Railways cash in on crude
Also: Brickburn Asset Management's Bill Bonner thinks the days of double-digit differentials are behind us, and has three smaller companies in mind that could benefit from that
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
The movement of crude by rail may be dangerous, but for the time being, at least, it’s also a fantastically profitable business. Take Canadian Pacific’s most recent quarterly earnings, which it released yesterday morning. It earned $324 million in profit, and improved its operating ratio by 820 basis points to 65.9 per cent, a level that, according to the company, is the lowest in its history. It’s Q3 revenue of $1.5 billion was also a record, and it was driven in large part by its industrial and consumer products segment, where revenues per tonne were up 11 per cent “on gains in long-haul crude oil and on frac sand volumes,” CP’s Jane O’Hagan said in the quarterly conference call. The stock soared 10 per cent on the day, and that from its already lofty valuation. Its chief rival, Canadian National Railway, also had a blowout third quarter.
Brickburn Asset Management’s Bill Bonner, meanwhile, showed up on BNN’s Market Call with some comforting news for energy investors: the worst of the big differentials between Canadian crude and key global and American benchmarks is over. “That scared a lot of investors away,” he said, “and particularly foreign investors, and you saw that in a lot of stocks and their stock charts.” He predicts that “smoother waters” lie ahead both for Canadian energy companies and the people who invest in them.
As for his favourite picks, he singled out three unusual names. First was Crocotta Energy (TSE:CTA), a natural-gas weighted producer that’s sitting on a particularly attractive light oil asset that he thinks could move the stock up as much as 60 per cent. It has a nice asset in the Cardium, near Edson, and Bonner says the company could start allocating a lot more capital towards drilling up the nearly 200 locations it has there. Given that it already gets netbacks of close to $50 a barrel on wells in that play, it could be very accretive to the company’s cash flow. “If you layer on a couple thousand barrels a day coming from this Cardium [play], you can start to build a case for cash flow well over $1 per share,” Bonner said. “We think it’s undervalued at $0.75 or $0.80 per share, but you can build a case for cash flows 20 or 25 per cent higher without much imagination….The stock at sub-$3 is an absolute screaming buy. As it approaches $5, we’ll have to make up our mind then.”
He also liked Spyglass Resources (TSE:SGL), a company that the market “has loved to hate,” he said. Bonner thinks that antipathy is overdone, despite an admittedly over-levered balance sheet and a dividend that is yielding upwards of 13 per cent. “You have to have faith in this management team,” he said. “The assets they brought together were assets they all knew when they were part of Provident Energy.” He thinks that team will begin to de-lever the balance sheet (indeed, that process has already begun with an asset sale announced last week), and that the longevity of their assets – he says their wells have an average decline rate of just 20 per cent – will make the dividend appear more and more sustainable as time goes on. “The fact is, when you look at the cash flow and measure the dividend, you can build a case for the dividend being highly sustainable for a long period of time.”
Finally, he picked Tamarack Valley Energy (CVE:TVE), which recently acquired Sure Energy and sports both a quality management team – Bonner put them in the top decile – and plenty of running room in its Viking and Cardium acreage. “I see nothing but production growth and upside,” Bonner said.