Maple Leaf Memo
The Best Forecast for Oil Prices
Predicting the price of oil next week, next month or next year is about as Quixotic a venture as can be undertaken by even the most diligent expert. And engaging in such forecasts is even more counterproductive for individual investors focused on the long term; you don’t enjoy the romance of headline-grabbing statements or electric cable TV shout-fest appearances, and, most important, it’s an impractical exercise.
Today media outlets are full of forecasts that the per-barrel price of crude will approach $100. They’re as numerous and full-throated as the predictions three months ago that oil would soon top $200. Consider for a moment the factors that influence the price of crude:
University of Michigan economists Ron Alquist and Lutz Kilian have actually authored a statistical study supporting that conclusion. In What Do We Learn From the Price of Crude Oil Futures?, Alquist and Kilian compare different methods of forecasting oil prices: the consensus forecast based on surveys of economists; oil futures; the difference between the oil price in futures and spot markets; and various econometric models that take account of recent trends as well as variables such as interest rates.
All that effort is essentially useless. Alquist and Kilian conclude that the most accurate forecast of oil price over the next month, quarter or year is the current price–in other words, no change.
Canadian Edge is essentially an income-focused advisory: We’re most interested in companies that can and will pay sustainable distributions long into the future. The energy trusts recommended in the CE Portfolio have long track records of developing and producing oil and gas assets and passing the fruits of that expertise and labor on to unitholders in the form of monthly cash payments. Our approach to trusts has always been rooted in a respect for the characteristics energy companies have traditionally displayed relative to the broader market: solid value plays, strong dividends, moderate growth.
ARC Energy Trust (TSX: AET.UN, OTC: AETUF), the first CE-recommended energy trust to report second quarter results, maintained a 53 percent payout ratio during the period from April 1, 2008, to June 30, 2008. ARC’s unit price fluctuated between CAD25.19 and CAD33.95 in that time frame, closing the second quarter at its high as crude approached the USD140 mark. The trust realized an average price of USD118.32 per barrel of crude, which represents just less than half of its total production on an oil-equivalent basis.
ARC boosted the “top-up” portion of its distribution from 4 cents Canadian per unit to 8 cents Canadian per unit, an increase that will take effect with the Aug. 15 payment and remain in place “as long as commodity prices maintain their current strength.” ARC also increased its 2008 capital budget to CAD550 million, a substantial portion of which will be used to exploit its position in the Montney natural gas play in northeast British Columbia and to complete a new gas plant in the Dawson area of British Columbia.
Crude’s rapid rise, as well as natural gas’s return to health, obviously helped ARC and its unitholders during the second quarter, but the trust, like others including Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN), Enerplus Resources (NYSE: ERF, TSX: ERF.UN) and Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF), have held payouts within conservative ranges while devoting significant resources to new development opportunities. Wild fluctuations in commodity prices haven’t distracted such trusts from their basic function: efficiently exploit resource plays and pass on cash to investors.
The recent drop has been severe, but oil has crashed more than 40 percent three times since 1999; none of those previous precipitous drops signaled the end of what is a long-term secular bull market. Limited supplies and strengthening demand will continue to support the oil market in the long term. Every oil-producing country in the world has declining reserves, and nearly every oil company has declining reserves. Where will the supply that’s going to end the energy bull come from?
Oil is largely considered only in the context of transportation: We need it to fuel cars and airplanes. In 1998, China’s total vehicles sales were less than 2 million units a year; by 2007, GM (NYSE: GM) by itself sold more than a million. And the overall Chinese auto market grew by 19 percent from January to May 2008. But there are other, less-obvious sources of petroleum demand, such as the manufacture of personal computers.
The Semiconductor Industry Association reported Monday that chip sales reached USD127.5 billion in the first six months of the year, based largely on rising demand from emerging markets for computers and electronics. China is the world’s fastest-growing market for semiconductors and ranks as the world’s third-largest market, with USD19 billion in annual sales, and it’s expected to become the world’s second-largest market by 2010. The emergence of large middle-class populations in China (and India, Eastern Europe and Latin America) is driving personal computer sales; such markets will account for half of worldwide PC sales in 2008, about 153 million units.
And the manufacture of the average PC consumes about 529 pounds of fossil fuels.
China and other emerging economies are also committed to huge amounts of infrastructure spending. (China has more than 100 cities with populations exceeding 1 million people; the US has nine.) The government announced last week that it would focus on sustainable growth rather than worry about inflation. Expect the Chinese money supply to loosen following the Beijing Olympics, and for energy consumption there and in Asia at large to continue to ramp up.
Many energy stocks are already trading at levels not seen since crude was less than USD100; the correction is already largely reflected in stock valuations. Price-to-earnings ratios are well below the broader market, and these companies have tangible assets that are unaffected by mortgage writedowns. This pullback may be a great opportunity for patient, long-term investors to pick up solid trusts paying sustainable distributions at good values.
Speaking Engagements
We invite you to tune in as KCI’s LIVE Webcast events air from the 30th annual Money Show San Francisco. The editors will be presenting their latest insights and recommendations surrounding this year’s central theme “Tech and Biotech Investing.”
Registration is FREE and can be completed at MoneyShow.com. So please check out the KCI events, and tune in Aug. 7-10, 2008.
The Best Stocks Money Can Buy
Friday, Aug. 8
6 – 6:45 pm PDT
I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please click here or call 877-238-1270.
The Roundup
The first set of second quarter earnings reports for CE Portfolio recommendations is in, and the numbers are, for the most part, very positive.
Conservative Portfolio
Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) reported second quarter cash flow from operations of CAD68.2 million and distributable cash of CAD48.2 million, or 36.22 cents Canadian per unit; excluding nonrecurring items, the distributable cash figure was 38.10 cents Canadian per unit. The fund paid 36 cents Canadian per unit per month during the period, for a reported payout ratio of 97 percent.
Throughput for Pembina’s conventional pipelines was slightly lower than a year ago, but the oil sands and heavy oil infrastructure segment maintained pace; the completion of the Horizon pipeline is forecast to generate a more than 100 percent increase in net operating income for the oil sands segment from July 1. Net operating income from Pembina’s midstream and marketing business grew 65 percent quarter-over-quarter to CAD25.4 million.
Total revenue for the second quarter was CAD181.5 million, while net earnings came in at CAD42.1 million, an 18.6 percent increase over the comparable period. Pembina also announced an 8.3 percent distribution increase, effective with the August 2008 distribution to be paid Sept. 15, 2008. Steady and growing, Pembina Pipeline Income Fund is a buy up to USD18.
RioCan REIT (TSX: REI.UN, OTC: RIOCF) generated second quarter funds from operations (FFO), the best measure of REIT performance, of CAD86.4 million (40 cents Canadian per unit), up from CAD79.8 million (38 cents Canadian per unit) during the second quarter of 2007.
Net earnings for the quarter were CAD44.9 million (21 cents Canadian per unit), compared with a net loss of CAD106.2 million (51 cents Canadian per unit) in the second quarter of 2007. The increase in net earnings is primarily related to growth in net operating income because of growth in the portfolio, gains realized from the partial disposition of interests in two development properties and a lower, noncash charge for future income taxes.
As of June 30, 2008, RioCan boasts a 97 percent occupancy rate. The REIT’s stability is further bolstered by the fact that 66.6 percent of rental revenue was derived from properties located in Canada’s six high-growth markets (including and surrounding Calgary, Edmonton, Montreal, Ottawa, Toronto and Vancouver); 83.5 percent of annualized rental revenue was derived from, and 82.9 percent of space was leased to, national and anchor tenants; and no individual tenant comprised more than 5.4 percent of annualized rental revenue.
RioCan acquired 1.1 million square feet of retail property and currently has 10.2 million more in development. Buy RioCan REIT up to USD25.
Aggressive Portfolio
ARC Energy Trust (TSX: AET.UN, OTC: AETUF) generated cash flow from operating activities of CAD273.4 million (CAD1.27 per unit), a 52 percent increase from the second quarter of 2007. The increase is a function of a 61 percent increase in the trust’s total realized commodity price for the quarter and a 4 percent increase in production volume. Production for the quarter rose to 63,896 barrels of oil equivalent per day (boe/d).
Revenue increased to CAD512 million during the quarter, a record for ARC attributable to higher realized oil and gas prices as well as the production increase. Before hedging activities, ARC’s total realized commodity price was CAD88.04 per barrels of oil equivalent (boe), up 62 percent from the second quarter of 2007. Although high commodity prices certainly helped ARC’s revenue, the trust also realized losses on risk-management contracts, and high forward prices for oil and natural gas led to unrealized losses.
ARC paid 68 cents Canadian per unit per month in distributions, for a payout ratio (distributions as a percentage of cash flow from operating activities) of 53 percent. ARC Energy Trust is a buy up to USD32.
Boralex Power Income Fund (TSX: BPT.UN, OTC: BLXJF) reported a 7.1 percent increase in revenue to CAD25.6 million. Earnings before interest, taxation, depreciation and amortization (EBITDA) rose 19.6 percent to CAD13.4 million. Net income came in at CAD5.3 million (9 cents Canadian per unit), reversing a CAD44.3 million (75 cents Canadian per unit) loss during the second quarter of 2007 brought on by a CAD47.1 million deferred tax expense related to the change in income trust taxation.
Power generation increases at both hydroelectric and natural gas facilities, higher electricity and steam prices, and a favorable judicial ruling in municipal tax case boosted the bottom line. Overall production volume in the hydroelectric segment was up 2.2 percent. The fund’s natural gas power stations generated a 34 percent revenue increase to CAD6.7 million. Electricity production was up more than 10 percent, and steam production rose 4.9 percent.
Revenue from its wood residue power stations was up 2.7 percent, but Boralex faces supply problems because of the idling of several Quebec feeder sawmills. Excluding the impact of a second quarter 2007 tax deferral, Boralex’s net earnings grew nearly 93 percent from CAD2.8 million.
The issue now for Boralex is the future of the wood residue assets, specifically the fuel supply question and the impact of the arbitration with AbitibiBowater (TSX: ABH, NYSE: ABH) over an operating agreement for the Dolbeau plant. But the second quarter numbers are encouraging. Buy Boralex Power Income Fund up to USD6.
Predicting the price of oil next week, next month or next year is about as Quixotic a venture as can be undertaken by even the most diligent expert. And engaging in such forecasts is even more counterproductive for individual investors focused on the long term; you don’t enjoy the romance of headline-grabbing statements or electric cable TV shout-fest appearances, and, most important, it’s an impractical exercise.
Today media outlets are full of forecasts that the per-barrel price of crude will approach $100. They’re as numerous and full-throated as the predictions three months ago that oil would soon top $200. Consider for a moment the factors that influence the price of crude:
- The Organization of the Petroleum Exporting Countries (OPEC)
- Saudi Arabia
- The US dollar
- Interest rates
- Speculation
- Iran
- Iraq
- Venezuela
- Nigeria
- Mexico
- Russia
- Cold weather
- Hot weather
- Hurricanes
- Supply
- Demand
- India
- China
University of Michigan economists Ron Alquist and Lutz Kilian have actually authored a statistical study supporting that conclusion. In What Do We Learn From the Price of Crude Oil Futures?, Alquist and Kilian compare different methods of forecasting oil prices: the consensus forecast based on surveys of economists; oil futures; the difference between the oil price in futures and spot markets; and various econometric models that take account of recent trends as well as variables such as interest rates.
All that effort is essentially useless. Alquist and Kilian conclude that the most accurate forecast of oil price over the next month, quarter or year is the current price–in other words, no change.
Canadian Edge is essentially an income-focused advisory: We’re most interested in companies that can and will pay sustainable distributions long into the future. The energy trusts recommended in the CE Portfolio have long track records of developing and producing oil and gas assets and passing the fruits of that expertise and labor on to unitholders in the form of monthly cash payments. Our approach to trusts has always been rooted in a respect for the characteristics energy companies have traditionally displayed relative to the broader market: solid value plays, strong dividends, moderate growth.
ARC Energy Trust (TSX: AET.UN, OTC: AETUF), the first CE-recommended energy trust to report second quarter results, maintained a 53 percent payout ratio during the period from April 1, 2008, to June 30, 2008. ARC’s unit price fluctuated between CAD25.19 and CAD33.95 in that time frame, closing the second quarter at its high as crude approached the USD140 mark. The trust realized an average price of USD118.32 per barrel of crude, which represents just less than half of its total production on an oil-equivalent basis.
ARC boosted the “top-up” portion of its distribution from 4 cents Canadian per unit to 8 cents Canadian per unit, an increase that will take effect with the Aug. 15 payment and remain in place “as long as commodity prices maintain their current strength.” ARC also increased its 2008 capital budget to CAD550 million, a substantial portion of which will be used to exploit its position in the Montney natural gas play in northeast British Columbia and to complete a new gas plant in the Dawson area of British Columbia.
Crude’s rapid rise, as well as natural gas’s return to health, obviously helped ARC and its unitholders during the second quarter, but the trust, like others including Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN), Enerplus Resources (NYSE: ERF, TSX: ERF.UN) and Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF), have held payouts within conservative ranges while devoting significant resources to new development opportunities. Wild fluctuations in commodity prices haven’t distracted such trusts from their basic function: efficiently exploit resource plays and pass on cash to investors.
The recent drop has been severe, but oil has crashed more than 40 percent three times since 1999; none of those previous precipitous drops signaled the end of what is a long-term secular bull market. Limited supplies and strengthening demand will continue to support the oil market in the long term. Every oil-producing country in the world has declining reserves, and nearly every oil company has declining reserves. Where will the supply that’s going to end the energy bull come from?
Oil is largely considered only in the context of transportation: We need it to fuel cars and airplanes. In 1998, China’s total vehicles sales were less than 2 million units a year; by 2007, GM (NYSE: GM) by itself sold more than a million. And the overall Chinese auto market grew by 19 percent from January to May 2008. But there are other, less-obvious sources of petroleum demand, such as the manufacture of personal computers.
The Semiconductor Industry Association reported Monday that chip sales reached USD127.5 billion in the first six months of the year, based largely on rising demand from emerging markets for computers and electronics. China is the world’s fastest-growing market for semiconductors and ranks as the world’s third-largest market, with USD19 billion in annual sales, and it’s expected to become the world’s second-largest market by 2010. The emergence of large middle-class populations in China (and India, Eastern Europe and Latin America) is driving personal computer sales; such markets will account for half of worldwide PC sales in 2008, about 153 million units.
And the manufacture of the average PC consumes about 529 pounds of fossil fuels.
China and other emerging economies are also committed to huge amounts of infrastructure spending. (China has more than 100 cities with populations exceeding 1 million people; the US has nine.) The government announced last week that it would focus on sustainable growth rather than worry about inflation. Expect the Chinese money supply to loosen following the Beijing Olympics, and for energy consumption there and in Asia at large to continue to ramp up.
Many energy stocks are already trading at levels not seen since crude was less than USD100; the correction is already largely reflected in stock valuations. Price-to-earnings ratios are well below the broader market, and these companies have tangible assets that are unaffected by mortgage writedowns. This pullback may be a great opportunity for patient, long-term investors to pick up solid trusts paying sustainable distributions at good values.
Speaking Engagements
We invite you to tune in as KCI’s LIVE Webcast events air from the 30th annual Money Show San Francisco. The editors will be presenting their latest insights and recommendations surrounding this year’s central theme “Tech and Biotech Investing.”
Registration is FREE and can be completed at MoneyShow.com. So please check out the KCI events, and tune in Aug. 7-10, 2008.
The Best Stocks Money Can Buy
Friday, Aug. 8
6 – 6:45 pm PDT
I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please click here or call 877-238-1270.
The Roundup
The first set of second quarter earnings reports for CE Portfolio recommendations is in, and the numbers are, for the most part, very positive.
Conservative Portfolio
Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) reported second quarter cash flow from operations of CAD68.2 million and distributable cash of CAD48.2 million, or 36.22 cents Canadian per unit; excluding nonrecurring items, the distributable cash figure was 38.10 cents Canadian per unit. The fund paid 36 cents Canadian per unit per month during the period, for a reported payout ratio of 97 percent.
Throughput for Pembina’s conventional pipelines was slightly lower than a year ago, but the oil sands and heavy oil infrastructure segment maintained pace; the completion of the Horizon pipeline is forecast to generate a more than 100 percent increase in net operating income for the oil sands segment from July 1. Net operating income from Pembina’s midstream and marketing business grew 65 percent quarter-over-quarter to CAD25.4 million.
Total revenue for the second quarter was CAD181.5 million, while net earnings came in at CAD42.1 million, an 18.6 percent increase over the comparable period. Pembina also announced an 8.3 percent distribution increase, effective with the August 2008 distribution to be paid Sept. 15, 2008. Steady and growing, Pembina Pipeline Income Fund is a buy up to USD18.
RioCan REIT (TSX: REI.UN, OTC: RIOCF) generated second quarter funds from operations (FFO), the best measure of REIT performance, of CAD86.4 million (40 cents Canadian per unit), up from CAD79.8 million (38 cents Canadian per unit) during the second quarter of 2007.
Net earnings for the quarter were CAD44.9 million (21 cents Canadian per unit), compared with a net loss of CAD106.2 million (51 cents Canadian per unit) in the second quarter of 2007. The increase in net earnings is primarily related to growth in net operating income because of growth in the portfolio, gains realized from the partial disposition of interests in two development properties and a lower, noncash charge for future income taxes.
As of June 30, 2008, RioCan boasts a 97 percent occupancy rate. The REIT’s stability is further bolstered by the fact that 66.6 percent of rental revenue was derived from properties located in Canada’s six high-growth markets (including and surrounding Calgary, Edmonton, Montreal, Ottawa, Toronto and Vancouver); 83.5 percent of annualized rental revenue was derived from, and 82.9 percent of space was leased to, national and anchor tenants; and no individual tenant comprised more than 5.4 percent of annualized rental revenue.
RioCan acquired 1.1 million square feet of retail property and currently has 10.2 million more in development. Buy RioCan REIT up to USD25.
Aggressive Portfolio
ARC Energy Trust (TSX: AET.UN, OTC: AETUF) generated cash flow from operating activities of CAD273.4 million (CAD1.27 per unit), a 52 percent increase from the second quarter of 2007. The increase is a function of a 61 percent increase in the trust’s total realized commodity price for the quarter and a 4 percent increase in production volume. Production for the quarter rose to 63,896 barrels of oil equivalent per day (boe/d).
Revenue increased to CAD512 million during the quarter, a record for ARC attributable to higher realized oil and gas prices as well as the production increase. Before hedging activities, ARC’s total realized commodity price was CAD88.04 per barrels of oil equivalent (boe), up 62 percent from the second quarter of 2007. Although high commodity prices certainly helped ARC’s revenue, the trust also realized losses on risk-management contracts, and high forward prices for oil and natural gas led to unrealized losses.
ARC paid 68 cents Canadian per unit per month in distributions, for a payout ratio (distributions as a percentage of cash flow from operating activities) of 53 percent. ARC Energy Trust is a buy up to USD32.
Boralex Power Income Fund (TSX: BPT.UN, OTC: BLXJF) reported a 7.1 percent increase in revenue to CAD25.6 million. Earnings before interest, taxation, depreciation and amortization (EBITDA) rose 19.6 percent to CAD13.4 million. Net income came in at CAD5.3 million (9 cents Canadian per unit), reversing a CAD44.3 million (75 cents Canadian per unit) loss during the second quarter of 2007 brought on by a CAD47.1 million deferred tax expense related to the change in income trust taxation.
Power generation increases at both hydroelectric and natural gas facilities, higher electricity and steam prices, and a favorable judicial ruling in municipal tax case boosted the bottom line. Overall production volume in the hydroelectric segment was up 2.2 percent. The fund’s natural gas power stations generated a 34 percent revenue increase to CAD6.7 million. Electricity production was up more than 10 percent, and steam production rose 4.9 percent.
Revenue from its wood residue power stations was up 2.7 percent, but Boralex faces supply problems because of the idling of several Quebec feeder sawmills. Excluding the impact of a second quarter 2007 tax deferral, Boralex’s net earnings grew nearly 93 percent from CAD2.8 million.
The issue now for Boralex is the future of the wood residue assets, specifically the fuel supply question and the impact of the arbitration with AbitibiBowater (TSX: ABH, NYSE: ABH) over an operating agreement for the Dolbeau plant. But the second quarter numbers are encouraging. Buy Boralex Power Income Fund up to USD6.
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