$100 Oil Makes Canada’s Oil Sands a Hot Commodity

Liberal leader Stephane Dion won’t take Canada to the polls over its military commitment in Afghanistan.

Yesterday, Dion said the official opposition will support the minority Conservative government’s plan to keep 2,500 troops in Kandahar until the end of 2011.

The compromise motion provides an extension of the mission to July 2011, with withdrawal of troops by the end of 2011. The extension is conditioned upon North Atlantic Treaty Organization (NATO) providing an extra 1,000 troops to rotate into Kandahar by February 2009, the current mission end date. It also calls for more transportation and surveillance equipment.

Dion wants a few issues in the motion clarified, such as why the government would extend the mission five months longer than the Liberals and why the government considers 1,000 extra NATO troops in Kandahar sufficient to allow Canadian troops to shift from combat to training and reconstruction duties. He also wants assurances the government won’t wait until the last minute to determine if the conditions to extend the mission have been met.

Defence Minister Peter Mackay said, “Afghanistan is a Canadian mission; it’s not a Conservative mission or a Liberal mission.”

Dion echoed Mackay: “What we have now is neither a Conservative motion nor a Liberal motion; it is a Canadian motion.”

Monday marked the first day of debate on a confidence motion aimed at averting the defeat of the government over the mission. A final vote should happen in March, ahead of Prime Minister Stephen Harper’s April trip to Romania for a NATO meeting.

The New Democratic Party and Bloc Quebecois oppose any extension, but the Liberals form a decisive voting bloc.

The Budget

Finance Minister Jim Flaherty will deliver the minority government’s 2008-09 federal budget today.

The Canadian Press reported yesterday that Flaherty’s crunchers found an extra CAD1 billion to spread around, so he’s set to announce an aid package for Canada’s ailing manufacturing sector, including the automobile industry, and new road and bridge expenditures.

The budget proposal reportedly will include a CAD200 million fund to encourage the manufacture of more fuel-efficient cars, an incentive designed to boost sluggish sales and slow job losses. It’s also expected to include a plan for a job-creating fund called Build Canada, which would devote CAD1 billion toward infrastructure in Canada’s major urban areas.

(It’s the kind of thing a government can do when it generates a CAD13 billion in surplus. First pay down long-term debt—to the tune of about CAD8 billion—then pump money into projects that will put people to work and benefit the economy over time.)  

Delivery of the budget is just the beginning of what will be a weeks-long debate marked with confidence votes. During the House of Commons question period Monday, a Conservative member asked the government whether it would entertain amendments to the proposed budget.

According to the Canadian Press, Flaherty’s Parliamentary Secretary Ted Menzies answered, “Unlike the Liberals in previous years who amended their budget after it had been tabled, we will not accept any amendments that the Liberals would like to propose that will drive us into a deficit.”

“I never thought that we would be able to amend his budget anyway,” said Dion. “So we’ll see the budget, and we’ll react when we will have seen it.” Dion, unable to change the electoral landscape and still fighting for control of his own caucus, is in no hurry to face voters in a federal election.

India Explores the Oil Sands

Asia’s emerging role in the global economy is already having a substantial impact on Canada. The country boasts solid domestic fundamentals and is underpinned with enormous resource wealth.

One part of the resource story is Alberta’s oil sands region, which is estimated to hold more than 170 billion barrels of oil.

With the per-barrel price of crude surpassing USD100, the oil sands and other alternative sources are back in play. Canada is in great shape to weather a US downturn because of interest from new trading partners in its resources. 

Now, according to India-based Mint.com, state-owned Indian Oil Corp (IOC) is talking to Shell Canada and BP Plc about acquiring stakes in Canadian oil sands blocks. Talks are said to be in preliminary stages, but IOC is looking to buy a 10 percent to 20 percent position with one of the major oil sands operators.

IOC recently said it won’t meet its 2012 target of sourcing 2 million tons per year of crude oil from its own overseas blocks; it currently has a total of 21 exploration & production (E&P) blocks in India and elsewhere.

An Indian delegation led by Petroleum Secretary MS Srinivasan visited Canada earlier this month to discuss the proposed investment. Other Indian firms interested in acquiring oil sands assets in Alberta include Oil and Natural Gas Corp and Oil India.

Establishing long-term import contracts is critical to India sustaining its economic growth. India currently consumes around 112 million tons of petroleum products a year; it’s the world’s fifth-largest oil importer, and about 78 percent of its energy needs are met through imports.

Speaking Engagements

It’s time: Vegas, baby! Neil, Elliott and I will head to the desert paradise May 12-15, 2008, for the Las Vegas Money Show at Mandalay Bay. Go to http://www.lasvegasmoneyshow.com or call 800-970-4355 and refer to priority code 010583 to do the “what happens here stays here” thing as my guest.

The Roundup

Oil & Gas

Enterra Energy Trust (NYSE: ENT, TSX: ENT-U) closed three property sales initially announced Jan. 3, 2008. Total proceeds of CAD40.9 million will be used to pay down debt in accordance with Enterra’s plan announced Dec. 21, 2007.

The trust believes it won’t have to sell any more assets to deal with its debt problems. With its distribution on hold at least until November, Enterra Energy Trust is a sell. 

Harvest Energy Trust (NYSE: THE, TSX: THE-U) will decide by June whether to pursue one of three plans, all priced at CAD1 billion or more, to expand or retool its Newfoundland oil refinery. The Come By Chance refinery is currently generating the same output it did upon its opening 30 years ago: 155,000 barrels per day.

Harvest is considering a processing expansion, a project to convert about 30,000 barrels a day of low-value residual fuel oil into more-valuable, low-sulfur diesel or gasoline and installation of new equipment that would allow it to process heavier grades of crude oil. Harvest Energy Trust is a buy up to USD24.

Penn West Energy Trust (NYSE: PWE, TSX: PWT-U) reported a 3 percent rise in fourth quarter profit to CAD127 million (52 cents Canadian per unit) from CAD123 million (44 cents Canadian per unit) a year ago. Cash flow, which funds distributions, was up 14 percent to CAD347 million (CAD1.43 per unit) from CAD303 million (CAD1.22 per unit). Revenues were CAD644 million, up 11 percent from CAD578 million.

Fourth quarter production averaged 128,024 barrels of oil equivalent per day (boe/d), down 1 percent from the year before. Natural gas output fell 7 percent to 328 million cubic feet a day. Year-end production capacity, including the contribution from recently acquired Canetic Resources, was 206,000 boe/d.

Penn West realized an average of CAD55.44 per barrel of its oil and gas, up 18 percent from the fourth quarter of 2006. Oil prices were up more than 30 percent during 2007, but that surge was offset by a 9 percent decline in natural gas prices. Canadian gas has strengthened to more than CAD7 so far in 2008 because of cold weather.

CEO Bill Andrew reiterated his forecast that Penn West would remain a trust at least until 201l. Penn West will pay 34 cents Canadian per unit for February and will maintain that payment level through the second quarter. Buy Penn West Energy Trust up to USD38.

Electric Power

Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) reported a net loss of CAD5.5 million (9 cents Canadian per unit); in the fourth quarter of 2006, the fund generated net earnings of CAD7.4 million (12 cents Canadian per unit). Revenues were CAD24.5 million, down 18 percent from CAD30 million a year ago.

Earnings before interest, taxes, depreciation and amortization (EBITDA) amounted to CAD12.4 million, down from CAD18.9 million for the fourth quarter of 2006. Hydroelectric power generation was off 13.7 percent from historical averages because of lower hydrology; that translated into a decrease of about CAD5 million in revenue and EBITDA. A rising loonie reduced revenue and EBITDA by another CAD1.5 million.

Boralex also took a CAD14 million goodwill impairment charge related to its natural gas cogeneration facility. The fund recorded a net loss of CAD35.7 million (60 cents Canadian per unit) for full-year 2007. The fund reported EBITDA of CAD55.2 million for 2007 on revenue of CAD102.2 million. In 2006, Boralex made CAD70.9 million on CAD115.2 million in revenue.

Excluding the CAD42 million in future income taxes booked because of the change in Canadian tax legislation and the goodwill impairment charge, Boralex would have earned CAD20.3 million (34 cents Canadian per unit). The fund reduced its distribution to 70 cents Canadian per unit on an annualized basis, beginning with the March distribution payable in April. Boralex Power Income Fund is a buy up to USD8.

Business Trusts

CI Financial Income Fund (TSX: CIX-U, OTC: CIXUF) reported earnings of CAD187.7 million (66 cents Canadian per unit) for the fourth quarter, up from CAD149.9 million (53 cents Canadian per unit) a year earlier. Net sales of investment funds totaled CAD422 million, more than three times the net sales recorded a year earlier.

For the full year, net sales slipped 3 percent to CAD2.1 billion. CI reduced its monthly distribution to 16 cents Canadian per unit from 19 cents Canadian per unit, effective with the March payment. CI Financial Income Fund is a buy up to USD25.

Consumers’ Waterheater Income Fund’s (TSX: CWI-U, OTC: CSUWF) fourth quarter profit of CAD26.4 million (53 cents Canadian per unit) was boosted by a one-time, noncash income tax recovery of CAD23.3 million because of tax cuts; the fund generated CAD42.5 million in revenue in the three months ended Dec. 31, 2007. In the fourth quarter of 2006, Consumers’ reported a profit of CAD4.7 million (10 cents Canadian per unit) on revenue of CAD39.5 million.

For 2007, Consumers’ earned CAD18.3 million (37 cents Canadian per unit) on revenue of CAD168.1 million. In 2006, the fund made CAD45.2 million (91 cents Canadian per unit) on CAD156.7 million in revenue. Consumers’ Waterheater Income Fund is a buy up to USD18.

IBI Income Fund (TSX: IBI-U, OTC: IBIBF) has boosted its monthly distribution by 5.5 percent to 12.75 cents Canadian per unit, effective with the March payment. The fund holds an indirect 68 percent interest in IBI Group, a professional services firm serving urban land, building facilities, transportation network and systems technology development. Hold IBI Income Fund.

Real Estate Trusts

Boardwalk REIT (TSX: BEI-U, OTC: BOWFF) reported fourth quarter funds from operations (FFO) rose 22.7 percent on higher rents. The REIT reported funds from operations (FFO) of CAD29.9 million (54 cents Canadian per unit), up from CAD25 million (44 cents Canadian per unit) a year ago.

Net operating income was CAD61.6 million, up 22 percent from CAD50.5 million for the fourth quarter of 2006. Average monthly rent was CAD903 per suite, up from CAD820 a year ago. The REIT forecast 2008 FFO of between CAD2.35 per unit and CAD2.50 per unit. Hold Boardwalk REIT.

Extendicare REIT (TSX: EXE-U, OTC: EXMUF) reported a fourth quarter profit of CAD10.5 million (15 cents Canadian per unit), reversing a CAD48.7 million (71 cents Canadian per unit) loss during the same period of 2006. Revenue in the fourth quarter was CAD469.7 million, up from CAD453 million.

For full-year 2007, Extendicare earned CAD70.4 million (CAD1 per unit) on CAD1.8 billion in revenue. In 2006, the REIT lost CAD35.7 million (53 cents Canadian per unit) on revenue of CAD1.73 billion. Hold Extendicare REIT.

Natural Resources Trusts

Canfor Pulp Income Fund’s (TSX: CFX-U, OTC: CFPUF) operating arm Canfor Pulp LP earned CAD12.1 million (17 cents Canadian per partnership unit) on sales of CAD215.1 million in the fourth quarter; a year ago, the limited partnership made CAD44.8 million (63 cents Canadian per unit) on sales of CAD225.2 million. The fund holds a 49.8 percent stake in the partnership.

Based on the partnership’s results, the fund earned CAD8.7 million (25 cents Canadian per unit) in the fourth quarter, down from CAD12.2 million (56 cents Canadian per unit) a year ago. The partnership produced 261,400 tons of pulp in the fourth quarter and 1,175,900 tons for the year.

In 2006, production was 263,700 tons in the fourth quarter and 1,015,400 tons for the year. Paper production was 33,100 tons in the fourth quarter, down from 33,900 tons a year ago. Paper production for 2007 was 131,600 tons, up from 129,100 tons in 2006. Canfor Pulp Income Fund is a buy up to USD13.

Fording Canadian Coal Trust (NYSE: FDG, TSX: FDG-U) reported a 57 percent drop in fourth quarter net income, from CAD114.6 million (78 cents Canadian per unit) a year ago to CAD48.8 million (33 cents Canadian per unit) in the three months ended Dec. 31, 2007. Excluding one-time items, Fording earned CAD74.9 million (51 cents Canadian per unit) from continuing operations, down from CAD116.3 million (79 cents Canadian per unit).

Distributable cash fell 49 percent to CAD75 million (50 cents Canadian per unit) from CAD147 million (CAD1 per unit) a year ago. Revenue was CAD327.5 million, down from CAD424.9 million. Sell Fording Canadian Coal Trust.

Noranda Income Fund (TSX: NIF-U, OTC: NNDIF) earned CAD27.4 million (73 cents Canadian per unit) in 2007, down from CAD33.2 million (89 cents Canadian per unit) in 2006; the fund booked a future tax expense of CAD13.1 million that ate into results.

For the full year, zinc output fell to 262,133 ton from 266,427 ton. Revenue dropped to CAD985.3 million from just more than CAD1 billion. Noranda posted a fourth quarter profit of CAD13.7 million, up from CAD4 million, because of higher premiums and zinc metal sales, the impact of prior-month pricing and commodity hedging gains.

Revenue fell to CAD198.2 million from CAD307.8 million, while zinc production dropped to 66,697 tons from 68,147 tons because output was hurt by contamination in the production process. Also, Noranda reported reaching an agreement with zinc workers, who are represented by the United Steelworkers of America, on a new collective agreement. Hold Noranda Income Fund.