Maple Leaf Memo
Why Georgia Matters
Expedition officials compared the act to Neil Armstrong’s planting of the American flag on the moon, and the US Geological Survey determined, to a degree that should satisfy United Nations Convention on the Land of the Sea requirements (should the US eventually ratify it), that there’s not much ground for resource disputes in the area.
But Russia’s staking a tricolor claim to the North Pole was widely viewed as an act of aggression, “openly choreographed publicity stunt” or not.
Last week, symbolism became tanks and airstrikes as Russia celebrated the first anniversary of its deepwater claim by getting physical with the Republic of Georgia after several years of shadowboxing.
Accounts of Russia’s Arctic adventure framed it in terms of two larger themes: Russia’s restored sense of confidence and the international competition for oil and natural gas.
The first theme seems to be dominating Western interpretations of what’s happening in the Caucasus, but the long history of ethnic and geopolitical conflict is ripe territory for substantive argument on behalf of several interpretations.
James Traub tells the long story in The New York Times, providing solid background for the present conflict:
Traub, in a characterization troubling to many realists, including The American Conservative’s Daniel Larison, seems to validate the viewpoint that Russia (read: ex-KGB official and current Prime Minister Vladimir Putin) and Russia alone is stuck in a Cold War mindset.
Putin has responded to US efforts to establish a missile-defense presence in the Czech Republic, on his doorstep; the former president (it was Putin, however, who left Beijing for the Russian military’s staging ground for its current operations, not current President Dmitry Medvedev) warned, in stark terms, of Russia’s concern about the eastward creep of the North Atlantic Treaty Organization (NATO); and NATO remains a military alliance, despite the fact that its raison d’etre–the Union of Soviet Socialist Republics–no longer exists.
Here’s Larison:
On this point, however, Kissinger and Cohen are right. One of the impediments to building such a partnership between Washington and Moscow is the assumption that Moscow is a revisionist power that must be thwarted at every step. The other obvious impediments are the steady eastward creep of NATO and the introduction of U.S. weapons systems into current central European member states. Depressingly, some of the foreign policy advisors to the candidates don’t seem to understand this at all. Just as worrying as Kagan’s misleading democracy/autocracy struggle model are the views of one of Obama’s Russia advisors, Michael McFaul:
There’s that Cold War mentality again.
Anatol Lieven, professor in the department of war studies at King’s College London, cuts to the heart of the matter in The Times of London:
The second theme–the international competition for oil and natural gas–is of more practical concern for investors.
Georgian President Mikheil Saakashvili’s decision to send troops into South Ossetia was stupid, rash and probably informed by an assumption that Western backers of a regional democracy would provide substantive support. As well, Medvedev’s assertion that Moscow hopes to restore peace to the region are overly simplistic.
Georgia provides a crucial link of East and West in the global transit of oil and gas. Three major pipelines connecting energy sources in the Caucasus and Central Asia to European markets pass through its territory.
The South Caucasus pipeline, operated by BP (NYSE: BP) and transport of Azerbaijani natural gas through Georgia, has been closed temporarily as of Tuesday morning. The South Caucasus pipeline is also known as (as in the map below) the Baku-Tbilisi-Erzurum pipeline. It carries production from BP’s Shah Deniz natural gas field, daily output from which topped about 14.2 million cubic meters of gas as well as more than 30,000 barrels of condensate at the end of 2007.
Source: Thomas Blomberg, via Wikipedia
The 150,000-barrel-a-day Baku-Supsa oil pipeline operated by the Azerbaijan International Operating Co, whose largest shareholder is BP, was already shut down. The Baku-Tbilisi-Ceyhan pipeline, the second-longest in the world, is already out of action after a fire last week on its Turkish stretch. Kurdish rebels took responsibility for sabotaging the pipeline, which usually provides around 1 million barrels of Caspian crude to international markets.
The South Caucasus pipeline is an important part of the plan for the Nabucco pipeline to Austria, which would deliver natural gas directly to the European Union, bypassing Russia entirely, if built. The Russian government, which controls Gazprom, the world’s largest gas company, wants Europe to forget about Nabucco in favor of its own pipelines. Russia wants Europe’s energy to pass through its borders, not through independent countries.
The US and Canada will conduct a joint expedition to map the western Arctic this fall, an effort announced Monday that has interesting significance in light of Moscow’s current effort to preserve and extend its energy-based resurgence. It’s far too early to contemplate a new Cold War, but the coming days could provide significant clues about where we’ll be in five, 10 or 20 years.
This is a crucial period. Oil is becoming increasingly scarce; transporting natural gas is becoming increasingly critical. We’re about to find out how the West will deal with a re-emerging global power.
Speaking Engagements
Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the presidential election in the seat of the federal government.
Join Neil George, Elliott Gue and me for the DC Money Show Nov. 6-8, 2008, at The Wardman Park Marriott.
Click here or call 800-970-4355 and refer to priority code 011362 to register as my guest.
Conservative Portfolio
AltaGas Income Trust (TSX: ALA.UN, OTC: ATGFF) reported 8.7 percent funds from operations (FFO) growth, as extraction and transmission and power generation results were explosive, offsetting weakness in the smaller energy services operation. Debt-to-capitalization was cut from 45.1 percent in March to just 36.4 percent, and management boosted the distribution by another 2.9 percent.
The trust also raised its monthly cash distribution by 3 percent to 18 cents Canadian a unit effective with the September payment; AltaGas’ annual payout to unitholders is CAD2.16 per unit. Net income rose to CAD32.9 million (49 cents Canadian per unit) from CAD21.1 million (37 cents Canadian per unit) a year ago. Revenue increased to CAD487.1 million from CAD341.8 million, reflecting the January acquisition of Taylor NGL LP.
All in all, it was confirmation of both the trust’s conservative growth strategy and the underlying strength of energy infrastructure trusts. Buy AltaGas Income Trust up to USD28 if you haven’t already.
Bell Aliant Regional Communications Income Fund (TSX: BA.UN, OTC: BLIAF) reported a line-loss rate 8.5 percent lower than in the first quarter of 2008, 6.8 percent below the year-earlier quarter and less than half the losses from the fourth quarter of 2007. Those losses were more than offset by customer gains for higher margin wireless and Internet service.
Wireless turnover, or “churn,” fell to just 1.1 percent, down from 1.7 percent for the full-year 2007. High-speed Internet customer rolls are up 13.1 percent year-over-year. The rate of growth tapered off a bit in the second quarter, but revenue per customer moved higher for the fourth consecutive quarter. And with the company’s accelerated deployment of fiber-optic connections, its network is capable of offering more data and entertainment services than ever.
Overall revenue growth accelerated from 1.1 percent in the first quarter to 2.4 percent in the second quarter. Meanwhile, distributable cash flow per share rose 16 percent over year-earlier totals. Year to date, the payout ratio stands at 84 percent of distributable cash flow after capital expenditures, well below last year’s 93.1 percent. That leaves room for continued modest dividend growth, with the next bump likely coming in late 2008 or early 2009.
Finances are very solid, with cash flow covering interest expense by a 7.5-to-1 margin and the balance sheet drawing midlevel investment-grade ratings from Standard & Poor’s and Dominion Bond Rating Service (DBRS). Bell Aliant Regional Communications Income Fund is a buy up to USD32.
Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) reported strong US growth that helped offset flat results in Canada. Distributable cash after all marketing expenses increased 13 percent to CAD30.3 million (27 cents Canadian per unit) from CAD26.7 million (25 cents Canadian per unit) a year ago. Sales in the US rose 55 percent to CAD87.6 million, while Canadian sales slackened 2 percent to CAD290.3 million.
Net income rose 32 percent from CAD25.9 million (24 cents Canadian per unit) to CAD34.2 million (31 cents Canadian per unit). Coupled with cost cuts and a reduction of bad debt expense, the payout ratio actually fell from last year’s level and the seasonally weak quarter, and management expects further improvement. Energy Savings Income Fund is still a buy for those who don’t own it up to USD18.
Northern Property REIT (TSX: NPR.UN, OTC: NPRUF) reported distributable income per unit of 52 cents Canadian, up 13 percent from 46 cents Canadian a year ago, while FFO per unit rose 10 percent. Acquisitions completed during the second half of 2007 and in the first quarter of 2008 drove rental revenue growth in both residential (19.2 percent) and commercial (138 percent) segments. Northern Property paid out 72 percent of distributable income to unitholders. Steady, stable Northern Property REIT is a buy up to USD25.
TransForce (TSX: TFI, OTC: TFIFF) revenue surged 20 percent, triggering an 18 percent jump in operating cash flow and an 11 percent increase in after-tax earnings, not including costs related to the conversion to a corporation and the termination of an incentive plan. TransForce’s payout is well protected by earnings (29.4 percent second quarter payout ratio), which affords it ample cash to fund its growth effectively without piling on debt.
And the yield of nearly 5 percent is well above that of any comparable transportation corporation. The bottom line is TransForce remains an attractive holding for long-term growth and generous income. TransForce is a buy up to USD9.
Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF) posted a 9.1 percent boost in distributable cash flow per share, triggering a 3.6 percent dividend boost. Online revenue grew 44 percent to 14.3 percent of overall sales, a clear sign this directory trust is dodging the fate of US rivals. Buy Yellow Pages Income Fund up to USD14.
Aggressive Portfolio
Daylight Resources Trust’s (TSX: DAY.UN, OTC: DAYYF) payout ratio plunged to just 32 percent, as FFO more than doubled from year-earlier levels and rose 31 percent from first quarter 2008 FFO. Net debt was cut to just 1.1 times cash flow, and management projects internally generated resources would cover the entire 2008 capital spending program of CAD140 million as well as the payout.
Something to bear in mind for Daylight, and for all energy trusts, is that second quarter realized prices uniformly outstrip the current spot prices for crude and natural gas, a difference that would obviously widen if commodities continue to slide. Effective hedging and low payout ratios, however, will mitigate the threat to distributions. Daylight Resources Trust, fresh off a 30 percent distribution increase, is a buy up to USD13.
Newalta Income Fund (TSX: NAL.UN, OTC: NALUF) reported 67 percent growth in second quarter FFO, good enough to bring its payout ratio down to 84 percent. The western division reported an 11 percent increase in revenue to CAD83.5 million, boosted by strong oil prices and increased waste receipts from oil sands customers. The eastern division reported a 64 percent revenue increase to CAD59.4 million, built largely on acquisitions completed during the second half of 2007.
Net income surged 76 percent to CAD11.8 million (28 cents Canadian per unit) from CAD6.7 million (16 cents Canadian per unit) a year ago. Expenses as a percentage of revenue also came down during the period.
Management hasn’t yet said what it will do with the now 12 percent-plus yield as 2011 trust taxation nears. But with its underlying business stronger and more resilient than ever, it’s hard to see it not commanding more than its current multiple of 1.5 book value and annual sales. Newalta Income Fund remains a buy up to USD25.
Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) reported second quarter FFO of CAD81.4 million (73 cents Canadian per unit), compared to CAD72.7 million (81 cents Canadian per unit) a year ago.
A 22 percent increase in natural gas production drove Paramount’s operating netback to CAD92.8 million from CAD81 million a year ago, but a steep increase in royalty rate offset that growth; Paramount’s realized gas price significantly exceeded the Alberta gas reference price, so royalties as a percentage of revenue were 5 percentage points lower in the second quarter of 2007 compared to 2008.
Production was up 22 percent compared to year-ago levels, driven mainly by the Birchway acquisition in east central Alberta. The significant increase in natural gas prices during the first half of 2008 resulted in a CAD70.4 million mark-to-market paper loss; Paramount reported a CAD55.7 million net loss for the period. Paramount Energy Trust, which figures to reduce debt significantly over the balance of 2008, remains a buy up to USD10.
Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN), as did its oil- and gas-producing peers, saw enormous gains in realized prices during the second quarter. The trust logged FFO CAD753 million (CAD1.98 per unit) up from CAD326 million (CAD1.35 per unit) a year ago. Revenue for the quarter was CAD1.25 billion, compared to CAD495 million in the second quarter of 2007.
Noncash charges related to oil and gas hedging pulled Penn West to a CAD323 million, but production increases, the impact of acquisitions and rising commodity prices fueled a 130 percent FFO surge. Production averaged 190,515 barrels of oil equivalent a day in the quarter, an increase of 50 percent from 126,599 a year earlier. Buy Penn West Energy Trust up to USD36.
Provident Energy Trust (NYSE: PVX, TSX: PVE.UN) reported second quarter FFO of CAD241.5 million (95 cents Canadian per unit), up from CAD98.5 million (45 cents Canadian per unit) a year ago. The trust paid out 43 percent of FFO in distributions, down from 85 percent in the second quarter of 2007. Provident reported a CAD382.8 million increase in unrealized hedging losses, leading to a CAD184.1 net loss for the quarter.
Net debt to annualized second quarter FFO stood at 1.4 times, down from 3.3 times a year ago, reflecting a decrease in net debt and higher funds flow. Production from the Canadian Oil and Gas business unit averaged approximately 28,000 barrels of oil equivalent per day (boe/d) in the second quarter, increasing 9 percent from 25,700 boe/d in the second quarter of 2007.
FFO in Provident’s Canadian segment rose to CAD113 million, up 117 percent from CAD52 million, while the midstream delivered earnings before interest, taxes, depreciation and amortization (EBTDA) of CAD62 million, up 72 percent from CAD36 million in the second quarter of 2007. Buy Provident Energy Trust up to USD14.
Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF) is using the good fortune born of high commodity prices to pay down debt, position itself to make accretive acquisitions and solidify its distribution for sustainable growth long into the future. Second quarter FFO more than doubled to CAD190.3 million (CAD2.50 per unit) from CAD85.1 million (CAD1.18). The trust distributed 57 cents Canadian per unit for a payout ratio of just 21 percent.
At its current pace, Vermilion could be debt-free by the end of the year: The trust reduced total net debt during the second quarter by 32 percent from Dec. 31, 2007, levels. Vermilion can further strengthen its balance sheet, or it can fund an acquisition without equity. Vermilion Energy Trust is a buy up to USD40.
Expedition officials compared the act to Neil Armstrong’s planting of the American flag on the moon, and the US Geological Survey determined, to a degree that should satisfy United Nations Convention on the Land of the Sea requirements (should the US eventually ratify it), that there’s not much ground for resource disputes in the area.
But Russia’s staking a tricolor claim to the North Pole was widely viewed as an act of aggression, “openly choreographed publicity stunt” or not.
Last week, symbolism became tanks and airstrikes as Russia celebrated the first anniversary of its deepwater claim by getting physical with the Republic of Georgia after several years of shadowboxing.
Accounts of Russia’s Arctic adventure framed it in terms of two larger themes: Russia’s restored sense of confidence and the international competition for oil and natural gas.
The first theme seems to be dominating Western interpretations of what’s happening in the Caucasus, but the long history of ethnic and geopolitical conflict is ripe territory for substantive argument on behalf of several interpretations.
James Traub tells the long story in The New York Times, providing solid background for the present conflict:
The combination of Vladimir Putin’s reforms and the dizzying rise in the price of oil and gas have rapidly restored Russia to the status of world power. And Mr. Putin has harnessed that power in the service of aggressive nationalism.
Marshall Goldman, a leading Russia scholar, argues in a recent book that Mr. Putin has established a “petrostate,” in which oil and gas are strategically deployed as punishments, rewards and threats. The author details the lengths to which Mr. Putin has gone to retain control over the delivery of natural gas from Central Asia to the West. A proposed alternative pipeline would skirt Russia and run through Georgia, as an oil pipeline now does. “If Georgia collapses in turmoil,” Mr. Goldman notes, “investors will not put up the money for a bypass pipeline.” And so, he concludes, Mr. Putin has done his best to destabilize the Saakashvili regime.
(snip)
Russia threatens Georgia, but Georgia threatens Abkhazia and South Ossetia. Russia looks like a crocodile to Georgia, but Georgia looks to Russia like the cats’ paw of the West. One party has all the hard power it could want, the other all the soft. And now, while the world was looking elsewhere, the frozen conflict between them has thawed and cracked. It will take a great deal of care and attention even to put things back to where they were before.
Marshall Goldman, a leading Russia scholar, argues in a recent book that Mr. Putin has established a “petrostate,” in which oil and gas are strategically deployed as punishments, rewards and threats. The author details the lengths to which Mr. Putin has gone to retain control over the delivery of natural gas from Central Asia to the West. A proposed alternative pipeline would skirt Russia and run through Georgia, as an oil pipeline now does. “If Georgia collapses in turmoil,” Mr. Goldman notes, “investors will not put up the money for a bypass pipeline.” And so, he concludes, Mr. Putin has done his best to destabilize the Saakashvili regime.
(snip)
Russia threatens Georgia, but Georgia threatens Abkhazia and South Ossetia. Russia looks like a crocodile to Georgia, but Georgia looks to Russia like the cats’ paw of the West. One party has all the hard power it could want, the other all the soft. And now, while the world was looking elsewhere, the frozen conflict between them has thawed and cracked. It will take a great deal of care and attention even to put things back to where they were before.
Traub, in a characterization troubling to many realists, including The American Conservative’s Daniel Larison, seems to validate the viewpoint that Russia (read: ex-KGB official and current Prime Minister Vladimir Putin) and Russia alone is stuck in a Cold War mindset.
Putin has responded to US efforts to establish a missile-defense presence in the Czech Republic, on his doorstep; the former president (it was Putin, however, who left Beijing for the Russian military’s staging ground for its current operations, not current President Dmitry Medvedev) warned, in stark terms, of Russia’s concern about the eastward creep of the North Atlantic Treaty Organization (NATO); and NATO remains a military alliance, despite the fact that its raison d’etre–the Union of Soviet Socialist Republics–no longer exists.
Here’s Larison:
The thing that I find most frustrating, and what I think Russians may also find very frustrating, is that even after years of long Russian forebearance in the face of things Moscow regarded as serious provocations and humiliations Russia has continually been portrayed as an expansionist, revisionist and (in McCain’s crazy world) “revanchist.” Many American pols were taking this view of Russia when it was quite weak, c. 1999, and you have them taking it up now that Russia is resurgent, and at neither time was it the correct view.
Traub buys into the view that recent events have made it harder to advance a realist view of Russia:
Traub buys into the view that recent events have made it harder to advance a realist view of Russia:
In a recent essay, the archrealist Henry Kissinger argued that Putin-era policy had been driven not by dreams of restored glory, but by “a quest for a reliable strategic partner, with America being the preferred choice.” Some Russia experts on the left, like Stephen Cohen of Princeton, have taken a similar view. But Russia’s bellicose behavior, and now the hostilities along its border, make it increasingly difficult to act on such a premise without seeming naïve.
On this point, however, Kissinger and Cohen are right. One of the impediments to building such a partnership between Washington and Moscow is the assumption that Moscow is a revisionist power that must be thwarted at every step. The other obvious impediments are the steady eastward creep of NATO and the introduction of U.S. weapons systems into current central European member states. Depressingly, some of the foreign policy advisors to the candidates don’t seem to understand this at all. Just as worrying as Kagan’s misleading democracy/autocracy struggle model are the views of one of Obama’s Russia advisors, Michael McFaul:
He attributes Russia’s hostility to further NATO expansion less to geostrategic calculations than to what he says is Mr. Putin’s cold war mentality. The essential Russian calculus, he says, is, “Anything we can do to weaken the U.S. is good for Russia.”
There’s that Cold War mentality again.
Anatol Lieven, professor in the department of war studies at King’s College London, cuts to the heart of the matter in The Times of London:
Many factors are involved in the present conflict but the central one is straightforward: the majority of the Ossetes living south of the main Caucasus range in Georgia wish to unite with the Ossetes living to the north, in an autonomous republic of the Russian Federation; and the Georgians, regarding South Ossetia as both a legal and an historic part of their national territory, refuse to accept this.
(snip)
Russia’s policy is driven by a mixture of emotion and calculation. The Russian security establishment likes the Ossetes, who have been Russian allies for more than 250 years. They loathe the Georgians for their anti-Russian nationalism and alliance with the US. For a long time they hoped to use South Ossetia initially to keep Georgia within the Soviet Union and later in a Russian sphere of influence.
That Russian ambition has been abandoned largely in the face of the Georgians’ determination to escape from this influence.
What remains is an absolute determination not to be defeated by Georgia and not to suffer the humiliation of having to abandon Russia’s South Ossete client state, with everything that this would mean for Russian prestige in other areas. Vladimir Putin’s Kremlin made it clear again and again that if Georgia attacked South Ossetia, Russia would fight. Georgian advocates in the West claimed that Moscow was only bluffing. It wasn’t.
(snip)
Russia’s policy is driven by a mixture of emotion and calculation. The Russian security establishment likes the Ossetes, who have been Russian allies for more than 250 years. They loathe the Georgians for their anti-Russian nationalism and alliance with the US. For a long time they hoped to use South Ossetia initially to keep Georgia within the Soviet Union and later in a Russian sphere of influence.
That Russian ambition has been abandoned largely in the face of the Georgians’ determination to escape from this influence.
What remains is an absolute determination not to be defeated by Georgia and not to suffer the humiliation of having to abandon Russia’s South Ossete client state, with everything that this would mean for Russian prestige in other areas. Vladimir Putin’s Kremlin made it clear again and again that if Georgia attacked South Ossetia, Russia would fight. Georgian advocates in the West claimed that Moscow was only bluffing. It wasn’t.
The second theme–the international competition for oil and natural gas–is of more practical concern for investors.
Georgian President Mikheil Saakashvili’s decision to send troops into South Ossetia was stupid, rash and probably informed by an assumption that Western backers of a regional democracy would provide substantive support. As well, Medvedev’s assertion that Moscow hopes to restore peace to the region are overly simplistic.
Georgia provides a crucial link of East and West in the global transit of oil and gas. Three major pipelines connecting energy sources in the Caucasus and Central Asia to European markets pass through its territory.
The South Caucasus pipeline, operated by BP (NYSE: BP) and transport of Azerbaijani natural gas through Georgia, has been closed temporarily as of Tuesday morning. The South Caucasus pipeline is also known as (as in the map below) the Baku-Tbilisi-Erzurum pipeline. It carries production from BP’s Shah Deniz natural gas field, daily output from which topped about 14.2 million cubic meters of gas as well as more than 30,000 barrels of condensate at the end of 2007.
Source: Thomas Blomberg, via Wikipedia
The 150,000-barrel-a-day Baku-Supsa oil pipeline operated by the Azerbaijan International Operating Co, whose largest shareholder is BP, was already shut down. The Baku-Tbilisi-Ceyhan pipeline, the second-longest in the world, is already out of action after a fire last week on its Turkish stretch. Kurdish rebels took responsibility for sabotaging the pipeline, which usually provides around 1 million barrels of Caspian crude to international markets.
The South Caucasus pipeline is an important part of the plan for the Nabucco pipeline to Austria, which would deliver natural gas directly to the European Union, bypassing Russia entirely, if built. The Russian government, which controls Gazprom, the world’s largest gas company, wants Europe to forget about Nabucco in favor of its own pipelines. Russia wants Europe’s energy to pass through its borders, not through independent countries.
The US and Canada will conduct a joint expedition to map the western Arctic this fall, an effort announced Monday that has interesting significance in light of Moscow’s current effort to preserve and extend its energy-based resurgence. It’s far too early to contemplate a new Cold War, but the coming days could provide significant clues about where we’ll be in five, 10 or 20 years.
This is a crucial period. Oil is becoming increasingly scarce; transporting natural gas is becoming increasingly critical. We’re about to find out how the West will deal with a re-emerging global power.
Speaking Engagements
Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the presidential election in the seat of the federal government.
Join Neil George, Elliott Gue and me for the DC Money Show Nov. 6-8, 2008, at The Wardman Park Marriott.
Click here or call 800-970-4355 and refer to priority code 011362 to register as my guest.
We also have a special invitation for our readers. KCI Communications, Inc., publisher of Maple Leaf Memo, is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with me and my colleagues Gregg Early, Neil George and Elliott Gue.
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 RoundupConservative Portfolio
AltaGas Income Trust (TSX: ALA.UN, OTC: ATGFF) reported 8.7 percent funds from operations (FFO) growth, as extraction and transmission and power generation results were explosive, offsetting weakness in the smaller energy services operation. Debt-to-capitalization was cut from 45.1 percent in March to just 36.4 percent, and management boosted the distribution by another 2.9 percent.
The trust also raised its monthly cash distribution by 3 percent to 18 cents Canadian a unit effective with the September payment; AltaGas’ annual payout to unitholders is CAD2.16 per unit. Net income rose to CAD32.9 million (49 cents Canadian per unit) from CAD21.1 million (37 cents Canadian per unit) a year ago. Revenue increased to CAD487.1 million from CAD341.8 million, reflecting the January acquisition of Taylor NGL LP.
All in all, it was confirmation of both the trust’s conservative growth strategy and the underlying strength of energy infrastructure trusts. Buy AltaGas Income Trust up to USD28 if you haven’t already.
Bell Aliant Regional Communications Income Fund (TSX: BA.UN, OTC: BLIAF) reported a line-loss rate 8.5 percent lower than in the first quarter of 2008, 6.8 percent below the year-earlier quarter and less than half the losses from the fourth quarter of 2007. Those losses were more than offset by customer gains for higher margin wireless and Internet service.
Wireless turnover, or “churn,” fell to just 1.1 percent, down from 1.7 percent for the full-year 2007. High-speed Internet customer rolls are up 13.1 percent year-over-year. The rate of growth tapered off a bit in the second quarter, but revenue per customer moved higher for the fourth consecutive quarter. And with the company’s accelerated deployment of fiber-optic connections, its network is capable of offering more data and entertainment services than ever.
Overall revenue growth accelerated from 1.1 percent in the first quarter to 2.4 percent in the second quarter. Meanwhile, distributable cash flow per share rose 16 percent over year-earlier totals. Year to date, the payout ratio stands at 84 percent of distributable cash flow after capital expenditures, well below last year’s 93.1 percent. That leaves room for continued modest dividend growth, with the next bump likely coming in late 2008 or early 2009.
Finances are very solid, with cash flow covering interest expense by a 7.5-to-1 margin and the balance sheet drawing midlevel investment-grade ratings from Standard & Poor’s and Dominion Bond Rating Service (DBRS). Bell Aliant Regional Communications Income Fund is a buy up to USD32.
Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) reported strong US growth that helped offset flat results in Canada. Distributable cash after all marketing expenses increased 13 percent to CAD30.3 million (27 cents Canadian per unit) from CAD26.7 million (25 cents Canadian per unit) a year ago. Sales in the US rose 55 percent to CAD87.6 million, while Canadian sales slackened 2 percent to CAD290.3 million.
Net income rose 32 percent from CAD25.9 million (24 cents Canadian per unit) to CAD34.2 million (31 cents Canadian per unit). Coupled with cost cuts and a reduction of bad debt expense, the payout ratio actually fell from last year’s level and the seasonally weak quarter, and management expects further improvement. Energy Savings Income Fund is still a buy for those who don’t own it up to USD18.
Northern Property REIT (TSX: NPR.UN, OTC: NPRUF) reported distributable income per unit of 52 cents Canadian, up 13 percent from 46 cents Canadian a year ago, while FFO per unit rose 10 percent. Acquisitions completed during the second half of 2007 and in the first quarter of 2008 drove rental revenue growth in both residential (19.2 percent) and commercial (138 percent) segments. Northern Property paid out 72 percent of distributable income to unitholders. Steady, stable Northern Property REIT is a buy up to USD25.
TransForce (TSX: TFI, OTC: TFIFF) revenue surged 20 percent, triggering an 18 percent jump in operating cash flow and an 11 percent increase in after-tax earnings, not including costs related to the conversion to a corporation and the termination of an incentive plan. TransForce’s payout is well protected by earnings (29.4 percent second quarter payout ratio), which affords it ample cash to fund its growth effectively without piling on debt.
And the yield of nearly 5 percent is well above that of any comparable transportation corporation. The bottom line is TransForce remains an attractive holding for long-term growth and generous income. TransForce is a buy up to USD9.
Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF) posted a 9.1 percent boost in distributable cash flow per share, triggering a 3.6 percent dividend boost. Online revenue grew 44 percent to 14.3 percent of overall sales, a clear sign this directory trust is dodging the fate of US rivals. Buy Yellow Pages Income Fund up to USD14.
Aggressive Portfolio
Daylight Resources Trust’s (TSX: DAY.UN, OTC: DAYYF) payout ratio plunged to just 32 percent, as FFO more than doubled from year-earlier levels and rose 31 percent from first quarter 2008 FFO. Net debt was cut to just 1.1 times cash flow, and management projects internally generated resources would cover the entire 2008 capital spending program of CAD140 million as well as the payout.
Something to bear in mind for Daylight, and for all energy trusts, is that second quarter realized prices uniformly outstrip the current spot prices for crude and natural gas, a difference that would obviously widen if commodities continue to slide. Effective hedging and low payout ratios, however, will mitigate the threat to distributions. Daylight Resources Trust, fresh off a 30 percent distribution increase, is a buy up to USD13.
Newalta Income Fund (TSX: NAL.UN, OTC: NALUF) reported 67 percent growth in second quarter FFO, good enough to bring its payout ratio down to 84 percent. The western division reported an 11 percent increase in revenue to CAD83.5 million, boosted by strong oil prices and increased waste receipts from oil sands customers. The eastern division reported a 64 percent revenue increase to CAD59.4 million, built largely on acquisitions completed during the second half of 2007.
Net income surged 76 percent to CAD11.8 million (28 cents Canadian per unit) from CAD6.7 million (16 cents Canadian per unit) a year ago. Expenses as a percentage of revenue also came down during the period.
Management hasn’t yet said what it will do with the now 12 percent-plus yield as 2011 trust taxation nears. But with its underlying business stronger and more resilient than ever, it’s hard to see it not commanding more than its current multiple of 1.5 book value and annual sales. Newalta Income Fund remains a buy up to USD25.
Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) reported second quarter FFO of CAD81.4 million (73 cents Canadian per unit), compared to CAD72.7 million (81 cents Canadian per unit) a year ago.
A 22 percent increase in natural gas production drove Paramount’s operating netback to CAD92.8 million from CAD81 million a year ago, but a steep increase in royalty rate offset that growth; Paramount’s realized gas price significantly exceeded the Alberta gas reference price, so royalties as a percentage of revenue were 5 percentage points lower in the second quarter of 2007 compared to 2008.
Production was up 22 percent compared to year-ago levels, driven mainly by the Birchway acquisition in east central Alberta. The significant increase in natural gas prices during the first half of 2008 resulted in a CAD70.4 million mark-to-market paper loss; Paramount reported a CAD55.7 million net loss for the period. Paramount Energy Trust, which figures to reduce debt significantly over the balance of 2008, remains a buy up to USD10.
Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN), as did its oil- and gas-producing peers, saw enormous gains in realized prices during the second quarter. The trust logged FFO CAD753 million (CAD1.98 per unit) up from CAD326 million (CAD1.35 per unit) a year ago. Revenue for the quarter was CAD1.25 billion, compared to CAD495 million in the second quarter of 2007.
Noncash charges related to oil and gas hedging pulled Penn West to a CAD323 million, but production increases, the impact of acquisitions and rising commodity prices fueled a 130 percent FFO surge. Production averaged 190,515 barrels of oil equivalent a day in the quarter, an increase of 50 percent from 126,599 a year earlier. Buy Penn West Energy Trust up to USD36.
Provident Energy Trust (NYSE: PVX, TSX: PVE.UN) reported second quarter FFO of CAD241.5 million (95 cents Canadian per unit), up from CAD98.5 million (45 cents Canadian per unit) a year ago. The trust paid out 43 percent of FFO in distributions, down from 85 percent in the second quarter of 2007. Provident reported a CAD382.8 million increase in unrealized hedging losses, leading to a CAD184.1 net loss for the quarter.
Net debt to annualized second quarter FFO stood at 1.4 times, down from 3.3 times a year ago, reflecting a decrease in net debt and higher funds flow. Production from the Canadian Oil and Gas business unit averaged approximately 28,000 barrels of oil equivalent per day (boe/d) in the second quarter, increasing 9 percent from 25,700 boe/d in the second quarter of 2007.
FFO in Provident’s Canadian segment rose to CAD113 million, up 117 percent from CAD52 million, while the midstream delivered earnings before interest, taxes, depreciation and amortization (EBTDA) of CAD62 million, up 72 percent from CAD36 million in the second quarter of 2007. Buy Provident Energy Trust up to USD14.
Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF) is using the good fortune born of high commodity prices to pay down debt, position itself to make accretive acquisitions and solidify its distribution for sustainable growth long into the future. Second quarter FFO more than doubled to CAD190.3 million (CAD2.50 per unit) from CAD85.1 million (CAD1.18). The trust distributed 57 cents Canadian per unit for a payout ratio of just 21 percent.
At its current pace, Vermilion could be debt-free by the end of the year: The trust reduced total net debt during the second quarter by 32 percent from Dec. 31, 2007, levels. Vermilion can further strengthen its balance sheet, or it can fund an acquisition without equity. Vermilion Energy Trust is a buy up to USD40.
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