuts.

The question here is how low crude oil will go before it truly bottoms. In 2009, it bottomed out at US$35/barrel, while today it is at around US$55/barrel. My gut instinct here says that we are very, very, very close to the bottom, but if you recall during the era of Bear Stearns’ near-bankruptcy (technically taken over by JP Morgan), it could take a few more months for this to play out to its ultimate bottom.

One thing I do know, however, is that the demand for liquid crude is not going away – airplanes are flying, people are driving their vehicles, and trucks are delivering cargo. The need for energy in the form of transport fuels is not going away anytime soon. A commodity can trade under the marginal cost of extraction for quite some time (this was the case for Silver post-80’s collapse) but continued demand will inevitably result in price rises unless if the extractors are operating as charitable organizations – most of them are currently at US$55/barrel!

Talisman gets bailed out by Spanish firm

Everybody by now has heard that Talisman is getting bought out for US$8/share by Respol. Talisman was in the middle of some fairly serious difficulties and this is probably a very welcome takeover which should easily glide through a shareholder vote.

The focus of this post is not on the actual takeover, but rather whether the Canadian government will clear the acquisition or not – if it was a Chinese national entity doing the takeover, the primary headlines would be about whether the government would allow it or not. Presumably Talisman management would be smart enough to pre-consult with the appropriate federal officials to see if the acquisition would proceed.

This is very likely a welcome injection of about US$13 billion (when one factors in debt) and most institutions this very minute are likely dumping shares and bonds of the company – these assets will get redeployed elsewhere. Despite crude oil and gas being down a tiny bit today, most Canadian oil and gas equities have increased a moderate single-digit percentage.

The question is – are there more acquisitions to come in the Canadian oil and gas space?

General comments – furiously conducting research

I have been intensely researching the oil and gas sector, and specifically looking for companies that have decent metrics and enough fortitude to not be operationally taken down due to financial impacts of low commodity prices. I also have been trying to find collateral damage, typical cases of the baby thrown out with the proverbial bathwater.

There are many, many “hits” on my screens which makes the research very slow going. Specifically I want to know about hedging, and financial covenants and their financial structure in general in addition to the usual metrics. Dredging this stuff is very slow going.

There is a lot of high-yield out there which is trading at quite distressed levels, some of which seems very alluring. But high yield of course comes with risk.

A simple example: Do you want to lend your money to Russia for 10 years even though you are compensated with a 13% yield to maturity? I’d actually gamble that their large cap companies (NYSE: RSX is their ETF) would fare better than an investment in their sovereign debt at the moment.

Here’s a more specific example: Do you want to be a HERO? Specifically (Nasdaq: HERO) Hercules Offshore is a third-tier deepwater drilling firm, which is of a lower tier than Seadrill (Nasdaq: SDRL), Diamond Offshore (NYSE: DO), Transocean (NYSE: RIG), etc. All of the drillers have gotten killed over the past couple months simply due to the fact that nobody wants to drill into expensive ocean when you can’t even make money on the shale inland.

In HERO’s case, their equity is trading as if the company is already dead, while the bond market is placing their 2019 debt issue at a yield to maturity of about 28%. So, what is more risky: Investing in Vladimir Putin, or Hercules Offshore?

Seadrill, however, is comparable to Russia – roughly 11.5% yield to maturity on 6 year debt vs. 13% for 10-year Russian debt.

Tax loss selling candidates

The following is a table of tax-loss selling candidates for TSX-issued companies that have a market cap of at least $100 million and revenues of at least $50 million. All of these companies have lost 30% of their stock price year-to-date and one would assume active fund managers would not want to have the embarrassment of having these in their portfolios by the Canadian tax loss selling deadline of December 24, 2014.

Company	Symbol	Last	52wkHigh	52wkLow	MktCap	QtrRev	QtrInc
Ainsworth Lumber Co.	ANS-T	2.7	4.22	2.24	650	129.7	12.8
Alamos Gold	AGI-T	8.59	13.92	7.75	1075	39.3	-2.2
Argonaut Gold	AR-T	2.29	6.65	1.91	358	44.8	2.2
Athabasca Oil	ATH-T	3	8.84	2.78	1233	32.3	-56.8
Atlantic Power	ATP-T	2.54	4.44	2.14	297	156.7	-64.6
Avigilon Corp.	AVO-T	17.91	34.5	13.15	834	75.4	11.6
Black Diamond Group	BDI-T	20.31	35.99	16.63	880	88.4	9.6
Canacol Energy	CNE-T	3.58	8.77	3.44	409	71.9	-2.3
Capstone Mining	CS-T	2.12	3.35	1.91	786	222	0.3
Cathedral Energy Services	CET-T	3.39	5.23	2.85	121	58.2	0.3
Chesswood Group	CHW-T	11.89	19.44	11.28	120	28.1	2.8
Essential Energy Services Ltd.	ESN-T	1.92	3.19	1.86	245	52.8	-5.4
First Majestic Silver	FR-T	5.56	13.74	5.23	653	95.6	8.3
Horizon North Logistics	HNL-T	3.26	10.05	2.77	371	123.6	8.1
Imperial Metals Corp.	III-T	9.15	18.63	7.92	690	58.7	15.2
Ithaca Energy	IAE-T	1.41	2.95	1.29	476	90.9	0.7
Kinross Gold	K-T	3.33	5.99	2.27	3605	915.6	44.1
Labrador Iron Ore Royalty	LIF-T	18.21	34.87	17.75	1183	52	35.9
Legacy Oil + Gas	LEG-T	3.95	10.03	3.9	716	169.3	18.8
Lightstream Resources	LTS-T	3.5	9.09	2.28	750	314.8	3.9
Long Run Exploration	LRE-T	2.85	6.09	2.7	432	156.8	20.8
Pengrowth Energy	PGF-T	4.48	7.78	4.17	2343	476.9	52.2
Penn West Petroleum	PWT-T	5.05	11	4.54	2527	719	143
Points International	PTS-T	14.9	35.5	14.59	232	76.8	1.3
Redknee Solutions	RKN-T	3.82	7.82	3.15	436	70.7	-7.5
Savanna Energy Services	SVY-T	5.26	9.31	5.2	474	201.1	-24.4
Serinus Energy Inc.	SEN-T	2.03	4.88	1.4	160	41.9	8.7
Sirius XM Canada Holdings	XSR-T	5.2	10.5	5.01	688	77.3	4.4
SMART Technologies	SMA-T	1.48	5.9	1.41	176	142.7	12.1
TAG Oil Ltd	TAO-T	1.8	3.64	1.47	121	15.4	4.1
Talisman Energy	TLM-T	6.53	13.13	6.01	6976	1742.3	462.5
Teck Resources	TCK.B-T	19.2	29.1	16.87	10969	2251	84
Transat A.T.	TRZ.B-T	8.66	14.7	7.65	340	943.5	25.8
TransGlobe Energy	TGL-T	4.17	10	4.18	322	155.5	26.2
Trilogy Energy Corp.	TET-T	13.59	32.3	12.23	1724	171.1	28.2
Trinidad Drilling	TDG-T	6.32	12.89	6.07	900	170.6	-24.8
Twin Butte Energy	TBE-T	1.42	2.5	1.35	499	152.6	7.2
Westport Innovations	WPT-T	6.12	24.11	5.97	396	33.4	-27.7
Yamana Gold Inc.	YRI-T	4.72	11.86	3.93	4043	516.5	-1023.3

Some obvious conclusions:
– Gold and energy are not liked.
– Energy service companies are also not liked.
– Was a little surprised at Transat considering Air Canada and Westjet’s relative performance.