Tag Archives: energy

Go For Birchcliff’s Preferred Shares Instead Of The Common Stock

Summary Birchcliff enjoys an ultra-low production cost for its natural gas, thanks in part to processing the majority at its own processing plant. I’m curious to see Birchcliff’s plan for 2016 as, despite the $120M price tag, it would make sense to expand the gas processing plant. The IRR is positive and will be 22% at a 10% higher gas price, so technically and theoretically Birchcliff should be going ahead with the expansion plans. But everything will depend on the company’s plans to achieve production growth, and I think Birchcliff will have to choose between the gas plant and a higher gross production rate. It’s pretty obvious the vast majority of the oil and gas producers are bleeding in the current price environment. That’s particularly true for Birchcliff Energy ( OTCPK:BIREF ) where the majority of the annual production consists of natural gas, which has been hit pretty hard. In fact, the gas price in North America has even dropped to less than $2. BIR data by YCharts Birchcliff is a Canadian company and I think it would be a better idea to trade the shares through the facilities of the Toronto Stock Exchange, where Birchchliff is listed on the main board with BIR as its ticker symbol . The average daily volume is much better in Canada as approximately 660,000 shares are changing hands on a daily basis for a daily dollar volume of $2M. El Nino Is Hurting the Company’s Top and Bottom Lines Let’s start with the good news: Birchcliff Energy was able to keep its production rate stable at a total of 38,400 barrels of oil-equivalent per day. As I said, the vast majority of this comes from natural gas sales and the revenue from natural gas was approximately 3.25 times higher than the revenue generated from selling the attributable oil output. As the average production rate in the same quarter of last year was just over 34,000 boe/day and as the average in the first nine months of the current financial year was approximately 38,400 barrels per day, Birchcliff has done a pretty good job at keeping its production rates pretty consistent despite the worsening climate on the oil and gas front. (click to enlarge) Source: Financial statements. The total revenue in the third quarter of the financial year was almost C$79M ($57M) , which is more than 25% lower compared to the same quarter last year, so the higher output didn’t compensate for the lower oil and gas prices. The operating costs also increased a bit, due to increased marketing and transportation expenses. Nonetheless, Birchcliff was able to write black numbers on its bottom line, and the company generated a net profit of C$4.8M ($3.65M) in the third quarter of 2015. Keep in mind that Birchcliff hasn’t hedged any of its gas and oil production, so “what you see is what you get.” The revenue has not been boosted by one-time events, such as the gain on derivative instruments. Source: Financial statements. The operating cash flow on an adjusted basis was C$44.3M ($32M), which is pretty good considering the circumstances and the shortfall to cover the capital expenditures. The investing part of the working capital position was limited to just C$20M ($14.5M). This could be better, but it could also have been a lot worse. This is where Birchcliff’s low-cost gas production at Montney comes in handy. Will Birchcliff Generate a Sufficient Amount of Cash Flow to Cover Its 2016 Capital Expenditures? My main test for Birchcliff will be in seeing what the company is planning to do next year. The original plan called for another 10%-12% production increase to 42,000-45,000 barrels of oil-equivalent per day, but I can imagine the company is currently developing a revised capital plan that will forego any production expansion while waiting for a higher gas price. This might probably be the smartest decision because even though the production costs at Montney are quite low, it might not be sufficient to cover the additional capital expenditures to indeed break even on the cash flow front. Source: Company presentation. It’s encouraging to see that even in the current gas price environment, the annualized operating cash flow will be roughly C$160M ($116M) and Birchcliff will have to try to keep the capital expenditures limited to approximately this level. Fortunately, the Canadian Dollar continued to weaken. This basically means that the lower natural gas price expressed in USD is partly compensated by the weaker CAD, which is also the currency Birchcliff is reporting its financial statements in. (click to enlarge) Fortunately, Birchcliff Energy still has ample access to liquidity as its bank has confirmed and increased an existing credit facility. Birchcliff can still draw approximately US$120M from this credit facility, and that should be sufficient to cover the capital shortfalls for the next two to three years. The Preferred Shares Could Be a Solution to Raise More Cash No company likes to issue new shares at the bottom of a cycle, but Birchcliff has an attractive Plan B. Birchcliff has two series of preferred shares in the market, and both the A-series and C-series have 2 million outstanding shares. The A-shares have a fixed 8% yield (payable quarterly) and are currently trading at 70% of par (and can be reset in 2017 based on the five-year yield on Canadian government bonds with a mark-up of 6.83%). The C-series have a fixed 7% yield . Both preferred share issues are perpetual, so Birchcliff can decide whether or not it wants to retire these preferred shares in the future. Should Birchcliff double the preferred share issue, it could raise C$70M ($50M) in a heartbeat, further reducing the pressure on its balance sheet. This could cover almost two years of capex funding shortfall. The additional cost of raising this C$70M? Just C$7.5M ($5.5M) per year. That’s not cheap, but it would provide an easy way to fund the ongoing activities. Once Birchcliff’s cash flows increase, the company can easily repurchase the preferred shares. Investment Thesis Birchcliff Energy is definitely hoping for a harsh winter to see a boost in the average gas price. The cash flow situation remains under control, but I think I would prefer the additional layer of safety and purchase the preferred shares. Yes, the upside is a bit more limited, but the series-C preferred share now yields almost 9%. That excludes any potential capital gains if Birchcliff decides to repurchase the preferred shares at par value sometime in the future. It will be very interesting to see what kind of capital investment plan Birchcliff has been preparing for 2016, and what it will do with the PCS gas plant, which was expected to see its throughput increase by 30% by the end of 2016. I think holding off on the expansion is the wisest decision, considering the IRR is just 22% at an AECO gas price of $2.5/GJ (currently at $2.25) and the initial capex is budgeted at US$120M. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

3 ETF Winners Post Fed Rate Hike

For the first time in nearly a decade, the Fed opted for a lift-off last week indicating that the economy has gained enough strength to bear future increases in borrowing costs. Significant improvements in the key sections of the economy including that in the labor market were the main reasons behind the hike. Expressing confidence in the U.S. economy, Fed Chair Janet Yellen announced the beginning of a slow-but-steady series of rate increases. The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50% as policy makers unanimously voted in favor of a hike. The long wait for the hike was what Janet Yellen labelled an “extraordinary period.” During this period, ultra-low interest rates aided economic recovery, lending a bull run to the markets. Following the lift-off decision, Yellen stated that the decision “reflects our confidence in the U.S. economy.” The Fed also indicated that “solid” consumer spending, a rebound in the housing market and strong business fixed investment played an important role in the decision. How the Markets Moved Post Hike? Though the highly anticipated hike helped the broader benchmarks to move northward, markets failed to extend the gains due to concerns including the slump in oil prices. Despite yesterday’s gains, the Dow, S&P 500 and Nasdaq lost 2.4%, 1.8% and 1.3%, respectively. Oil was the main reason behind the benchmarks slipping into negative territory following the rate-hike decision. Concerns regarding weak global demand, absence of production cuts from OPEC and North American shale suppliers, and a stronger dollar continued to weigh on oil prices, which in turn affected energy shares during the period. The broader energy index – Energy Select Sector SPDR ETF (NYSEARCA: XLE ) – declined nearly 5.4% in this time frame. However, the alternative energy sector moved in the opposite direction thanks to some important developments. The historic Paris Climate Deal and news on tax credit extension boosted the sector during this period. The Paris deal, in which about 195 countries agreed to a landmark treaty to curb global warming to a significant extent, will invariably motivate renewable energy companies to step up their investments in new technologies, boosting the industry’s growth prospects. Meanwhile, the unexpected approval of a five-year extension to the Investment Tax Credit (ITC) and Production Tax Credit (PTC) for solar and wind companies by the U.S. government also boosted the stocks. 3 ETF Winners In this scenario, we have highlighted three ETFs that registered healthy gains in the post rate-hike period. Guggenheim Solar ETF (NYSEARCA: TAN ) This ETF follows the MAC Global Solar Energy Index, holding 31 stocks in the basket. American firms dominate the fund’s portfolio with nearly 50.9% share, followed by Hong Kong (19.8%) and China (17.5%). The product has amassed $323.8 million in its asset base and trades in moderate volume of around 226,000 shares a day. It charges investors 70 bps in fees per year. The fund has returned 7.7% in the post rate-hike period. Market Vectors Mortgage REIT Income ETF (NYSEARCA: MORT ) The ETF tracks the Market Vectors Global Mortgage REITs Index, measuring the performance of companies primarily engaged in the purchase or service of commercial or residential mortgage loans. The fund consists of 24 stocks and charges 41 bps in investor fees per year. The fund is relatively less popular with an asset base of $102.2 million and average volume of roughly 31,000 shares per day. The commitment of a gradual increase in the key interest rate helped the fund to return 4.6% in the post rate-hike period. SPDR S&P Biotech ETF (NYSEARCA: XBI ) This ETF follows the S&P Biotechnology Select Industry Index, holding 105 stocks in the basket. The fund has a well-diversified portfolio as none of the firms has more than 1.7% of assets. The fund is quite popular with an asset base of $2.8 billion and strong average volume of more than 4 million shares per day. It charges investors 35 bps in fees per year. The fund has returned 4.7% in the post rate-hike period. Original Post

GREK Seems Just Fairly Valued, But Many Of Its Individual Stocks Are Undervalued

Summary My rough bottoms-up valuation of the GREK index reveals just fair overall valuation. Greek banks now represent less than 5% of the GREK, and I consider them a long-term call option costing me roughly 5% of the index. While the overall GREK index looks just fairly valued, the low median values reveal that there are many very cheap individual stocks. These stocks are cheap for a reason, such as high debt, falling sales and often energy sector dependence. The general theme of Greece has come out of the headlines recently. However, its banks were very much in the spotlight in the past weeks as their stocks crashed following the expected stock dilution and lukewarm interest from institutional investors to take part in the recapitalization. With the Greek banks’ bad news getting gradually priced in, I wanted to reexamine the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) index now and attempt to make a very rough bottoms-up valuation to see if there is an attractive investing opportunity. My analysis revealed several surprises and facts, which I would like to share with my readers now. Fact #1: There is very little downside risk in GREK from the Greek banks now With year-to-date returns of Alpha Bank ( OTCPK:ALBKY ), National Bank of Greece ( OTCPK:NBGGY ), Eurobank ( OTCPK:EGFEY ) and Piraeus Bank ( OTCPK:BPIRF ) up to negative 99%, the total weight of the Greek banks in GREK has been diminished to below 5%. This significantly reduces the risk of a large decline in GREK. The GREK options implied that volatility has fallen recently to reflect this lower downside risk. So I now consider the Greek banks as a call option that costs less than 5% of the GREK index and never expires. Not only is the banks’ weight on the index insignificant, but the banks are also usually valued using industry-specific valuation metrics. Valuing them using traditional broad market valuation metrics would just distort the entire picture. Due to these two facts, I decided to simply ignore the banks in the valuation and treat them as the 5% call option that never expires. So what exactly is GREK made of? Here is the list of the current top 25 holdings, representing the overwhelming majority of the total index value, sorted by their weights on the index. The holdings and their weights are updated as of December 17, 2015 and provided my Morningstar. (click to enlarge) Source: Morningstar, author’s recalculations Financial ratio metrics I recalculated the index weight values by summing up holdings of the same company in the form of its primary stock listing (usually listed in the Athens stock exchange) and its ADR form. Here is the updated list, which simplifies things and shows a clearer picture of the holdings, including the financial ratio metrics. (click to enlarge) Source: author’s calculations based on data from Bloomberg, Morningstar, Gurufocus, Yahoo finance and Finviz A quick warning on methodology Please bear in mind that some of the data was hard to get and calculate, and had to be obtained from several sources that may not be using a consistent methodology. While most data incorporates the third quarter 2015 numbers, which include the tough period of bank transaction limits, etc., some minor data was available for the June quarter only. Therefore, an error margin should be much wider than usual, at least plus and minus 20% in the valuation metrics. Otherwise, the valuation is very representative because it takes into account ~92% of the GREK index’s holdings, omitting just the ~5% attributed to the banks for the reasons described above, and also ignoring about 3% of GREK that comes from some below 1% positions. The total GREK metrics calculations are made using a weighted average, with the values being weighted by the stock’s index weight. Negative or N/A values are ignored, and the weights of the remaining valid values are increased proportionally to make up 100%. Surprising fact #2: the GREK index as a whole looks fully valued using most financial metrics The overall dividend yield for the trailing twelve months is just 1.25%, nothing to attract income investors (even if the other risks were ignored). Other metrics are not faring much better. Consider the following. Trailing-twelve-month P/E not very attractive The average trailing-twelve-month P/E of the GREK index is ~16.14x. This is roughly on par with the U.S. and many European or other indexes of economies that are in much better shape, with much more predictable future political and economic environment. So this is a big disappointment, but in times of economic distress, P/E’s may be abnormally high or low as they near bottoms. Some commodity and energy-related GREK stocks are arguably at a deep through of the current cycle. The negative P/Es were ignored, so the calculation takes into account ~86.50% of the total index; the 10% of the index has negative earnings, and the remaining 5% are the banks. The high P/E for the two largest constituents, which are not very cyclical and represent ~40% of GREK, are not very enticing. On the other hand, if we look at the more important cash earnings, the P/FCF figures for these two largest stocks are much lower and arguably quite attractive. Trailing-twelve-month Price/free cash flow is more attractive than the TTM P/E The weighted average TTM P/FCF came in at ~13.31x. This is not bad at all given what Greece and their companies have had to go through in the past twelve months, though the largest constituent, Coca Cola HBC ( OTC:CCHBF ), is predominantly export-oriented. Nevertheless, investors can buy many companies outside of Greece with even lower P/FCF ratios and arguably similar or better prospects or at least less political and economic risk, such as even Apple (NASDAQ: AAPL ), or International Business Machines (NYSE: IBM ), or Xerox (NYSE: XRX ). The P/FCF calculation includes ~85% of the index weight. About 10% of the index has negative FCF, and the remaining 5% are the banks, which were excluded. The forward P/E is even a bit worse than the TTM P/E The weighted average forward P/E currently stands at ~16.94x, as represented by just ~54% of the index. The rest of the constituents either don’t provide forward guidance or I was not able to obtain one. So the forward P/E is less representative but not very attractive nonetheless and carries a higher risk of ending significantly off the mark as many factors are either unpredictable or not factored in the guidance. The Price-to-sales and price-to-book is similar to other markets and not very attractive The weighted average P/S came in at ~1.40x and the P/B is ~1.60x. This is nothing out of the normal range typical for other markets and doesn’t really entice much buying when so many markets with similar valuations are available to international investors. However, some companies within the average show very attractively low P/S and P/B values, indicating distress but also potential attractive deep value plays for patient investors. These include the energy sector stocks, such as Motor Oil (Hellas) Corinth Refineries SA ( OTCPK:MOHCY ), Hellenic petroleum SA (ATH:ELPE), and Public Power Corporation of Greece ( OTCPK:PUPOF ), as well as others such as Ellaktor SA ( OTCPK:ELLKY ). However, many of them carry relatively high debt and other risks. The important fact #3: Using EV/EBIT and EV/EBITDA, GREK trades at about half the S&P 500 valuation The average EV/EBIT stands at ~11.6x and is calculated using 85% of the index. The remaining 10% has negative enterprise value or negative EV/EBIT and was ignored, as were the banks. The average EV/EBITDA is ~5.7x and was derived from ~88% of the stocks weight, with ~7% being EV/EBITDA negative or having negative enterprise value, with the banks being excluded again. For a comparison, the aggregate S&P 500 EV/EBITDA currently stands at around 10x while the median value is around 11x and is arguably overvalued as a group. The GREK index trades at about a half of the EV valuation of the S&P 500. In other words, GREK would have to DOUBLE in order to trade at the same valuation as the S&P 500. And EV metrics for some individual GREK stocks are even more attractive. For example, Coca Cola HBG trades at just ~3.5x EV/EBIT and 2.29 EV/EBITDA thanks to its high debt leverage. The most important fact #4: while overall GREK valuation looks full, the mean averages are much lower, signaling plenty of individual stock opportunities in GREK While mean valuations for the U.S. indexes are mostly higher than the weighted average, in GREK, the opposite is true. There are many stocks cheaper than the overall index. In other words, while the U.S. S&P index valuation masks how expensive many of its individual stocks are, the GREK index’s seemingly unattractive overall valuation hides many undervalued stocks beneath the surface. For example, the median P/B is just 0.91, below 1x, signaling clear distress in parts of the index, especially the energy. I believe it is worth it for investors to go through the individual Greek stocks and pick the best spots rather than buy the overall index, which in itself is only fairly priced and future returns will be just average in my opinion (5% to 10% per year with high political and economic risk). Several GREK individual stock ideas for further research 1. Coca Cola HBC While the company trades at a seemingly high P/E and forward P/E, the cash metric, trailing P/FCF is sitting at just ~11x. 3.5x EV/EBIT and 2.29 EV/EBITDA are very low as well. The problem, of course, is the relatively high debt/capital ratio as well as other potential risks that need to be analyzed in more detail before buying. 2. Several other companies There are many companies trading at very attractive valuation metrics, and their individual risk profiles and future outlooks have to be carefully examined before jumping in. These include Athens Water Supply & Sewerage ( OTCPK:AHWSF ), Folli Follie ( OTCPK:FLLIY ), and Greek Organisation of Football Prognostics ( OTCPK:GOFPY ). 3. Many energy-related bargains, mostly carrying higher risk Metka SA trades at just ~6x P/E. However, it is FCF negative. As an engineering contractor, it has been negatively impacted by the energy sector weakness. However, the 2.28x EV/EBIT and 1.45x EV/EBITDA look very cheap if the company manages to survive through the downcycle. There are also several companies trading at depressed valuations due to being closely tied to falling energy prices, such as Public Power Corporation of Greece , Motor Oil (Hellas) Corinth Refineries , and Hellenic petroleum (ATH:ELPE) and Ellaktor , which trade at rock-bottom P/S ratios but carry mostly very high risk due to low commodity prices and high debt. Risks Besides the specific risks in the individual stocks, such as debt and falling sales and margins, the GREK and its constituents are prone to very high political and economic risks that may include higher taxes, price controls, and even an outright nationalization or semi-permanent strikes, revolutions, and boycotts of local sales by the local population. Conclusion While the overall GREK index does not look cheap given all the extra risks involved with Greece, the low median valuations reveal that there are many individual companies in the index that are attractively priced. However, they also carry individual risks such as high debt and more. Some individual stocks worth further investigation include Coca Cola HBG, Metka, Athens Water Supply & Sewerage, Folli Follie, and Greek Organisation of Football Prognostics. There are also several energy-related companies trading at distressed P/S ratios carrying high debt and cyclical risk. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.