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Here we go again

Why the Eurozone could send a shockwave through global markets this summer

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

May 20, 2014

by Max Fawcett

Remember the summer of 2011, when the Eurozone crisis threatened to tip the global economy back into recession? Well, it’s starting to look an awful lot like the summer of 2014 could see a repeat of that scenario, because while ECB president Mario Draghi managed to talk the continent’s credit markets off the ledge, there still hasn’t been anything resembling a genuine recovery. Now, as the Eurozone stares at the possibility of deflation – and deflation, as the Japanese have demonstrated, is a trap that’s very difficult to get out of – it must once again overcome both political indecisiveness and German foot dragging. It is widely expected that the ECB will announce a cut in the interest rate that it pays on bank deposits from zero (where it sits now) to negative 0.1 or 0.2 per cent, an attempt to incent banks to lend rather than hoard their assets. But it is just as widely expected that it will need to do more to propel the continent towards growth and away from economic stagnation, and even more widely expected that it will struggle to achieve that.

After all, the solution that many economists and academics have repeatedly recommended for the region, one that involves a massive expansion of the ECB’s balance sheet (quantitative easing, in other words) is still off the table. Jens Weidman, the president of the Bundesbank, recently reiterated that it will not consider any quantitative easing measures until “the other measures planned by the European Central Bank have been tried and found wanting,” Reuters columnist Anatole Kaletsky noted in a recent piece. And as Kaletsky wrote, “the problem with the step-by-step approach favored by the ECB under pressure from the Bundesbank is that every step taken becomes an excuse for delaying the next step. Past experience suggests that ECB economists may well spend months ‘analyzing’ and ‘studying’ the consequences of negative deposit rates before they decide to move onto other measures, such as purchasing small and medium enterprise loans.” In other words, the Eurozone may well get much worse before it gets better – and that’s if it gets better at all.

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For Bellatrix Exploration (TSE:BXE), though, the reverse might be true. The company’s shares got whacked recently after restrictions at some of its facilities (including unscheduled turnarounds at third-party-operated gas plants) reduced its production by a share over 4,000 boe/d in May. As a result, it had to reduce its full year production guidance. But AltaCorp’s Jeremy McCrea suggests that shareholders stay on the bid, given that these short-term hiccups are masking its profitability and “top tier well economics.” McCrea has an outperform rating and a $14 target on its shares, noting that “we highlighted BXE as our top pick at the beginning of 2013 and we believe there is still much more upside this year, given its highly economical asset base (ability to recycle capital with well paybacks under 6 months thanks to its JVs), running room (20+ years), healthy balance sheet (1.3 times debt-to-cash flow), and management execution.”

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