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TOP NEWS: June 15 • Big Oil saving Putin top investor show again Some of the world's most powerful oil executives will attend Russia's top investment show next week, once again helping the organisers shrug off a meagre turnout from other leading Western industrialists and bankers. Many CEOs and chairmen from major U.S. and European firms withdrew from last year's St Petersburg International Economic Forum because of tensions tied to Russia's annexation of Crimea and a separatist war in eastern Ukraine. • Australia's Arrium faces more impairments amid low iron ore price Australia's Arrium Ltd on Monday forecast a sharp drop in future iron ore production as it fights to cut costs amid low prices and said it will take a further A$320 million ($247 million) impairment charge this year. Like most small-sized iron ore miners, Arrium is reviewing its business in the low price environment, despite a modest recovery which analysts are warning could be short-lived. • China's top corn region hikes subsidies again for processors China's Heilongjiang province, the country's top corn producing region in the northeast, has agreed to again increase its subsidies to local corn processors to help the loss-making industry and encourage more use of domestic corn. The subsidies, which have already been doubled this year to 200 yuan per tonne, will be doubled again to 400 yuan ($64.43)per tonne of corn they process from April 17, industry sources said. It was not clear how many processors will get more subsidies. Last time, 26 local processors were given 200 yuan per tonne in subsidies for buying state corn. • U.S. oil companies eye tropical disturbance in south Gulf of Mexico U.S. oil companies were closely watching a large tropical disturbance in the southern Gulf of Mexico, but were not changing operations despite the system's 70 percent chance of developing into a tropical cyclone over the next 48 hours, according the U.S. National Hurricane Center. Leading oil producer in the U.S.-regulated Gulf of Mexico Shell Oil Co, the U.S. arm of Royal Dutch Shell, said it was monitoring the storm on Sunday. • COLUMN-Zinc's infinitely stretchable deficit deadline: Andy Home All mining activities at the giant Century zinc mine in Australia will have ceased by the end of this month. News that will be greeted with relief by believers in the zinc deficit story, who have had to watch Century's operator MMG push back the fateful closure date many times in the past. • Total ordered halting of France's La Mede refinery due to strike French oil major Total said on Saturday management had ordered the halting of the La Mede refinery in southeast France after a union launched a strike against plans to stop crude processing at the plant. Total intends to halt crude oil processing at its 153,000 barrels-per-day La Mede site near Marseille by the end of 2016 as demand for petroleum products declines in Europe. • Vedanta makes $2.3 bln bid to buy out minorities in Cairn India Indian mining and energy group Vedanta Ltd made a $2.3 billion offer on Sunday to buy out minority shareholders in cash-rich oil unit Cairn India, a deal that helps parent Vedanta Resources Plc repay hefty debts. Shareholders in Cairn India, India's top private sector oil producer, will get one share in Vedanta Ltd for every share held, the companies said in a joint statement on Sunday. • U.S. oil drillers pull 7 rigs, biggest drop since late May - Baker Hughes A slowdown in U.S. oil drilling trudged along in its seventh month as more rigs were pulled than in the previous week, denying the market a sign that producers have started ramping up production. Energy firms pulled another seven rigs from U.S. oil fields this week, the most since late May, oil services company Baker Hughes Inc said on Friday in its closely followed report. • Iran sought to resurrect quota system at OPEC meeting-Shana Iran sought to bring back OPEC export quotas at the group's meeting in Vienna last week, the oil news agency Shana reported. Iran's OPEC governor Hossein Kazempour Ardabili sent a letter to the group's secretariat last week proposing "a technical price formula that can resurrect the quota system and also prevent prices from falling," Shana reported on Saturday. • Nigeria starts investigating crude oil swap contracts Nigerian authorities have launched an investigation to determine whether the government has been short-changed by a state oil company scheme to swap crude for refined products, the company, three oil traders and a security source said. The Nigerian government may be losing money through opaque contracts in which crude oil worth billions of dollars is given to traders in exchange for refined imports, mainly gasoline, international and domestic watchdogs have said. • Outflows from energy ETPs continue in May-BlackRock Investors continued to pull money from energy exchange-traded products in May after a rebound in oil prices stumbled as the global supply glut showed no signs of eroding. Some $540 million exited energy ETPs globally last month, following net withdrawals of $1.2 billion in April, data from asset manager BlackRock showed.
JUNE 12 At midday: TSX down as energy shares fall with oil Canada’s main stock index was down for the second day in a row on Friday as energy shares fell alongside the price of oil and financial shares came under pressure. U.S. crude prices were down 1.5 per cent to $59.86 a barrel after Saudi Arabia said it stood ready to raise output to new records. The energy sector led the way down, falling 1 per cent. Among the laggards, Suncor Energy fell 1.1 per cent to $35.14, while Canadian Oil Sands dropped 2.4 per cent to $9.99. Canadian Natural Resources tumbled 1.7 per cent to $36.06 as it was caught in the broader energy sell-off, despite saying output at its Primrose and Kirby South oil sands projects had returned to normal levels after wildfires in northeastern Alberta. “The bigger issue for oil companies is that if oil stays around these levels, they’re going to feel more pain because, especially large-cap oil companies, their cost structure is way out of whack with their returns,” said Paul Harris, portfolio manager at Avenue Investment Management, in Toronto. The Toronto Stock Exchange’s S&P/TSX composite index fell 85.81 points, or 0.58 per cent, to 14,745.07. After touching a seven-month high in mid-April, the index has since waned as investors have taken in disappointing economic data on both sides of the border. The uncertainty around when the Federal Reserve will start to raise interest rates adds to the sense of a lack of direction, said Harris. “In our view, you probably see a pullback just simply because this is a bad time of the year,” said Harris. “Seasonally, people are weary of the stock market and the market seems to be wanting to go down as opposed to going up.” Of the index’s 10 main groups, all but one were in negative territory. A gain in gold producers bucked the broader descent in commodity shares as the gold subsector rose 0.3 percent after falling sharply on Thursday and as the price of gold futures <GCv1> steadied. A drop in financial shares also contributed to the broad decline, with the group down 0.9 per cent. Royal Bank of Canada fell 0.8 per cent to $77.53, while Toronto Dominion Bank lost 1.3 per cent to $53.88. BlackBerry gained 0.4 per cent to $11.35 after sources said the company is considering equipping an upcoming smartphone with Google Inc’s Android software for the first time. U.S. stocks also fell, as equities trimmed a weekly gain, amid concern Greece won’t reach a deal with its creditors as its debt negotiations drag on. Energy shares retreated 1.2 per cent as oil declined for a second day. Cisco Systems Inc. lost 1.6 per cent to pace a slide among technology companies. Eli Lilly & Co. dropped 2.8 per cent to lead health-care companies lower. Airlines climbed amid the decline in crude. Twitter Inc. rose after saying Chief Executive Officer Dick Costolo will step down. The Standard & Poor’s 500 Index lost 0.7 per cent to 2,093.49 in New York. The Dow Jones Industrial Average fell 151.44 points, or 0.8 per cent, to 17,887.93. The Nasdaq Composite Index slid 0.7 per cent. “Every time we think we’re close to a deal with Greece there’s some kind of monkey wrench,” said Karyn Cavanaugh, the New York-based senior market strategist at Voya Investment Management LLC. Voya oversees $215-billion. “The more opaque the picture becomes with Greece the more people opine on what the potential repercussions would be and it’s a little touch and go.” After four months going around in circles, German Chancellor Angela Merkel urged Greece to accept the framework for financial aid as euro-area officials demanded a proposal for stabilizing the country’s debt by the end of today. The S&P 500 has all but erased its weekly gain as sentiment soured on the potential for a deal between Greece and its creditors. Optimism for deal earlier in the week coupled with improving economic data had helped push the benchmark toward its best week since April. Federal Reserve policy makers meet next week to discuss the potential timing of an interest-rate increase, while recent data have helped bolster the case for higher rates this year. Wholesale prices rose in May as the biggest jump in fuel costs in at least five years swamped muted advances in other categories. Costs dropped 1.1 percent over the past 12 months, in line with estimates. A separate report showed consumer confidence rose more than forecast in June as Americans were the most upbeat about their wage prospects in seven years. Data yesterday showed consumers were more willing to spend as increased retail sales reflected broad-based gains from car dealers to clothing outlets to department stores. With files from Bloomberg News
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OPINION: How Enbridge’s planned asset shuffle bodes well for investors There are many ways for public companies to prosper. But in my opinion, one of the best is multiple expansion. Let me explain. Consider Brookfield Asset Management Inc. (BAM), the leviathan that emerged in the late-1990s from the Edper/Brascan empire. Its transformation was hugely complicated but, with the vision of its board and the execution of its CEO Bruce Flatt, it has become a Bay Street darling. From the high single digits, its earnings multiple has climbed to about 15. Inevitably, as the market cap climbed, the dividend yield declined – to just above 1 per cent. A far cry from the 1998 dividend yield of 4.7 per cent. How did it do this? Simplifying its corporate structure, BAM rolled its assets into sole-purpose public entities, such as Brookfield Infrastructure Partners and Brookfield Energy Partners. In addition, they have moved more heavily into managing other companies’ assets. This strategy has allowed it to earn substantially more revenue from management fees than it did 15 years ago. How much more? The composition of BAM has changed dramatically over the years, so it’s hard to be precise; however, at the end of 2014, it managed $200-billion in assets, of which $89-billion, or 45 per cent, are “fee-bearing capital.” The conclusion is aptly made by the title of its 2014 annual report, which declares BAM a “Global Alternative Asset Management Company” – and it certainly is. I believe Brookfield’s transformation has not gone unnoticed at Enbridge Inc. Enbridge has three main subsidiaries – Enbridge Energy Partners (EEP-NYSE), Enbridge Income Fund (ENF-TSX), and Enbridge Energy Management LLC (EEQ-NYSE). Enbridge, the parent, has a market cap of $50-billion. Through these public subsidiaries, Enbridge effectively controls each entity with varying percentage ownerships. Last December, Enbridge management declared its intent to roll more assets into the sole-purpose companies controlled by these entities. Henceforth, the public subsidiaries – not the parent, Enbridge – will issue most of the equity and debt to fund the future capital-expansion projects that they own. Over time, Enbridge Inc. will thus have to issue less equity and debt, and will consequently enjoy more organic earnings growth. This should also lead to higher dividends growth. In the past, to keep its cap table in balance, Enbridge had issued equity and debt in lockstep with its major capital projects. Now, with the repositioning of assets, the subsidiaries will issue most of the paper. According to a December, 2014, press release, Enbridge aims to roll more of its $53-billion in property, plant and equipment, or PPE, into the respective Canadian and U.S. subsidiaries. In exchange, Enbridge, the parent, will take back equity and debt paper. But here’s the payoff: The related entities will pay more management fees to the parent than they currently do and thus Enbridge will earn a higher return on the lower capital employed. These management fees constitute the real prize. Hence, the prospect of higher dividend growth in the future. Still, you may fear that Enbridge’s vaults will be empty once it transfers the assets. Not so. Another $44-billion of growth projects are in the “pipeline,” more than replacing the transferred assets. Enbridge takes its corporate governance very seriously. There is no guarantee that management’s plans will be approved by a majority of independent directors on the respective boards; however, if approved with this transformation, Enbridge will become more like a management company, reaping the benefits of robust management fees, just like BAM. If the market begins to recognize the merit of this approach, Enbridge’s stock price could trade at a 2-per-cent dividend yield over time. Two important caveats: No oil and gas investment is complete without assessing Alberta’s new provincial government and the looming interest-rate rise planned by the U.S. Federal Reserve. The NDP’s platform proposal – to review royalty and tax rates – will affect all Alberta-based oil and gas companies, as well as the peripheral “food chain” that benefits from production growth. Enbridge is most certainly a target. The second caveat is that, generally, dividend-yielding stocks decline when interest rates go up – unless they can grow their dividends faster. With Enbridge’s planned restructuring, this could be in the cards. In the short term, until the NDP plans are clarified, multiples may well be constrained. But I’m betting on the long term, and have been acquiring Enbridge for clients as its transformation begins to unfold. Gabriel Lowenberg is CEO and president of Lowenberg Investment Counsel Inc. (LICi), an independent wealth-investment management firm based in Ottawa, which owns Enbridge for the benefit of its clients. The views and opinion expressed in this article are those of Mr. Lowenberg and do not constitute investment advice.
JUNE 10 The close: Oil prices push TSX higher, rising yields aid financials Canada’s main stock index finished higher on Wednesday as oil and gas shares rallied on stronger crude prices, while financial stocks gained on higher bond yields. Nine of the top 10 most influential movers on the index were oil and gas or financial companies. The Toronto Stock Exchange’s S&P/TSX composite index ended up 71.33 points at 14,889.04. Eight of the index’s 10 main sectors rose, with advancers outnumbering decliners by about 3.4-to-1. “Energy is really doing the bulk of the lifting in today’s market,” said Allan Small, a senior investment adviser at Holliswealth. Among the most heavily weighted movers were pipeline company TransCanada Corp., which rose 2.6 per cent to $52.05, and Suncor Energy Inc., which advanced 1 per cent to $36.23. The index’s energy group climbed 1.3 per cent as oil prices jumped on a drawdown in U.S. inventories that boosted the outlook for summer fuel demand. U.S. crude prices settled up $1.29 (U.S.), or 2.1 per cent, at $61.43 a barrel, while Brent crude settled up 82 cents, or 1.3 per cent at $65.70. Among rising financials, Manulife Financial climbed 1.4 per cent to $23.97, and Sun Life Financial Inc advanced 2.6 per cent to $42.70. The overall group rose 0.6 per cent, helped by rising bond yields. “Rates have really ticked up in the last week and a half or so in both Canada and in the U.S., which is really good for banks, a steeping yield curve is good for banks on their net interest margins,” said Bryden Teich, associate portfolio manager at Avenue Investment Management. The index’s materials group, which includes miners, climbed 0.5 per cent, while consumer staples were up 1 per cent. Health care and telecoms were the lone decliners, falling nearly 0.7 per cent and 0.2 per cent, respectively. In the U.S., stocks jumped, helped by optimism that Greece may be closer to reaching a deal with creditors and by gains in technology and financial shares. All 10 major S&P 500 sectors ended higher, with the technology index up 1.6 per cent and leading the gainers. The S&P financial index, which has risen with the prospect of higher rates, climbed 1.4 per cent and turned positive for the year. The chairman of euro zone finance ministers said a cash-for-reform deal with Athens was still possible in time for their June 18 meeting, with just a few issues remaining to be solved, but Greek counter-proposals were not yet satisfactory. A Bloomberg report said the German government may settle for a clear commitment by Greece to at least one reform measure in order to unlock aid. “The notion that they’re going either kick the can down the road some more or actually come up with some kind of mutually acceptable deal is a mild positive. It’s more the avoidance of a short-term negative,” said Uri Landesman, president of Platinum Partners in New York. Netflix was up 3.7 per cent at $671.10 (U.S.) and hit a record intraday high of $692.79, a day after shareholders approved a massive increase in the number of shares the company is authorized to issue, the first step towards a possible stock split. The Dow Jones industrial average rose 236.36 points to 18,000.4, the S&P 500 gained 25.05 points to 2,105.2 and the Nasdaq Composite added 62.82 points to 5,076.69. U.S. stocks have been under pressure as investors expect the U.S. Federal Reserve to raise rates sooner rather than later. The Fed has said it will raise rates only if data points to a recovery in the U.S. economy, which had come to a standstill in the first quarter. HCC Insurance Holdings shares rose 36.4 per cent to $77.35 after Tokio Marine Holdings said it had agreed to buy U.S. speciality insurer for $7.5-billion. About 6.5 billion shares changed hands on U.S. exchanges, above the 6.0 billion daily average for June so far, according to BATS Global Markets.