The Loonie’s Tune

According to Bloomberg data, Canada’s dollar took its biggest one-day fall since 1971 on Monday. The loonie closed at USD1.0307, down 2.9 percent from Friday’s close of USD1.0606. Last Wednesday, it traded as high as USD1.1039; according to research by Bank of Nova Scotia, the last time the loonie was that strong was during the Civil War.

It was the fourth-straight session that the Canadian dollar dropped versus the greenback, good for a collective decline from last week’s peak of 7 cents.

The loonie is tightly linked to commodity prices, and crude oil has been stuck in a trading range in the mid-90s. What once seemed an inexorable march past the century mark was stalled by Saudi Arabia’s announcement that the Organization of the Petroleum Exporting Countries (OPEC) would consider boosting output when the oil cartel meets Dec. 5. And speculation that tighter credit markets will stifle economic expansion and reduce consumption of commodities held oil, copper, gold and silver down on Monday.

Unwinding of the so-called carry trade–borrowing money in low interest rate countries to invest in high-yield environments–is also having an impact. The continuing creep of subprime-mortgage-related writedowns has made investors more sensitive to risk, and they’ve backed down from leveraged currency bets.

Canada is currently home to low interest rates, but investors bet on the loonie because of its close tie to rising commodity prices. Similar currencies–the Australian dollar, the South African rand, the Brazilian real, the New Zealand dollar–have backed up against the US dollar as well.

And there’s another piece to the risk-aversion story: Investors could be looking at the loonie’s 29 percent 2007 run against the greenback and opting to take profits off the table. The Canadian dollar has run far and fast, perhaps a little too far, too fast.

The long-term global story is still intact, however: Rising middle classes in China, India and other emerging markets have increased demand for natural resources, leading to a structural change in the economics of commodity markets worldwide.

Trendspotting

Although lumping it with interventionists in South America, Asia and Africa ignores a slew of obvious and important distinctions, Alberta’s royalty rate hike is part of a long-term global trend toward increased public ownership of natural resources. But the situation up north is far different, far less dramatic, then scenarios in Venezuela, Russia, China and other jurisdictions defined by almost total state control.

Both Venezuela and Russia forced foreign companies to cede control of assets and share more of their profits this year. Exporters that aren’t reneging on contracts have imposed tariff increases in recent months, including Canada, the UK, the US, Algeria, Angola and Equador.

The date of its onset only a little more recent than the per-barrel price of oil’s, a rising chorus of citizens of reserve-rich nations has sung tunes of “more” and “fair.” And politicians, including those of Canada’s Texas, are dancing.

As with any similar stress test, solid businesses will survive and flourish. Weaker operations–those saddled with high debt, high costs or both, or an unfavorable production mix–will have a tougher time. But the heavyweights will find opportunity.

It was easy and a bit comforting to poke fun at Canada’s recent fascination with all forms of the word “fair” and its leaders’ reliance on mushy, indefinable-yet-John Q.-public-pleasing phrasing. That was elevated from one-off curiosity (Tax Fairness Plan) to borderline Orwellian mindbender by Alberta’s Our Fair Share report.

The fact is, however, no matter the word choice, Alberta’s recent royalty adjustments are part of a longer-term global trend. Let’s not dismiss, however, the political gamesmanship of energy executives.

Although many forecast dramatic capital spending cuts, early reports suggest the show will go on. Maybe a little less “Oklahoma!” and a little more “The Filth and the Fury,” but oil and gas trusts will adjust to the new demand on cash flow.

Tory Limitations

Prime Minister Stephen Harper proposed CAD60 billion in tax cuts in a mini-budget introduced in late October, but a new poll by Strategic Counsel for The Globe and Mail/CTV News suggests it hasn’t had the intended effect.

Harper’s Conservatives are even with Stephane Dion’s Liberals at 32 percent support. The Conservatives were up by five percentage points, 34 percent to 29 percent, just before the introduction of the mini-budget. And the new poll numbers come at a time when Harper is wrapped up in a controversy surrounding former Prime Minister Brian Mulroney, a member of the Conservative party.

Peter Donolo, a partner with Strategic Counsel, said the poll appears to confirm that the Liberals are the natural beneficiaries when the Tories face political difficulties. According to the poll, the New Democratic Party dropped three points to 12 percent.

The Greens are up one percentage point to 13, a virtual tie with the New Democrats.

The Liberals are now ahead of the Tories, 47 percent to 29 percent, in Ontario. In Quebec, the Bloc Quebecois jumped five points to 42 percent, while the Conservatives dropped three points to 23 percent. The Liberals remained stable, gaining one point to 18 percent.

The Roundup

Conservative Portfolio

Algonquin Power Income Fund (APF.UN, AGQNF) reported net earnings of CAD12.2 million (17 cents Canadian per unit), up from CAD5 million (7 cents Canadian per unit) a year ago. The earnings increase was based on lower expected future income tax expenses and increased unrealized gains on financial instruments.

Revenue for the quarter ended Sept. 30 was CAD46.5 million, down from CAD49.4 million in the third quarter of 2006, on the combination of lower production in the cogeneration division and lower reported revenue from its US facilities because of the stronger Canadian dollar. Cash available for distribution in the third quarter of 2007 was CAD18.5 million (24 cents Canadian per unit), up slightly from CAD17.6 million (23 cents Canadian per unit) in the third quarter of 2006.

Algonquin distributed 23 cents Canadian per unit, consistent with the amount distributed during the same period in 2006. Buy Algonquin Power Income Trust up to USD9.50.

AltaGas Income Trust (ALA.UN, ATGFF) reported net income of CAD31.4 million (54 cents Canadian per unit) for the three months ended Sept. 30, up 9 percent from CAD28.8 million (52 cents Canadian per unit) a year ago. AltaGas attributed the increase to higher hedge prices, lower costs in its power generation segment and higher rates.

Funds from operations (FFO) were CAD47.6 million (83 cents Canadian per unit), up from CAD43.2 million (78 cents Canadian per unit) for the same period in 2006. AltaGas declared total cash distributions of 52 cents Canadian per unit during the quarter.

AltaGas reported total debt of CAD229.1 million, down from CAD265.5 million at Dec. 31, 2006. The trust’s debt-to-total capitalization ratio was 29 percent, down from 33.4 percent at the end of 2006.

AltaGas announced Nov. 12 that it’s buying the interest in Taylor NGL LP it didn’t already own for CAD448 million. The acquisition should increase AltaGas’ processing capacity. AltaGas will pay CAD11.20 a unit in cash, 24 percent above Taylor’s Nov. 9 closing price, or 0.42 AltaGas unit per Taylor unit. The trust will also assume CAD142 million in debt.

AltaGas held 9.6 percent of Taylor prior to the new deal. AltaGas will assume full ownership of four plants that produced 20,041 barrels of gas liquids a day in the third quarter. AltaGas Income Trust is a buy up to USD28.

Arctic Glacier Income Fund (AG.UN, AGUNF) reported net income of CAD23.4 million (54 cents Canadian per unit) for the third quarter, up 23 percent from CAD19.1 million (52 cents Canadian per unit). Recent acquisitions overcame warmer-than-average weather and a rising Canadian dollar.

Revenue for the quarter was CAD106.6 million, up 2.3 percent from CAD104.2 million a year earlier. Distributable cash was CAD39.1 million, up from CAD35.7 million last year. Arctic Glacier attributed most of the revenue gain to the platform acquisitions of Union Ice in California, Tropic Ice in Michigan and six additional acquisitions since the end of the third quarter of 2006.

Sales in previously serviced markets decreased CAD1 million, or 1 percent, compared to the same quarter in 2006. The rising loonie decreased reported sales by $5.5 million for the quarter.

Earnings before interest, taxes, depreciation and amortization (EBITDA) during the third quarter were up 2 percent to CAD43.3 million. Net debt-to-EBITDA ratio fell to 2.1 to 1 at Sept. 30, 2007, from 2.7 to 1 at Dec. 30, 2006.

Arctic Glacier’s improved balance sheet and the strong loonie put the company in strong position to grow its business in the US. Buy Arctic Glacier Income Fund up to USD14.

Canadian Apartment Properties REIT (CAR.UN, CDPYF) reported a 7 percent rise in FFO in the third quarter to CAD20.8 million (35 cents Canadian per unit) from CAD19.3 million (34 cents Canadian per unit) a year ago. Operating revenue was up 9.5 percent to CAD74.9 million from CAD68.4 million on acquisitions completed over the last 12 months and higher average monthly rents across CAP REIT’s portfolio.

Distributable income was CAD21.3 million (36 cents Canadian per unit) for the three months ended Sept. 30, 2007, compared to CAD19.3 million (34 cents Canadian per unit) a year ago. CAP REIT’s payout ratio improved to 77.8 percent from 82 percent.

Net operating income (NOI) for the third quarter was up 12.6 percent to CAD42.6 million. NOI for properties owned at Dec. 31, 2005, increased 4.3 percent during the quarter. Operating expenses as a percentage of operating revenues decreased from 47.7 percent to 46.9 percent during the first nine months of 2007 primarily because of lower property taxes and energy costs compared to the prior year.

The ratio of total debt to gross book value was 65.3 percent at Sept. 30, 2007, compared to 61.4 percent last year. The REIT reported an occupancy rate of 97.7 percent. Buy Canadian Apartment Properties REIT up to USD20.  

Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF) reported a 33 percent revenue increase to CAD30.4 million from CAD20.4 million in the third quarter of 2006. The rise reflects three full months of contribution from acquired Clean Power Income Fund’s wind, hydro and biomass power assets and the continuing impact of electricity rate increases under Cardinal’s power purchase agreement.

Income from operations was CAD4.4 million for the quarter, up from CAD2.2 million a year ago. Distributable cash was CAD9 million (18 cents Canadian per unit), compared with CAD6.9 million (23.1 cents Canadian per unit) in the same quarter last year. Declared distributions to unitholders for the quarter were CAD12.9 million (25.7 cents Canadian per unit) compared with CAD7.7 million (25.5 cents Canadian per unit) in the same period last year.

The fund’s payout ratio for the third quarter was 143 percent, up from 110 percent a year ago. The higher payout ratio reflects the seasonality of the fund’s power assets.

Total power production for the quarter was 524,319 megawatt hours (MWh) compared with 306,436 MWh in the same period last year because of the contribution from the fund’s new assets. Leisureworld’s revenue was up 3.9 percent, and income from operations for the long-term care facility rose 11.9 percent.

Debt-to-capitalization as of Sept. 30 was 41.8 percent. Macquarie Power & Infrastructure Income Fund is a buy up to USD12.

Northern Property REIT (NPR.UN, NPRUF) reported total property revenue for the third quarter of CAD28.4 million, up 26.9 percent from a year ago. Net operating income rose to CAD19.5 million from CAD15.2 million, a 27.9 percent increase.

Same-door growth of 4 percent fueled the REIT’s third quarter results. Northern Property posted quarterly distributable income per unit of 50 cents Canadian for the first time.

Through the first three quarters of 2007, the REIT’s payout ratio was 76.1 percent of distributable income. Debt at Sept. 30 was 53.6 percent of gross book value.

In a separate announcement, the REIT announced a distribution increase of 10 cents Canadian per unit to CAD1.48 annually. The 7.25 percent increase becomes effective with the November 2007 distribution. Northern Property REIT is a buy up to USD25.

Yellow Pages Income Fund (YLO.UN, YLWPF) reported net earnings of CAD122 million (23 cents Canadian per unit), compared with CAD119.5 million (23 cents Canadian per unit) a year ago. Yellow Pages also increased its cash distributions by 3.7 percent to CAD1.13 annually from CAD1.09. Distributable cash increased by 14.4 percent to CAD182.9 million (34 cents Canadian per unit) in the third quarter.

Revenue for the period increased 12.9 percent to CAD417.6 million from CAD369.9 million. Recent acquisitions accounted for CAD26.4 million in third quarter revenue growth.

The fund’s board approved a 2008 capital expenditure budget of about CAD50 million, down from approximately CAD77 million in 2007; the decline frees more cash flow for distribution to investors. Yellow Pages will focus for the foreseeable future on integrating recent acquisitions in Canada before expanding into the US. Yellow Pages Income Fund is a buy up to USD16.

Aggressive Portfolio

ARC Energy Trust (AET.UN, AETUF) reported net income of CAD120.8 million (58 cents Canadian per unit), up 3 percent from CAD116.8 million (58 cents Canadian per unit) in the third quarter of 2006. Cash flow from operating activities was CAD179.6 million (85 cents Canadian per unit), down 12 percent from CAD203.4 million (95 cents Canadian per unit) a year ago.

Revenue for the period was CAD300.2 million (CAD1.42 per unit), off from CAD312.3 million (CAD1.52 per unit). ARC distributed CAD125 million (60 cents Canadian per unit) in the third quarter, up slightly from CAD121.4 million (60 cents Canadian per unit) in the third quarter of 2006.

Production averaged 61,108 barrels of oil equivalent per day (boe/d), down 2 percent from 62,178 boe/d a year ago. ARC’s total realized commodity price was USD53.28 per barrel of oil equivalent (boe) in the third quarter of 2007, compared to USD54.45 per boe received prior to hedging in the third quarter of 2006.

ARC’s payout ratio for the period ended Sept. 30 was 70 percent. Production this year has been hampered by restricted access to third-party processing facilities for new production and downtime on existing properties where turnarounds took longer than expected. ARC has lowered its fourth quarter production expectations to approximately 64,000 boe/d but is still on target for full-year guidance of approximately 63,000 boe/d.

ARC drilled 151 gross wells (113 net wells) on operated properties during the third quarter with a 100 percent success rate. Of the gross wells drilled, 30 were oil wells and 121 were natural gas wells.

Capital expenditures for the quarter, including CAD33 million for land purchases, were CAD131.9 million, bringing year-to-date capital expenditures to CAD257.9 million. Ninety-one percent of year-to-date capital expenditures have been funded from cash flow from operating activities and the proceeds from ARC’s distribution reinvestment plan.

Fourth quarter distributions will remain at 20 cents Canadian per unit per month, a level that has been maintained since October 2005. Buy ARC Energy Trust up to USD23.

Enerplus Resources (ERF.UN, NYSE: ERF) reported third quarter net income of CAD93 million (72 cents Canadian per unit), down from CAD161.3 million (CAD1.31 per unit) on a lower future income tax recovery and a 5 percent decline in production. The trust’s income tax recovery in the third quarter was CAD8.8 million compared to a CAD32.3 million recovery a year ago.

Oil and gas sales slipped to CAD370 million from CAD403.8 million as average production during the period declined to 79,891 boe/d. Cash flow for the three months ended Sept. 30, 2007, was CAD232.8 million, compared to CAD268.9 million a year ago. The quarterly decrease was primarily a result of lower oil and gas sales and higher operating costs.

Enerplus paid cash distributions of CAD163.1 million, funded entirely through cash flow. The payout ratio was 70 percent, up from 58 percent in the third quarter of 2006.

The fund estimates the Alberta government’s new royalty regime will have an impact of about CAD15 million to CAD20 million a year, or a 2 percent reduction, in cash flow. Enerplus cut its 2007 capital development budget by CAD25 million, primarily in nonoperated deep gas, shallow gas and coalbed methane activities, because of lower gas prices and uncertainty around the royalty changes.

That reduced third quarter volumes by about 1,300 barrels per day and full-year average production by about 600 barrels per day. Enerplus Resources is a buy up to USD50.

Newalta Income Fund (NAL.UN, NALUF) reported an 11 percent increase in third quarter revenue to CAD133.4 million, but net earnings decreased 11 percent to CAD17.9 million. FFO decreased 26 percent in the third quarter to CAD24.9 million, mainly because of reduced natural gas drilling activity levels in western Canada.

Drilling rig and service rig utilization rates for the third quarter of 2007 remained at 10-year lows of 38 percent and 55 percent, respectively. Cash distributed to unitholders was consistent with the same period in 2006 at CAD19.2 million.

Newalta’s western division revenue was flat, and net margin was down 19 percent. Revenue increased over the first quarter of 2007 by 5 percent, while net margin remained flat. Eastern division revenue was up 61 percent, and net margin increased 34 percent compared to the same period in 2006 on the contributions of acquisitions completed in the second half of 2006 in Quebec and Atlantic Canada.

Maintenance capital expenditures in the quarter were CAD5.3 million, 34 percent lower than a year ago. Growth capital expenditures in the quarter were CAD22.5 million, up from CAD16.6 million in 2006. Newalta’s funded debt-to-EBITDA ratio as of Sept. 30 was 2.57-to-1. Newalta Income Fund is a buy up to USD25.

Paramount Energy Trust (PMT.UN, PMGYF) reported net earnings of CAD5.2 million (5 cents Canadian per unit), down 73 percent from CAD19.6 million (23 cents Canadian per unit) in the third quarter of 2006. Funds flow from operations were CAD41.2 million (38 cents Canadian per unit), down 32 percent from CAD60.8 million (72 cents Canadian per unit) a year ago.

Revenue for the three months ended Sept. 30 was CAD100.6 million, off 4 percent from CAD104.7 million. The trust distributed CAD32.4 million (30 cents Canadian per unit), compared to CAD50.6 million (60 cents Canadian per unit) in the third quarter of 2006.

Average production increased 25 percent to a Paramount record of 193.1 thousand cubic feet equivalent per day (Mcfe/d) up from 154.6 MMcfe/d in the third quarter of 2006. The Birchwavy acquisition added production volumes of 43 Mcfe/d for the quarter.

Realized natural gas prices decreased by 23 percent to USD5.66 per thousand cubic feet (Mcf) from USD7.36 per Mcf in 2006. Paramount Energy Trust is a buy up to USD10.

Penn West Energy Trust (PWT.UN, NYSE: PWE) reported net earnings of CAD137.4 million (57 cents Canadian per unit), down from CAD177.8 million (65 cents Canadian per unit) a year ago. Revenue fell to CAD627.1 million from CAD636.0 million. Cash flow was up 6 percent from the second quarter to CAD347 million (CAD1.44 per unit).

Third quarter production was reduced by about 3,750 boe/d per day as a result of a fire at its Wildboy tank farm. Production averaged 125,345 boe/d in the third quarter, down from 126,599 boe/d in the second quarter. Crude oil and natural gas liquids production averaged 72,783 barrels per day, and natural gas production averaged 315 Mcf per day.

Penn West invested CAD230 million on capital development, including CAD55 million of net acquisitions, and drilled 68 net wells in the third quarter with a success rate of 97 percent. Production is currently approximately 131,000 boe/d, comprising 67,700 boe/d of crude oil, 350 Mcf per day of natural gas and 5,200 boe/d of natural gas liquids.

Penn West will continue to pay 34 cents Canadian per unit per month for the next three months. Buy Penn West Energy Trust up to USD38.

Peyto Energy Trust (PEY.UN, PEYUF) reported net income of CAD39.9 million (37 cents Canadian per unit) for the third quarter, down 14 percent from CAD46.2 million (44 cents Canadian per unit) a year ago. FFO were CAD62.9 million (60 cents Canadian per unit), down 13 percent from CAD72.4 million (69 cents Canadian per unit).

Peyto distributed CAD44.4 million (42 cents Canadian per unit), consistent with year-ago levels. The payout ratio for the third quarter of 2007 increased to 71 percent from 61 percent a year ago.

Production decreased 16 percent to 19,740 boe/d from 23,422 boe/d in the third quarter of 2006. Peyto’s debt-to-FFO ratio stood at 1.7-to-1 as of Sept. 30, 2007. Net debt increased 2 percent from CAD431 million to CAD439 million.

The trust spent CAD42.6 million finding and developing new natural gas reserves, down from CAD71.2 million in the year-ago period. Peyto Energy Trust is a buy up to USD20.

Provident Energy Trust (PVE.UN, NYSE: PVX) reported a net loss for the third quarter of CAD35 million (14 cents Canadian per unit), turning from a CAD120.9 million (61 cents Canadian per unit) profit a year ago on noncash unrealized financial derivative losses on the commodity price risk management program of CAD56 million.

Funds flow from operations for the period were CAD105 million (43 cents Canadian per unit), down 12 percent from CAD120.1 million (61 cents Canadian per unit) in the third quarter of 2006. The trust distributed CAD87.8 million (36 cents Canadian per unit) to unitholders, compared with CAD71 million (36 cents Canadian per unit) a year ago.

The payout ratio for the quarter was 89 percent, up from 59 percent in the third quarter of 2006. Weak natural gas prices and the rising Canadian dollar in the third quarter were partially offset by strong oil prices, higher production and midstream frac spreads.

Oil and gas production in the third quarter increased by 26 percent in 2006 to 38,800 boe/d. Provident’s Canadian oil and gas production was up 9 percent, and the midstream segment continued to show good performance. Provident Energy Trust is a buy up to USD14.