TSX, S&P 500 Diverge

The relationship between the US and Canada is the closest and most extensive in the world, reflected in the volume of bilateral trade: the equivalent of USD1.5 billion a day in cross-border exchange of goods. And about 300,000 people cross the shared border every day.

Canada’s economy is and will ever be closely related to that of its southern neighbor. In 2007, the US exported USD248.9 billion in merchandise to Canada, 65 percent of Canada’s imports. Canada exported USD313.1 billion worth of merchandise–motor vehicles and spare parts, crude oil and natural gas, forest products, agricultural products, metals, industrial machinery and aircraft–accounting for 76 percent of its total exports.  

The first two days of the current trading week, however, highlight an emerging disparity between North America’s major equity markets. Canada’s economy will never “decouple” from the US, but the S&P/Toronto Stock Exchange Composite Index has certainly diverged from the S&P 500.

The two broad market indicators have been moving in opposite directions in 2008, corresponding to the increasingly influential role oil is playing on investor sentiment. The S&P/TSX Composite is up nearly 9 percent year-to-date, while the S&P 500 has shed nearly 8 percent.

Late in Tuesday trading, the S&P/TSX Composite had posted a gain of 123.68 points (0.83 percent), while the S&P 500 was off 5.41 points (0.41 percent).

Earnings expectations drive the stock market, and according to a recent report from CIBC World Markets, resource stocks will push average earnings growth for Toronto Stock Exchange-listed firms to the 30 percent range during the second half of 2008. The weaker US economy–and the weight of its financial sector–will limit TSX growth to 10 percent in the second quarter, but energy and materials stocks will make an enormous difference going forward.

CIBC forecast 2008 TSX earnings to rise by nearly 21 percent, with a further advance of around 12 percent to in 2009. The projection exceeds 2007’s 12 percent increase and the 10 percent rise anticipated at last count for the S&P 500 in 2008. The average annual rise in TSX profits over the course of the last 25 years is 7 percent.

The lead analyst on the CIBC report, senior economist and strategist Peter Buchanan, dismissed the idea that what’s taking place in the resource space is another bubble, succeeding the dot-com and housing speculation.

“We remain equally dubious of the mantra that recent resource price gains are largely driven by speculative pressures, and are consequently unsustainable,” he noted. “The nearly USD4 trillion per year global oil market’s vast size–almost twenty times the value of global commodity index investment–is of itself an obstacle to market-moving speculation. Inventories for oil and other commodities are also not ballooning, as might be expected if speculators were truly keeping prices radically above costs.”

Buchanan pointed out several factors that point to strong TSX earnings growth.

Record highs on the Reuters/Jefferies CRB Index of commodities indicate that overseas economies so far are weathering the housing-centric US slowdown better than many observers had expected. The TSX has a nearly 50 percent resource cap weighting.

China’s recent earthquake could lift commodity consumption in coming quarters, as the focus shifts to metal-intensive reconstruction. Petroleum consumption there should also rise in place of quake-idled hydro- and coal-fired plants.

Each dollar-per-barrel increase in the price of oil lifts earnings in the TSX oil and gas group by some USD700 million to USD800 million, or around 3 percent, allowing for the longstanding correlation between oil and natural gas prices.

Rising global fertilizer demand, related to the global food crisis, has lifted new potash contract prices to nearly USD1,000 per ton. Metallurgical coal prices have also risen sharply, and metals such as copper are at near-record prices.

Ivanhoe’s Bounce

Ivanhoe Energy (NSDQ: IVAN), which we previously discussed here, has increased the size of a planned private placement from CAD50 million to CAD88 million because of “significantly increased expressions of interest from institutional investors.”

Ivanhoe will use proceeds from the private placement, which is priced at CAD3 per special warrant, to make its initial payment on the agreement to purchase three leases in the Athabasca oil sands region in Alberta from Talisman Energy (NYSE: TLM, TSX: TLM) and for the development of those leases using its patented HTL process. Recent estimates of the Talisman leases suggest they contain approximately 294 million barrels of contingent bitumen resources.

HTL is a field-located upgrading process that converts heavy oil to a transportable, partially upgraded synthetic crude oil and converts the upgrading by-products to on-site energy. The process frees the heavy oil producer from the need to purchase diluent for transport, significantly eliminates the need to purchase natural gas to steam the reservoir and allows the producer to capture the majority of the heavy oil-light oil value differential.

Bingaman, Oil Sands, New US Energy Bill

Sen. Jeff Bingaman (D-NM), speaking at a meeting of the Canadian American Business Council in Washington, DC, last week, said that US legislation prohibiting the federal government from buying alternative fuels that have higher greenhouse gas (GHG) emissions doesn’t apply to Canadian oil sands.

“Producing fuel from oil sands is not a new technology,” said Bingaman, chairman of the Senate Energy and Natural Resources Committee. “Since Canadian feedstocks are comingled with US feedstocks at oil refineries producing fuel, it’s hard to see how Section 526 could be enforced against Canadian oil sands in any case.”

Section 526 of the Energy and Security Act of 2007 limits US government procurement of alternative fuels to those from which the lifecycle GHG emissions are equal to or less than those from conventional fuel from conventional petroleum sources. The oil sands are considered unconventional fuels, and producing them emits more GHG than conventional production.

Canadian Ambassador Michael Wilson had written to US Secretary of Defense Robert Gates warning that an “expansive interpretation” of the act could impede development of Canada’s oil sands. Sen. Bingaman’s comments may tamp down questions about future development of the oil sands. 

Speaking Engagements

“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.

The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.

Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.

The Roundup

Oil & Gas

Crescent Point Energy Trust (TSX: CPG.UN, OTC: CPGCF) increased its 2008 capital spending plans by CAD200 million to CAD425 million, raised its production guidance by 5 percent and boosted its distribution by 15 percent. The moves reflect “significant growth” in Crescent Point’s Bakken play, better-than-expected drilling and production results and high commodity prices.

Most of the capital budget increase will go to boosting development at Bakken. Crescent Point now expects to exit 2008 with production greater than 37,500 barrels of oil equivalent per day (boe/d) and revised its full-year forecast to 36,250 boe/d.

Cash flow expectations have also been revised upward to CAD621 million (CAD4.98 per unit). The revised distribution is 23 cents Canadian per unit per month. Hold Crescent Point Energy Trust.

Enterra Energy Trust (NYSE: ENT, TSX: ENT.UN) executed a term sheet with its lenders for new credit facilities that provide greater flexibility for the trust, increase its borrowing capacity and remove restrictions on the use of cash flow.

Enterra also filed a preliminary base shelf prospectus in Canada and in the US, under which it may periodically sell up to USD300 million in trust units, subscription receipts or warrants. The shelf prospectus allows Enterra to raise capital via the equity markets for a period of 25 months. Enterra Energy Trust is a sell.

Freehold Royalty Trust (TSX: FRU.UN, OTC: FRHLF) announced a 39 percent increase in its monthly distribution to 25 cents Canadian per unit effective with the July 15, 2008, payment. It’s the second distribution increase for Freehold in as many months, for a total increase of 67 percent since the beginning of 2008, reflecting strong commodity prices thus far this year. Hold Freehold Royalty Trust.

Gas/Propane

Precision Drilling Trust’s (NYSE: PDS, TSX: PD.UN) unsolicited proposal to buy US drilling services company Grey Wolf (AMEX: GW) has been rejected. Precision, Canada’s biggest driller, first offered USD9 per share (USD1.6 billion) in an effort to break up a previously announced merger between Grey Wolf and Basic Energy Services (NYSE: BAS); it then upped its bid to USD9.30 a share (USD1.8 billion), but that offer, too, was turned down.

Houston-based contract oil driller Grey Wolf said its board of directors still believes its pending combination with Basic Energy Services will offer better value than Precision’s hostile bid. Precision Drilling Trust is a buy up to USD25.

Business Trusts

Cinram International Income Fund (TSX: CRW.UN, OTC: CRWFF) signed a long-term manufacturing and distribution agreement with Universal Pictures International that covers DVD products throughout Western Europe. Toronto-based Cinram will boost production capacity to make and ship discs in order to meet the needs of the agreement.

Financial details, including the length of the contract, weren’t disclosed. Sell Cinram International Income Fund.

Futuremed Healthcare Income Fund (TSX: FMD.UN, OTC: FMDHF) is acquiring privately held Dismed, a Quebec-based medical supply, instrument and equipment distributor, for CAD24.3 million. The deal adds 2,500 customers and a base to operate in eastern Canada for Futuremed.

To finance part of the transaction, Futuremed is selling CAD17.1 million of subscription receipts exchangeable for trust units at CAD9.10 per unit to a syndicate led by CIBC World Markets and National Bank Financial. Futuremed Healthcare Income Fund is a buy up to USD10.

North West Company Fund (TSX: NWF.UN, OTC: NWTUF) reported 2008 first quarter (ended April 30, 2008) earnings of CAD15.2 million (32 cents Canadian per unit), a 41 percent increase from CAD10.8 million (23 cents Canadian per unit) a year ago.

Sales increased 34.6 percent to CAD315.5 million compared to the first quarter last year. Same-store sales were up 4.7 percent. The fund also announced a quarterly distribution of 32 cents Canadian per unit payable to unitholders of record June 30, 2008, by July 15, 2008. Buy North West Company Fund up to USD20.