Energy Trusts - Canadian Oilsands Trust & Peyto
I recieved an interesting note today regarding Canadian Oilsands Trust (COSWF.PK), and their big drop after the corporate conversion announcement. For those who are not familiar with income trusts, many are converting back to corporations at the end of this year because the Canadian Government is ending their special tax treatment. My friend was wondering if I was worried that Peyto (PEYUF.PK), one of my core holdings, will suffer a large market drop like COS.un did Friday (down 12%).
I told him that Peyto had made that announcement a couple months back on Sept 28th. They cut their dividend by 50% from $0.12/mo to $0.06/mo. The reason for the cut was partially because of taxation, but they went deeper than that to retain capital to increase capex. Peyto closed at $14.35 that day and immediately jumped and is up 21% since the announcement. Their horizontal drilling is really a game changer, and the announcement discusses corporate plans. I highly recommend everyone read it here (.pdf).
What I just love about Peyto is that they understand investment returns on every dollar the company spends. If you have some spare time it would be well worth listening to Darren Gee, CEO of Peyto, speaking at the First Energy Conference in Montreal this past week. You can access it here.
If you don't have the time at least listen to what Darren says at the 24:20 - 25:20 mark. To paraphrase somewhat he says, Every company stands up here and say they can drill wells with 50, 60, 100% rates of return. To investors that is meaningless. What we want to see return on capital coming out the back end of the organization. Who cares what the well economics are if they are eaten up by G&A, taxes, stock options, bonuses, etc.
Now, I couldn't agree more and most investors don't understand how real returns are generated.
To get back to COS.un, it doesn't really make sense why the market tanked on COS.un as the conversion process has been known for several years now. Secondly, COS.un differs from Peyto because they likely don't have any tax pools generated to offset taxes. I would guess COS.un is partially or fully taxable. Peyto should be able to shelter for around 3 years with existing tax pools and if they can spend enough capex they should be able to shelter for at least another 2-3 years after that. Those tax pools at Peyto are a significant unrealized value.
COS must have some other issues and rising costs may be one of them. I guess their cut wasn't expected to be that deep by most of the shareholders. It also doesn't hurt that a handful of analysts have cut the stock.
While I am not really interested in own COS.un, I wouldn't mind it at the right price. I will have to do some reading this weekend and attempt to put a value on COS (if I have time). A good place to look is what others have paid/sold their share in the Syncrude project. If you have a reasonable analysis I would be interesting reading it. And not some pie in the sky estimate.
Fairfax Financial - Prem Watsa
Moving away from energy, I noticed some interesting comments from Prem Watsa, CEO of Fairfax Financial (FRFHF.PK), this week. He believes there may be a bubble brewing in commodities and agriculture. Now Prem Watsa isn't afraid of going against the crowd and standing along (and appearing to be wrong) for long periods of time.
He has for many years warned of the problems coming in the US and was hedged against them for several years. He lost on those hedges for many years until the harvest finally came in during the financial crisis and he made billions on credit default swaps and equity hedges.
I would take it he is referring to Gold/Silver/Copper as well as agriculture. I personally agree and don't care to invest in whatever is popular. There are always opportunities elsewhere.
Now, I personally don't own Fairfax (but do for some family accounts), but it it's getting tempting. FFH currently sells for book value, and their goal is to grow their book value at 15% per year. During the past 24 years, they have compounded book value at 26%. If they can compound at 15% for the next 24 years, their shareholders will be rewarded appropriately.
Disclosure: Long PEY.un, FFH