Will House Republicans do the unthinkable?
The markets haven't reacted too strongly to the political theatre taking place in Washington yet. That might change - fast
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
It’s hard to tell whether what’s happening in the U.S., as House Republicans do their best imitation of domestic terrorists in an effort to roll back the Affordable Health Care Act, qualifies as comedy or tragedy, but so far it hasn’t troubled the markets too much. That could change, though, as the discussion shifts from the relatively minor economic impacts associated with a temporary shutdown of the U.S. government to the much more serious – and, frankly, largely unknown – ones that would be attached to a decision not to raise the government’s debt ceiling. Market watchers continue to bet that radical House Republicans will back down on their threat to push the U.S. government into an historic default if their demands aren’t met, but that’s the thing about terrorists – counting on rational behaviour isn’t always an optimal strategy.
The U.S. Treasury Department released a report earlier this week that studied the effects of the 2011 impasse over the debt ceiling – one, you’ll remember, that triggered a near 20 per cent sell off in U.S. markets and pushed volatility to near-record levels. A repeat of that may be in the offing, and while that would be attractive to bargain hunters who have been waiting in vain for markets to pull back this year, “a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” the report said. Yikes.
Closer to home – well, actually, a lot further from home – Bankers Petroleum (TSE:BNK) delivered yet another quarter of solid production growth. As FirstEnergy’s Darren Engels noted in an update, the company posted record-high numbers in 3Q13, coming in at 18,541 bbl/d and exceeding FirstEnergy’s forecast of 18,300 bbl/d. And there’s still more to come, Engels thinks. “We are forecasting 4Q13e production of 18,800 bbl/d, and y/y production growth of 20 per cent. This now appears too conservative following this update.” He continues to have it rated as a top pick with an aggressive $6.25 price target, one that constitutes an implied upside of more than 50 per cent.
And AltaCorp Capital’s Jeremy McCrea continues to like Bonterra Energy (TSE:BNE), in large part due to the operational gains the company has made with its Carnwood area wells. Those improvements (mostly related to drilling techniques and frack intensity) appear to have reduced the payback time on those wells from 12 to 15 months down to just six to eight, and if that holds true over a larger data set it could have a whole series of knock-on benefits, from upward revisions to the company’s cash flow per share to an increase in its dividend. And with its relatively under-levered balance sheet (a forecast ratio of debt-to-cash flow of just 0.7 for 2014) that uptick in cash flow could presage an acquisition. “With a healthy balance sheet, a sizeable and highly profitable resource play (Cardium) and an experienced, invested management team, we believe Bonterra will continue to be one of the better-performing yield names for the foreseeable future,” McCrea wrote. The company bumped its target from $60 to $65 on its shares, and has it rated as outperform.