Huronia 3 and 4 are included as earlier blogs on Workathon.Huronia 1,2,and 3, are consulting pieces on possible improvements to Midland.Huronia 4,5 and 6 are blogs on improvements to Wasaga Beach.Huronia 4 is also included in an earlier blog on Workathon.Huronia 5 is one of my blogs on Wordpress called Econothon.Here is Huronia 6, also a piece on Wasaga Beach.
Huronia 5
The basis of Huronia 5 is that there are a number of things that the town council can do to improve business coming into Wasaga.The town council can do a number of things easily and cheaply to increase traffic into Wasaga Beach and keep visitors longer.This includes programs to encourage restaurants on Mosley Street(the main street) to reduce prices and try to increase the number of visitors.Also to buy up abandoned properties on the main street and use them for community businesses such as thrift shops or even a drop-in centre.This will require little expenditure and little change to the structure of Wasaga Beach.
Bigger changes The changes mentioned in Huronia 5 will not have a big impact.Wasaga Beach has a population of 17,000
according to the census figures but the town sign says it has a population of 18,000. Both are the peak population and do not reflect the population in the winter.It is somewhat comparable to another town further along the beach called Port Elgin.Port Elgin is on Lake Huron and is built along the beach.It has a population of only 10,000 to 11,000 but is within 3 to 4 kilometres of another town called Southampton.Their total population is about 18,000.It's main street is very similar to Wasaga as both have empty lots and houses and cottages on their main street.But I believe that Port Elgin has more new construction;it has a new Walmart,Canadian Tire and two or three new subdivisions, all in the east end.Both towns have a steady base of population from campers.Camping facilities are excellent in both towns.
Both have small libraries as only a small percentage of the population use it. But Wasaga definitely has more motels -both low-priced and higher-priced motels.Port Elgin has more cottages for rent and generally visitors stay longer in cottages than in motels.Port Elgin has the headquarters for two small bus companies and they have maintenance facilities for the buses here also.Also their bus terminal is a little bigger as it connects to more towns than Wasaga Beach.Both Port Elgin and Wasaga Beach have a few higher-priced motels for high end visitors.But neither really counts on getting much traffic here.In summary, their structure is similar.
A new platform
Small towns need some kind of platform to jump from a small town to a mid-sized town, for example,a town like Hanover or Peterboro.Unless a town has a very special situation such as an industry or a software company that is in town the usual platform to growth is agricultural or lumber processing.First the town must have successful farming or forestry around the town.The processing would be done inside the town.Examples abound, for example, Creemore has a brewery,Bobcaygeon has a milk factory,Owen Sound has grain milling and other towns have small lumber milling plants.Hanover has a small grain milling operation as well as a meat processing plant.These plants cannot compete with multi-national plants but they will satisfy the region and have fresher products.Here is the most popular way for small towns to jump to the next level. But it is far from easy to do.Both Port Elgin and Wasaga Beach need a big investor and some kind of guarantee of low wages (at least for the initial period).And they need some people with special skills.
Sunday 28 December 2014
Monday 22 December 2014
Measuring the performance of a stock
There are three or four performance measurement indicators for a stock.They can be used to tell if a stock is doing better or worse?The three main indicators are the earnings per share(e.p.s.) and the price/earnings ratio(p/e) and the yield or dividend per share.But all three depend on the earnings per share.Movement in the e.p.s affect the other two.This is the key measurement tool to determine how well a stock is doing.
EBITDA versus funds flow
The two main indicators of earnings performance are EBITDA and funds flow.The difference between the two is that EBITDA is earnings before interest, taxes and depreciation and amortization.Funds flow is EBITDA after (ITD and A) which are non-cash items have been removed from earnings.But these four items are not directly related to performance.Both amortization and depreciation are arbitrary expenditures.There is a lot of scope in the amount taken each year or quarter.The amount taken is affected by the value of the asset and the value of the equipment being depreciated.Resources with a long life such as oil pools and mines and industrial equipment can be depreciated at a slower rate.Other assets with a short life should be depreciated more quickly or at a larger rate each year.In addition, an asset with a big value such as an oil pool worth $10 billion will still have a large depreciation charge even if the rate is only 2 or 3% a year.So the amount of the depreciation charge has little to do with the earnings or the performance of the stock.
The second indicator of earnings per share is the funds flow method.This is EBITDA after all charges have been taken( both cash and non-cash items).This is the amount available to shareholders, chiefly for dividends and capital expenditures.But also to preferred shares and to some debt charges.
How do REITs do it
REITs and real estate companies have come up with another perfmorance indicator;it is called adjusted funds flow from operations(AFFO).This indicator starts with funds flow and makes some adjustments,chiefly foreign exchange gains or losses and financial charges.REITs typically take large depreciation and amortization charges.So typically AFFO per share is substantially less than FFO per share.This is a figure that is usually used as e.p.s for REITs.They do not use adjusted EBITDA per share as an earnings measurement.But other than the large depreciation and amortization charges, the main difference between AFFO and adjusted EBITDA per share is the taxes.It is good to remember that adjusted EBITDA per share will always be larger than AFFO per share. AFFO has deductions for foreign exchange losses and financing charges.But in a case where taxes have been deferred as in some utility stocks, taxes will not be significant either.But the amount of the depreciation and amortization charges will always make AFFO and adjusted EBITDA different.And almost always AFFO will be smaller.
Funds flow is still Useful
Some companies will use funds flow as their measure of e.p.s.But it is less useful in comparing to many other companies.Canadian companies like to use adjusted EBITDA per share.Yet funds flow still has it's uses.It is more useful to look at debt and interest coverage.Funds flow is the amount of money available to pay interest if it were all used for that purpose.It is a measure of protection for debt holders.A standard multiple of debt coverage is 2.5 to 3.5 times funds flow.
Secondary indicators
Once you have a good steady measure of earnings the other two can be derived from there.For example, a p/e ratio of 15 is high and 5 times is fairly low.A yield of 3% is ample and a yield of 7.5% is quite high.However the higher the dividend the greater payout to shareholders of earnings.And if earnings do not increase then the divdend will not likely increase.Both secondary indicators are directly affected by the earnings per share.First the investor must be sure that the right measure of earnings per share has been used.
send emails to daleandmac@gmail.com for financial advice
EBITDA versus funds flow
The two main indicators of earnings performance are EBITDA and funds flow.The difference between the two is that EBITDA is earnings before interest, taxes and depreciation and amortization.Funds flow is EBITDA after (ITD and A) which are non-cash items have been removed from earnings.But these four items are not directly related to performance.Both amortization and depreciation are arbitrary expenditures.There is a lot of scope in the amount taken each year or quarter.The amount taken is affected by the value of the asset and the value of the equipment being depreciated.Resources with a long life such as oil pools and mines and industrial equipment can be depreciated at a slower rate.Other assets with a short life should be depreciated more quickly or at a larger rate each year.In addition, an asset with a big value such as an oil pool worth $10 billion will still have a large depreciation charge even if the rate is only 2 or 3% a year.So the amount of the depreciation charge has little to do with the earnings or the performance of the stock.
The second indicator of earnings per share is the funds flow method.This is EBITDA after all charges have been taken( both cash and non-cash items).This is the amount available to shareholders, chiefly for dividends and capital expenditures.But also to preferred shares and to some debt charges.
How do REITs do it
REITs and real estate companies have come up with another perfmorance indicator;it is called adjusted funds flow from operations(AFFO).This indicator starts with funds flow and makes some adjustments,chiefly foreign exchange gains or losses and financial charges.REITs typically take large depreciation and amortization charges.So typically AFFO per share is substantially less than FFO per share.This is a figure that is usually used as e.p.s for REITs.They do not use adjusted EBITDA per share as an earnings measurement.But other than the large depreciation and amortization charges, the main difference between AFFO and adjusted EBITDA per share is the taxes.It is good to remember that adjusted EBITDA per share will always be larger than AFFO per share. AFFO has deductions for foreign exchange losses and financing charges.But in a case where taxes have been deferred as in some utility stocks, taxes will not be significant either.But the amount of the depreciation and amortization charges will always make AFFO and adjusted EBITDA different.And almost always AFFO will be smaller.
Funds flow is still Useful
Some companies will use funds flow as their measure of e.p.s.But it is less useful in comparing to many other companies.Canadian companies like to use adjusted EBITDA per share.Yet funds flow still has it's uses.It is more useful to look at debt and interest coverage.Funds flow is the amount of money available to pay interest if it were all used for that purpose.It is a measure of protection for debt holders.A standard multiple of debt coverage is 2.5 to 3.5 times funds flow.
Secondary indicators
Once you have a good steady measure of earnings the other two can be derived from there.For example, a p/e ratio of 15 is high and 5 times is fairly low.A yield of 3% is ample and a yield of 7.5% is quite high.However the higher the dividend the greater payout to shareholders of earnings.And if earnings do not increase then the divdend will not likely increase.Both secondary indicators are directly affected by the earnings per share.First the investor must be sure that the right measure of earnings per share has been used.
send emails to daleandmac@gmail.com for financial advice
Tuesday 2 December 2014
The economics of SAGD plants
Alberta and Saskatchewan both have significant light and heavy oil deposits.The economics of each is different;both have several important factors to consider in their production and marketing processes.But at present day prices of heavy and light oil it is still more profitable to go the traditional way with light oil.And the main reason is still the price differential for light oil.
The reserves of heavy oil are massive at 135 billion barrels in Alberta alone.There are two main ways of extraction- mining and the in situ process."In situ" means on site in latin and it is a smaller and less capital intensive process.There are quite a few mining operations ;they belong to bigger operators such as Suncor and Japan Oil and Canadian Oil Sands.Mining operations require a large capital outlay. In situ operations have two well pairs;one is drilled at the bottom of the formation and the second one is above it.They are drilled into central pads and can extend for miles.The SAGD operation or steam assisted gravity drainage operation can drain a large area and a large resource. Steam is pumped into the top well and goes down the liquid drains into the bottom hole. Oil is then pumped up to an inlet facility where it is processed.Steam pumped into the top well turns tar into bitumen which is a semi-solid then it is processed by removing lighter oil fractions from the heavy crude oil. But the bitumen will not flow unless it is heated up.Once it goes into the separation vessel the coarse material is removed ; the sand settles to the bottom and "the middlings" are suspended. The impure bitumen froth is removed.Later naptha (a byproduct) is added to reduce viscosity.You now have a layer of bitumen and other products and a layer of naptha and lighter oil products. Sometimes there are "hot spots" or "dry spots" and this slows down the flow of oil that is being pumped up to the inlet facility.This can be remedied by using Inflow Control Devices that cost up to $1million per well.This improves the well conformance and the flow of oil to the inlet;the cost of the device is paid for quickly. As a well that is not performing may produce only about 200 to 250 barrels per day while a performing well may produce up to 650 or 700 barrel per day.This makes a big difference to the economics of producing heavy oil.
Factors in the Equation
There are a number of factors that must be considered to determine which resource is more economical.First,the heavy oil deposits tend to be bigger in size.The in situ process can have wells running for long distances.Also a heavy oil plant will extract around 60% of the oil in place whereas only 5 to 15% of light oil is extracted on the primary recovery and 30 to 35% of the remainder on the secondary recovery.So total extraction is about 30 to 40% of the reserve in comparison to 60% for heavy oil. But the all important factor is the netback which is the price minus the cost of recovery or the contribution added by each barrel to the bottom line. Presently the netback for light oil is $52 per barrel and the netback for heavy oil is $34 per barrel.The differential in the netback favours producing a barrel of light oil over a barrel of heavy oil in today's environment.And there are less barrels of light oil around to extract.
The reserves of heavy oil are massive at 135 billion barrels in Alberta alone.There are two main ways of extraction- mining and the in situ process."In situ" means on site in latin and it is a smaller and less capital intensive process.There are quite a few mining operations ;they belong to bigger operators such as Suncor and Japan Oil and Canadian Oil Sands.Mining operations require a large capital outlay. In situ operations have two well pairs;one is drilled at the bottom of the formation and the second one is above it.They are drilled into central pads and can extend for miles.The SAGD operation or steam assisted gravity drainage operation can drain a large area and a large resource. Steam is pumped into the top well and goes down the liquid drains into the bottom hole. Oil is then pumped up to an inlet facility where it is processed.Steam pumped into the top well turns tar into bitumen which is a semi-solid then it is processed by removing lighter oil fractions from the heavy crude oil. But the bitumen will not flow unless it is heated up.Once it goes into the separation vessel the coarse material is removed ; the sand settles to the bottom and "the middlings" are suspended. The impure bitumen froth is removed.Later naptha (a byproduct) is added to reduce viscosity.You now have a layer of bitumen and other products and a layer of naptha and lighter oil products. Sometimes there are "hot spots" or "dry spots" and this slows down the flow of oil that is being pumped up to the inlet facility.This can be remedied by using Inflow Control Devices that cost up to $1million per well.This improves the well conformance and the flow of oil to the inlet;the cost of the device is paid for quickly. As a well that is not performing may produce only about 200 to 250 barrels per day while a performing well may produce up to 650 or 700 barrel per day.This makes a big difference to the economics of producing heavy oil.
Factors in the Equation
There are a number of factors that must be considered to determine which resource is more economical.First,the heavy oil deposits tend to be bigger in size.The in situ process can have wells running for long distances.Also a heavy oil plant will extract around 60% of the oil in place whereas only 5 to 15% of light oil is extracted on the primary recovery and 30 to 35% of the remainder on the secondary recovery.So total extraction is about 30 to 40% of the reserve in comparison to 60% for heavy oil. But the all important factor is the netback which is the price minus the cost of recovery or the contribution added by each barrel to the bottom line. Presently the netback for light oil is $52 per barrel and the netback for heavy oil is $34 per barrel.The differential in the netback favours producing a barrel of light oil over a barrel of heavy oil in today's environment.And there are less barrels of light oil around to extract.
Saturday 29 November 2014
A potential combination for Temple Hotels
I have written several articles on combination theory.A combination is a mini-merger.A small number of shares(from 5 to 25%) can be purchased which gives the acquiring company a chance to train or apprentice as the owner of the smaller company.I have ,in an earlier blog, on both Wordpress and Tumblr discussed the possibility of Temple Hotels starting a combination with Lanesboro REIT.Both are reits and both own properties in the Canadian north.In particular, properties in Fort Macmurray.
Needs and Resources
Lanesboro has only $5 million left in it's revolving loan credit facility.It has refinanced it's mortgage loans at better interest rates but there is no more financing capacity left on their mortgages.Lanesboro has stated that it intends to sell another property before the end of the year but does not state the location.It also had a small operating loss in the last quarter.However it still has about $125 million in shareholder equity and $475 million in assets.Temple Hotels (TPH) has hotels in Fort Macmurray and hotels throughout Canada but it only has hotels. Lanesboro (LRT) has extended stay properties and senior residences.Both have properties in Fort Macmurray and both are affected by the drop in occupancy rates.There is getting to be more competition especially for hotels.But the occupancy rate has stabilized.It was about 90% in 2013 and fell to 86% and then 80% in Q1 2014.Now it is back to 89%.However both TPH and LRT want an occupancy rate of 96 to 98%.
LRT needs some cash to renovate their big project called Parson's Landing.Quite a few suites have been renovated but it is still only 94 % complete.LRT will be strapped for cash as it has only $5 million left on it's credit facility. On the other hand, TPH made $15 million Operating Income for 9 months and has about $15 million cash on hand.This is a chance for a combination.TPH also has only 69% of it's assets in debt and could increase one of it's convertible debt issues;it has four series and lots of debt capacity left.
The Proposal
Right now Lanesboro shares are trading at about $.80 per share.TPH could buy 8 million shares for about $8 million.This would give it less than 35% as the price would go up for a large block but it would probably give it 50 to 65% and the start of a combination.TPH might sell off an older property that it has lots of equity in and has lower occupancy rates.This would give it higher occupancy rates overall and the cash necessary to help it's 30% owned partner to improve Parson's Landing.Some renovations to other Fort Macmurray properties might raise the occupancy rates on both TPH and LRT properties.Higher occupancy rates on the "Fort" properties would have great impact on profit margins for Temple Hotels and it's 65% owned partner.This combination stage would give both partners a chance to improve operations and margins and see if they want to go further.
Needs and Resources
Lanesboro has only $5 million left in it's revolving loan credit facility.It has refinanced it's mortgage loans at better interest rates but there is no more financing capacity left on their mortgages.Lanesboro has stated that it intends to sell another property before the end of the year but does not state the location.It also had a small operating loss in the last quarter.However it still has about $125 million in shareholder equity and $475 million in assets.Temple Hotels (TPH) has hotels in Fort Macmurray and hotels throughout Canada but it only has hotels. Lanesboro (LRT) has extended stay properties and senior residences.Both have properties in Fort Macmurray and both are affected by the drop in occupancy rates.There is getting to be more competition especially for hotels.But the occupancy rate has stabilized.It was about 90% in 2013 and fell to 86% and then 80% in Q1 2014.Now it is back to 89%.However both TPH and LRT want an occupancy rate of 96 to 98%.
LRT needs some cash to renovate their big project called Parson's Landing.Quite a few suites have been renovated but it is still only 94 % complete.LRT will be strapped for cash as it has only $5 million left on it's credit facility. On the other hand, TPH made $15 million Operating Income for 9 months and has about $15 million cash on hand.This is a chance for a combination.TPH also has only 69% of it's assets in debt and could increase one of it's convertible debt issues;it has four series and lots of debt capacity left.
The Proposal
Right now Lanesboro shares are trading at about $.80 per share.TPH could buy 8 million shares for about $8 million.This would give it less than 35% as the price would go up for a large block but it would probably give it 50 to 65% and the start of a combination.TPH might sell off an older property that it has lots of equity in and has lower occupancy rates.This would give it higher occupancy rates overall and the cash necessary to help it's 30% owned partner to improve Parson's Landing.Some renovations to other Fort Macmurray properties might raise the occupancy rates on both TPH and LRT properties.Higher occupancy rates on the "Fort" properties would have great impact on profit margins for Temple Hotels and it's 65% owned partner.This combination stage would give both partners a chance to improve operations and margins and see if they want to go further.
Sunday 23 November 2014
Northland Power -very busy but still on track
On November13,2014 Nothland Power released it's third quarter results and their key financial indicators are still growing.Northland intends to take a 60% interest in a 2.8 billion Euro capital cost project called Gemini in the North Sea. $286 million was already raised in Q2 and more was raised in Q3.Now it announces that it is taking a 85% interest in another large project just offshore of Germany called Nordsee One,Two And Three.There is going to be construction starting in early 2015.These are two big projects and have already raised Northland's payout ratio from 63% in 2013 to 82% in the present quarter.
This aside their financial performance figures look good.There is a 13% increase in revenue from Q3 2013 and 11% increase in profits.There is also a 15% increase in adjusted EBITDA in Q3 2014 over Q3 2013.However there is a 10% decrease in quarterly cash flow as debt payments are kicking in for two solar projects-one is in North Battleford.Conversely the increase in revenues is largely due to these two new installations.In addition, free cash flow is reduced because of the newly started debt payments on the two new installations.
New projects
Adjusted EBITDA is up by 15% or by $11.1 million because of new projects that were started in the first nine months of 2013.There are four of them and all have been built on Canadian soil.Profit will likely even increase in Q4 from these new Canadian projects.In addition, more financing has been arranged for the large Gemini project and costs incurred here.More will be incurred in Q4 but they will be offset by revenues from the new projects..Gemini will not be completed until 2016 and revenues will not likely come in until 2017.This will likely raise the payout ratio again in 2015.Northland Power(NPI) does have the liquidity to keep the dividend as it is.The payout ratio has been higher in the past temoroarily and NPI does intend to keep the dividend as it is.
On track
N orthland intends that there will be a continued increase of profit and EBITDA coming in from their pipeline of new projects for the rest of the year.This will create an increase in EBITDA for the fourth quarter as well.Also some more capital will likely be raised for Gemini although construction will not start yet.Nevertheless NPI is on track to produce EBITDA in Q4 of about $100 million;this will bring annual EBITDA to $365 to $375 million.NPI will only say that it will meet it's guidance of $350 to $360 million for 2014 and $380 to $400 million for 2015.It will certainly meet guidance for 2014 fairly easily and that will create earnings per share of about $2.50 per share and a price/earnings ratio of less than 7. This should bring Northland Power's share price close to the $19 level by the end of Q4.
This aside their financial performance figures look good.There is a 13% increase in revenue from Q3 2013 and 11% increase in profits.There is also a 15% increase in adjusted EBITDA in Q3 2014 over Q3 2013.However there is a 10% decrease in quarterly cash flow as debt payments are kicking in for two solar projects-one is in North Battleford.Conversely the increase in revenues is largely due to these two new installations.In addition, free cash flow is reduced because of the newly started debt payments on the two new installations.
New projects
Adjusted EBITDA is up by 15% or by $11.1 million because of new projects that were started in the first nine months of 2013.There are four of them and all have been built on Canadian soil.Profit will likely even increase in Q4 from these new Canadian projects.In addition, more financing has been arranged for the large Gemini project and costs incurred here.More will be incurred in Q4 but they will be offset by revenues from the new projects..Gemini will not be completed until 2016 and revenues will not likely come in until 2017.This will likely raise the payout ratio again in 2015.Northland Power(NPI) does have the liquidity to keep the dividend as it is.The payout ratio has been higher in the past temoroarily and NPI does intend to keep the dividend as it is.
On track
N orthland intends that there will be a continued increase of profit and EBITDA coming in from their pipeline of new projects for the rest of the year.This will create an increase in EBITDA for the fourth quarter as well.Also some more capital will likely be raised for Gemini although construction will not start yet.Nevertheless NPI is on track to produce EBITDA in Q4 of about $100 million;this will bring annual EBITDA to $365 to $375 million.NPI will only say that it will meet it's guidance of $350 to $360 million for 2014 and $380 to $400 million for 2015.It will certainly meet guidance for 2014 fairly easily and that will create earnings per share of about $2.50 per share and a price/earnings ratio of less than 7. This should bring Northland Power's share price close to the $19 level by the end of Q4.
Wednesday 19 November 2014
Southern Pacific has an operational update
On October 27 Southern Pacific had an operational update for Q3.It was a report on the operations of their Mackay plant and the Senelac plant.Their workover was completed on 5 well pairs and are back onstream.4 well pairs had workovers successfully completed and a fifth was deferred until later.Production at two well pairs was only 200 to 250 barrels per day.Total production at the Mckay installation was 2000 barrels per day and at Senelac it was 1300 to 1400 barrels per day.Overall production then was 3400 barrels per day.There has been no production at the Phase L installation at Senelac ; it is scheduled for December.
Comparison to other juniors
An earlier blog on Tumblr compared Southern Pacific(STP) to two other juniors-BNK Petroleum and Argent Energy.Production at that time was about 4500 barrels per day.STP had predicted that once well bore conformance was obtained production might reach 7000 barrels.It was on track to match these other two juniors.And Phase L (at Senelac) was going to be producing probably in December.
Then STP carried out a Strategic Review Process and investors reacted by sending the price down from the $.20 to $.25 area to the present $.025 to $.03 area.This is an overreaction.If you compare STP to other heavy oil producers it can be seen as oversold.For example, Palliser Oil is another heavy oil producer and it has production of only 1200 to 1700 barrels per day.It's assets are only $104 million and shareholder equity of $35 million.Yet it trades at $.065 per share.Another example is Rock Energy,another heavy oil producer. It has production of about 4800 barrels per day and assets of only $170 million with shareholder equity of $116 million.This heavy oil producer trades at about $4.00 per share.This indicates that STP should at least be trading at $.10 to $1.5 per share.
More Strategic Reviews It is true that Southern Pacific's production fell in this quarter from about 4200 barrels per day to 3400 barrels partly because of conformance problems in the newer wells.But this has now been almost remedied and approvals are in place to increase production up to 7000 barrels per day.In conclusion, if Southern Pacific's management had comforted it's shareholders more then it's shareholders would have given it a more reasonable share price now.This blog predicts that the price will stay in this price range until production is back up around 5000 barrels per day.Any further strategic reviews should be kept in the boardroom.
Comparison to other juniors
An earlier blog on Tumblr compared Southern Pacific(STP) to two other juniors-BNK Petroleum and Argent Energy.Production at that time was about 4500 barrels per day.STP had predicted that once well bore conformance was obtained production might reach 7000 barrels.It was on track to match these other two juniors.And Phase L (at Senelac) was going to be producing probably in December.
Then STP carried out a Strategic Review Process and investors reacted by sending the price down from the $.20 to $.25 area to the present $.025 to $.03 area.This is an overreaction.If you compare STP to other heavy oil producers it can be seen as oversold.For example, Palliser Oil is another heavy oil producer and it has production of only 1200 to 1700 barrels per day.It's assets are only $104 million and shareholder equity of $35 million.Yet it trades at $.065 per share.Another example is Rock Energy,another heavy oil producer. It has production of about 4800 barrels per day and assets of only $170 million with shareholder equity of $116 million.This heavy oil producer trades at about $4.00 per share.This indicates that STP should at least be trading at $.10 to $1.5 per share.
More Strategic Reviews It is true that Southern Pacific's production fell in this quarter from about 4200 barrels per day to 3400 barrels partly because of conformance problems in the newer wells.But this has now been almost remedied and approvals are in place to increase production up to 7000 barrels per day.In conclusion, if Southern Pacific's management had comforted it's shareholders more then it's shareholders would have given it a more reasonable share price now.This blog predicts that the price will stay in this price range until production is back up around 5000 barrels per day.Any further strategic reviews should be kept in the boardroom.
Sunday 16 November 2014
Perpetual Energy grows by twists and turns
Perpetual Energy has for a couple of years grown very slowly .It's production has stayed around 19,000 to 21,000 boe/day.It's production hasn't exceeded 22,000 barrels per day for the last four years.One of the reasons that it has not grown past 21,000 barrels per day of production is that it has sold off non-core producing assets.On October 27 it announced that it had signed a purchase and sale agreement to divest of several non-core properties in eastern Alberta for $21.6 million.This deal will close on November 7.
This property has 870 Mboe of heavy oil reserves and 4026 net acres of undeveloped Mannville heavy oil rights.It was expected to produce 400 to 415 boe/day of heavy oil for Q4 2014.The money received will be used to establish a bank and working capital surplus and the ability to redeem convertible debentures that mature in December31,2015.It is Perpetual Energy's main strategic priority to reduce it's debt.However Perpetual will soon need capital for the waterflooding of several large pools in the Mannville area and the Edson area.So in order to keep increases in debt down they thought it prudent to sell these properties.
East Edson update
This is the most interesting discovery that Perpetual Energy has come across.It made a joint venture with an unknown partner that gave it $70 million to develop the property although money had to be put into an escrow account.9 wells have been developed so far ;7 in the northeast area and 2 in the southwest area.4 of these 9 wells have been completed and tied-in to their existing gas compression station and 2 through the new Rosevear gas plant.Both are producing above 10MMcf/day plus the accompanying liquids.2 more wells are starting initial flow back but it is too early to estimate final production.It is not clear from reading the Joint Venture Agreement if production from the South west area is covered by the joint venture agreement.Most,if not all of the production in this area might be considered as Perpetual production.Whereas it looks like the North east area has a royalty payment of 5.6MMcf/day.Any production beyond this amount goes totally to Perpetual Energy.Here( the N.E and S.W. area) is where Perpetual Energy has a chance to boost production to the 25,000 boe/day by the end of 2015.
Operations are on track for 6 new wells to be drilled before year-end.2 wells are to be drilled in the North east area and 4 in the South west area.Including production from the first 2 wells, total production from East Edson is about 25,000 MMcf/day or about 6,250 boe/day.With the 4 other wells coming onstream in Q4 Perpetual will likely have total production close to 23,000 boe/day.If not in Q4 then in Q1 2015.Also Perpetual has all regulatory approvals for the new East Edson gas plant and it will be built before September,2015.Pipeline has already been ordered to connect to the Alliance gas Pipeline.
West Edson properties
Since the end of Q2, 9 wells have been drilled and production here has exceded expectation;7 were completed and tied-in and 2 are in progress.Production at full capacity is expected to be 64mmcf/day or almost 11,000 boe/day.
Conclusion
For the last two or three years Perpetual Energy has been troubled by having too much debt;over this period it has pared down it's debt.But Perpetual is one of the busiest and most active drillers ,especially for junior producers.Now it has three drilling rigs that are active on it's properties.It has gotten some cash from it's joint venture and is using it for neighbouring ,contiguous properties.However Perpetual continues to lose production by selling off properties,especially around it's heavy oil property in the Mannville area.That aside,Q4 2014 or Q1 2015 are seen as the quarter that Perpetual will break out of this range and start to move towards 25,000 boe/day and $25 million in earnings for the quarter.
for consulting advice on energy stocks ;email daleandmac@gmail.com
This property has 870 Mboe of heavy oil reserves and 4026 net acres of undeveloped Mannville heavy oil rights.It was expected to produce 400 to 415 boe/day of heavy oil for Q4 2014.The money received will be used to establish a bank and working capital surplus and the ability to redeem convertible debentures that mature in December31,2015.It is Perpetual Energy's main strategic priority to reduce it's debt.However Perpetual will soon need capital for the waterflooding of several large pools in the Mannville area and the Edson area.So in order to keep increases in debt down they thought it prudent to sell these properties.
East Edson update
This is the most interesting discovery that Perpetual Energy has come across.It made a joint venture with an unknown partner that gave it $70 million to develop the property although money had to be put into an escrow account.9 wells have been developed so far ;7 in the northeast area and 2 in the southwest area.4 of these 9 wells have been completed and tied-in to their existing gas compression station and 2 through the new Rosevear gas plant.Both are producing above 10MMcf/day plus the accompanying liquids.2 more wells are starting initial flow back but it is too early to estimate final production.It is not clear from reading the Joint Venture Agreement if production from the South west area is covered by the joint venture agreement.Most,if not all of the production in this area might be considered as Perpetual production.Whereas it looks like the North east area has a royalty payment of 5.6MMcf/day.Any production beyond this amount goes totally to Perpetual Energy.Here( the N.E and S.W. area) is where Perpetual Energy has a chance to boost production to the 25,000 boe/day by the end of 2015.
Operations are on track for 6 new wells to be drilled before year-end.2 wells are to be drilled in the North east area and 4 in the South west area.Including production from the first 2 wells, total production from East Edson is about 25,000 MMcf/day or about 6,250 boe/day.With the 4 other wells coming onstream in Q4 Perpetual will likely have total production close to 23,000 boe/day.If not in Q4 then in Q1 2015.Also Perpetual has all regulatory approvals for the new East Edson gas plant and it will be built before September,2015.Pipeline has already been ordered to connect to the Alliance gas Pipeline.
West Edson properties
Since the end of Q2, 9 wells have been drilled and production here has exceded expectation;7 were completed and tied-in and 2 are in progress.Production at full capacity is expected to be 64mmcf/day or almost 11,000 boe/day.
Conclusion
For the last two or three years Perpetual Energy has been troubled by having too much debt;over this period it has pared down it's debt.But Perpetual is one of the busiest and most active drillers ,especially for junior producers.Now it has three drilling rigs that are active on it's properties.It has gotten some cash from it's joint venture and is using it for neighbouring ,contiguous properties.However Perpetual continues to lose production by selling off properties,especially around it's heavy oil property in the Mannville area.That aside,Q4 2014 or Q1 2015 are seen as the quarter that Perpetual will break out of this range and start to move towards 25,000 boe/day and $25 million in earnings for the quarter.
for consulting advice on energy stocks ;email daleandmac@gmail.com
Thursday 13 November 2014
I'd like to add you to my professional network on LinkedIn
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Friday 7 November 2014
Huronia Consulting (part4) or Georgian Consulting
When I was in Midland I started a series of blogs that I called Huronia Consulting.It was intended to offer some ideas on how to improve the economy in the Midland area.It could be used by local politicians.This blog is entitled Huronia Consulting(part4) but it refers to Wasaga Beach and should really be called Georgian Consulting although Midland believes that Wasaga Beach is a part of Huronia.
Wasaga Beach is midway between Midland and Barrie;it is about 40 kilometres from each.It is on the east side of Notawasaga Bay and on the Nottawasaga River.It is on the northern border of Flos,Sunnidale and Nottawasaga townships.It's full time population is about17,000 with about 16,000 others that are considered seasonal.
Wasaga Beach should be considered as a close neighbour of Collingwood.There is considerable interaction between the two towns. It is only about 13 kilometres from the east end of Collingwood to the west end of Wasaga.The province just paved the highway between them so it is an easy drive in to Collingwood.
Comparison to other Resort towns
Bobcaygeon
Wasaga can be easily compared to other resort or tourist towns.A pretty town that comes to mind as a comparable is Bobcaygeon which is north-east of Peterboro.It's full time population is about 10,000.Bobcaygeon does get some tourists and some business from Peterboro but Bobcaygeon does get more business from it's closest neighbour-Lindsay.However more business does tend to go from Bobcaygeon to Lindsay rather than the other way.Bobcaygeon ,like Wasaga, has a healthy motel and hotel business.But Bobcaygeon ,being near two lakes,gets a lot of fishermen and hikers and hunters.There are one or two top of the line resort locations but a few low rent motels that hunters and hikers can use.Two or three are in the middle of town.Wasaga is getting some new high-priced motels but needs to keep some lower priced motels for the lower-income crowd.The question is-should all the motels along it's main street be high-priced or should there be a variety of types here.I think Wasaga like Bobcaygeon has to cater to all would-be tourists.Also a good business to encourage further would be rafting and touring down the river, such as Spirit Tours.Wasaga needs more of this;maybe even a fishing or hunting camp at the edge of town along the river.
Bobcaygeon also has some smaller business.It has one or maybe two bakeries evn though they only employ one or two people each.It like Wasaga has a few lawyers and a surveyor and real estate companies.But the big employer in Bobcaygeon is the Kawartha Dairy.It started selling milk only to Peterboro and Lindsay;now it sells a variety of products,including yogurt and ice cream to a much bigger market area (including Barrie).This is where Wasaga falls behind Bobcaygeon;it does not have the small businesses although it has excellent locations to do this.For example,the WasagaDairy which is a retail outlet could be converted to a milk processing plant if the property next door is bought as well.Just like in Bobcaygeon!
Niagara Falls
Another town to compare Wasaga to is Niagara Falls.The epitome of tourist towns.But there are two Niagara Falls.One has the casinos and the top hotels;the other(at the far end of Lundy Lane) has the cheap motels,the cheap restaurants and the strip joints.This end of Niagara Falls is very competitive.It caters to low-income tourists.I ,myself, have stayed here for several months.You used to be able to get a small breakfast for $1.00 (not counting coffee).Prices were listed out front on all motels so you knew the price by just walking by.This encouraged many tourists to come in that would have kept on going.There is a library for this end of town and one downtown.Both are fairly new and have all facilities and lots of room.This is something that Wasaga does not do.It does not compete on price and show it's prices right up front.This does bring in extra tourists who might not stay otherwise.Also as everybody knows Wasaga Beach needs a new and bigger library.This does encourage local business that need to do research and find things out.Libraries can,for example,show free films and documentaries and exhibit local artist's work.
2015
Small towns such as Wasaga Beach and Bocaygeon and West Lundy Lane (Niagara Falls) will move slowly.This way residents are less disturbed.But Wasaga Beach would be well advised to make at least a small move towards zoning that would allow a dairy and helping Spirit Tours get some new equipment.Two small steps that might make for a better 2015.
Wasaga Beach is midway between Midland and Barrie;it is about 40 kilometres from each.It is on the east side of Notawasaga Bay and on the Nottawasaga River.It is on the northern border of Flos,Sunnidale and Nottawasaga townships.It's full time population is about17,000 with about 16,000 others that are considered seasonal.
Wasaga Beach should be considered as a close neighbour of Collingwood.There is considerable interaction between the two towns. It is only about 13 kilometres from the east end of Collingwood to the west end of Wasaga.The province just paved the highway between them so it is an easy drive in to Collingwood.
Comparison to other Resort towns
Bobcaygeon
Wasaga can be easily compared to other resort or tourist towns.A pretty town that comes to mind as a comparable is Bobcaygeon which is north-east of Peterboro.It's full time population is about 10,000.Bobcaygeon does get some tourists and some business from Peterboro but Bobcaygeon does get more business from it's closest neighbour-Lindsay.However more business does tend to go from Bobcaygeon to Lindsay rather than the other way.Bobcaygeon ,like Wasaga, has a healthy motel and hotel business.But Bobcaygeon ,being near two lakes,gets a lot of fishermen and hikers and hunters.There are one or two top of the line resort locations but a few low rent motels that hunters and hikers can use.Two or three are in the middle of town.Wasaga is getting some new high-priced motels but needs to keep some lower priced motels for the lower-income crowd.The question is-should all the motels along it's main street be high-priced or should there be a variety of types here.I think Wasaga like Bobcaygeon has to cater to all would-be tourists.Also a good business to encourage further would be rafting and touring down the river, such as Spirit Tours.Wasaga needs more of this;maybe even a fishing or hunting camp at the edge of town along the river.
Bobcaygeon also has some smaller business.It has one or maybe two bakeries evn though they only employ one or two people each.It like Wasaga has a few lawyers and a surveyor and real estate companies.But the big employer in Bobcaygeon is the Kawartha Dairy.It started selling milk only to Peterboro and Lindsay;now it sells a variety of products,including yogurt and ice cream to a much bigger market area (including Barrie).This is where Wasaga falls behind Bobcaygeon;it does not have the small businesses although it has excellent locations to do this.For example,the WasagaDairy which is a retail outlet could be converted to a milk processing plant if the property next door is bought as well.Just like in Bobcaygeon!
Niagara Falls
Another town to compare Wasaga to is Niagara Falls.The epitome of tourist towns.But there are two Niagara Falls.One has the casinos and the top hotels;the other(at the far end of Lundy Lane) has the cheap motels,the cheap restaurants and the strip joints.This end of Niagara Falls is very competitive.It caters to low-income tourists.I ,myself, have stayed here for several months.You used to be able to get a small breakfast for $1.00 (not counting coffee).Prices were listed out front on all motels so you knew the price by just walking by.This encouraged many tourists to come in that would have kept on going.There is a library for this end of town and one downtown.Both are fairly new and have all facilities and lots of room.This is something that Wasaga does not do.It does not compete on price and show it's prices right up front.This does bring in extra tourists who might not stay otherwise.Also as everybody knows Wasaga Beach needs a new and bigger library.This does encourage local business that need to do research and find things out.Libraries can,for example,show free films and documentaries and exhibit local artist's work.
2015
Small towns such as Wasaga Beach and Bocaygeon and West Lundy Lane (Niagara Falls) will move slowly.This way residents are less disturbed.But Wasaga Beach would be well advised to make at least a small move towards zoning that would allow a dairy and helping Spirit Tours get some new equipment.Two small steps that might make for a better 2015.
Wednesday 5 November 2014
Where is the turning point?
Before an investor determines the exact nature of the stockmarket,that is,whether it is a diminished bull market or the beginning of a bear market he needs to know it's overall direction.Are we in a bull market or a bear market?Furthermore if we are in a bull market when will this bull market turn down?There are a number of key indicators that can tell whether we are turning down or upwards.
I,myself, have a Master's degree in economics and my major was in business cycles. I have studied business cycles since before the second world war and have seen them change. I found that there is a strong correlation between business cycles and the stock markets. It is very difficult for there to be a bear market and have an economic upswing.However there are shades of grey in between that are very hard to tell and they do presage further swings upwards or downwards.This is where work must be done in order to tell how close we are to the turning point.
The new Business cycle
Since the second world war the average business cycle has lasted four to six years. And it had a"V" shape;production and incomes went down substantially in the first two to three years and back up even more in the following two to three years.This was a fairly violent change in incomes although overall total production and income increased over the five year period.One of the main problems with this dramatic change in incomes was the affect on unemployment. Unemployment in the first two years or the downswing(and even in the third year) went up dramatically. People demanded that governments do something about this dreadful situation.And they did. This was the beginning of Keynesian Economics.
John Maynard Keynes ,a British economist, realized that the dramatic drop in income and production was caused by a drop in aggregate demand.And this could be remedied by an increase in government spending.The government bought more bonds from the commercial banks and deposited them so the bank reserves went up and the banks were able to lend out more money.This was government created demand.This increased bank loans and hence total production.The effect of the increased demand was an increase in jobs and a reduction in unemployment.This was the beginning of using increase in government spending to reduce unemployment.
The "U" Shaped Business Cycle
History proved that increased government spending did remedy the high level of unemployment.It did not eliminate it but it did dampen it.In fact,the dampened demand modified the shape of the "V" cycle.It reduced the depth of the cycle and it lengthened it's duration. The four year cycle turned into a seven or eight year cycle and the "V" cycle turned into a "U" cycle.However the "V" cycle showed increases in production and incomes of 5 and 6% in the upper part of the cycle.Now there were three to five years of 2 to 3% increases in growth;economic growth had been dampened.Reductions in income and employment had been reduced but so had the increases in the upper part of the cycle.This produced the shape of the "U" cycle.
Stockmarket Indicators
The question is,does the downturn in the economy coincide with the turndown in the stockmarket?Do the stockmarket indicators correlate with those for the economy?The key indicators for whether the stockmarket will go up or down are the price/earnings ratio and the dividend yield.Not these ratios for an individual stock but for the entire TSX index.It is generally considered that a healthy P/E ratio is 15.Below 15 is a time to buy and above 15 is a time to sell.The yield is the dividend amount(in dollars)divided by the price of the stock.If the dividend yield for the index is above the 10 year government bond yield but rising then dividend yields will still climb and this is an indicator to continue buying stocks .If the index dividend yield is below the 10 year bond yield and falling then it is time to sell stocks and buy bonds.The price of bond yields will rise soon and earnings will drop.
Generally speaking when the economy is in a downturn the P/E ratio will be below the average of 15 times earnings.And the P/E ratio moves up when the economy moves into the upper part of the cycle.When dividend yields are low and below the 10 year bond rate, the cycle is near the bottom.This indicates earnings will soon start to increase and so will dividend yields.Conversely when the P/E ratio is 15 or higher and the dividend yield is above 3.5% the market has peaked.Price will be heading down soon and this is time to sell stocks.
Shades of Grey
So when the bond yield is still above 2% but falling the investor should be in the stock market.Bond prices are falling and the investor can earn more on dividends. The TSX index dividend yield is typically between 3 and 3.5% in a bull market.But when the 10 year government yield is above 3.5% it is time to think about moving back into the bond market to get forthcoming gains.It is likely that the stockmarket has peaked.Now we are at the top of the "U" curve and the P/E ratio is at a maximum or near to it.There is no hurry as the P/E ratio is close to 15 but will rise for awhile only temporarily.
The tie-in here to the economy is through earnings.As the economy slows down the growth in earnings starts to slow down.And as the growth in earnings slows the P/E ratio will automatically rise.That is because earnings will remain constant and the price will continue to rise slightly.Stocks will become more expensive. At a certain point the P/E ratio will remain close to or above 15 and the dividend yield will approach 3.5%.The 10 year bond yield will start to move up reflecting higher risk in the economy .However the price of bonds will now move downwards and some investors will pull their money out.While other investors will move into alternative investments such as cash or gold.
Conclusion
This study does not look at the amount of capital appreciation in the price of their stock nor in the price of bonds specifically.This paper looks at the direction of markets not the magnitude of the gains.This depends to a large degree on the astuteness of the individual investor.
The main theme that is explored here is that there is a strong correlation between the movement of the economic cycle and the movement of the stockmarket.There are indicators that can be used to tell when the business cycle is moving downwards;these indicators also tell that the stockmarket is moving downwards.There are specific numbers that can be used to tell just how close the stockmarket is to the turning point.Principally the economic growth rate and the length of the "U"curve.
We have concluded that we are presently in a "U" shaped business or economic cycle.And the bottom was in March, 2009.Since then the market has been moving up on the upwards part of the "U"curve.There has been positive economic growth from 2010 to 2013.The economic growth has gradually slowed down so that it now is expected to be only 2.5% in 2015.The"U" curve will almost be completed.
In summary,it seems as if 2014 is going to be a good year for investors in the stockmarket.But investors should probably cautiously in 2015 start to put their money into high quality stocks and high grade bonds.Growth and small 'cap" stocks may start to wither as interest rates move up.
I,myself, have a Master's degree in economics and my major was in business cycles. I have studied business cycles since before the second world war and have seen them change. I found that there is a strong correlation between business cycles and the stock markets. It is very difficult for there to be a bear market and have an economic upswing.However there are shades of grey in between that are very hard to tell and they do presage further swings upwards or downwards.This is where work must be done in order to tell how close we are to the turning point.
The new Business cycle
Since the second world war the average business cycle has lasted four to six years. And it had a"V" shape;production and incomes went down substantially in the first two to three years and back up even more in the following two to three years.This was a fairly violent change in incomes although overall total production and income increased over the five year period.One of the main problems with this dramatic change in incomes was the affect on unemployment. Unemployment in the first two years or the downswing(and even in the third year) went up dramatically. People demanded that governments do something about this dreadful situation.And they did. This was the beginning of Keynesian Economics.
John Maynard Keynes ,a British economist, realized that the dramatic drop in income and production was caused by a drop in aggregate demand.And this could be remedied by an increase in government spending.The government bought more bonds from the commercial banks and deposited them so the bank reserves went up and the banks were able to lend out more money.This was government created demand.This increased bank loans and hence total production.The effect of the increased demand was an increase in jobs and a reduction in unemployment.This was the beginning of using increase in government spending to reduce unemployment.
The "U" Shaped Business Cycle
History proved that increased government spending did remedy the high level of unemployment.It did not eliminate it but it did dampen it.In fact,the dampened demand modified the shape of the "V" cycle.It reduced the depth of the cycle and it lengthened it's duration. The four year cycle turned into a seven or eight year cycle and the "V" cycle turned into a "U" cycle.However the "V" cycle showed increases in production and incomes of 5 and 6% in the upper part of the cycle.Now there were three to five years of 2 to 3% increases in growth;economic growth had been dampened.Reductions in income and employment had been reduced but so had the increases in the upper part of the cycle.This produced the shape of the "U" cycle.
Stockmarket Indicators
The question is,does the downturn in the economy coincide with the turndown in the stockmarket?Do the stockmarket indicators correlate with those for the economy?The key indicators for whether the stockmarket will go up or down are the price/earnings ratio and the dividend yield.Not these ratios for an individual stock but for the entire TSX index.It is generally considered that a healthy P/E ratio is 15.Below 15 is a time to buy and above 15 is a time to sell.The yield is the dividend amount(in dollars)divided by the price of the stock.If the dividend yield for the index is above the 10 year government bond yield but rising then dividend yields will still climb and this is an indicator to continue buying stocks .If the index dividend yield is below the 10 year bond yield and falling then it is time to sell stocks and buy bonds.The price of bond yields will rise soon and earnings will drop.
Generally speaking when the economy is in a downturn the P/E ratio will be below the average of 15 times earnings.And the P/E ratio moves up when the economy moves into the upper part of the cycle.When dividend yields are low and below the 10 year bond rate, the cycle is near the bottom.This indicates earnings will soon start to increase and so will dividend yields.Conversely when the P/E ratio is 15 or higher and the dividend yield is above 3.5% the market has peaked.Price will be heading down soon and this is time to sell stocks.
Shades of Grey
So when the bond yield is still above 2% but falling the investor should be in the stock market.Bond prices are falling and the investor can earn more on dividends. The TSX index dividend yield is typically between 3 and 3.5% in a bull market.But when the 10 year government yield is above 3.5% it is time to think about moving back into the bond market to get forthcoming gains.It is likely that the stockmarket has peaked.Now we are at the top of the "U" curve and the P/E ratio is at a maximum or near to it.There is no hurry as the P/E ratio is close to 15 but will rise for awhile only temporarily.
The tie-in here to the economy is through earnings.As the economy slows down the growth in earnings starts to slow down.And as the growth in earnings slows the P/E ratio will automatically rise.That is because earnings will remain constant and the price will continue to rise slightly.Stocks will become more expensive. At a certain point the P/E ratio will remain close to or above 15 and the dividend yield will approach 3.5%.The 10 year bond yield will start to move up reflecting higher risk in the economy .However the price of bonds will now move downwards and some investors will pull their money out.While other investors will move into alternative investments such as cash or gold.
Conclusion
This study does not look at the amount of capital appreciation in the price of their stock nor in the price of bonds specifically.This paper looks at the direction of markets not the magnitude of the gains.This depends to a large degree on the astuteness of the individual investor.
The main theme that is explored here is that there is a strong correlation between the movement of the economic cycle and the movement of the stockmarket.There are indicators that can be used to tell when the business cycle is moving downwards;these indicators also tell that the stockmarket is moving downwards.There are specific numbers that can be used to tell just how close the stockmarket is to the turning point.Principally the economic growth rate and the length of the "U"curve.
We have concluded that we are presently in a "U" shaped business or economic cycle.And the bottom was in March, 2009.Since then the market has been moving up on the upwards part of the "U"curve.There has been positive economic growth from 2010 to 2013.The economic growth has gradually slowed down so that it now is expected to be only 2.5% in 2015.The"U" curve will almost be completed.
In summary,it seems as if 2014 is going to be a good year for investors in the stockmarket.But investors should probably cautiously in 2015 start to put their money into high quality stocks and high grade bonds.Growth and small 'cap" stocks may start to wither as interest rates move up.
Thursday 30 October 2014
A Precise Stockmarket Forecast
An earlier article of mine (in Moneysense magazine) stated that 2014 seems to be continuing the upswing in the stockmarket.It also reported that 2015 may be a time to cautiously move out of stocks and into the bond market.But the 10 year bond rate will not be that low.The bond rate has not fallen well below the yield on quality stocks.The bond rate has not "tanked".This time there may not be a huge switch into the bond market to get forthcoming gains.In addition, bond rates will be heading upwards but bond prices will be heading down. There will not be capital gains here but capital losses.Consequently the best strategy may be to stay in the stockmarket but be more selective about the kind of stocks you purchase and stay with.
What kind of business cycle are we in?
Economic textbooks are full of descriptions of business cycles being 5 to 6 years in duration and having a "V" shape.Down for three years and and up for three to four years.The growth rates are 4 to 6% each year thus giving the "V" shape.Recent business cycles are longer in duration and dampened; they have annual growth rates of 2 to 3.5%.They are referred to as having a "U" shape.It is likely that the economic growth rate will be only 2% in 2015.But there is little incentive to jump into the bond market as interest rates move up bond prices will move down and there will be a capital loss not a gain.Interest rates have been kept down as a government incentive to spur on more economic growth.
The key indicators for whether we will still have a diminished bull market or a slight bear market are the economoic growth and the shape of the "U" curve.Since we are expecting there to be a 2.5% growth and a continuation of the "U"curve,there is a high probability that there will be a diminished bull market in 2014 and early2015.These two markets will move together.And since the bond rate is low at 2.5% because of interest rates the bond rate may rise but bond prices will fall.If bond prices fall then there will be capital losses not gains from investing in the stock market.Capital will not move in large volumes to the bond market and the stockmarket will likely continue upwards albeit at a slower pace. At first it will be difficult to tell if the market has turned downwards or not but the downswing will not likely continue. Money will come back into the stockmarket to reap future gains and not switch into the bond market.Dividend yields will remain the same or above yields.Economic growth has not yet turned down and earnings will still rise although not as robustly as before.
Fine tuning
So we have estimated the overall trend of the stockmarket for the rest of 2014 and early 2015 but what will the short term changes be?This can be measured by changes in the interest rate.The indicator that is used here is the 10 year government bond yield.It is presently earning a 2.01% rate of interest.The Governor of the Bank of Canada does not seem ready to change the interest rate and any changes will likely be in the second half of 2015.Changes here will be slow and small.But it is widely expected that the Federal Reserve may make a change before this time.Growth in USA has been solid but a large or fast move may slow their recovery.Some experts are predicting a small change in the fall of 2015.That will certainly depend on what the annual growth is for 2014.But any change here is very likely to influence Canadian interest rates.
The theory is that the 10 year government rate will respond first and move almost in lock-step with the change in the bank rate.The short term rates will follow but not by the same amount and it may take awhile to change.The longer term rates,such as the 20 year and 30 year ,will be affected by macro factors such as American and European rates and will move slower and not by as much.Other factors such as long term earnings forecasts will cause the long term rates to move more or less than the original change.Long term rates are seen as an indicator of future changes in the 10 year government rate and hence stockmarket swings.Long term rates have moved up slowly since the summer and are predicted to move up in advance of the coming raise in the bank rate.
Once this change occurs the stockmarket will take this as an indicator and any upward movement will be forestalled.Gradually the market will move sideways or even downwards. This will depend on the strength of earnings.This will also make dividend yields more attractiveand act as another incentive to switch into the stockmarket.At the minimum this will be a short term bear market within a prolonged bull market.But unexpectedly slow growth in earnings in this quarter will presage sideways movement in the stockmarket until earnings pick up.Forecasts are that earnings will be greater than the 2.5% economic growth.The best forecast for the rest of the year will be for a slight increase in the stockmarket as a whole and better than average increase for select stocks.The best stocks (like always) will be those with an increase in earnings and dividends but a constant dividend payout and above average growth in earnings should also perform well.
What kind of business cycle are we in?
Economic textbooks are full of descriptions of business cycles being 5 to 6 years in duration and having a "V" shape.Down for three years and and up for three to four years.The growth rates are 4 to 6% each year thus giving the "V" shape.Recent business cycles are longer in duration and dampened; they have annual growth rates of 2 to 3.5%.They are referred to as having a "U" shape.It is likely that the economic growth rate will be only 2% in 2015.But there is little incentive to jump into the bond market as interest rates move up bond prices will move down and there will be a capital loss not a gain.Interest rates have been kept down as a government incentive to spur on more economic growth.
The key indicators for whether we will still have a diminished bull market or a slight bear market are the economoic growth and the shape of the "U" curve.Since we are expecting there to be a 2.5% growth and a continuation of the "U"curve,there is a high probability that there will be a diminished bull market in 2014 and early2015.These two markets will move together.And since the bond rate is low at 2.5% because of interest rates the bond rate may rise but bond prices will fall.If bond prices fall then there will be capital losses not gains from investing in the stock market.Capital will not move in large volumes to the bond market and the stockmarket will likely continue upwards albeit at a slower pace. At first it will be difficult to tell if the market has turned downwards or not but the downswing will not likely continue. Money will come back into the stockmarket to reap future gains and not switch into the bond market.Dividend yields will remain the same or above yields.Economic growth has not yet turned down and earnings will still rise although not as robustly as before.
Fine tuning
So we have estimated the overall trend of the stockmarket for the rest of 2014 and early 2015 but what will the short term changes be?This can be measured by changes in the interest rate.The indicator that is used here is the 10 year government bond yield.It is presently earning a 2.01% rate of interest.The Governor of the Bank of Canada does not seem ready to change the interest rate and any changes will likely be in the second half of 2015.Changes here will be slow and small.But it is widely expected that the Federal Reserve may make a change before this time.Growth in USA has been solid but a large or fast move may slow their recovery.Some experts are predicting a small change in the fall of 2015.That will certainly depend on what the annual growth is for 2014.But any change here is very likely to influence Canadian interest rates.
The theory is that the 10 year government rate will respond first and move almost in lock-step with the change in the bank rate.The short term rates will follow but not by the same amount and it may take awhile to change.The longer term rates,such as the 20 year and 30 year ,will be affected by macro factors such as American and European rates and will move slower and not by as much.Other factors such as long term earnings forecasts will cause the long term rates to move more or less than the original change.Long term rates are seen as an indicator of future changes in the 10 year government rate and hence stockmarket swings.Long term rates have moved up slowly since the summer and are predicted to move up in advance of the coming raise in the bank rate.
Once this change occurs the stockmarket will take this as an indicator and any upward movement will be forestalled.Gradually the market will move sideways or even downwards. This will depend on the strength of earnings.This will also make dividend yields more attractiveand act as another incentive to switch into the stockmarket.At the minimum this will be a short term bear market within a prolonged bull market.But unexpectedly slow growth in earnings in this quarter will presage sideways movement in the stockmarket until earnings pick up.Forecasts are that earnings will be greater than the 2.5% economic growth.The best forecast for the rest of the year will be for a slight increase in the stockmarket as a whole and better than average increase for select stocks.The best stocks (like always) will be those with an increase in earnings and dividends but a constant dividend payout and above average growth in earnings should also perform well.
Wednesday 15 October 2014
Lake Shore Gold -a technical analysis
This is not a usual blog about the price of a stock today and it's expected price in a quarter or two.This blog looks at the operation and the production of Lake Shore and it's likely direction.It(LSG) released a press release on October7, 2014 stating that they had found gold at 144 property and that confirms an earlier deposit near the Thunder Creek deposit.Earlier LSG found low grade ore at the Ogden Zone which is closer to the Timmins West mine.The 144 property is further away from the Timmins mine but is higher grade ore.It includes three properties,144 north,144 south, and 144Gap.The grade is from 5.87 grams per tonne to 21.87 grams per tonne.It can be accessed from the Thunder Creek mine.
It is within 770 metres of the Thunder Creek deposit southwest of the Timmins West mine.LSG calls it a high priority target.Furthermore it believes that this has the same geological structure as the Timmins deposit and the Thunder Creek deposit.This means that LSG could have a mining complex with multiple mining deposits instead of just two deposits.The size of the resource is still unknown but they have three drilling rigs on the 144 property.
Increased production or increased allocation
Lake Shore recently increased their capacity of the processing mill from 2000 tonnes per day to 3550 tonnes per day.This mill serves two mines- the Timmins West mine and the Bell Creek mine.The Bell Creek mine is 20 km. north east of Timmins;it also has lower grade ore than appears to be in the new discovery.In addition,production from the Bell Creek mine has almost doubled from 21,000 ounces to 40,000 ounces for 2014.However the ore has further to go to the mill than the newly discovered orebody.Is LSG going to increase the processing capacity of the mill or reduce the processed production from the Bell Creek mine?It is not a problem yet but it may soon be.Guidance has been raised for the year from 135,000 to 150,000 up to 160,000 to 180,000 ounces.It is likely that the mill capacity will be raised from 3550 tonnes per day to 5000 tonnes per day sometime in 2015.
Comparison to Crocodile Gold
Both are junior producers and both have similar problems.Crocodile Gold has seen it's production rise quickly from two years ago and so has Lake Shore Gold.Both have had to raise milling capacity.Both have raised their guidance from last year.Crocodile Gold has a resource that has been discovered but not yet completely defined in their Maud Creek deposit.Lake Shore has a new resource that has barely been defined.Both will likely have to increase their milling capacity in 2015.However Crocodile Gold has guidance of 200,000 to 215,000 ounces while LSG has guidance of only 160,000 to 180,000 ounces for 2014.Oh yes and the price of LSG is about five times higher than the proficient Crocodile.But LSG has a problem many producers would like to have - soon they will have too much gold for their mill to process.
It is within 770 metres of the Thunder Creek deposit southwest of the Timmins West mine.LSG calls it a high priority target.Furthermore it believes that this has the same geological structure as the Timmins deposit and the Thunder Creek deposit.This means that LSG could have a mining complex with multiple mining deposits instead of just two deposits.The size of the resource is still unknown but they have three drilling rigs on the 144 property.
Increased production or increased allocation
Lake Shore recently increased their capacity of the processing mill from 2000 tonnes per day to 3550 tonnes per day.This mill serves two mines- the Timmins West mine and the Bell Creek mine.The Bell Creek mine is 20 km. north east of Timmins;it also has lower grade ore than appears to be in the new discovery.In addition,production from the Bell Creek mine has almost doubled from 21,000 ounces to 40,000 ounces for 2014.However the ore has further to go to the mill than the newly discovered orebody.Is LSG going to increase the processing capacity of the mill or reduce the processed production from the Bell Creek mine?It is not a problem yet but it may soon be.Guidance has been raised for the year from 135,000 to 150,000 up to 160,000 to 180,000 ounces.It is likely that the mill capacity will be raised from 3550 tonnes per day to 5000 tonnes per day sometime in 2015.
Comparison to Crocodile Gold
Both are junior producers and both have similar problems.Crocodile Gold has seen it's production rise quickly from two years ago and so has Lake Shore Gold.Both have had to raise milling capacity.Both have raised their guidance from last year.Crocodile Gold has a resource that has been discovered but not yet completely defined in their Maud Creek deposit.Lake Shore has a new resource that has barely been defined.Both will likely have to increase their milling capacity in 2015.However Crocodile Gold has guidance of 200,000 to 215,000 ounces while LSG has guidance of only 160,000 to 180,000 ounces for 2014.Oh yes and the price of LSG is about five times higher than the proficient Crocodile.But LSG has a problem many producers would like to have - soon they will have too much gold for their mill to process.
Saturday 11 October 2014
Crocodile Gold farms out assets
Crocodile Gold released it's second quarter results about a month ago and it had solid results.It's production was ahead of the same quarter in 2013.While production expenses were reduced.Consequently it showed a net income of $4 million.The first in several quarters.It says that it is on track for guidance for 2014 that was given previously(200,000 to 210,000 ounces).It also spent $15 million on resource definition at their Cosmo mine and their Fosterville mine.Both have large deposits but they need to know how large in order to plan capital expenditures,drilling equipment and processing capacity at their mill.
Gold production has levelled off in 2014.That is because
(a) production at the Cosmo mine has stabilized
(b) the Fosterville deposit seems huge but has not been developed, and
(c) production at the Stawell mine has slowed until the Big Hill project comes onstream
New Agreements
On August 28 Crocodile announced three new agreements with Phoenix Copper.The first agreement is for the Iron Blow and Mount Bonnie property.There is a 2% royalty on any gold and silver production.Also there is a buy-back agreement if gold or silver is found.Lastly there will be cash compensation if a bankable feasibility study is produced for base metals.
There is a similar agreement for their Maud Creek property.There is a buy-back agreement for properties around Maud Creek while Crocodile Gold retains 100% ownership of the Maud Creek property itself. Crocodile Gold states that there are 900,000 ounces of Indicated Resource and 350,000 ounces of gold of Inferred Resource here .The gold is low to medium grade of ore.There is no mention of Proved and Probable Resources.But this blog believes it to be significant .Also Phoenix Copper may enter into agreements with third parties such as BHP or Freeport-McNamara.The Maud Creek deposit looks sizeable and this should speed up development.But there will not likely be any production before 2016.
The rest of 2014
Crocodile expects to meet it's guidance of 200,000 to 210,000 ounces of gold.But it also expects the Stawell mine to drop in production before their Big Hill project comes onstream.They have a tremenduous resource in their Fosterville mine that is not being exploited.Possibly there is not enough equipment in place but it seems that drilling could be taking place in both the Upper and Lower Phoenix deposits and then a more likely target would be 250,000 to 275,000 ounces of total annual production.In addition, they have just ended their milling agreement with Thor mining so they can increase their own processing at the mill.
Their agreement with Phoenix Cooper is a good one and will speed up development of the sizeable Maud Creek deposit but no production will be coming onstream in 2014.Crocdile must buy extra equipment and even increase milling capacity to produce another 50,000 to 60,000 ounces from their Fosterville mine.
Gold production has levelled off in 2014.That is because
(a) production at the Cosmo mine has stabilized
(b) the Fosterville deposit seems huge but has not been developed, and
(c) production at the Stawell mine has slowed until the Big Hill project comes onstream
New Agreements
On August 28 Crocodile announced three new agreements with Phoenix Copper.The first agreement is for the Iron Blow and Mount Bonnie property.There is a 2% royalty on any gold and silver production.Also there is a buy-back agreement if gold or silver is found.Lastly there will be cash compensation if a bankable feasibility study is produced for base metals.
There is a similar agreement for their Maud Creek property.There is a buy-back agreement for properties around Maud Creek while Crocodile Gold retains 100% ownership of the Maud Creek property itself. Crocodile Gold states that there are 900,000 ounces of Indicated Resource and 350,000 ounces of gold of Inferred Resource here .The gold is low to medium grade of ore.There is no mention of Proved and Probable Resources.But this blog believes it to be significant .Also Phoenix Copper may enter into agreements with third parties such as BHP or Freeport-McNamara.The Maud Creek deposit looks sizeable and this should speed up development.But there will not likely be any production before 2016.
The rest of 2014
Crocodile expects to meet it's guidance of 200,000 to 210,000 ounces of gold.But it also expects the Stawell mine to drop in production before their Big Hill project comes onstream.They have a tremenduous resource in their Fosterville mine that is not being exploited.Possibly there is not enough equipment in place but it seems that drilling could be taking place in both the Upper and Lower Phoenix deposits and then a more likely target would be 250,000 to 275,000 ounces of total annual production.In addition, they have just ended their milling agreement with Thor mining so they can increase their own processing at the mill.
Their agreement with Phoenix Cooper is a good one and will speed up development of the sizeable Maud Creek deposit but no production will be coming onstream in 2014.Crocdile must buy extra equipment and even increase milling capacity to produce another 50,000 to 60,000 ounces from their Fosterville mine.
Thursday 9 October 2014
Western Forest - the Brookfield factor
Recently Western forest announced a secondary offering to buy 92 million shares that Brookfield Special Situations owned.Shares were sold at $2.50 a share.This offering went so well that they sold another 22 million shares.This removes all of the equity that Brookfield had in Western Forest.Brookfield had a 49% interest in Western and now it has no equity at all.This increases the float of shares and gives their shares more liquidity.It also gives Western more control over it's own operations.This is seen as a very positive factor in Western (WEF) moving higher in the coming quarters.
Results in 2014
Western already reported good results for the first half of 2014.Revenue is up 25 to 30% from Q2,2013.Operating expenses increased only 10% over Q2 in 2013.Consequently net income has almost doubled since the same quarter in 2013.This helped to bring the price of WEF shares up to the $2.50 per share area.The price of the shares allowed Western to make this offer look acceptable to Brookfield.Without good operating metrics WEF could not have sold enough shares at $2.50.But in fact,their offering was so successful that they sold another 22 million shares.This also eliminates any management fees that WEF had to pay to Brookfield.Western decided to pay a dividend and this makes their stock look more attractive to investors also.
Management changes
Western has already started to make changes to their operation.They closed down their Nanaimo saw mill and invested $10 million in their Duke Point and Saltair operations.Employees will be shifted over to the expanded operation in Duke Point.This will reduce their operational costs and increase overall production.Additionally this will allow more flexibility to produce different grades of lumber.If one of their markets changes so that their is more demand for one product and less for another Western will have little trouble adapting to the market.Western will likely in the future have to increase their log production especially to the Chinese market. Lastly it is not clear whether they have continued and ramped up their chip mill or closed it down.It is likely that they will need this in the future as well as increased log production.But now they have much more flexibility to make these changes.Look for slightly better earnings in the third quarter and down a little in the fourth quarter.Nevertheless earnings per share and net income will likely be double that of 2013.
Results in 2014
Western already reported good results for the first half of 2014.Revenue is up 25 to 30% from Q2,2013.Operating expenses increased only 10% over Q2 in 2013.Consequently net income has almost doubled since the same quarter in 2013.This helped to bring the price of WEF shares up to the $2.50 per share area.The price of the shares allowed Western to make this offer look acceptable to Brookfield.Without good operating metrics WEF could not have sold enough shares at $2.50.But in fact,their offering was so successful that they sold another 22 million shares.This also eliminates any management fees that WEF had to pay to Brookfield.Western decided to pay a dividend and this makes their stock look more attractive to investors also.
Management changes
Western has already started to make changes to their operation.They closed down their Nanaimo saw mill and invested $10 million in their Duke Point and Saltair operations.Employees will be shifted over to the expanded operation in Duke Point.This will reduce their operational costs and increase overall production.Additionally this will allow more flexibility to produce different grades of lumber.If one of their markets changes so that their is more demand for one product and less for another Western will have little trouble adapting to the market.Western will likely in the future have to increase their log production especially to the Chinese market. Lastly it is not clear whether they have continued and ramped up their chip mill or closed it down.It is likely that they will need this in the future as well as increased log production.But now they have much more flexibility to make these changes.Look for slightly better earnings in the third quarter and down a little in the fourth quarter.Nevertheless earnings per share and net income will likely be double that of 2013.
Friday 3 October 2014
Southern Pacific finshes Strategic Review
On September 25 Southern Pacific released a press release giving their year end results.First they announced that their Strategic Review process was finished and they are not selling the company nor merging with another company.They instead decided to maximize shareholder value and production rates.They obtained a new $150 million lien credit facility to replace their old $100 million revolving line of credit.They also sold off a $19 million non-core asset called the Leismer property.Their proved plus probable reserves barely changed since last year.In addition, STP booked a loss of $424 million with $395 million being a non-cash impairment charge.In other words, they had an operating loss of $29 million.
Like a startup
Southern Pacific trades at $.04 to $.06 a share right now.It has a market capitalization of about $20 million.But it is no ordinary penny stock.It has assets of about $650 million.It has two heavy oil plants-one at Fort Mackay,Alberta and one at Senlac, Sakatchewan.It produced 4173 barrels per day in the last quarter which is up 2% from the previous quarter.The production is split almost evenly between the two plants.
STP produces bitumen at it's Fort Mackay facility, near Fort Mcmurray, Alberta.However it experienced well bore conformance problems.So it had to install interflow control devices(ICDs) to stabilize the flow over the length of the well and reduce the risk of steam short circuits.Production is stabilizing and gradually increasing.More ICDs will be used at Mackay.Also(during the strategic review process)they got approval for downspacing well pairs,that is, putting new wells between existing well pairs.The cost here would be $51 million and money is in place to do it.First steaming of the new wells would be in mid 2015.It seems that STP does not count on significant production increases in the next quarter from Mackay.
Senlac. Saskatchewan
Production of heavy oil is about the same as in the previous quarter.But STP has gotten approval to start work on a new well pad;this will be called Phase L.It will have three well pairs in the pad at a cost of $19 million.Money is in place to start construction.They will watch how well the ICDs work in Fort Mackay and see if some or all must be installed at Senlac. STP thinks that production could commence in the next quarter but it will take some time to get to full production.This blog does not expect significant increases in production in the next quarter.
The rest of 2014
Southern Pacific still has negative funds flow. But other higher priced stocks do as well.It is not likely that Southern Pacific will have positive funds flow in 2014 even with Phase L coming onstream at Senlac.STP expects that it will have 7000 barrels per day from the original 12 well pairs; that does not count production from Phase L.There is no doubt that the Strategic Review process has slowed down their targets but 5000 barrels seems likely by the end of the year .And positive funds flow by the early part of the second half of 2015.If true, then shareholders should see $.20 to $.25 per share by next March.The next quarter will tell us how STP has done with the ICDs at Fort Mackay and whether they will have 4300 to 4400 barrels per day in total production.
Like a startup
Southern Pacific trades at $.04 to $.06 a share right now.It has a market capitalization of about $20 million.But it is no ordinary penny stock.It has assets of about $650 million.It has two heavy oil plants-one at Fort Mackay,Alberta and one at Senlac, Sakatchewan.It produced 4173 barrels per day in the last quarter which is up 2% from the previous quarter.The production is split almost evenly between the two plants.
STP produces bitumen at it's Fort Mackay facility, near Fort Mcmurray, Alberta.However it experienced well bore conformance problems.So it had to install interflow control devices(ICDs) to stabilize the flow over the length of the well and reduce the risk of steam short circuits.Production is stabilizing and gradually increasing.More ICDs will be used at Mackay.Also(during the strategic review process)they got approval for downspacing well pairs,that is, putting new wells between existing well pairs.The cost here would be $51 million and money is in place to do it.First steaming of the new wells would be in mid 2015.It seems that STP does not count on significant production increases in the next quarter from Mackay.
Senlac. Saskatchewan
Production of heavy oil is about the same as in the previous quarter.But STP has gotten approval to start work on a new well pad;this will be called Phase L.It will have three well pairs in the pad at a cost of $19 million.Money is in place to start construction.They will watch how well the ICDs work in Fort Mackay and see if some or all must be installed at Senlac. STP thinks that production could commence in the next quarter but it will take some time to get to full production.This blog does not expect significant increases in production in the next quarter.
The rest of 2014
Southern Pacific still has negative funds flow. But other higher priced stocks do as well.It is not likely that Southern Pacific will have positive funds flow in 2014 even with Phase L coming onstream at Senlac.STP expects that it will have 7000 barrels per day from the original 12 well pairs; that does not count production from Phase L.There is no doubt that the Strategic Review process has slowed down their targets but 5000 barrels seems likely by the end of the year .And positive funds flow by the early part of the second half of 2015.If true, then shareholders should see $.20 to $.25 per share by next March.The next quarter will tell us how STP has done with the ICDs at Fort Mackay and whether they will have 4300 to 4400 barrels per day in total production.
Saturday 20 September 2014
Algonquin Power raises cash
On September 4,2014 Algonquin Power announced a secondary offering of 16.86 million shares at $8.90 a share.There was also an overallotment of about 250,000 shares.This blog considers that $8.90 is a reasonable price for Algonguin Power to raise cash.The money was raised in 12 days-a good sign that demand is strong for Algonquin shares.This will increase the number of shares from 207 million to 224 million.Ordinarily this would dilute earnings and drive the price of shares down but Algonquin had a good first half and has new operations that will increase earnings for the second half.Consequently even with 17 million new shares , earnings per share will rise.Investors know this and have bid the price up to almost $9.00.It is likely to soon surpass the 52 week high of $9.15.
Another acquisition
Algonquin also acquired in Sepember another American utility in a kind of auction from Carlyle Infrastructure for US $327 million.The sale is conditional on approvals from American regulators.It is expected to close in the second half of 2015 and will not affect the balance sheet until then.Yahoo Finance points out that this is the eighth American utility acquired by Algonquin since 2010.It has picked up utilities in Georgia, Arizona and Arkansas along with these new Carlyle utilities in California and Montana.Most have gotten recent rate increases that have increased revenues and earnings.Earnings went from $.16 per share in the first half of 2013 up to $.22 in 2014.This with new earnings coming onstream from Cornwall and Bakersfield, California in the second half of 2014 .An earlier blog predicted earnings of $.47 to $.50 per share for 2014.This still seems reasonable with the new shares as net earnings seem on track to hit $100 to $120 million for the year; they reported $51 million for the first half and new earnings about to be delivered.The question is whether the new properties can deliver as the existing properties did in the first half.And the bigger question is can they keep getting generous rate increases from American regulators like they did in early 2014.
Forecast for 2015
This blog sees an increase in earnings for 2014 to $.47 to $.50 per share from $.34;this is an increase of more than 40% and should send the P/E ratio down to 21 or 22 from the present 26.This blog sees little resistance at it's 52 week high of $9.15 and it may head towards $10.00 per share by late November.But 2015 may see small or no rate increases from American regulated utilities and earnings growth will stall.Algonquin has a nice portfolio of assets but more future purchases must come from northern properties.It appears that Algonquin is better at buying distressed properties than building them.
Another acquisition
Algonquin also acquired in Sepember another American utility in a kind of auction from Carlyle Infrastructure for US $327 million.The sale is conditional on approvals from American regulators.It is expected to close in the second half of 2015 and will not affect the balance sheet until then.Yahoo Finance points out that this is the eighth American utility acquired by Algonquin since 2010.It has picked up utilities in Georgia, Arizona and Arkansas along with these new Carlyle utilities in California and Montana.Most have gotten recent rate increases that have increased revenues and earnings.Earnings went from $.16 per share in the first half of 2013 up to $.22 in 2014.This with new earnings coming onstream from Cornwall and Bakersfield, California in the second half of 2014 .An earlier blog predicted earnings of $.47 to $.50 per share for 2014.This still seems reasonable with the new shares as net earnings seem on track to hit $100 to $120 million for the year; they reported $51 million for the first half and new earnings about to be delivered.The question is whether the new properties can deliver as the existing properties did in the first half.And the bigger question is can they keep getting generous rate increases from American regulators like they did in early 2014.
Forecast for 2015
This blog sees an increase in earnings for 2014 to $.47 to $.50 per share from $.34;this is an increase of more than 40% and should send the P/E ratio down to 21 or 22 from the present 26.This blog sees little resistance at it's 52 week high of $9.15 and it may head towards $10.00 per share by late November.But 2015 may see small or no rate increases from American regulated utilities and earnings growth will stall.Algonquin has a nice portfolio of assets but more future purchases must come from northern properties.It appears that Algonquin is better at buying distressed properties than building them.
Wednesday 17 September 2014
A Reit in the north
Lanesboro Reit posted their second quarter results on August 18.They are not widely followed because they do not have a huge amount of assets and much of their assets are in the Canadian north.They trade at about $1.15 per share now but have traded at $1.50 per share recently;they sold some non-core assets in 2013 and made a good gain.This quarter they made a net loss of $.21 million before extraordinary items while net operating income decreased by $.16 million compared to Q2 2013.Their occupancy rates are rising but still below industry standards.But they did make some gains on the financing side.In particular, they received a $9 million repayment of two mortgage loans on Clarington Senior's residence in central Ontario.
Financial details
The main item here is the repayment of two mortgage loans for $9 million.They also increased a mortgage on one property and got proceeds of $1.6 million.Also they refinanced a $16 million loan that was subject to a covenant breach and got a better interest rate.They have no loans that are in breach of loan covenants and this brings a better interest rate on all mortgage loans.They also got an extension on their series G Debentures.Lastly they expect their warrants will be exercised in 2015 and will use proceeds to pay off more debt.
Conclusion
It has many properties in the Fort Mcmurray tar sands area.Incomes are not yet stable here and Lanesboro has suffered low occupancy rates in the past.Occupancy rates are up but rental rates have fallen somewhat.They need to raise rental rates and occupancy and the increase in the price of heavy oil should help by stabilizing incomes.It did have a small loss this quarter but the financing gains help to offset.The second half should be slightly better but they need to diversify their portfolio perhaps into Edmonton or Fort St.John in British Columbia.Still they are more solid than many small Reits as their shareholder equity is about $120 million and total assets of about $475 million.The price should stay in a range this half between $1.00 to $1.25 per share.However they would make an excellent takeover candidate for a bigger operator like Holloway Lodging or Interrent Reit if it can be obtained at the right price.With their financing situation improved Lanesboro will be a little more expensive this quarter.
Financial details
The main item here is the repayment of two mortgage loans for $9 million.They also increased a mortgage on one property and got proceeds of $1.6 million.Also they refinanced a $16 million loan that was subject to a covenant breach and got a better interest rate.They have no loans that are in breach of loan covenants and this brings a better interest rate on all mortgage loans.They also got an extension on their series G Debentures.Lastly they expect their warrants will be exercised in 2015 and will use proceeds to pay off more debt.
Conclusion
It has many properties in the Fort Mcmurray tar sands area.Incomes are not yet stable here and Lanesboro has suffered low occupancy rates in the past.Occupancy rates are up but rental rates have fallen somewhat.They need to raise rental rates and occupancy and the increase in the price of heavy oil should help by stabilizing incomes.It did have a small loss this quarter but the financing gains help to offset.The second half should be slightly better but they need to diversify their portfolio perhaps into Edmonton or Fort St.John in British Columbia.Still they are more solid than many small Reits as their shareholder equity is about $120 million and total assets of about $475 million.The price should stay in a range this half between $1.00 to $1.25 per share.However they would make an excellent takeover candidate for a bigger operator like Holloway Lodging or Interrent Reit if it can be obtained at the right price.With their financing situation improved Lanesboro will be a little more expensive this quarter.
Tuesday 26 August 2014
Northland Power changes guidance
Northland Power released it's second quarter results recently and it experienced another solid quarter.Northland is a little different than many traditional power generators.It has quite a few Canadian operations including solar and wind based generators but it also has a new wind farm in the North Sea.It is a massive operation and took massive financing.It has completed it's financing now and has started construction.The completion date is expected to be 2017.
The second quarter
Sales were up, from $124 million in Q2 2013 to $170 million in 2014.Free cash flow was up 43 % over last year while it was up by 87% in Q1 2014 over the same quarter in 2013.However Northland had significant non-cash charges and showed a net loss of $61 million compared to net income of $75 million in Q2 2013.Because of heavy capital write-offs and interest charges a better measure of performance for most utilities(including Northland) is adjusted EBITDA.For example, Northland(NPI) had a net loss for the first half of 2014 of $46 million in comparison to a net income of $100 million for the first half of 2013.But EBITDA which allows for financing and foreign exchange gains and losses has been raised by NPI from $305 million to $350 TO $360 million for 2014.This presumably does cover preliminary financing charges for their huge wind farm called Gemini.In addition,NPI raised guidance for 2015 up to $380 to $400 million.
The impact of Gemini
The total capital cost of Gemini will be around EUR$2.8 billion.It took awhile to arrange financing but it is now completed.Financing charges will affect it's earnings and earnings per share but these are non-cash charges and most will not affect cash flow.However for large capital projects like Gemini many investors will use EBITDA as a guide.The only problem is that it can put a strain on the payout ratio which will remain high until Gemini is finished.NPI says that their dividend is safe and this blog believes that it is.After all they just raised their guidance for both 2014 and 2015.
The second quarter
Sales were up, from $124 million in Q2 2013 to $170 million in 2014.Free cash flow was up 43 % over last year while it was up by 87% in Q1 2014 over the same quarter in 2013.However Northland had significant non-cash charges and showed a net loss of $61 million compared to net income of $75 million in Q2 2013.Because of heavy capital write-offs and interest charges a better measure of performance for most utilities(including Northland) is adjusted EBITDA.For example, Northland(NPI) had a net loss for the first half of 2014 of $46 million in comparison to a net income of $100 million for the first half of 2013.But EBITDA which allows for financing and foreign exchange gains and losses has been raised by NPI from $305 million to $350 TO $360 million for 2014.This presumably does cover preliminary financing charges for their huge wind farm called Gemini.In addition,NPI raised guidance for 2015 up to $380 to $400 million.
The impact of Gemini
The total capital cost of Gemini will be around EUR$2.8 billion.It took awhile to arrange financing but it is now completed.Financing charges will affect it's earnings and earnings per share but these are non-cash charges and most will not affect cash flow.However for large capital projects like Gemini many investors will use EBITDA as a guide.The only problem is that it can put a strain on the payout ratio which will remain high until Gemini is finished.NPI says that their dividend is safe and this blog believes that it is.After all they just raised their guidance for both 2014 and 2015.
Tuesday 12 August 2014
Pengrowth Energy- a successful driller
Pengrowth Energy released it's second quarter results last week and it was adequate but not great.Pengrowth is working hard to develop it's heavy oil property called Lindberg for the fourth quarter.So Pengrowth inked an agreement with Husky Oil for delivery of heavy oil.This will assure cash flow for it's new oil and should be seen as a good move although the cost is unknown.It also shows an increase in reserves at Lindberg which will extend the life of the Lindberg pool.
The Cardium
Pengrowth has spent a good portion of their capital expenditures on the Cardium area of Alberta.Pengrowth(PGF) has developed a few fields here and had an excellent drilling record.They report a 100 % drilling rate.But this is likely all horizontal drilling and vertical drilling in a well delineated pool or pools.They have not extended their field with any or not many exploratory drilling.There may be accessible oil that has not been explored which could easily increase their production if true.This will be important in the next quarter if production does not rise. As it should not be that expensive and PGF has a good cash balance on hand.
The other areas
PGF has significant acreage in the Mannville area of Alberta and in the Swan Hills area.This blog( in an earlier blog) advocated PGF to take a position in Perpetual Energy which has properties near it's properties and not a huge market cap.PGF missed this opportunity and Perpetual got another partner even though PGF needed this increase in production.Perpetual is also developing it's Mannville sands property and would make a good partner for PGF.PGF could get a JV agreement with Perpetual to develop it's Mannville property and pay some of it's cash on hand.
PGF also has significant acreage in the Swan Hills area which is primarily a natural gas area.Perpetual might take a farm-in agreement here too . Or PGF could talk to Lightstream Resources which has just developed a battery that will eventually produce up to 3500 barrels of oil per day.Lightstream needs cash and would make an excellent partner.PGF expects to spend only about $220 million on capital expenses for the rest of the year and this will just not "cut it".They need new production in the third quarter before the well awaited Lindberg comes onstream.However PGF still produces almost double the barrels per day of Lightstream Resources and ten times juniors like Argent Energy or BNK Petroleum;so it seems to be fairly valued.
The Cardium
Pengrowth has spent a good portion of their capital expenditures on the Cardium area of Alberta.Pengrowth(PGF) has developed a few fields here and had an excellent drilling record.They report a 100 % drilling rate.But this is likely all horizontal drilling and vertical drilling in a well delineated pool or pools.They have not extended their field with any or not many exploratory drilling.There may be accessible oil that has not been explored which could easily increase their production if true.This will be important in the next quarter if production does not rise. As it should not be that expensive and PGF has a good cash balance on hand.
The other areas
PGF has significant acreage in the Mannville area of Alberta and in the Swan Hills area.This blog( in an earlier blog) advocated PGF to take a position in Perpetual Energy which has properties near it's properties and not a huge market cap.PGF missed this opportunity and Perpetual got another partner even though PGF needed this increase in production.Perpetual is also developing it's Mannville sands property and would make a good partner for PGF.PGF could get a JV agreement with Perpetual to develop it's Mannville property and pay some of it's cash on hand.
PGF also has significant acreage in the Swan Hills area which is primarily a natural gas area.Perpetual might take a farm-in agreement here too . Or PGF could talk to Lightstream Resources which has just developed a battery that will eventually produce up to 3500 barrels of oil per day.Lightstream needs cash and would make an excellent partner.PGF expects to spend only about $220 million on capital expenses for the rest of the year and this will just not "cut it".They need new production in the third quarter before the well awaited Lindberg comes onstream.However PGF still produces almost double the barrels per day of Lightstream Resources and ten times juniors like Argent Energy or BNK Petroleum;so it seems to be fairly valued.
Wednesday 21 May 2014
Huronia Consulting(part 3)
Huronia Consulting is a name I have given to a series of blogs related to improving things in Midland, Ontario.Firstly I have suggested that the mayor needs to talk to and get funding form provincial and federal politicians (not necessarily the minister) to modernize the three or four factories on highway 12.This will take a concerted effort by the mayor and town council.Secondly I point out that Midland is the centre of a county(Simcoe County) that has grown faster than the province since the 2006 census.Primarily Tiny and Tay township have grown in population and have no real centre ,other than Midland,to get many of their weekly purchases.Also Midland has special attractions that most of the surrounding towns do not have.For example,Mcdonald's Restaurant, Canadian Tire,many restaurants,and a large Shopper's Drug Mart plus an art centre and a hospital.
A breakdown of the Townships
Once you look at the breakdown of the population in the three townships around Midland you can see just how potentially important they are to Midland's future.Including Springwarter township the three townships have a population(2011 census) of 39,200.The main two population centres(other than Midland) are Penetanguishene and Elmvale.Neither has the special attractions that Midland does but Penetanguishene must be taken as a competitor for business from the townships.Elmvale less so.In fact, many people from Elmvale may shop at the Midland Canadian Tire or go to it's art centre.So it can easily be seen that competitive prices and customer service can bring more dollars spent into Midland over Penetanguishene and Elmvale.
The new Structure
There has been changes going on in Midland over the past year.Quite a few stores in the Mountainview mall have closed down and business is not booming in the remaining stores perhaps with the exception of the Food Basics store.It has competitive prices and always a special or two.Service in all the mall stores is questionable.The future is not certain unless the remaining stores start to compete on price and become more customer-friendly.A couple of stores have closed also downtown but the art centre may have brought a little more traffic downtown.There is steady traffic downtown because the banks are downtown.It is expected that new stores may gradually take the place of the ones closed.But I think the area that might get new stores is on the road between Midland and Penetanguishene.The hospital seems to be expanding and some new stores have already opened such as the Subway store.There is more traffic coming out here as people increasingly come to Swiss Chalet and the Beer store.New outlets may spring up along the highway.The Super store and the Canadian Tire are always busy and bring traffic.Here is where we may get new stores.
A breakdown of the Townships
Once you look at the breakdown of the population in the three townships around Midland you can see just how potentially important they are to Midland's future.Including Springwarter township the three townships have a population(2011 census) of 39,200.The main two population centres(other than Midland) are Penetanguishene and Elmvale.Neither has the special attractions that Midland does but Penetanguishene must be taken as a competitor for business from the townships.Elmvale less so.In fact, many people from Elmvale may shop at the Midland Canadian Tire or go to it's art centre.So it can easily be seen that competitive prices and customer service can bring more dollars spent into Midland over Penetanguishene and Elmvale.
The new Structure
There has been changes going on in Midland over the past year.Quite a few stores in the Mountainview mall have closed down and business is not booming in the remaining stores perhaps with the exception of the Food Basics store.It has competitive prices and always a special or two.Service in all the mall stores is questionable.The future is not certain unless the remaining stores start to compete on price and become more customer-friendly.A couple of stores have closed also downtown but the art centre may have brought a little more traffic downtown.There is steady traffic downtown because the banks are downtown.It is expected that new stores may gradually take the place of the ones closed.But I think the area that might get new stores is on the road between Midland and Penetanguishene.The hospital seems to be expanding and some new stores have already opened such as the Subway store.There is more traffic coming out here as people increasingly come to Swiss Chalet and the Beer store.New outlets may spring up along the highway.The Super store and the Canadian Tire are always busy and bring traffic.Here is where we may get new stores.
Sunday 4 May 2014
Huronia Consulting(part 2)
Simcoe County is in Central Ontario and it has lagged behind the province in industrial growth and in population.But according to Statistics Canada from 2006 to 2011 Simcoe County has had population growth exceeding the provincial average.Simcoe County had an average growth of about 1.2% versus a little less than 1% for the province.Wasaga Beach has grown also but it has not had much industrial deelopment.Springwater Twp.,Tiny Twp.,and Tay Twp. all have grown at about the provincial average.Here is where Midland gets a substantial amount of it's income from!Midland is a centre for the area.It has services that the surrounding small towns do not have.This includes to some extent Wasaga Beach and certainly includes Penetanguishene.
Midland Services
Midland has lots of services not in the surrounding towns.Their main street is considerably more fashionable than that of Balm Beach or Waubashene.Midland has a hospital matched only by Collingwood in this area.The Mcdonald's restaurant brings people into Midland that don't want to go to Barrie and don't like the one in Elmvale nor the one in Wyevale(there is none).Grocery stores in Midland offer much more variety than the ones in Perkinsfield.So services do bring people into Midland but will it continue to? Midland must compete on the basis of customer friendliness and on price. Customers may come in from Tay township and Tiny township but will they buy a little or a lot?It depends on the friendly staff and the prices they must pay.However the difference between selling $60,000 in sales or $100,000 per day may depend on just that.The area is growing and the townships are growing almost as fast so Midland will continue to service the area for people that don't want to drive to Barrie.The question is how successful will local businesses be?
Midland Services
Midland has lots of services not in the surrounding towns.Their main street is considerably more fashionable than that of Balm Beach or Waubashene.Midland has a hospital matched only by Collingwood in this area.The Mcdonald's restaurant brings people into Midland that don't want to go to Barrie and don't like the one in Elmvale nor the one in Wyevale(there is none).Grocery stores in Midland offer much more variety than the ones in Perkinsfield.So services do bring people into Midland but will it continue to? Midland must compete on the basis of customer friendliness and on price. Customers may come in from Tay township and Tiny township but will they buy a little or a lot?It depends on the friendly staff and the prices they must pay.However the difference between selling $60,000 in sales or $100,000 per day may depend on just that.The area is growing and the townships are growing almost as fast so Midland will continue to service the area for people that don't want to drive to Barrie.The question is how successful will local businesses be?
Monday 31 March 2014
Letters on my shingle
I have let readers of my blog know that I have hung out my shingle and am looking for consulting business.Some might reply to Workathon and some might send me an email.Google Analytics shows that Workathon gets a lot of readers.So far there have been no contacts.I have explained in previous blogs that I have my Master's degree in Economics plus one course short of my M.B.A. and four or five courses short of my Chartered Management Accounting degree.But these are simply letters on my shingle.This does not guarantee practical advice to any" wannabe" customers.They want practical experience.
So I can add that I have worked as a management consultant in the federal government and as an economist in the federal government.However potential customers in the Huronia region know that industry in this region is quite different than working in the federal government. And they are right.
The real world
After I left the federal government(as a civil servant) I had to get licences to work in the industrial town of Cambridge (8 miles from Kitchener).The first licence I got was a real estate licence and I worked for two years with a company called Olsen Real Estate.My first year I was in the middle of the pack;half sold more than me and half sold less.But the next year was a recession and lots of people left real estate and I was one of them.Still I had 10 to 15 listings and 15 to 20 sales.I had partly learned the trade.Next I turned to stocks and bonds and mutual funds. I studied for three months and took my exam and passed the Canadian Securities Course(C.S.C).I mostly sold mutual funds as people wanted to buy stocks and bonds from larger companies.But the mutual funds I sold did very well.Lastly I decided to get my life insurance and accident and sickness licence.I passed it right away.At first I sold for Mutual Life acquired by Clarica and then Sun Life.But I was much more successful selling it with my own company as a self employed agent.I found a number of small companies that competed on lower prices and I did sell quite a bit of insurance.In particular these small companies offered health insurance that I sold to seniors and people who travelled to the south for winter.This was quite successful for awhile.It is primarily because of this experience that I think I can offer acceptable advice to small companies in this region. But it is nice to have a few letters on my shingle.
So I can add that I have worked as a management consultant in the federal government and as an economist in the federal government.However potential customers in the Huronia region know that industry in this region is quite different than working in the federal government. And they are right.
The real world
After I left the federal government(as a civil servant) I had to get licences to work in the industrial town of Cambridge (8 miles from Kitchener).The first licence I got was a real estate licence and I worked for two years with a company called Olsen Real Estate.My first year I was in the middle of the pack;half sold more than me and half sold less.But the next year was a recession and lots of people left real estate and I was one of them.Still I had 10 to 15 listings and 15 to 20 sales.I had partly learned the trade.Next I turned to stocks and bonds and mutual funds. I studied for three months and took my exam and passed the Canadian Securities Course(C.S.C).I mostly sold mutual funds as people wanted to buy stocks and bonds from larger companies.But the mutual funds I sold did very well.Lastly I decided to get my life insurance and accident and sickness licence.I passed it right away.At first I sold for Mutual Life acquired by Clarica and then Sun Life.But I was much more successful selling it with my own company as a self employed agent.I found a number of small companies that competed on lower prices and I did sell quite a bit of insurance.In particular these small companies offered health insurance that I sold to seniors and people who travelled to the south for winter.This was quite successful for awhile.It is primarily because of this experience that I think I can offer acceptable advice to small companies in this region. But it is nice to have a few letters on my shingle.
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