On the sell side, AltaCorp also really likes CNQ, seeing a return of more than 20% within the next 12 to 18 months.
As I mentioned, we're quite bullish on natural gas
Last winter put a significant dent in stockpiles, and although we didn't have much of a summer, we're likely to be starting this winter at a decently lower level than last year
Much of it depends on the weather, but with structural factors like coal displacement and LNG getting nearer to affecting the balance, we think the days of gas plummeting to $1 are over, and we're likely in a new range with mid $3's as a low and mid $4 to $5 a more likely outcome
We likely will see a decision by Petronas in the next 6 months, and we think that they will decide to move ahead. There are a few details to iron out on taxes with the BC government and agreements with various First Nations groups, but we expect these to be resolved
In terms of the impact on Canadian equities, we think the most likely to be impacted are the energy services stocks. LNG will require a significant amount of drilling, the more projects that are approved, the better it gets
Ultimately we think at least 2 projects get approved, and that this will be a big plus for the drilling companies
We have some more users' questions on energy I hope to get to later. But first, let's move along to this question from Mike K:
Not to hammer the point home, but we are quite positive on energy, specifically due to the selloff we've seen after a great start to the year
As far as geography, we spent most of last year looking for opportunities outside of Canada, but given the move in our dollar, we've been finding more opportunites "back at home", so to speak
When your currency depreciates, it makes any revenue you get outside the country that much more valuable when you bring it back to Canadian dollars
Energy is an easy example as the commodities are priced in US dollars, but really anyone that does business in the US is a beneficiary
Weve had good success with companies that do business in the US in a variety of different industries, as long as their economy holds up, the likely path for the Canadian dollar is lower, and as such these companies will continue to win
Gold is in a bit of a tug of war at the moment
On one hand, you have people looking for rates to rise in the US and the USD to appreciate, which is a very obvious negative
On the other, you have a world completely awash in liquidity, as I mentioned Europe is picking up where the US is trying to exit, the Bank of Japan seems likely to increase their own massive liquidity program, and any time you have this magnitude of unconventional monetary policy, there's a chance it goes too far, and gold would be an obvious benficiary
We think the safest bet is to look at gold producers with very low cash costs, which ensures a decent safety net in the event prices head lower
Can you name some favourite gold producers of yours that have low costs?
Actually my favourite producer is Tahoe Resources, which produces silver, not gold, but they tend to move in the same direction
Their cash costs are near the $10 range, with silver at nearly $19, they're making great margins in almost any enviroment, and the company has publicly spoken of their desire to institute a meaningful dividend, which is somewhat of a rarity in the space
There are a variety of ways to play the physical commodity from some reputable companies. We tend to stick with the producers, but also have the ability to buy physical gold, which we would do if we were very bullish
OK, let's switch gears and talk tech now...here are two questions in that field:
As Canadian investors, we're a bit starved of options in both of these spaces
In technology, we're fans of "old tech" so to speak. Companies like Microsoft with big cash flows and reasonable valuations that are paying good dividends.
Earlier this year we saw what can happen when the market stops being willing to pay the ultra high multiples of some of the more trendy US tech companies. As protectors of capital, we tend to not play in these arenas
Genomics is an extremely intriguing field but unfortunately not something that we're invested in, although we consistently monitor these exciting new technologies for investment opportunities
I notice some of the biggest holdings in the NEI Northwest Macro Canadian Equity Fund are REITs (or were, as of April 30…Chartwell Retirement Residence and H&R Real Estate Investment Trust). Is this still the case, and why would you be overweight on REITs right now in a rising interest rate environment?
As I mentioned, we think rates are at best rangebound for the near term, and in that environment, we think income producing equities will continue to be in demand
Not all REITs are created equal, you mentioned one of my favourites, Chartwell. They have a couple unique things going on that make them better able to deal with higher rates
Firstly, they arent fully occupied, and they have natural tenant turnover. As rates rise, they are better able to adjust rents to accomodate higher interest rates, versus a large commerical REIT where the lease terms are longer
They also benefit from demographics, as the population ages, their customer base rises
Long term care REITs have been consolidating in the US, and we think Chartwell would make a natural target for an institutional investor, if they do get bought, we think the price is probably 20%+ higher, and in the meantime you get paid monthly, which is great.
I would say in general we're more bullish of gas than oil, so I would point in that direction.
Earlier this year with the cold winter, you saw a lot of excitement build and some fantastic gains for midcap Canadian gas stocks.
As it became clear the summer wasn't going to be co-operative, we've seen a big retracement in gains from some of these stocks, but we still like the fundamental backdrop.
If you believe that we've likely reset the lower end of the natural gas range higher, as I do, and you think that LNG will happen, there's a group of companies that are cheap as going concerns but even cheaper as takeout targets.
We don't like to buy companies assuming they will be taken out, but when they're cheap on their ongoing fundamentals and there's a potential windfall in a takeout, that's the best of both worlds
Can you name some of these firms that are going cheap, as you say?
Sure, I think Crew Energy is a prime example.
There's a company that had a bit of a fall from grace with investors 2 years ago as one of their oil properties (called Princess) had operational issues. When it became clear it wasn't the growth asset some thought it was, investors dumped the stock.
Since then, the company stabilized Princess, using waterflood technology, while at the same time pulling off a massive coup expanding their Montney gas acreage in BC on the cheap.
They've recently divested Princess, which puts their balance sheet in great shape, and they've had some great drilling results in BC. Going forward they have a big land position and a lot of runway to re-rate as a gas producer. They have infrastructure running right through their land base and would be a prime candidate for a firm looking to buy gas with LNG in mind.
Yes, I do, I think that a royalty spinout is a real possibility, perhaps as early as year end.
The Bakken is certainly a prolific play, even a few years into its development we still perhaps haven't fully grasped how big it will be. However, there are some infrastructure issues, call them growing pains, that we're starting to see, not unlike what Alberta saw with the original oilsands boom.
When you factor in our companies at home are in general trading cheaper and have the benefit of the weaker currency, we're finding better opportunities north of the border
We like both of the Canadian rails, I think in terms of upside to operational efficiencies you probably see more upside to CP vs CN. There's more room for them to squeeze margin out of their operations.
So, we’ve gone past our allotted time, thanks for sticking with us Chris – a lot of questions today. Any other stock picks you’d like to bring to our users’ attention – or any other insights on the market before we wrap?
No problem. In closing I would say we continue to like the market, but at OtterWood our first goal is protection of capital, so we're constantly vigilant on the macro markets and keeping an eye out for any shocks.
We provide weekly commentary on some of the bigger picture themes we see developing, you can sign up for our newsletter at our website www.otterwoodcapital.com and you will be able to keep tabs on what we're seeing in the market every Friday.
Thanks again for all your questions!
Lots of interesting insight today, thanks for joining us Chris. And thanks to all for reading and/or participating in the discussion. Join us again soon for another live chat at Inside the Market. Thanks for being Globe Unlimited subscribers.