Maple Leaf Memo
The Arctic’s Bounty: Cheap Energy Still a Thing of the Past
The raw numbers are impressive: A report by the US Geological Survey (USGS) found that 25 areas inside the Arctic Circle contain about a fifth of the world’s undiscovered but recoverable oil and natural gas reserves.
According to the USGS, the area north of the Arctic Circle has an estimated 90 billion barrels of oil, 1,670 trillion cubic feet of natural gas and 44 billion barrels of natural gas liquids, accounting for about 22 percent of the undiscovered, technically recoverable resources in the world. The Arctic accounts for about 13 percent of the undiscovered oil, 30 percent of the undiscovered natural gas and 20 percent of the undiscovered natural gas liquids in the world.
The long-term impact might be relatively slight, though: At the present consumption rate of 86 million barrels a day, the oil in the Arctic would meet global demand for three years. The reserves might bring a little relief to tight markets, but they don’t look like the answer to declining production in oil fields in the rest of the world.
As for natural gas, the region’s undiscovered reserves are equal to Russia’s proven gas reserves, the world’s largest. Most of the new estimated recoverable gas is located in two Russian provinces.
A separate USGS study estimates that a billion-barrel Arctic oil field would cost about USD37 per barrel to produce, plus about USD3 per barrel in exploration costs. It costs about USD2 per barrel to pump oil from the ground in Saudi Arabia and USD5 to USD7 per barrel in Venezuela and Azerbaijan. And it costs more than USD30 to mine, haul and upgrade a barrel of synthetic crude from Canada’s oil sands.
Asia’s Impact
PIMCO co-CEO Mohammed El-Erian took a seat at Charlie Rose’s oak table last Thursday to discuss the current state of the economy and financial markets. The first words from El-Erian’s mouth concerned “a short-term answer” and “a long-term answer”:
You can watch the interview here.
Here’s the shameless plug portion of our post today: My colleagues Yiannis Mostrous and Elliott Gue and our former colleague Ivan Martchev co-authored a book published in April 2006, The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity, wherein they address many of the themes El-Erian discussed with Charlie, including the precarious state of US financials.
The utility of the book is defined by the action steps self-directed investors can take given the shift in growth leadership to Asia and other emerging markets. We’ve discussed here and in Canadian Edge the impact emerging Asia has had on Canada’s economy, particularly in light of the continuing slowdown in the US. The region has allowed our neighbor to the north to better withstand declining exports to its largest trading partner; greater global demand for Canada’s ample energy and mineral resources has led to better terms of trade and rising real incomes.
Canada’s Competitiveness
It may come as a shock to income trust investors traumatized by Finance Minister Jim Flaherty’s October 2006 announcement of the Tax Fairness Plan, but overall, Canada is among the lowest-tax-cost environments in the world, according to a study on tax and competitive alternatives conducted by global accounting shop KPMG.
KPMG studied the general tax competiveness of 102 cities in 10 countries, focusing on 35 cities with populations greater than 2 million.
Competitive Alternatives 2008 Special Report: Focus on Tax assesses taxes paid by businesses in Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the UK and the US.
The report measures the total effective tax burden, including corporate, capital, sales, property and business taxes, that a business bears while operating within a given country. Cities were measured by a total tax index, which compares the actual tax cost in each city.
Key findings of the report, according to KPMG, include:
Canada had three cities in the top 10 of the study’s ranking of 35 major metro areas. Vancouver ranked fourth with a score of 77; Montreal came in sixth with a score of 94.5, while Toronto came in seventh with a score of 94.8.
Merrill’s Duplicity
Barry Ritholtz has five questions begging answers in the wake of Merrill Lynch’s (NYSE: MER) new writedown and subsequent share offering:
Speaking Engagements
You’re invited to tune in as KCI’s LIVE Webcast events air from the 30th annual Money Show San Francisco. The editors will be presenting their latest insights and recommendations surrounding this year’s central theme “Tech and Biotech Investing.”
Registration is FREE and can be completed at MoneyShow.com. So please check out the KCI events, and tune in Aug. 7-10, 2008.
The Best Stocks Money Can Buy
Friday, Aug. 8
6 pm – 6:45 pm PDT
I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please click here or call 877-238-1270.
The Roundup
Oil & Gas
Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF) received approval from the Toronto Stock Exchange to make a normal course issuer bid to purchase up to 10 percent of its issued and outstanding units, subject to a daily limit of 25 percent of the average daily trading volume, or about 150,000 units. The bid will commence July 30, 2008, and will terminate on July 29, 2009, or when Daylight completes the bid or decides not to purchase any more units. Daylight Resources Trust is a buy up to USD12.
Pengrowth Energy Trust (NYSE: PGH, TSX: PGF.UN) is buying Accrete Energy (TSX: GZ, OTC: ACEYF) for CAD95 million worth of its units to add oil and gas production and reserves in the Harmattan region of Alberta. The Harmattan assets produce light oil and natural gas at low operating costs of about CAD6 per barrel. Pengrowth will add reserves of 8.4 million barrels of oil equivalent (boe) and 1,900 barrels of oil equivalent per day (boe/d) of production.
Pengrowth offered 0.273 of its units for each Accrete share, or about CAD4.97 per share, and will assume CAD25 million of debt for total consideration of about CAD120 million. Pengrowth will spin off Accrete assets outside Harmattan in the form of a new exploration company; Accrete shareholders will receive a quarter of a share of that entity. A low-production-cost acquisition isn’t enough to offset its existing cost profile and relatively high payout ratio; sell Pengrowth Energy Trust.
Electric Power
TransAlta Corp (NYSE: TAC, TSX: TA) has received a CAD39-per-share offer from US power plant developer LS Power Equity Partners, its largest shareholder, and Global Infrastructure Partners, a private-equity joint venture between Credit Suisse Group (NYSE: CS) and General Electric (NYSE: GE). The New York-based firms hope to take TransAlta, Canada’s biggest publicly traded electricity generator, private to capitalize on growing energy demand in Alberta.
The all-cash offer values TransAlta at CAD7.8 billion, 21 percent higher than its July 20 closing price. TransAlta Corp, which is trading well below the buyout offer, is a buy up to USD40.
Gas/Propane
AltaGas Income Trust (TSX: ALA.UN, OTC: ATGFF) suspended operations at its Harmattan natural gas liquids extraction plant following a fire in an oil heater last Thursday. Producers in the region use the facility to remove ethane and natural gas liquids from raw gas.
The facility has been processing about 135 million cubic feet of gas a day, though it’s capable of handling 490 million cubic feet. AltaGas hasn’t said when the plant will be repaired. No one was injured in the fire. Buy AltaGas Income Trust up to USD28.
Precision Drilling Trust (NYSE: PDS, TSX: PD.UN) reported that second quarter profits fell to CAD21.7 million (17 cents Canadian per unit) from CAD25.7 million (20 cents Canadian per unit) a year earlier because expenses for its incentive compensation program rose to CAD9 million from CAD4 million in the corresponding period of 2007. Operating income fell 19 percent to CAD22.1 million from CAD27.1 million.
The rise in expenses lowered its operating earnings profit margin to 16 percent from 22 percent. Revenue was up 14 percent to CAD138.5 million from CAD122 million, driven by growth in the US. Precision Drilling Trust is a buy up to USD30.
Business Trusts
Bird Construction Income Fund (TSX: BDT.UN, OTC: BIRDF) announced that a subsidiary has been named as a preferred contractor for the Alberta Schools Alternative Procurement project and that a second subsidiary has been awarded a contract by Fort Hills Energy LP. The Alberta agreement should be completed in the fall for construction completion in 2010.
The Fort Hills Energy project, which is already under contract, is for the design and construction of six buildings located at Fort Hills’ oil sands location near Fort McMurray, Alberta. The aggregate contribution of these projects to Bird’s third quarter backlog will be approximately CAD310 million. Buy Bird Construction Income Fund up to USD45.
Consumers’ Waterheater Income Fund (TSX: CWI.UN, OTC: CSUWF) reported a second quarter loss of CAD1.4 million (3 cents Canadian per unit), an improvement from a loss of CAD23.1 million (47 cents Canadian per unit) a year ago on a reduction in income tax charges from CAD26.8 million in 2007 to CAD7.2 million. Revenue for the quarter was CAD44.3 million, up from CAD42 million. Consumers’ Waterheater Income Fund is a buy up to USD14.
Real Estate Trusts
Royal Host REIT (TSX: RYL.UN, OTC: ROYHF) reached an agreement to sell the Grand Okanagan Lakefront Resort and Conference Centre in Kelowna, British Columbia, for CAD131 million. Royal Host will use the cash proceeds from the sale, about CAD85 million, to pursue other hospitality opportunities. Hold Royal Host REIT.
Natural Resource Trusts
Fording Canadian Coal (NYSE: FDG, TSX: FDG.UN) reported a more-than-300-percent increase in earnings from continuing operations, from CAD106.4 million (72 cents Canadian per unit) to CAD373 million (CAD2.51 per unit), on a surge in the price of metallurgical coal. Fording’s average contracted price for the 2008 coal year, which began April 1, is CAD275 per ton, up from CAD93 per ton in 2007.
The units had been on a tremendous run this year before settling back to the mid-80s on a decline in metallurgical coal spot prices. That backtracking in the spot price and a corresponding unit-price retreat made Fording an attractive target; demand from Asia for seaborne coal is still intense, and that coal produced at the Elk Valley Partnership, the world’s No. 2 exporter of met coal of which Fording owns 60 percent, is of particular value.
Teck Cominco (NYSE: TCK, TSX: TCK.B), which controls the 40 percent of the Elk Valley Partnership that Fording didn’t control, and Fording agreed on Monday to a CAD14.1 billion buyout deal. Fording investors will receive CAD82 in cash and 0.245 class B Teck shares for each Fording unit held.
If you haven’t yet sold Fording Canadian Coal per our recommendation, our advice is to sell it now. Although the cash portion of this deal is set at CAD82 per share, the US dollar value of that will vary until the deal is completed, as will the value of the stock portion in Teck Cominco shares.
We think this deal will come off. But Fording shares have been extremely volatile all year as momentum has waxed and waned. Take your profit.
The raw numbers are impressive: A report by the US Geological Survey (USGS) found that 25 areas inside the Arctic Circle contain about a fifth of the world’s undiscovered but recoverable oil and natural gas reserves.
According to the USGS, the area north of the Arctic Circle has an estimated 90 billion barrels of oil, 1,670 trillion cubic feet of natural gas and 44 billion barrels of natural gas liquids, accounting for about 22 percent of the undiscovered, technically recoverable resources in the world. The Arctic accounts for about 13 percent of the undiscovered oil, 30 percent of the undiscovered natural gas and 20 percent of the undiscovered natural gas liquids in the world.
The long-term impact might be relatively slight, though: At the present consumption rate of 86 million barrels a day, the oil in the Arctic would meet global demand for three years. The reserves might bring a little relief to tight markets, but they don’t look like the answer to declining production in oil fields in the rest of the world.
As for natural gas, the region’s undiscovered reserves are equal to Russia’s proven gas reserves, the world’s largest. Most of the new estimated recoverable gas is located in two Russian provinces.
A separate USGS study estimates that a billion-barrel Arctic oil field would cost about USD37 per barrel to produce, plus about USD3 per barrel in exploration costs. It costs about USD2 per barrel to pump oil from the ground in Saudi Arabia and USD5 to USD7 per barrel in Venezuela and Azerbaijan. And it costs more than USD30 to mine, haul and upgrade a barrel of synthetic crude from Canada’s oil sands.
Asia’s Impact
PIMCO co-CEO Mohammed El-Erian took a seat at Charlie Rose’s oak table last Thursday to discuss the current state of the economy and financial markets. The first words from El-Erian’s mouth concerned “a short-term answer” and “a long-term answer”:
The long-term answer is the easy one. We are in the middle of a major transformation, that we’re going to be able to look back and identify handoffs in terms of who is driving global growth, who is driving global wealth.
The long-term story is one of a handoff. The short-term story is of a system that wasn’t ready for this, that’s been taken by surprise, and a system that doesn’t know how to deal with these handoffs.
The long-term story is one of a handoff. The short-term story is of a system that wasn’t ready for this, that’s been taken by surprise, and a system that doesn’t know how to deal with these handoffs.
You can watch the interview here.
Here’s the shameless plug portion of our post today: My colleagues Yiannis Mostrous and Elliott Gue and our former colleague Ivan Martchev co-authored a book published in April 2006, The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity, wherein they address many of the themes El-Erian discussed with Charlie, including the precarious state of US financials.
The utility of the book is defined by the action steps self-directed investors can take given the shift in growth leadership to Asia and other emerging markets. We’ve discussed here and in Canadian Edge the impact emerging Asia has had on Canada’s economy, particularly in light of the continuing slowdown in the US. The region has allowed our neighbor to the north to better withstand declining exports to its largest trading partner; greater global demand for Canada’s ample energy and mineral resources has led to better terms of trade and rising real incomes.
Canada’s Competitiveness
It may come as a shock to income trust investors traumatized by Finance Minister Jim Flaherty’s October 2006 announcement of the Tax Fairness Plan, but overall, Canada is among the lowest-tax-cost environments in the world, according to a study on tax and competitive alternatives conducted by global accounting shop KPMG.
KPMG studied the general tax competiveness of 102 cities in 10 countries, focusing on 35 cities with populations greater than 2 million.
Competitive Alternatives 2008 Special Report: Focus on Tax assesses taxes paid by businesses in Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the UK and the US.
The report measures the total effective tax burden, including corporate, capital, sales, property and business taxes, that a business bears while operating within a given country. Cities were measured by a total tax index, which compares the actual tax cost in each city.
Key findings of the report, according to KPMG, include:
- Canada is the third-least-expensive country when it comes to the tax burden placed on business.
- Out of the 35 large cities (with populations greater than 2 million), Vancouver, Toronto and Montreal are in the top seven for providing low tax costs. Additional findings on manufacturing, services and R&D also show Canada in a very favorable overall position.
- Paris is ranked No. 35 for the most expensive for taxes, with Naples, Frankfurt, London and Yokohama close behind.
Canada had three cities in the top 10 of the study’s ranking of 35 major metro areas. Vancouver ranked fourth with a score of 77; Montreal came in sixth with a score of 94.5, while Toronto came in seventh with a score of 94.8.
Merrill’s Duplicity
Barry Ritholtz has five questions begging answers in the wake of Merrill Lynch’s (NYSE: MER) new writedown and subsequent share offering:
1. Why did Merrill fail to disclose this write-down to shareholders when they reported on July 17th? The stock was $30.73 then; everyone who bought since then just got totally sandbagged.
2. The Financials–especially Merrill–traded today as if many people knew this was coming. How much non-public information leaked in advance of this announcement? (Isn’t non-public material inside information something the SEC used to care about?)
3. Who really thinks the worst of the write-downs, share issuance, and dilution is behind us? Anyone? Bueller? (These CDOs were vintage 2005. That means we have ’06 and ’07 yet to go).
4. Anyone think Financials are cheap? You cannot trust the “E,” and the “P” is obviously subject to change. Think they might get cheaper?
5. Who really thinks the Financials have put in a bottom?
2. The Financials–especially Merrill–traded today as if many people knew this was coming. How much non-public information leaked in advance of this announcement? (Isn’t non-public material inside information something the SEC used to care about?)
3. Who really thinks the worst of the write-downs, share issuance, and dilution is behind us? Anyone? Bueller? (These CDOs were vintage 2005. That means we have ’06 and ’07 yet to go).
4. Anyone think Financials are cheap? You cannot trust the “E,” and the “P” is obviously subject to change. Think they might get cheaper?
5. Who really thinks the Financials have put in a bottom?
Speaking Engagements
You’re invited to tune in as KCI’s LIVE Webcast events air from the 30th annual Money Show San Francisco. The editors will be presenting their latest insights and recommendations surrounding this year’s central theme “Tech and Biotech Investing.”
Registration is FREE and can be completed at MoneyShow.com. So please check out the KCI events, and tune in Aug. 7-10, 2008.
The Best Stocks Money Can Buy
Friday, Aug. 8
6 pm – 6:45 pm PDT
I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please click here or call 877-238-1270.
The Roundup
Oil & Gas
Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF) received approval from the Toronto Stock Exchange to make a normal course issuer bid to purchase up to 10 percent of its issued and outstanding units, subject to a daily limit of 25 percent of the average daily trading volume, or about 150,000 units. The bid will commence July 30, 2008, and will terminate on July 29, 2009, or when Daylight completes the bid or decides not to purchase any more units. Daylight Resources Trust is a buy up to USD12.
Pengrowth Energy Trust (NYSE: PGH, TSX: PGF.UN) is buying Accrete Energy (TSX: GZ, OTC: ACEYF) for CAD95 million worth of its units to add oil and gas production and reserves in the Harmattan region of Alberta. The Harmattan assets produce light oil and natural gas at low operating costs of about CAD6 per barrel. Pengrowth will add reserves of 8.4 million barrels of oil equivalent (boe) and 1,900 barrels of oil equivalent per day (boe/d) of production.
Pengrowth offered 0.273 of its units for each Accrete share, or about CAD4.97 per share, and will assume CAD25 million of debt for total consideration of about CAD120 million. Pengrowth will spin off Accrete assets outside Harmattan in the form of a new exploration company; Accrete shareholders will receive a quarter of a share of that entity. A low-production-cost acquisition isn’t enough to offset its existing cost profile and relatively high payout ratio; sell Pengrowth Energy Trust.
Electric Power
TransAlta Corp (NYSE: TAC, TSX: TA) has received a CAD39-per-share offer from US power plant developer LS Power Equity Partners, its largest shareholder, and Global Infrastructure Partners, a private-equity joint venture between Credit Suisse Group (NYSE: CS) and General Electric (NYSE: GE). The New York-based firms hope to take TransAlta, Canada’s biggest publicly traded electricity generator, private to capitalize on growing energy demand in Alberta.
The all-cash offer values TransAlta at CAD7.8 billion, 21 percent higher than its July 20 closing price. TransAlta Corp, which is trading well below the buyout offer, is a buy up to USD40.
Gas/Propane
AltaGas Income Trust (TSX: ALA.UN, OTC: ATGFF) suspended operations at its Harmattan natural gas liquids extraction plant following a fire in an oil heater last Thursday. Producers in the region use the facility to remove ethane and natural gas liquids from raw gas.
The facility has been processing about 135 million cubic feet of gas a day, though it’s capable of handling 490 million cubic feet. AltaGas hasn’t said when the plant will be repaired. No one was injured in the fire. Buy AltaGas Income Trust up to USD28.
Precision Drilling Trust (NYSE: PDS, TSX: PD.UN) reported that second quarter profits fell to CAD21.7 million (17 cents Canadian per unit) from CAD25.7 million (20 cents Canadian per unit) a year earlier because expenses for its incentive compensation program rose to CAD9 million from CAD4 million in the corresponding period of 2007. Operating income fell 19 percent to CAD22.1 million from CAD27.1 million.
The rise in expenses lowered its operating earnings profit margin to 16 percent from 22 percent. Revenue was up 14 percent to CAD138.5 million from CAD122 million, driven by growth in the US. Precision Drilling Trust is a buy up to USD30.
Business Trusts
Bird Construction Income Fund (TSX: BDT.UN, OTC: BIRDF) announced that a subsidiary has been named as a preferred contractor for the Alberta Schools Alternative Procurement project and that a second subsidiary has been awarded a contract by Fort Hills Energy LP. The Alberta agreement should be completed in the fall for construction completion in 2010.
The Fort Hills Energy project, which is already under contract, is for the design and construction of six buildings located at Fort Hills’ oil sands location near Fort McMurray, Alberta. The aggregate contribution of these projects to Bird’s third quarter backlog will be approximately CAD310 million. Buy Bird Construction Income Fund up to USD45.
Consumers’ Waterheater Income Fund (TSX: CWI.UN, OTC: CSUWF) reported a second quarter loss of CAD1.4 million (3 cents Canadian per unit), an improvement from a loss of CAD23.1 million (47 cents Canadian per unit) a year ago on a reduction in income tax charges from CAD26.8 million in 2007 to CAD7.2 million. Revenue for the quarter was CAD44.3 million, up from CAD42 million. Consumers’ Waterheater Income Fund is a buy up to USD14.
Real Estate Trusts
Royal Host REIT (TSX: RYL.UN, OTC: ROYHF) reached an agreement to sell the Grand Okanagan Lakefront Resort and Conference Centre in Kelowna, British Columbia, for CAD131 million. Royal Host will use the cash proceeds from the sale, about CAD85 million, to pursue other hospitality opportunities. Hold Royal Host REIT.
Natural Resource Trusts
Fording Canadian Coal (NYSE: FDG, TSX: FDG.UN) reported a more-than-300-percent increase in earnings from continuing operations, from CAD106.4 million (72 cents Canadian per unit) to CAD373 million (CAD2.51 per unit), on a surge in the price of metallurgical coal. Fording’s average contracted price for the 2008 coal year, which began April 1, is CAD275 per ton, up from CAD93 per ton in 2007.
The units had been on a tremendous run this year before settling back to the mid-80s on a decline in metallurgical coal spot prices. That backtracking in the spot price and a corresponding unit-price retreat made Fording an attractive target; demand from Asia for seaborne coal is still intense, and that coal produced at the Elk Valley Partnership, the world’s No. 2 exporter of met coal of which Fording owns 60 percent, is of particular value.
Teck Cominco (NYSE: TCK, TSX: TCK.B), which controls the 40 percent of the Elk Valley Partnership that Fording didn’t control, and Fording agreed on Monday to a CAD14.1 billion buyout deal. Fording investors will receive CAD82 in cash and 0.245 class B Teck shares for each Fording unit held.
If you haven’t yet sold Fording Canadian Coal per our recommendation, our advice is to sell it now. Although the cash portion of this deal is set at CAD82 per share, the US dollar value of that will vary until the deal is completed, as will the value of the stock portion in Teck Cominco shares.
We think this deal will come off. But Fording shares have been extremely volatile all year as momentum has waxed and waned. Take your profit.
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