“This piece of heaven that I've found;
Rocky Mountains and black fertile ground;
Everything I need beneath that big blue sky;
It doesn't matter where I go;
This place will always be my home;
Yeah I've been Alberta Bound for all my life;
And I'll be Alberta Bound until I die.”
- Paul Brandt
For those that have experienced an Alberta winter, you may disagree with Canadian singer and song writer Paul Brandt that Alberta is a great place to be bound for in December. In fact, our Chief Operating Officer was in Calgary a month ago on a day in which Calgary registered as the second coldest place on the planet. While he was a bit whiny about that fact, in my opinion, cold weather is like anything – if it doesn’t kill you it makes you stronger. Last night I took my nieces and nephew on a sleigh ride in -20 degrees Celsius weather and I think it made them stronger.
I always enjoy flying back home to Alberta and into the Calgary International Airport. Each time I’m struck by two things: the vastness of my home province and the rapid growth of Calgary, the business capital of the Canadian energy industry. The newest addition to the growth of Calgary is a 59-story office tower called “The Bow”, which will be the largest office tower in Canada outside of Toronto when it’s completed in 2012. This tower will become the world headquarters of Encana, a global leader in non-conventional gas production.
Alberta is the home to the vast majority of Canada’s energy resources. In particular, the Canadian oil sands, containing ~170 billion barrels of oil reserves, is second only to Saudi Arabia and accounts for just over 13% of all global reserves. It is estimated that the Canadian reserves could supply Canadian energy needs for the next 400 years. This is true energy independence.
These vast energy resources are one of the key factors supporting our long position in the Canadian Dollar (or the Loonie) in the Virtual Portfolio. Not only is Canada completely energy independent, it will also benefit in a weak dollar environment which inflates the prices of U.S. dollar-based commodities, such as oil. While the United States gets squeezed in a high oil price environment, Canada becomes cash rich, as 99% of Canadian oil exports get sent to the U.S. Clearly, the current U.S. Federal reserve policy of Quantitative Guessing is very supportive of our long Loonie position.
It is estimated that energy contributes ~31% of Alberta's GDP and almost 5% of Canada's GDP overall, therefore the price of oil has a real impact on Canadian GDP. As the price of oil increases, Canadian GDP will directly benefit. Moreover, as Canadian production increases, energy’s contribution to Canada’s GDP will grow. Currently, Canada represents ~6% of global oil production through ~13% of global reserves. Over time, as we’ve seen throughout the last decade, Canada’s production share globally will begin to mirror its reserve share, which should create a major tailwind for Canadian GDP in the next decade.
Our Energy Team led by Lou Gagliardi recently released their top 10 list for energy investment ideas in 2011. Not surprisingly, a number of these ideas were Alberta based energy companies. So without further adieu, our top 3 Alberta ideas for 2011:
1. CANADIAN OIL SANDS TRUST (COS) – Mispriced conversion
The company is converting to a corporation from a trust at the end of December 2010. The stock recently took a hit on news that COS will cut its dividend payout ratio in half upon conversion to a corporation in order to maintain cash flow within capital spending. COS is 100% levered to oil sands production, as the largest partner (36.74% interest) in the Canadian Syncrude Joint Venture.
We view COS a company with upside earnings potential in 2011 -- potentially a 63% increase from 2010 to C$2.04/share at $85 oil, and net cash flow positive C$0.20/share after capital spending. At $89 per barrel oil, earnings could increase further to C$2.28/share, with net cash flow at C$0.45/share. We view shares as oversold, as the market overreacted to the dividend reduction news, presenting a buying opportunity. COS is undervalued by roughly 30% according to our discounted cash flow models. The company's operating fundamentals remain strong, particularly with high oil price leverage. The balance sheet has a moderate debt-to-capital ratio at ~23%, net of cash at ~21%.
2. NORTH AMERICAN ENERGY PARTNERS (NOA) – Predictable cash flow and dirt cheap
This Canadian oil sands resource "services" provider has been hit hard by the downturn in Oil Sands project expansion that began in 2009 and continued into 2010. NOA provides oil sands mining and site preparation, piling and pipeline installation services: as of the end of September, revenue from oil sands services generated 83% of net revenue, 84% of which is recurring revenue. Although its balance sheet remains under pressure at ~57% debt-to-capital and net of cash at ~50%, recent projected increases in capital spending by oil sands companies and the resumption of oil sands growth projects is good news for NOA, which will benefit from increased project spending.
Oil sands project growth will provide the catalyst to earnings growth into next year. For NOA's fiscal year ending March 2011, earnings are expected to decline 21% to C$0.61/share, but earnings for fiscal year 2012 (beginning in April 2011) should bounce back by ~120% to $1.36/share, driven by higher oil sands spending, which equates to just under 10x earnings. Net cash flow for both years should remain positive, with fiscal 2012 expected at $32 million or C$0.90/share.
3. MEG ENERGY (MEG) – Growth with a monster balance sheet
MEG Energy is a bitumen producer based in Calgary, Alberta with shares traded on the Toronto Stock Exchange. We expect MEG's 2011 earnings to benefit from a full year in operation, a 3% increase in oil sands production lower operating costs per barrel, and expanding margins. With its strong balance sheet, a strategic partner in China's CNOOC owning 15%, debt-to-capital at 21% and net of cash at negative ~13%, we believe MEG is being underpriced by the market by roughly 30%.
The company is sitting on roughly C$1.4 billion in cash -- more than enough to meet its expected net cash flow deficit after capital spending of roughly ~C$600 million for 2011. It is in the growth mode, ramping up production for its next phase of expansion at Christina Lake, with expected start-up in 2013. Based on $85 oil in 2011, MEG's 2011 earnings should top consensus, reaching ~C$0.92 per share, up more than 150% increase from 2010. Should crude oil average $89 in 2011, MEG's earnings could go about 16% higher to ~C$1.06.
You would be remiss not make your energy portfolio “Alberta Bound” in 2011.
Yours in risk management,
Daryl G. Jones
The Macau Metro Monitor, December 30th, 2010
DETAILS EMERGE ON FIRING OF SANDS CHINA EXECUTIVE Las Vegas Sun
Attorneys for LVS argued that while Jacobs had sued LVS and Sands China, he had failed to name an “indispensable” party as a defendant — his actual employer Venetian Macau Ltd. For this reason, his lawsuit in the US should be dropped and any disputes should be resolved in Macau.
Some causes of Jacobs' termination are:
TOURISM SECTOR PERFORMANCE FOR NOVEMBER 2010 STB
Visitor arrivals to Singapore registered 16.1% growth to reach 963,000 in November 2010. It is also the 12th consecutive month of record visitor arrivals.
Indonesia (176,000), Malaysia (100,000), P R China (94,000), India (73,000) and Australia (64,000) were Singapore's top five visitor-generating markets in November 2010. These markets accounted for 53% of total visitor arrivals for the month. India (+46.3%), Hong Kong SAR (+45.3%), and South Korea (+41.8%) registered highest growth out of the top 15 markets.
REGULATION FD DISCLOSURE Las Vegas Sands
As part of his individual long-term strategy for asset diversification, tax and family planning, acting Sands China CEO, Michael Leven, plans to sell up to 1,758,349 shares of company stock during 2011, with 133,349 stock option shares planned to be exercised and sold in January 2011, 125,000 stock option shares planned to be exercised and sold in February 2011 and 150,000 stock option shares planned to be exercised and sold in each month from March through December 2011.
LIGHT RAIL TENDER WINNER ANNOUNCED macaubusiness.com
Mitsubishi Heavy Industries has won Macau's LRT contract (1st phase) by bidding MOP4.688 BN (US$586 MM). Construction is expected to start in 2011 with the 1st phase of the system opening in 2015.
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TODAY’S S&P 500 SET-UP - December 30, 2010
Equity futures are trading little changed to fair value following Wednesday's low volume gains which saw the S&P add to its best December performance in nearly 20 years. Today's MACRO data points may provide some incremental direction.
OTHER DATA/NEWS EVENTS TODAY:
CREDIT/ECONOMIC MARKET LOOK:
Treasuries rebounded from yesterday's sharp sell-off as today's 7-year auction showed solid demand. The auction was sufficient to spark a rally that gave the 10-year yield its largest decline (14 bp) since early June.
CRB: 330.71 -0.22%
Oil: 91.12 -0.40% - Trading down 0.02% in the AM
Crude Oil Trades Near 26-Month High Amid Speculation U.S. Stockpiles Fell
COPPER: 431.15 -0.38% - Trading up +1.15% in the AM
Copper climbed to a record in London after a report that China’s manufacturing is expanding
GOLD: 1,411.97 +0.60% - Trading up +0.01% in the AM
Gold May Climb as Weaker Dollar Spurs Investment Demand
OTHER COMMODITY NEWS:
Another weak day for the greenback saw the dollar index fall by 0.71% - of note, the dollar has now declined in eight consecutive sessions against the yen to a seven-week low vs yen amid speculation China will allow yuan to appreciate at a faster pace.
This note was originally published at 8am on December 29, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“This stubbornness in the face of clear data is right up there with the efficient market believers.”
-Jeremy Grantham (Quarterly Letter, October 2010)
Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.
This isn’t to say that there aren’t plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.
I’m fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn’t working, I shut down the noise, review my notes, and rethink my theses. Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.
Yesterday, I was re-reading Jeremy Grantham’s Quarterly Letter for October titled “Night of the Living Fed” and that helped me re-think my global macro positioning heading into 2011.
Before you scroll down, don’t worry – I’m not covering my short position in the SP500 (it’s -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I’ve been bearish plenty enough times on US stocks in my career with performance that’s worse than that.
Being bearish on US stocks here doesn’t mean you have to be bearish on everything – that’s a US-centric stock market investor’s risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America’s currency and hold rates of return on American savings accounts unsustainably low.
Grantham, Grant, and Hussman aren’t fans of The Ber-nank either. So, while hope is not an investment process, I’m really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.
On the politicized US central bank, here are some valuable excerpts from Grantham in the “Night of the Living Fed”:
The “real world” is, of course, real-time… and… as Ludwig von Mises said, “For many people, the “long run” quickly becomes the short run.” There’s no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.
On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here’s what the expectations of higher prices (inflation) have done:
For a man who preaches “price stability”, that’s nice Heli-Ben… really nice. The 45 MILLION Americans on food stamps salute you.
On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning’s ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn’t cool for the 90% of Americans who aren’t levered-long the SPY.
Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07’ and early 08’) that stocks are “cheap” even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.
Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.
My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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