The decline of the Australian dollar has exacerbated a selloff for the S&P/ASX 200 Index since a May 14, 2013, post-GFC peak of 5220.987 to 4655.960 on June 25.

In Australian dollar terms that’s a decline of 10.46 percent, including dividends. In US dollar terms, including dividends, the decline is 16.24 percent. The S&P/ASX 200 has actually recovered off that recent low, closing at 4965.700 on Thursday, July 11.

“The Aussie, the Buck and Share Prices” illustrates the impact of a declining Australian dollar on the US-dollar value of Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY).

The top part of the graphic is Oil Search’s one-year performance on the Australian Securities Exchange (ASX) in Australian dollar terms. The bottom part is the Aggressive Holding’s one-year performance on the ASX translated to US dollar terms.

It’s the same company, with the same great underlying assets and the same solid operating performance. But the image produced by converting from the home currency to the currency of most AE readers is significantly different.

From July 9, 2012, through July 9, 2013, Oil Search generated a total return of 25.06 percent in Australian dollar terms. From July 9, 2012, through July 9, 2013, it generated a total return of 12.62 percent in US dollar terms.

The road back for the aussie versus the buck probably won’t be as quick as the one that’s caused a virtual halving of total returns for US investors who own Oil Search–at the end of April the Australian dollar was still worth USD1.0371; by early July it was down to USD0.9067.

But long-term fundamentals, including solid government finances and geographic fortune that places it in the sweet spot of global economic growth, argue well for its rise from these oversold levels.

Oil Search too provides a good example of the types of companies we like to focus on in AE as well as in Canadian Edge and Utility Forecaster–that is, well-run businesses with solid underlying assets that generate sustainable cash flows.

Oil Search is set for a game-changing boost to its production once the Papua New Guinea Liquefied Natural Gas (PNG LNG) project comes online in 2014. But it’s also posting solid drilling results elsewhere in Papua New Guinea that should support expansion of PNG LNG.

And results from its exploration activities in Iraq, Yemen and Tunisia suggest growth will continue beyond the ramp-up of PNG LNG.

We’ve had some missteps in recent months. We unloaded Iluka Resources Ltd (ASX: ILU, OTC: ILKAF, ADR: ILKAY) and Grange Resources Ltd (ASX: GRR, OTC: GRRLF) and Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY) too late but before those stocks hit their ultimate lows.

And we’re involved with four other companies–Aggressive Holdings Ausdrill Ltd (ASX: ASL, OTC: AUSDF) and WorleyParsons Ltd (ASX: WOR, OTC: WOPEF, ADR: WOPEY) and Conservative Holdings Cardno Ltd (ASX: CDD, OTC: COLDF) and SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–whose management teams will have to prove their reliability come August’s fiscal 2013 reporting season.

All four have lowered earnings forecasts. All four have suffered significant share-price declines.

A couple may announce lower dividends, in part because Australian companies pay a fixed percentage a within a percentage range of earnings but ultimately because operating conditions were worse than they were during the prior corresponding period.

We have more on Ausdrill and SMS below. And we’ll note that WorleyParsons continues to win contracts with solid counterparties for work on significant energy and resources projects around the world and that Cardno’s share price has bounced from AUD4.82 on June 13 to AUD5.36 as of this writing.

WorleyParsons is a bigger, more entrenched entity. But Cardno is demonstrating that it too has the makings of a world-class engineering consulting firm. Of course, what happens in August will be dispositive, despite our optimistic-by-nature mindset, obviously evident here.

Those Iluka, Grange and Newcrest experiences have seared some of that optimism, however, and it serves you little if I can’t place cold, steely eyes on companies, their operations and their finances and cut the cord when necessary.

Of course we want a Portfolio full of Oil Searches and July Sector Spotlight Telstra Corps (ASX: TLS, OTC: TTRAF, ADR: TLSYY) and fellow July Sector Spotlight Australia & New Zealand Banking Groups (ASX: ANZ, OTC: ANEWF, ADR: ANZBY).

Oil Search, by the way, remains a strong buy under USD8.

But part of achieving any sort of long-term success in this business of investing is acknowledging that mistakes will be made. The key is to limit their impact. And that means–to paraphrase the late, great Coach John Wooden–we must be quick but not hurry to admit them and move on.

Here’s what’s happening around the AE Portfolio in early days of fiscal 2014 for many of our Holdings and dog days of 2013 for others.

Earnings reporting season will kick off later this month with Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF) posting results for the first half of calendar 2013 on July 24.

Transurban Group (ASX: TCL, OTC: TRAUF) will follow on July 31 with its numbers for fiscal 2013.

We will also have heard from Telstra, Rio Tinto Ltd (ASX: RIO, NYSE: RIO) and WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) in time for the August issue of Australian Edge, which will be published on Aug. 16, 2013.

Other Holdings may have reported by then as well, but their announcement dates are at this juncture still unconfirmed.

Aggressive Update

Ausdrill Ltd (ASX: ASL, OTC: AUSDF) has offered no further public commentary since reiterating the reduced fiscal 2013 earnings guidance it announced in mid-April. Since the downgrade the mining services firm’s share price has crashed from AUD2.43 to as low as AUD0.79 on July 1.

As we noted in last month’s issue, management reiterated that fiscal 2013 net profit after tax (NPAT) will come in between AUD90 million to AUD96 million on revenue of AUD1.15 billion to AUD1.17 billion.

The market expects a reduced final dividend from the AUD0.08 the company paid for fiscal 2012. But Ausdrill’s payout ratio for the first half of fiscal 2013 was just 39 percent, and the company has a debt-to-assets ratio of 27 percent. And there are no maturities until 2019. And, as we also noted last month, Ausdrill has never cut its dividend from one corresponding period to the next.

Past performance, of course, doesn’t guarantee the future. And the market would likely react positively to management preserving cash in a time of intense external pressure.

Continuing macroeconomic uncertainty and falling commodity prices have certainly clouded the outlook for revenue and margins for mining services companies in Australia and elsewhere around the world. Ausdrill’s pressure is particularly acute, as a significant portion of its revenue is tied to gold, and gold and gold miners have suffered high-profile declines in recent weeks.

But the company has broadened its production mining services into iron ore via core drill and blast as well as dewatering services.

And it’s possible, however, that scaled-back activity will allow the company to save in other ways, including CAPEX and operating costs, preserving its ability to make cash returns to shareholders.

In light of the significant slowdown in new-build CAPEX projects, the lifeblood of contractors will be the recurring elements of their operations. Ausdrill’s exposure to mining production–which accounts for 68 percent of revenue–as opposed to exploration and other operations and maintenance businesses that are suffering as miners put off non-essential spending sets it apart.

And it has a good balance sheet. That should help it navigate this difficult environment for mining services contractors.

Ausdrill’s share price on the Australian Securities Exchange has rebounded from a four-year closing low of AUD0.79 on July 1 to AUD0.95 on July 11. It went from AUD0.85 to AUD0.95 the day after Federal Reserve Chairman Ben Bernanke said that whether the US central bank’s bond-buying program scales back or not accommodative monetary policy is here to stay for the foreseeable future.

That’s still well below where it was when we recommended the stock in the March 2013 AE; we’re sitting on a greater than 70 percent loss in US dollar terms.

But for aggressive investors Ausdrill–which is yielding 15.3 percent at these levels–is a solid bet on continuing monetary stimulus under USD2.

Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY) also generates significant revenue from mining services, and it also has a growing iron ore production component. Its share price has held up better than Ausdrill’s, with which it shares in common favorable exposure to production.

In fact its two core Mining Services & Processing assets offer investors some of the best exposures among Australian mining services contractors. Crushing Services International (CSI) is integral to the delivery of iron ore for its customers, while Process Minerals International (PMI) owns valuable export capacity in West Australia.

That’s not to say Mineral Resources is immune. Although CSI’s and PMI’s operating histories and strong relationships with major iron ore producers are definite positives, broader market pressures on costs will be felt by all contractors. And this increases competitive tension for available construction work as well as mine support services.

Its direct ownership of iron ore tenements in the Pilbara and Yilgarn regions of West Australia exposes Mineral Resources to operational risks from mining deposits that produce ore at below the international benchmark.

It will also have to compete with increased production from the major Pilbara iron ore producers–including BHP Billiton Ltd (ASX: BHP, NYSE: BHP) and Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–and  secure additional port capacity as its properties ramp up output.

Management has actually indicated that the iron ore assets will likely to be divested, as Mineral Resources’ focus remains on providing services to the industry. Any sale process likely awaits a recovery in iron ore prices.

But this is a solid company that generates cash flow from essential mining services. Mineral Resources, which has never cut its dividend and is currently yielding 5.3 percent, is a buy under USD10.

GrainCorp Ltd’s (ASX: GNC, OTC: GRCLF) AUD3.4 billion takeover by Archer Daniels Midland Co (NYSE: ADM) was approved by the Australian Competition and Consumer Commission (ACCC) on June 27, 2013, satisfying the final condition of the offer terms.

An independent expert had previously determined that ADM’s AUD13.20 per share offer fell within an estimated valuation range of AUD12.74 to AUD13.97 per share.

ACCC chairman Rod Sims said the consumer watchdog did not believe the acquisition would substantially lessen competition because the new entity would continue to face competition from various sources.

It still needs approval from Australia’s Foreign Investment Review Board (FIRB) as well as foreign regulatory authorities in Canada, China, the European Union, Japan, South Africa and South Korea.

The New South Wales Farmers’ Association won’t support the deal until a mandatory code ensuring that growers have access to ports and infrastructure is extended. The group is pressuring Australian Treasurer Chris Bowen to delay a decision by the FIRB. The deal is opposed by some members of Parliament, suffering some criticism by National Party MPs.

Liberal Party Senator Bill Heffernan said that “a large wheat buyer” was concerned that the deal had potential for intimidation.

These concerns are unlikely to derail the deal. GrainCorp remains a hold pending the consummation of the takeover by ADM.

Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) announced the acquisition of Eraring Energy, with installed capacity of 3,160 megawatts, from the New South Wales government for a net payment of AUD50 million.

Origin has also agreed to terms for the cancellation of the Cobbora coal supply agreement, which will result in a payment to the company of AUD300 million.

In a related transaction, Origin has entered into a coal supply agreement with Centennial Coal for the provision of 24.5 million metric ton of coal over an eight-year period from fiscal 2015 for use at the Eraring Power Station.

Back in March 2011 Origin signed a “GenTrader” contract with then state-owned Eraring Energy, which included the right to dispatch and sell electricity output from the Eraring Power Station and the Shoalhaven Scheme.

At that time Origin also entered into an arrangement with the state-owned Cobbora Coal Mine Ltd, which included the supply of up to 5 million metric tons of coal per year from fiscal 2015 through fiscal 2013 from the undeveloped Cobbora coal project.

Management characterized the Eraring Power Station and the Shoalhaven Scheme as “high-quality generation assets;” their combined total generation capacity represents 6 percent of National Electricity Market capacity.

Eraring Power Station is one of the most efficient and lowest carbon intensity coal-fired power stations in New South Wales, while the Shoalhaven Scheme uses pump hydro technology to generate electricity during periods of peak demand.

The two assets will complement Origin’s existing NSW generation assets, including the gas-fired Uranquinty Power Station and the Cullerin Range Wind Farm. The net payment of AUD50 reflects the benefit of the additional flexibility and efficiency that ownership provides after taking into consideration the loss of potential liquidated damages available under the GenTrader arrangement with the NSW government.

The acquisition of Eraring Energy is a natural move given the existing GenTrader (a contract between a power station owner and a generation trader) relationship. The implied total purchase price is expected to be AUD659 million at completion.

The overall deal value includes the AUD50 million cash payment, with the remainder funded from the AUD609 million that Origin Energy paid to the NSW government for Eraring’s power under the GenTrader deal.

The Cobbora payment represents compensation to Origin for the expected difference between the price of the Cobbora contract and the market price of coal from fiscal 2023. The Centennial contract terms are broadly in line with the Cobbora terms.

Cancellation of the rights under the Cobbora arrangements and commencement of the supply agreement with Centennial Coal are both conditional on successful completion of the acquisition of Eraring Energy, which is expected in the next month or so.

Origin is essentially realizing a net cash payment of AUD250 million from the transactions. Overall it’s a solid deal for the company. Origin Energy remains a buy under USD15.

Spark Infrastructure Group’s (ASX: SKI, OTC: SFDPF) 49 percent owned Powercor Australia unit had its credit rating downgraded from A3 to Baa1, with a “negative” outlook, by Moody’s on June 17.

Spark management said in a statement that it remains “comfortable” with the outlook for Powercor, which distributes electricity in western Victoria and throughout the suburbs of western and southern Melbourne and is part of the Victoria Power Networks holding company.

In its announcement of the downgrade Moody’s cited a number of industry-wide and company-specific factors that could impact earnings and financial metrics in the future.

The credit rater expects Powercor to maintain a robust operational and financial profile. But it’s concerned about ongoing Australian Tax Office audits of Victoria Power Networks and expected changes to the Australian regulatory regime.

Powercor is in the middle of its five year regulatory period, with no regulatory reset until Jan. 1, 2016, which builds in considerable regulatory certainty as well as clearly visible revenues within this timeframe. The applicable 2010 decision by the Australian Energy Regulator (AER) provides for strong growth in the regulatory asset base (RAB) based on increased capital expenditure.

Powercor has consistently funded this growth from operational cash flows, while at the same time lowering its overall gearing, as measured by net debt-to-RAB.

Moreover, Powercor’s success in a number of appeals against aspects of the 2010 regulatory decision has added significantly to its expected revenues, with recovery of these cash flows having commenced from Jan. 1, 2013. The second half of the regulatory period will therefore see increasing regulated cash flows for Powercor from the approved real tariff increases. And this should bolster Powercor’s credit metrics.

Moody’s rates Spark Infrastructure Baa1 with a “stable” outlook. S&P rates SA Power, CitiPower and Powercor A- with “stable” outlooks.

Management noted that Spark Infrastructure’s previous distribution guidance–AUD0.105 per share–is unchanged. The company will report results for the first half of calendar 2013 on or about Aug. 27.

Spark’s share price has responded positively in the aftermath of the mid-June downgrade, rising from AUD1.65 on June 17 to AUD1.78 (approximately USD1.63) as of July 11. Spark Infrastructure, which is yielding 5.9 percent at these levels, is a buy under USD1.80.

Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY) announced on July 3 a downward revision to its 2013 production target to 85 to 89 million barrels of oil equivalent (MMboe) from a prior range of 88 to 94 MMboe.

Management attributed the reduction in its guidance to a temporary interruption to production from the Pluto LNG project due to an unplanned shutdown of the processing train and the extension of scheduled refurbishment work at the Vincent floating production storage and offloading vessel beyond the original timeframe.

Output from AUD15 billion Pluto LNG project will take a 2 MMboe “deferral”–it’s not as serious as an outright loss of production, and it’s capable of being recovered once technical issues are resolved–but should be back up to full speed “shortly.”

Management will provide an update on the shutdown on July 18 along with its production report for the second quarter.

Production at the Vincent floating facility, meanwhile, is now anticipated to recommence in October 2013, which would result in a deferral of approximately 1 MMboe.

Woodside’s share price suffered a temporary down-blip on the ASX but its recovery off a June 25 near-term low of AUD33.74 continues; the stock last changed hands at AUD37.32 on July 11. Management’s plan to significantly ramp up its dividend remains on track.

The Pluto interruption–the first blot on what had been a record of expectations exceeded–is non-recurring.

According to management the production downgrade is attributable to moisture in the gas stream. The issue has been identified, and the processing train could return to service this month. There are reportedly no design or safety issues that led to the problem, and Woodside doesn’t anticipate it cropping up again.

Woodside Petroleum remains a buy under USD42.

Conservative Update

Aberdeen Asia-Pacific Income Fund (NYSE: FAX) has taken a sharp below due to the Australian dollar’s steep decline–the steepest since the Great Financial Crisis–against the US dollar.

Aberdeen Asia-Pacific is a closed-end fund that holds Australian as well as Asian–developed and developing–debt.

Australian government and corporate bonds account for 42 percent of the fund’s holdings.

South Korea is the No. 2 market in terms of geographic exposure with 11 percent of assets, followed by Malaysia and the Philippines (6.9 percent each), Indonesia (6.7 percent), China (5.5 percent), Hong Kong (5 percent), Thailand (4.6 percent), India (4.3 percent) and Singapore (2.8 percent). These countries, along with Australia, account for 95.7 percent of the fund’s geographic exposure.

The fund’s currency exposure is primarily to the Australian dollar at 44.5 percent, while the US dollar accounts for 38 percent due to the fact that 35.6 percent of holdings comprise US dollar denominated bonds issued by foreign issuers.

The Chinese yuan accounts for 5 percent of currency exposure, the Malaysian ringgit 2.4 percent, the South Korean won 2.3 percent, the Indonesian rupiah 2.2 percent, the Thai bhat 2 percent, the Indian rupee 1.3 percent, the Singaporean dollar 1.1 percent, the Philippine peso 0.7 percent, the Hong Kong dollar 0.3 percent and the New Zealand dollar 0.2 percent.

The fund’s returns are denominated in US dollars. Performance is affected by how the US dollar fares against these currencies, though it is highly correlated with the Australian dollar’s movements against the buck.

As such its decline from USD7.76 in late April to a 52-week low of USD6 on July 5 mirrors the aussie’s double-digit slide over the past two-plus months.

We remain of the mind that the fundamental strengths as well as the strong fiscal positions of Australian state and federal governments will attract investors over time, particularly with the Fed’s continuing commitment to accommodative monetary policy.

Australia’s proximity to high-growth Asian economies ensures it will have markets for its ample stores of iron ore, coal, natural gas and other resources for decades to come.

Australia remains a “risk on” play, as its fortunes are clearly tied to global demand growth, particularly from Asia. When prospects are bright and investors are bullish, the Australian dollar rallies. When the mood darkens and money searches for safety, the aussie sells off.

But over the course of the past decade investors–institutions as well as sovereigns–have purchased increasing amounts of Australian-dollar denominated bonds, corporates and governments. This diversification has come at the expense of developed-world currencies such as the US dollar, the British pound, the euro and the Japanese yen.

Aberdeen Asia-Pacific Income Fund is a great way to play a rebound from oversold levels for the Australian dollar up to USD9.

SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF, ADR: SMSUY) has enjoyed a solid rally since the June issue of AE went to press, rising from four-year lows around AUD4.35 to AUD5.19 as of July 11.

And management continues to take steps to grow the business, despite broader economic headwinds impacting activity with mining and resource focused companies as well as financial and information and communications technology firms and government entities.

SMS announced on July 1 the AUD22 million acquisition of the Indicium and Access Networks group of entities (collectively “Indicium”). The AUD22 million includes an upfront payment and two deferred payments conditional on profit performance over a two-year period.

The upfront payment, as is SMS’ practice, will be a combination of cash and shares.

Indicium provides vendor-independent information technology (IT) infrastructure and managed services, including consulting, design, onboarding, management and service desk services, under its trademarked “Breathe Easy” range of solutions. “Breathe Easy” comprises two core offerings, business cloud and infrastructure management.

SMS management expects Indicium to afford it access to a high-growth sector of IT, a key plank in the development of the acquirer’s long-term market positioning. The target operates under annuity-like contracts with typical fixed terms of between three and five years. Its proven and mature capabilities will slide right into SMS’ Managed Services and Infrastructure Consulting unit.

Indicium generates annualized revenue of approximately AUD20 million, and SMS management expects the deal to be accretive to earnings per share in fiscal 2014. SMS Management & Technology, currently yielding 5.9 percent, is a buy under USD6.50.

Numbers to Come

Here’s when AE Portfolio Holdings will report their next sets of financial and operating numbers. Some have “confirmed” dates, while for others we’ve provided an “estimate.”

For most this will cover the full fiscal year ending June 30, 2013. We’ve noted for others that report on a different schedule the period to which the announcement pertains.

Conservative Holdings

• Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 28, 2013 (confirmed)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 21, 2013 (confirmed)
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–July 24, 2013 (2013 H1, confirmed)
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Aug. 16, 2013 (FY 2013 Q3 trading update, confirmed)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 14, 2013 (estimate)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 21, 2013 (estimate)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 22, 2013 (confirmed)
• GPT Group (ASX: GPT, OTC: GPTGF)–Aug. 13, 2013 (2013 H1, estimate)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 26, 2013 (confirmed)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Aug. 23, 2013 (estimate)
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Aug. 15, 2013 (estimate)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 8, 2013 (confirmed)
• Transurban Group (ASX: TCL, OTC: TRAUF)–July 31, 2013 (confirmed)
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Aug. 16, 2013 (estimate)

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Aug. 23, 2013 (estimate)
• Ausdrill Ltd (ASX: ASL, OTC: AUSDF)–Aug. 29, 2013 (estimate)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 20, 2013 (confirmed)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–Nov. 15, 2013 2013 (FY 2013, estimate)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 16, 2013 (estimate)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Aug. 20, 2013 (2013 H1, confirmed)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 22, 2013 (confirmed)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 8, 2013 (2013 H1, confirmed)
• Spark Infrastructure Group (ASX: SKI, OTC: SFDPF)–Aug. 27, 2013 (2013 H1, estimate)
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–Aug. 21, 2013 (2013 H1, confirmed)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 14, 2013 (confirmed)