BTB Reit outperforms

  On November3 BTB Reit reported it's third quarter results.It had another in a series of good quarters.Almost all of it's operational statistics were substantially ahead of results a year ago.This is a reit that is gradually getting bigger and more profitable.This blog believes that it is a well managed reit.It's assets have increased considerably over the last two years and so have it's profits.
 Operational Statistics
 BTB had a 9% increase in rental income to $19 million.And it had a 14% increase in operating income to $11 million.Funds from operations (FFO) went from $3.8 to $4.3 million in Q3 2015.While adjusted funds from operations (AFFO) went from $3.6 to $4.7 million.More importantly FFO per share went from 11.3 to 12.5 cents per share for the quarter.And earnings or adjusted funds flow per share went from 10.8 cents to 13.5 cents per share.Annualized earnings per share are on track to hit $.50 to $.60 per share.
  BTB does all the little details well also;as it reports that it's weighted average interest rate went from 4.13% to 3.93%.While the average maturity of it's debt went from 4.7 years to 5.5 years.BTB also had a 5.6% increase in rents on 125,000 square feet of space.And it has kept it's occupancy rate at a healthy 91%.
  It refinanced two properties that had rates of 5.26% and 4.0% and got refinancing at 3.77%.And it acquired two office buildings in Ottawa.BTB  has most of it's properties in Quebec but recently has started to diversify into Ontario.Ottawa is a natural leap for BTB as it is close to the Quebec border and so is easy to manage.These acquisitions bring their total assets from $592 million in Q3 2014 to $650 million in 2015.
     BTB gets bigger
  BTB Reit is a  small junior reit that  is little followed by many analysts.Some brokers show their assets and earnings as less than they actually are because they don't bother to be accurate about a small reit but it is growing.BTB raised it's dividend two quarters ago and their payout ratio became a little high.It didn't appear safe at that time but since they have brought in very good results and now their payout ratio has dropped from 83% to 68%.For awhile it was near 90% but BTB has worked hard to bring it in line.Another good quarter or two and they may be ready to raises it again.As BTB quietly moves up closer and closer to $1 billion in assets.
  see Workathon for financial analysis of reits; view Workathon for analysis of quarterly reports  

Why oil prices must inevitably go up

 My last blog on LinkedIn talked about the process whereby the price of oil will eventually go back up,although how high is not clear.It made a few good points but LinkedIn did chop it up and move stuff around on it.The main points made were twofold.The cost of new oil discovered and delivered to market is more than earlier discoveries.So the average cost of oil will go up and the average price of oil will follow.Price is based on the cost plus a margin and the cost will move the price back up.The second main point is that the elasticity of demand is substantial in the long term and this increases the demand for oil more than  any of the official estimates show.Old estimates show the daily production of oil at 94 to 95 million barrels per day but new and more accurate estimates show it closer to 100 millon barrels per day.This blog believes that the latter estimates are correct.Studies done by the University of Calgary show the long term elasticity of demand much greater than the short term elasticity.
         The Recovery Rate
   Some of the controversy has come because of the different estimates of the recovery rate from oil wells.It was conventionally thought that the recovery rate for light oil was 25 to 35%.While the recovery rate for heavy oil is about 30 to 40%.But it is clear that there are new enhanced oil recovery (EOR) methods that increase the recovery rate beyond these rates.They inject various substances into the wells that increase the pressure and recovery in the well.The problem is that these methods are costly.Producers cannot afford any substantial enhanced recovery at these prices.Substances injected into the well vary from water to water vapour to carbon dioxide.The recovery rate varies with each substance.
 In 1956 M. Hubbert introduced the peak production theory.It proposed that at first in 1970 and later in 1995 that production would outstrip oil from new discoveries.So reserves would be falling not increasing.This has been changed to the year 2000 now as hydro fracturing has increased potential reserves.Once again the size of reserves depends on the recovery rate and the price of recovery.
       Elasticity of Demand
    The University of Calgary has done extensive studies on the elasticity of demand.That is, what is the percentage increase in demand with a percentage change in the price.It has found that there is little change in demand in the short term but there is significant change in the long term,that is ,over 4 to 6 months.     The base demand is generally considered to be around 92 million now.With the decrease in the price of oil many studies have pegged the new demand at 94 to 95 million per day.But there has been a 55% reduction in the price of oil over the last six months.This is enough time for a long term change in demand.And the new studies peg demand at around 100 million barrels per day.In fact, this blog believes the new studies are correct as the long term elasticity kicks in.
   Studies have shown that the slope in the demand curve to be less than .4.From 2000 to 2009 the increase in production was  900,000 barrels per day.From 2010 to 2015 production increased(according to American studies) by 1.2 million barrels per day.That is when the price of oil was $90 to $100 per barrel.Now that the price is about $45 a barrel this blog calls for an increase in production of 3 to 5 million barrels per day over 2015 to 2017.That means that the recent studies showing 100 million barrels per day of consumption are probably correct.
        Summary
            It is very likely that demand for oil is higher than most official estimates and growing faster than expected.If price stays in the present range of $45 to $55 a barrel per day then the slope of the supply curve will  increase closer to .75 or .85.If this happens then the demand for oil may be as high as 110 million barrels per day in late 2016 or early 2017.This definitely will decrease reserves.EOR will only be important if the price is at a level that will allow covering the cost plus a profit margin.If price falls below this level then EOR will be curtailed.For sure, from now to 2017 the marginal cost of producing oil will rise and more expensive oil will replace the cheaper oil.So the average cost will rise and the average price will follow.By then oil reserves will be considerably smaller.                                               see Workathon for analysis of resource stocks; use Workathon for consulting on resource stocks