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TransAlta gets burned

Also: Arc Financial's Peter Tertzakian weighs in on the upside - and downside - of a weaker dollar

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 mfawcett@albertaventure.com

Feb 20, 2014

by Max Fawcett

The troubles for TransAlta (TSE:TA) continued on Thursday, as the company reported yet another disappointing quarter – and decided to cut its dividend by nearly 40 per cent as a result. As the Canadian Press noted, “TransAlta reported a fourth-quarter loss Thursday of $66 million or 25 cents per share compared with a profit of $39 million or 15 cents per share in the last quarter of 2012. Revenue slipped to $587 million from $646 million.” And while the dividend now appears more sustainable, questions remain about the company’s ability to generate the kind of free cash flow needed to pay that yield and still keep the business on a sustainable path. The fact that it’s saddled with billions of dollars in debt makes that all the more important.

Meanwhile, in the Globe and Mail, Arc Financial’s Peter Tertzakian had an interesting take on the influence that a lower loonie will have on Canadian oil and gas companies. “Oil and gas producers will look more profitable,” he wrote, “because while revenue is tied to U.S. dollars, operating costs are mostly in Canadian. Cash flow will be higher – around $70-billion, but it’s too early to say how much of that will be reinvested. Capital expenditure budgets could increase, because improving profitability typically attracts more investment. We’re already seeing some of this effect, especially in the publicly traded equities.”

But, he wrote, it’s not all good news. “The proverbial tide won’t lift all boats. The oil and gas industry is bifurcated. Low commodity prices and a high Canadian dollar over the past few years encouraged Darwinian forces to ordain winners and cast off losers. Future capital coming into Canada will be selective. Investors will fund only the most progressive companies and ignore those with the legacy baggage of poor assets and laggard historical performance.” And, he noted, the LNG proponents will be the ones most adversely affected by a weak loonie, given that they’ll need to build out their export terminals using now more expensive U.S. components and services. “Admittedly, big multinational companies that are championing these projects hedge their currency baskets around the world. Still, quarterbacking with Canadian dollars from a Canadian armchair is not comforting. A lot of the costs for building multibillion LNG liquefaction facilities are incurred abroad, mostly in U.S. dollars. So LNG projects just got a lot more expensive on Canadian paper.” Expensive enough to influence the pending FIDs, though? We’ll have to wait and see.

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