Maple Leaf Memo
Canada Flies High Amidst Recession Talk
There’s a mildly instructive dichotomy to draw from the ongoing mess that is the global credit market, and then there’s a useful takeaway for investors.
In one view, you have an earnest, stable operation in need of short-term help—a father, say, who runs a small business appealing to his highly successful C-level executive son for a quick jolt of cash. There’s a track record of innovation, and the old man’s successfully marketed his wares in the past, so you don’t feel at all foolish expressing a bit of confidence in the form of a loan.
In another, you have an uncontrollable, exotic ne’er-do-well looking for another bailout, a freelance freelancer keeping the rock-and-roll lifestyle alive by chiseling his relatives. He pulled a degree from a reputable university, and he had a couple decent (short-term but paying) gigs, but you can’t quite escape the feeling that putting a check in the mail is more an act of hope than reason.
Is ours a fundamentally sound system, capable of facilitating the efficient distribution of needs, though clearly in need of fine-tuning? (“We have worked, and will continue to work, closely to address global challenges and take concrete actions,” said US Treasury Secretary Henry Paulson said in a statement after talks last week in Washington, DC, with G-7 finance ministers and central bankers. “Most of our discussion focused on the ongoing challenges in the global economy and the international financial system, and the policy responses to these challenges. I have the greatest confidence in the resiliency, flexibility and strength of our economy and our capital markets.”)
Or is it a hopelessly flawed game, susceptible to rigging by increasingly sophisticated technicians exploiting the greed of experts who don’t do their homework? (“Investors agreed to terms which give senior noteholders control following certain triggers because they thought these were never going to happen,” said Ed O’Connell, a partner at law firm Jones Day, on the spate of lawsuits arising from the subprime mortgage meltdown. “Many CDOs [collateralized debt obligations] are now hitting the triggers. This is creating conflicts of interest and losses and an uptick in litigation, too.”)
The truth is always in between the extremes. And so it will be when the final tally is made on the Great Credit Crunch of 2007-0?. But the bottom line, for now, is there are assets worth shunning, and there are assets worth owning.
According to the International Monetary Fund (IMF), the US economy, if it isn’t already there, is headed into recession this year. But Canada is going to escape, albeit with slower growth.
The IMF’s recent World Economic and Financial Survey warned that “the global expansion is losing momentum in the face of the recent financial disturbances.” The Regional Economic Outlook for the Western Hemisphere states that between the fourth quarter of 2007 and the fourth quarter of 2008, the US economy will contract by 0.7 percent, reducing the growth rate for calendar 2008 in the US to 0.5 percent, down from 2.2 percent in 2007.
The IMF’s comments about Canada, however, are encouraging. “Canada’s growth is expected to slow this year as the downdraft from the US economy outweighs solid domestic demand supported by strong commodity prices. Overall, growth is projected to decelerate to 1.3 percent in 2008 and pick up only slowly to 1.9 percent in 2009,” the IMF concluded.
As we’ve discussed here and in Canadian Edge, its ample resources and demand for them from countries such as China, India and Brazil should enable Canada to withstand the significant slowing of the US economy. “One element supporting Canada’s growth, despite the US weakness, is the continued strength in global commodity markets, driven in part by still relatively robust demand forecast for emerging markets,” the report noted.
Domestic demand could prove a wildcard, but the Bank of Canada’s easing of interest rates and recent tax relief are forecast to boost 2008 GDP by 0.75 percent. The IMF stated, “[G]iven its strong policy framework, flexible labor markets, and the authorities’ focus on structural reform–including developing measures to boost competition–the economy should be well poised to ride through these cyclical challenges.”
Growth projections of 1.3 percent and 1.9 percent aren’t terribly impressive by historical measures, but in the current environment, any 2008 growth will be welcome news. Any positive momentum will come from commodities. And that’s where investment opportunities lie right now.
The S&P/TSX Capped Energy Index is up more than 7 percent year-to-date, and the S&P/TSX Capped Materials Index has surged more than 12 percent. The materials index covers a range of nonpetroleum resources, including gold, silver, fertilizer, iron ore, base metals, coal, diamonds, uranium, platinum and forest products.
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 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
ARC Energy Trust (TSX: AET.UN, OTC: AETUF), the Alberta Research Council and the Canadian government will spend CAD1.8 million evaluating the geology below ARC’s Redwater oil field for suitability to store carbon dioxide generated by the Edmonton upgrading hub. Upgraders convert tar-like bitumen from the oil sands into refinery-ready crude, emitting vast amounts of carbon dioxide in the process.
ARC says the Redwater field could store a billion tons of carbon dioxide and 20 years of output from the Heartland hub and boost production from the field by 15,000 barrels per day. Further stages in the study will collect additional data and offer a pilot project to inject the gas into the reservoir. ARC Energy Trust is a buy up to USD26.
Baytex Energy Trust (TSX: BTE.UN, NYSE: BTE) is acquiring Burmis Energy (TSX: BME) for CAD152 million in stock. Baytex is offering 0.1525 of a Baytex trust unit for each Burmis common share, which translates to about CAD3.52 per Burmis share, a premium of about 8 percent for the junior exploration and production (E&P) company. Baytex will assume CAD29 million of Burmis debt.
The Burmis properties have 6.5 million barrels of oil equivalent (boe) on a proved basis and 9.5 million boe on a proved plus probable basis. They produced 2,961 barrels of natural gas and light oil a day in the fourth quarter of 2007, a rate expected to increase to about 3,650 barrels a day in the first quarter of 2008.
The deal has already been approved by both boards. Baytex Energy Trust is a buy up to USD24.
Bonavista Energy Trust (TSX: BNP.UN, OTC: BNPUF) has signed a deal with a syndicate of underwriters co-led by TD Securities and CIBC World Markets to issue 6.5 million trust units at CAD30.60 per unit for gross proceeds of CAD198.9 million to help fund its 2008 capital program. The underwriters have also been granted an overallotment option for up to an additional 500,000 trust units at the same offering price; if it’s fully exercised, Bonavista will raise CAD214.2 million. Buy Bonavista Energy Trust up to USD30.
Crescent Point Energy Trust (TSX: CPG.UN, OTC: CPGCF) has acquired 21.2 percent of the outstanding shares of Painted Pony Petroleum (TSX V: PPY), a junior E&P focused on the Western Canadian Sedimentary Basin, as part of a previously announced sale by Crescent Point to Painted Pony of natural gas properties in the Cameron River/Blair fairway in northeast British Columbia. Crescent Point Energy Trust is a buy up to USD28.
Business Trusts
Colabor Income Fund (TSX: CLB.UN, OTC: COLAF) is acquiring Gestion Bertrand & Freres, an independent food distributor based in eastern Quebec, for CAD84.8 million, including CAD4.5 million in debt. Bertrand reported 2007 sales of CAD159 million. Colabor Income Fund is a buy up to USD12.
Real Estate Trusts
Calloway REIT’s (TSX: CWT.UN, OTC: CWYUF) deal with Wal-Mart Canada and land developer Mitchell Goldhar is being downsized. Calloway announced in December that it would buy 10 shopping centers for about CAD680 million; the altered deal includes six big-box centers for CAD375 million.
Calloway will pay CAD270 million upfront and another CAD105 million over the next three years as additional space is built and occupied in the centers. The deal will bring the total number of Wal-Marts in Calloway’s portfolio to more than 100.
Goldhar is co-owner, along with Wal-Mart, of the six properties; his already large stake in Calloway will grow to just under a quarter after the deal closes. Calloway REIT is a buy up to USD26.
RioCan REIT (TSX: REI.UN, OTC: RIOCF) announced lease agreements with Lowe’s Companies Canada, a subsidiary of Lowe’s Companies (NYSE: LOW), for two new home improvement stores in Ontario.
The first is for a Lowe’s store that will form part of RioCan’s greenfield shopping center; site work has already commenced, with an anticipated opening date of the Lowe’s store in early 2009. The second is for a Lowe’s store that will form part of RioCan’s existing property, RioCan Warden Centre, a 250,000-square-foot, new format retail center.
A former Wal-Mart location will be demolished to accommodate the Lowe’s store. Demolition should commence later this month, and the new Lowe’s is scheduled to open in 2009. Buy RioCan REIT up to USD25.
Natural Resources Trusts
Royal Utilities Trust (TSX: RU.UN, OTC: RYUTF) has received an increased offer from Sherritt International Corp (TSX: S). The Canada-based producer of nickel and oil in Cuba raised its bid for the 59 percent of Royal Utilities it doesn’t own by 3.5 percent to about CAD728.8 million.
Under the terms of the new offer, Royal Utilities unitholders would receive CAD12.68 in cash for each unit they hold. The trust would give investors 8 cents Canadian per unit if the offer succeeds on top of a planned 7.4 cents Canadian per unit distribution.
Royal Utilities unitholders can accept payment in cash, Sherritt stock or a combination of the two. The all-share alternative, which wasn’t increased, would be valued at about CAD12.15 per unit based on Sherritt’s April 11 share price.
There’s a mildly instructive dichotomy to draw from the ongoing mess that is the global credit market, and then there’s a useful takeaway for investors.
In one view, you have an earnest, stable operation in need of short-term help—a father, say, who runs a small business appealing to his highly successful C-level executive son for a quick jolt of cash. There’s a track record of innovation, and the old man’s successfully marketed his wares in the past, so you don’t feel at all foolish expressing a bit of confidence in the form of a loan.
In another, you have an uncontrollable, exotic ne’er-do-well looking for another bailout, a freelance freelancer keeping the rock-and-roll lifestyle alive by chiseling his relatives. He pulled a degree from a reputable university, and he had a couple decent (short-term but paying) gigs, but you can’t quite escape the feeling that putting a check in the mail is more an act of hope than reason.
Is ours a fundamentally sound system, capable of facilitating the efficient distribution of needs, though clearly in need of fine-tuning? (“We have worked, and will continue to work, closely to address global challenges and take concrete actions,” said US Treasury Secretary Henry Paulson said in a statement after talks last week in Washington, DC, with G-7 finance ministers and central bankers. “Most of our discussion focused on the ongoing challenges in the global economy and the international financial system, and the policy responses to these challenges. I have the greatest confidence in the resiliency, flexibility and strength of our economy and our capital markets.”)
Or is it a hopelessly flawed game, susceptible to rigging by increasingly sophisticated technicians exploiting the greed of experts who don’t do their homework? (“Investors agreed to terms which give senior noteholders control following certain triggers because they thought these were never going to happen,” said Ed O’Connell, a partner at law firm Jones Day, on the spate of lawsuits arising from the subprime mortgage meltdown. “Many CDOs [collateralized debt obligations] are now hitting the triggers. This is creating conflicts of interest and losses and an uptick in litigation, too.”)
The truth is always in between the extremes. And so it will be when the final tally is made on the Great Credit Crunch of 2007-0?. But the bottom line, for now, is there are assets worth shunning, and there are assets worth owning.
According to the International Monetary Fund (IMF), the US economy, if it isn’t already there, is headed into recession this year. But Canada is going to escape, albeit with slower growth.
The IMF’s recent World Economic and Financial Survey warned that “the global expansion is losing momentum in the face of the recent financial disturbances.” The Regional Economic Outlook for the Western Hemisphere states that between the fourth quarter of 2007 and the fourth quarter of 2008, the US economy will contract by 0.7 percent, reducing the growth rate for calendar 2008 in the US to 0.5 percent, down from 2.2 percent in 2007.
The IMF’s comments about Canada, however, are encouraging. “Canada’s growth is expected to slow this year as the downdraft from the US economy outweighs solid domestic demand supported by strong commodity prices. Overall, growth is projected to decelerate to 1.3 percent in 2008 and pick up only slowly to 1.9 percent in 2009,” the IMF concluded.
As we’ve discussed here and in Canadian Edge, its ample resources and demand for them from countries such as China, India and Brazil should enable Canada to withstand the significant slowing of the US economy. “One element supporting Canada’s growth, despite the US weakness, is the continued strength in global commodity markets, driven in part by still relatively robust demand forecast for emerging markets,” the report noted.
Domestic demand could prove a wildcard, but the Bank of Canada’s easing of interest rates and recent tax relief are forecast to boost 2008 GDP by 0.75 percent. The IMF stated, “[G]iven its strong policy framework, flexible labor markets, and the authorities’ focus on structural reform–including developing measures to boost competition–the economy should be well poised to ride through these cyclical challenges.”
Growth projections of 1.3 percent and 1.9 percent aren’t terribly impressive by historical measures, but in the current environment, any 2008 growth will be welcome news. Any positive momentum will come from commodities. And that’s where investment opportunities lie right now.
The S&P/TSX Capped Energy Index is up more than 7 percent year-to-date, and the S&P/TSX Capped Materials Index has surged more than 12 percent. The materials index covers a range of nonpetroleum resources, including gold, silver, fertilizer, iron ore, base metals, coal, diamonds, uranium, platinum and forest products.
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 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
ARC Energy Trust (TSX: AET.UN, OTC: AETUF), the Alberta Research Council and the Canadian government will spend CAD1.8 million evaluating the geology below ARC’s Redwater oil field for suitability to store carbon dioxide generated by the Edmonton upgrading hub. Upgraders convert tar-like bitumen from the oil sands into refinery-ready crude, emitting vast amounts of carbon dioxide in the process.
ARC says the Redwater field could store a billion tons of carbon dioxide and 20 years of output from the Heartland hub and boost production from the field by 15,000 barrels per day. Further stages in the study will collect additional data and offer a pilot project to inject the gas into the reservoir. ARC Energy Trust is a buy up to USD26.
Baytex Energy Trust (TSX: BTE.UN, NYSE: BTE) is acquiring Burmis Energy (TSX: BME) for CAD152 million in stock. Baytex is offering 0.1525 of a Baytex trust unit for each Burmis common share, which translates to about CAD3.52 per Burmis share, a premium of about 8 percent for the junior exploration and production (E&P) company. Baytex will assume CAD29 million of Burmis debt.
The Burmis properties have 6.5 million barrels of oil equivalent (boe) on a proved basis and 9.5 million boe on a proved plus probable basis. They produced 2,961 barrels of natural gas and light oil a day in the fourth quarter of 2007, a rate expected to increase to about 3,650 barrels a day in the first quarter of 2008.
The deal has already been approved by both boards. Baytex Energy Trust is a buy up to USD24.
Bonavista Energy Trust (TSX: BNP.UN, OTC: BNPUF) has signed a deal with a syndicate of underwriters co-led by TD Securities and CIBC World Markets to issue 6.5 million trust units at CAD30.60 per unit for gross proceeds of CAD198.9 million to help fund its 2008 capital program. The underwriters have also been granted an overallotment option for up to an additional 500,000 trust units at the same offering price; if it’s fully exercised, Bonavista will raise CAD214.2 million. Buy Bonavista Energy Trust up to USD30.
Crescent Point Energy Trust (TSX: CPG.UN, OTC: CPGCF) has acquired 21.2 percent of the outstanding shares of Painted Pony Petroleum (TSX V: PPY), a junior E&P focused on the Western Canadian Sedimentary Basin, as part of a previously announced sale by Crescent Point to Painted Pony of natural gas properties in the Cameron River/Blair fairway in northeast British Columbia. Crescent Point Energy Trust is a buy up to USD28.
Business Trusts
Colabor Income Fund (TSX: CLB.UN, OTC: COLAF) is acquiring Gestion Bertrand & Freres, an independent food distributor based in eastern Quebec, for CAD84.8 million, including CAD4.5 million in debt. Bertrand reported 2007 sales of CAD159 million. Colabor Income Fund is a buy up to USD12.
Real Estate Trusts
Calloway REIT’s (TSX: CWT.UN, OTC: CWYUF) deal with Wal-Mart Canada and land developer Mitchell Goldhar is being downsized. Calloway announced in December that it would buy 10 shopping centers for about CAD680 million; the altered deal includes six big-box centers for CAD375 million.
Calloway will pay CAD270 million upfront and another CAD105 million over the next three years as additional space is built and occupied in the centers. The deal will bring the total number of Wal-Marts in Calloway’s portfolio to more than 100.
Goldhar is co-owner, along with Wal-Mart, of the six properties; his already large stake in Calloway will grow to just under a quarter after the deal closes. Calloway REIT is a buy up to USD26.
RioCan REIT (TSX: REI.UN, OTC: RIOCF) announced lease agreements with Lowe’s Companies Canada, a subsidiary of Lowe’s Companies (NYSE: LOW), for two new home improvement stores in Ontario.
The first is for a Lowe’s store that will form part of RioCan’s greenfield shopping center; site work has already commenced, with an anticipated opening date of the Lowe’s store in early 2009. The second is for a Lowe’s store that will form part of RioCan’s existing property, RioCan Warden Centre, a 250,000-square-foot, new format retail center.
A former Wal-Mart location will be demolished to accommodate the Lowe’s store. Demolition should commence later this month, and the new Lowe’s is scheduled to open in 2009. Buy RioCan REIT up to USD25.
Natural Resources Trusts
Royal Utilities Trust (TSX: RU.UN, OTC: RYUTF) has received an increased offer from Sherritt International Corp (TSX: S). The Canada-based producer of nickel and oil in Cuba raised its bid for the 59 percent of Royal Utilities it doesn’t own by 3.5 percent to about CAD728.8 million.
Under the terms of the new offer, Royal Utilities unitholders would receive CAD12.68 in cash for each unit they hold. The trust would give investors 8 cents Canadian per unit if the offer succeeds on top of a planned 7.4 cents Canadian per unit distribution.
Royal Utilities unitholders can accept payment in cash, Sherritt stock or a combination of the two. The all-share alternative, which wasn’t increased, would be valued at about CAD12.15 per unit based on Sherritt’s April 11 share price.
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