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

Penn West makes a recovery

Penn West has fallen from $7 and $8 a share,a year ago, to a low of $.80 recently.But  during this period oil fell to a low recently of $38 a barrel.Oil is now about $50 a barrel and Penn West has recovered to about $1.50 a share.But Penn West has not recovered only because of the price of oil.It has sold off a lot of non-core assets to reduce it's senior debt.Unfortunately it's equity has been reduced also so it's debt/equity ratio has improved only slightly.
   Non-core Assets
Penn West has sold mostly smaller parcels of land with proven reserves.Earlier in the year they sold a 9.5% interest in their
 Weyburn property in southeast Saskatchewan for $205 million.Upon completion of the sale they will have raised $810 million in proceeds for 2015.They gave guidance that they would have non-core asset dispositions of $650 million and have surpassed their target.They intend to continue to pursue additional asset divestitures in 2015.
         Before this sale they announced that they sold their Mitsue properties  in Alberta for $192.5 million.In the first half of 2015 The Mitsue properties had produced 4500 barrels per day.The sales price was 14 times implied net operating incomehere and 13 times for the Weyburn property.
   Debt Reductions
     Debt has fallen since Q2 2014 by $1.4 billion and that has principally come from the sale of non-core assets.Debt fell from $3.2 billion to $1.9 billion but the debt/equity ratio only moved to .34 from.36.Penn West has used the sales to stabilize their capital expenditures and continue drilling on their explored land to increase it's value.This blog believes that drilling on unexplored land has probably been reduced.Drilling will be focussed on step-out wells near already discovered reservoirs. Work will be focussed on expanding existing resources and finding oil that is easy to deliver to market.This makes a noticeable increase in the value of already partly explored land.And they have  streamlined production which has made cost savings.The cost savings  in operational expenses have helped to increase their netback on oil.This helps to increase cash flow.Successful drilling is a key part of the Penn West program.That is why the reduction in the value of total assets has fallen lately.Some of the remaining land has gone up in value.
    The Book Value
Penn West has a large book value of their assets;it is $10.6 per share according to Yahoo Finance.They also show the price/book value of assets at about .12.Penn West was forced to find a way to increase the market value of their assets even with the falling price of oil and they are starting to do so.The price of oil may stay around $50 per barrel for awhile and they must continue to have strategic and successful drilling while costing less per well.The rest is up to the West Texas Intermediate  price of oil.
      The rest of 2015
   Experts are calling for further sales of assets in 2015.Some are calling for the sale of part of their jewel in Saskatchewan- their Viking property.This blog notes that the multiple of net operating income fell from 14 times to 13 times for their last sale.That is because the production was greater at the Mitsue property but the Weyburn property overall is more valuable.So the multiple was greater on the Mitsue properties.This blog calls for them to retain their Viking properties and sell further non-core assets that are contiguous to other producing properties.This however may include Viking properties with very small production figures.The key is to keep up their successful drilling to enhance the value of existing land and not to sell core assets.This will tie them over until the price of oil heads towards $60 a barrel.Over the last month it is looking like investors see the value of their strategy. see Workathon(blogger) for analysis of resource stocks; see Workathon(blogger) for corporate analysis

Perpetual Energy -perpetual poster boy for central Alberta

 Perpetual Energy is an Alberta company(a junior gas producer) that I have followed for several years.For seven or eight quarters it had constant(or perpetual production) at 19,000 to 21,000  boe/day.But it always had an active and productive drilling program.It bought land and discovered significant natural gas reservoirs in the Edson structure in central Alberta.This is a little known structure in central Alberta.At first it seemed like there was only natural gas in the East Edson area but later liquids were found in the West Edson area also.This changed everything about Perpetual Energy.
       The Swap
    On April1, 2015 PMT announced that it had swapped all joint interest lands in West Edson together with the wells with a production of 5,750 boe/day of natural gas production for 6.75 million Tourmaline Oil and Gas shares (TOU).It previously announced that it had a joint venture with Tourmaline for only a portion of the West Edson production.At the time of the April announcement Tourmaline shares were selling for about $38 a share.The deal was worth about $250 million.This however reduced Perpetual's production from 22,819 boe/day in the first quarter to 16,621 boe/day in the second quarter.Natural gas production at 86 MMcf/day was down while natural gas liquid production was only marginally lower than that in 2014.In addition, crude oil production was down almost 15% from 2014.
     The Remaining Operation
  Exploration and development spending for Q2 2015 was $13 million.$12 million of this total was spent to complete construction of the East Edson gas plant.Total expenditures were about $31 million on the processing plant along with gathering systems and tie-in operations of the wells.Also on April 10,2015 they sold land in east central Alberta  for $21 million to reduce debt.However  funds from operations(FFO) fell from $25 million in Q2 2014 to $3 million which was partly affected by the West Edson swap.Operating netbacks in Q2 were $10.16 boe which was 64% higher than Q1.This partly reflected cost savings and partly a small increase in prices.PMT also recorded gains of $135 million on other asset swaps and asset dispositions.So total debt was down from $360 million to $120 million.This aside from the TOU shares  they had valued at $253 million.
    The East Edson property
  The original discovery in the Edson structure was at East Edson.It is not known how far west Perpetual still owns.But next West Edson was discovered and then PMT made a joint venture to develop it faster.Now most of it has been sold but there may be the southwest corner that remains with PMT.Development at East Edson is continuing on the construction of a gas processing plant.It opened in July,2015 but PMT expects to expand it another 50% in the third quarter.It may drill another two well pad here as there are another 87 undeveloped drilling locations and a further 22 future development locations.East Edson seems to be a large property and the Tourmaline shares may only be used to develop this land.
      Outlook
 The outlook for Perpetual Energy  looks brighter now than it did at the start  of the year.It's total assets have increased from $747  in 2014 to $845 million in 2015 while debt has fallen from $359 million to $120 million in 2015.Perpetual has 5 wells and one being converted in a pool at their Mannville heavy oil property.But they will not develop this with the present oil prices.They have a substantial capital expenditure program and will spend almost it all on East Edson.Their gas processing plant will be soon expanded  by 50% and allow for increased production.Perpetual says that with the present size of the gas plant that they have replaced all lost production from West Edson.If this is true then when the processing plant has been expanded in the third quarter they will finally see production go higher than 22,000 boe/day.Two questions remain for investors.(1) Did they keep the southwest corner of West Edson for their own production? and (2) How far west does their East Edson property extend?This will determine whether Perpetual Energy goes back up beyond $1.00 per share.Either way Perpetual Energy is a successful driller in a little known area -the Edson structure and made it work.                             

Transalta Renewables arranges cheap financing

On September 24,2015 Transalta Renewables announced that it priced a $442 million bond for a subsidiary.The bond will be secured by a first ranking charge on Transalta Renewables ;it is senior secured debt.The interest rate will be 3.834%which is a  good rate  and it will mature in 2028.The bonds will have a rating of BBB.This is an above average to good commercial rate and is only two rankings below A-A-A-.
  Operational Statistics
 Almost all operational statistics have improved over the same quarter last year.EBITDA at $52 million and funds from operations(FFO) at$43 million have increased by $16 million over 2014.And earnings at $22 million was up from the $6 million recorded last year.These increases are due partly to the contribution from the  newly acquired Australian assets.In May they completed the $1.78 billion investment in Transalta's 425 MW gas fired generation assets in Australia.
    The New Bond
The new bond will be a $442 million senior secured bond maturing in 2028 and carrying an interest rate of 3.834%.Net proceeds of the financing will be used to make advances to Canadian Hydro Developers on "an intercompany loan agreement".Payments will be made on loans on three facilities (two in Shelburne,Ontario and one on Wolfe Island,near Kingston).The facility at Shelburne is a 200MW wind powered generator and at Wolfe Island also a 200MW wind powered generator.The projects are 100% contracted to IESO and utilize proven turbine technology.
       RNW  Increases Equity
 Transalta spun off 16 wind powered assets and 12 hydroelectric powered generation facilities into Transalta Renewables (RNW).The facilities have an installed generating capacity of 1856 MW.And it has an ownership interest of 1680 MW in the facilities. Transalta put some of the most profitable assets in RNW.In addition,RNW bought for $1.8 billion most of Transalta's Australian assets.With the closing of the Australian transaction RNW increased the dividend by 9% and will increase it another 7% upon completion of construction.                                                                                   The new $442 million bond will be used to pay an intercompany loan with Canadian Hydrodevelopers.The nature of the loan agreement is not clear but it is possible that the loans are secured by equity that Canadian Hydro has in these assets.It is also not clear whether Cdn. Hydro will still have equity in these assets after these payments.If so then RNW will be able to issue other bonds as it does not appear to have much debt and it will soon have new assets coming onstream in Australia.
         Summary of the Transaction
There is not much information available on the RNW capital structure so this blog will try and estimate it.Transalta spun off  their wind and hydroelectric assets but did it take any debt with it?Probably not much if any.The investment in the Australian assets did not take on much debt and so it is possible that this $442 million bond is about the first debt taken on.If this is approximately true then RNW has lots of debt capacity to buy back assets or expand existing assets.There are other estimates of RNW''s capital structure but at this time neither Transalta nor RNW is making it very clear just how much debt RNW took from it's parent.But we do know that BBB is a good credit rating and 3.834% is a pretty good interest rate.It does not look like the credit rating agency saw much debt on the books. workathon has financial analysis;workathon does utility analysis;workathon does corporate analysis

Huronia IX Lindsay-old town;new town

This is another in the Huronia series that offers consulting and possible improvements to a number of towns in the area around Lake Simcoe.This segment focuses on Lindsay and the sharp dichotomy between the old part of town and the new buildings in the west end of town.Many towns have a gradual separation between the older part of town and newer buildingsAlso many towns have newer buildings in several areas so the contrast is not so stark.But in Lindsay the newer construction is mostly on the west end of Kent Street (it's main artery);all in one area.
     The History of Lindsay
   Lindsay started along the Scugog river which is part of the Kawartha Lakes system.First a dam was built then a sawmill and after a grist mill.More construction developed that emanated from the corner of Lindsay and Kent Street.Building devlopped along Lindsay Street south and Kent Street westwards.Most of the original buildings are still there and there are many old brick buildings.Then a railway connected Lindsay to Port Hope and the station was built at St. Paul and King Street.Next there was another line built to Fenelon Falls.In total, there were five lines going through Lindsay which made it a pretty active town.All of the buildings and stations were in the old town.In fact, in these days there was no new town.
      Old Town
What I am referring to as the old town is contained within one square mile of the intersection of Kent Street and Lindsay Street.The Lindsay Armories is about the centre of this area.It goes north from Kent Street to about Queen Street and south to Durham or Mary Street.It goes west down Kent Street to Angeline Street where the hospital is.The hospital is relatively new but not as new as the new construction on Kent Street;the Ross Memorial hospital is transitional (not old and not new).
  This area now has a few abandoned buildings and a lot of barely used buildings.Many of the old brick buildings have not been renovated for 25 years.The products sold tend to be more traditional products and some of the styles are older as well.The store fronts need to be refurbished in a more modern style.But at this point in time very little money is being invested in this part of town.All of the new money is being invested in the west end of Lindsay.There is now starting to be more repetition of products  and competition between the outlets in the west end.
    New Town
     This part of town goes from Angeline Street (or the Ross Memorial hospital) right up to highway 35.The road is in better shape and there is new electrical service,sewers and new store fronts.There are a lot of gas stations,fast food outlets and stores selling newer products such as Mark's Work Warehouse,Staples and Midas Muffler.There are new buildings coming onstream also.Here is where the majority of retail sales are made in Lindsay.
   The Future of the Old Town
   Many older towns have found themselves in the same position.New York city along their harbour area ,Toronto in the harbour area and the old warehouse area and even Ottawa in their old market area.All these towns have decided to renovate what used to be an important and even the centre of town.Money has been invested and these areas have become rejuvenated.This is a probable solution for Lindsay also.Abandonned buildings need to be torn down and buildings underutilized need to have new functions.An earlier blog on Workathon discussed the possibility of developping a new inter and intra city bus terminal.There are many places to put a new bus terminal in the older town.Some new mid-rise(not high rise) apartment buildings could replace the older brick underutilized buildings.Even a new plaza or two with newer companies and newer products might come in here.Especially if they are built beside a mid-rise apartment building.Lindsay will have to find the money and it will take a lot of money to redevelop.
       Other Cities have done it
  As previously mentioned other cities have torn down and renovated the old and original parts of their town.These renovated ,formerly central, parts of town once changed have again become important parts of town.The warehouse district in Toronto is getting millions of dollars coming into the district.So is the market area in Ottawa.It may not look the same after new money has come into it but it will again be a functional and vibrant part of town.And this has helped all these towns grow as it will Lindsay.

The Lindsay Truck Centre- a model

 This is a possible model for a project I proposed in another blog on Econothon on Wordpress.The Lindsay Truck Centre was a name I gave to a project that would be owned and operated on the outskirts of Lindsay.It would be built on land on or near Walsh Street near the operation of Marbert Transport.This blog is a refinement of the earlier blog on Econothon.
        The Model
  This is an example only; if the city of Lindsay does go ahead with it they may decide to use some of the features shown here.First the truck centre should cover 4 to 6 acres and this entire area must be levelled and paved.The land purchased must be near or adjacent to Marbert Transport which is located on Walsh Street.This land is chosen because  Marbert is already in intercity transport.All the truck companies should operate from the same location.This makes it easier to build common facilities.First the lot must be serviced; it must have water and sewer and electrical services.Services must go into 5 to 8 units.So all services must go into each of the 5 to 8 units.The city may also install loading docks for each unit.The individual company will install it's own building for storage and loading.A new service that is springing up is fleet telematics.This service uses computers to monitor the location of trucks on the road.It can be modified to find out  when loads are ready to be moved and when trucks are ready to pick it up.A more advanced system would have the amounts of individual items needed by an individual store(such as Loblaws) and where it can be obtained most cheaply.This is ambitious and not likely to be used for some time.But I am pointing out that this type of computer operation is available.
      Specific Locations
 The main location served,of course, would be Lindsay and the main objective would be to use the truck centre to deliver a number of items (mostly food) to Lindsay stores.If it is successful then other items would be transported as well.For example, hardware and alcohol and some small car parts. Secondary locations to use this service might be Fenelon Falls,Bobcaygeon and Omemee.A transport truck could use a half load to Lindsay and a half load to Omemee.This would potentially cut the transport( and the total ) cost to both towns.        Contact Workathon for consulting advice