There is little doubt that shareholders of Pacific Rubiales Energy Corp. (TSX:PRE) are happy to have 2013 in the rearview mirror — and the first month of 2014 for that matter. During 2013, Pacific Rubiales shares dropped over 20% and the slide did not stop there. So far in 2014, shares have fallen by another 13%.

The poor performance is not without warrant. The company fell short of earnings estimates in the first three quarters of 2013 and management lowered 2014 EBITDA guidance from $4.0 billion to approximately $3.5 billion. So will 2014 be a repeat of what we have seen over the last year or can this dog hunt? Several announcements over the past couple of months may be signaling a better year in 2014.

Guidance

For 2014, management is targeting average net production of 148 to 162 million barrels of oil equivalent per day (Mboe/d) which represents a 15 to 25% increase over 2013 production levels. While this may seem aggressive, the company did exceed its 2013 low-end estimate by approximately 14%, and even exceeded the high-end estimate. In addition, the company’s current production already exceeds the low end of the estimate for 2014.

Management recently announced that actual exploration and development expenditures in 2013 increased by 15% over the original guidance to approximately $2.0 billion. Capital expenditures for 2014 are expected to eclipse the updated 2013 number by another 25% and come in at around $2.5 billion.

As mentioned earlier, EBITDA is currently projected at roughly $3.50 billion for 2014 which will produce the necessary cash to internally fund capex. The company’s exploration program received a big bump in the budget over 2013 and is expected to focus on the heavy oil prospects in Columbia as well as offshore basins of Peru and Brazil. As a result of an aggressive capex program, management expects EBITDA to reach a range of $4.0 billion to $5.0 billion over the next three years.

Acquisitions and dispositions

Late last year, the company completed the $1.60 billion acquisition of Petrominerales Ltd. for $11.00 per share plus assumed debt in an all-cash transaction. Through this accretive acquisition, the company gained access to approximately 6.8 million net acres of exploration and development properties located in Columbia and Peru producing approximately 22 Mbbl/d. The acquisition also included interests in two oil pipelines management deemed strategic to its heavy oil production.

As part of the company’s effort reduce debt associated with the Petrominerales acquisition, it sold the 5% interest acquired in the OCENSA pipeline for $385 million, but entered into a 10-year agreement to secure transportation capacity. During the guidance call on January 8, 2014, management stated it agreed to sell a 38% stake in Pacific Midstream for $400 million and is considering an IPO in 2015 of its Pacific Infrastructure unit in which the company holds a 41% working interest.

Foolish bottom line

The worst would seem to be over and management appears focused on increasing shareholder value. The company announced late last year that it had initiated purchases under a previously announced normal course issuer bid allowing it purchase up to approximately 10% of the public float or roughly 31.1 million shares. Last week the company confirmed it had already purchased approximately 4.0 million shares under the plan.

One wildcard in the Pacific Rubiales story is its proprietary Synchronized Thermal Additional Recovery technology referred to as STAR. The technology is designed to positively impact reserves, production and costs. The company recently defended STAR against what it referred to as false media reports regarding the technology and reiterated that STAR has performed in line with expectations. In addition, any benefits achieved from STAR have not been factored into future production forecasts.

Shares of Pacific Rubiales are trading at prices not seen in nearly four years. The low stock price combined with strategic asset sales, debt reduction, share buybacks, an attractive yield and the potential for the STAR technology make Pacific Rubiales worth consideration for the energy portion of your portfolio.

The post The Stock Picker’s Guide to Pacific Rubiales Energy Corp. in 2014 appeared first on The Motley Fool Canada.

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Cenovus Energy Inc. (TSX: CVE) (NYSE: CVE) began operating as an independent company just over four years ago when natural gas giant, Encana Corporation (TSX: ECA), split off its oil operations.  After the split, Cenovus became one of the largest integrated oil-focused companies in North America which included enhanced oil recovery projects in Alberta at Foster Creek and Christina Lake.  In addition, the split gave Cenovus the second largest refinery in the Midwest region of the U.S. located in Roxana, Illinois, capable of processing 311,000 barrels-per-day, as well as a refinery in Borger, Texas with a capacity of 146,000 barrels-per-day.  Both refineries are part of a joint venture with Phillips 66 (NYSE: PSX).

A quick look at 2013

Overall, total crude oil production for the company was up 9% through the first three quarters of 2013 to 176,085 barrels-per-day.  Carrying most of the load was the performance at the company’s Christina Lake project with a 58% increase to 45,211 barrels-per-day.  This helped make up for the disappointing results at Foster Creek which saw production fall 7% to 53,450 barrels-per-day.  The significant increase at Christina Lake was the result of phase D of the project reaching full capacity during the first quarter of the year and new production from phase E.  Foster Creek was negatively impacted by a planned turnaround which resulted in six days of a full production outage in the third quarter as well as work on a backlog of well maintenance at the project.  Going into 2014, Foster Creek is expected to be back at normal production levels.

On the earnings front, Cenovus fell short of expectations in every quarter except the first when it beat expectations by 10% reporting operating earnings of $0.52. Analysts currently expect the fourth quarter to come in at $0.41 per share which has been significantly reduced over the last 90 days from $0.53 per share.

The master plan

Management has laid out a 10-year business plan in which it shows net production at its oil sands projects reaching 435,000 barrels-per-day with total production including conventional oil reaching 525,000 barrels-per-day by the end of 2023. The early part of the plan is focused on land positions already held by the company primarily in the oil sands using steam-assisted gravity drainage (SAGD).  The forecast calls for a compounded annual production growth rate of 11% over the 10-year period.

In order to achieve the target production rate, the company expects to invest between $3.3 billion and $3.7 billion on average in each year for the next decade.  Management currently expects the large capital investment to be internally funded through cash flow from operations and existing financial capacity.  While the company is primarily an oil producer, it does produce natural gas which management considers purely a means to an end by providing fuel for the company’s oil sands and refining facilities as well as helping fund the capital spending program.

Projections for 2014

In order for the company’s 10-year plan to be successful, it must take one year at a time and meet specific goals for that year.  Management met a number of its targets in 2013 and has put forth a new set of objectives for 2014.  Some of the key milestones for 2014 include drilling 300 stratigraphic test wells in the first quarter, reaching sustainable production capacity at Christina Lake phase E in the second quarter, achieving initial production at Foster Creek phase F in the third quarter and increasing rail takeaway capacity for oil to approximately 30,000 bbls/d by the end of the fourth quarter.

If management is able to reach its goals, it expects oil production to increase by 10% in 2014 to an estimated 199 Mbbls/d.  However, it will have to achieve this on a 13% cut in capital investment to between $2.8 billion and $3.1 billion in order to align spending with cash flows that are expected to be in the range of $3.0 to $3.7 billion.  Approximately 90% of the estimated expenditure will be focused on upstream oil operations with the lion’s share going to enhanced recovery projects in the oil sands and roughly 27% going to conventional oil.  Approximately 7% of the capital investment is directed at natural gas and refining operations.

Final thoughts

Analysts are currently positive on the stock as most surveyed rate it with a “buy” with a mean price target for the next 12 months of almost $39.00 per share.  If the analysts are right, 2014 is shaping up to be a very good year for investors in Cenovus which could see shares move nearly 28% higher.  However, this is unlikely to occur unless the company can exceed the current 2014 earnings estimate of only $1.68 per share.  In order to exceed expectations, management will have to come through on its stated goals, be successful in efforts to attack the cost structure and with luck, get a little help from higher oil prices.

At current prices, Cenovus certainly seems worth a look as a possible portfolio addition for 2014.

The post What does the Future Hold for Cenovus Energy? appeared first on The Motley Fool Canada.

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Starting with a seven-passenger snowmobile first made commercially available in 1937, Bombardier Inc. (TSX: BBD.B) has grown into one of the premier manufacturers of aircraft and providers of rail solutions in the world.  The company would continue in the snowmobile business eventually launching the renowned Ski-Doo in 1959 until the recreation products division was sold in 2003.   Prior to the sale, the company entered the rail industry in 1971 with the acquisition of Lohnerwerke based in Vienna, Austria.  Approximately 15 years later, the company made its first entry into the aerospace industry through the acquisition of Canadair in 1986.

Now that you have had a quick history lesson on the beginning and transformation of Bombardier, let’s take a closer look at the more recent history – specifically 2013.

The numbers

2013 was a decent year for the company, but far from spectacular.  The first quarter kicked things off with revenues coming in at $4.3 billion which eclipsed those of the prior year by 23%.  However, adjusted earnings per share were flat at $0.08 per share. The second quarter was similar seeing an 8% increase in revenues and again earnings per share flat year-over-year at $0.09 per share.  The most recently reported quarter turned investors against the company as both revenues and earnings missed on the expectations of the analysts.  Earnings were a penny shy at $0.09 per share and revenues fell short by nearly $500 million.  EBIT as a percentage of revenue was also squeezed, falling to 5.2% from 5.7%.

The company is now closing on its fourth quarter in which analysts expect earnings per share of approximately $0.11 per share on revenues of $5.1 billion.  During the fourth quarter, the company finally received the necessary certification on its new Learjet 70/75 paving the way for deliveries to begin which may help support expectations.  Deliveries were initially expected sometime in early 2013, but the company pushed back certification due to issues with Garmin’s G5000 flight deck.

Aerospace

Early in 2013, management professed the year would be a turning point for the company primarily due to new developments within its aerospace unit.  Unfortunately, the year was filled with delays and disappointment.  As noted earlier, initial deliveries of the Learjet 70/75 aircraft were expected to begin prior to midyear, but were delayed until the fourth quarter of 2013.

The new Learjet 85 which was scheduled to begin delivery in late 2013 was pushed back until the summer of 2014.  The Learjet 85 is an all-composite aircraft which has presented its share of technological challenges.  Once delivered, the company boasts the Learjet 85 will be the largest, fastest and most capable Learjet ever with a target high-speed cruise of Mach 0.82 and a transcontinental range of approximately 3,000 nautical miles.

While the delays associated with the new Learjet models were disappointing, it is the new CSeries that many believe could have given investors’ confidence that 2013 was in fact going to be a turning point.  The CSeries will allow Bombardier to compete directly with Boeing and Airbus in the 100-to-149-seat aircraft market.   The new family of aircraft is expected to deliver low operating costs and a higher fuel burn advantage potentially giving it a leg up on the competition.  However, the pace of development has also been disappointing.  Management announced a six month delay in late 2012 and pushed the first flight off until June.  After further delays, a CS100 finally took off for its maiden test flight on September 16, 2013.  The delays now have investors concerned initial deliveries will be pushed into 2015.

Transportation

With little fanfare, the transportation segment has been quietly prodding along and has inched up its backlog to $32.6 billion at the end of the third quarter after starting 2013 with a backlog of $32.0 billion.  Revenues for the unit increased nearly 10% for the first nine months compared to the prior year and EBIT margin increased 30 basis points to 6.5%.

During the third quarter, the company began to see better growth across most geographic regions when compared to the prior year and the first two quarters of 2013.  The growth in Western Europe was led by larger orders by train operators in the United Kingdom and Germany.  In North America, the company saw increased investment primarily in light rail within the U.S. and Canada.  The Asia-Pacific region was boosted by orders from high speed rail operators in China.

Final thoughts

Now that 2013 is in the rearview mirror, the company must set its sights on 2014 and beyond making timely execution a primary goal.  Several delays in the aerospace segment have negatively impacted results and the stock.  However, 2014 could be shaping up to be a much better year with deliveries of the Learjet 70/75 now underway and the Learjet 85 and potentially the CSeries aircraft expected to start delivery in 2014.  The late strength seen by the transportation segment in several geographic areas also bodes well for the upcoming year.  Now it’s up to management to execute.

The post It was a Year of Delays for Bombardier appeared first on The Motley Fool Canada.

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Coming fresh off its divestiture of Empire Theaters to become a nearly pure play on the Canadian national grocery market, Empire Company Limited (TSX: EMP.A) reported earnings that beat analyst’s estimates only to see shares fall after the announcement.   So what did investors see that made them sour on the stock?  Let’s dig in and take a closer look.

The top and bottom line

For the company’s fiscal second quarter ended November 2, the company saw adjusted earnings from continuing operations come in at $1.15 per diluted share.  This number easily beat the average estimate of $1.09 per diluted share and nearly met the high analyst estimate of $1.16 per diluted share.  However, the number was short of the $1.21 per diluted share produced during the second quarter of the prior year.

As far as revenue is concerned, Empire could not have come closer to the analyst estimate producing sales of $4.43 billion which is the exact number the pros were expecting.  This number beat the same period in the prior year by 1.8% or $79.7 million.

Digging deeper

As we all know, investors need look beyond just the top and bottom line to not only understand where the company has been for the last quarter, but where it may be headed in future quarters.  In retail, one number that draws intense scrutiny from investors is same-store sales.

For Empire’s grocery subsidiary Sobeys, same-store sales inched up a mere 0.2%.  Management blamed the modest performance on a highly competitive environment which is the nature of this industry.  However, the company was outdone by its largest competitor, Loblaw Companies Limited (TSX: L) which reported same store sales of 0.4% for its most recently reported quarter which ended on October 5.  In addition, Loblaw believed performance may have been hindered by as much as 0.5 to 0.7% due to the Thanksgiving shopping week falling later in the month after the quarter ended.

Another important measure investors can use to assist in the evaluation process is earnings before income taxes, depreciation and amortization (EBITDA).  Empire produced an adjusted EBITDA of $214.8 million compared to $213.2 million during the same quarter in the prior year.  Of the $214.8 million, the food retailing segment supplied $203.8 million while the remaining $11.0 million came primarily from the company’s real estate operations.

So what spooked investors?

Margins, Margins, Margins…  The Canadian grocery business is becoming ever more competitive as invaders from the South, Wal-Mart Stores Inc. and Target Corp., vie for the almighty consumer dollar.  The battle between the two U.S. based retailing giants has forced the grocery retailers to rely on aggressive promotional activity in order to maintain foot traffic.

Adjusted EBITDA edged less than 1% higher during the quarter despite success by the company in controlling costs.  The primary culprit was a 51 basis point decline in gross margins.  Wal-Mart will most likely continue its efforts to add food to store shelves in order to stay ahead of a more recent entry by Target.  This will continue to force grocery retailers such as Sobeys to remain on the offensive with promotions in order to steer customers away from the competition keeping margins under pressure.

Increased focus and expansion

As Wal-Mart and Target look to expand their footprint within the Canadian borders, Empire has made its own moves to broaden the focus on retailing.  To that end, the company closed a few major transactions just last month.  In an effort to focus its resources more squarely on the retail business, the company closed on the sale of Empire Theaters in two separate transactions for approximately $248 million.

The company also looked to strengthen its presence in Western Canada with the acquisition of Canada Safeway Limited for $5.8 billion in cash which also closed in November.  The acquisition will help the company keep pace with competitor Loblaw which announced in July it would acquire Shoppers Drug Mart Corporation for $12.4 billion.

Final thoughts

The near-term success of Empire and more specifically its food retailing unit Sobeys will lie in management’s ability to control and cut the cost structure of the company as the highly competitive environment is here to stay.

The current quarter will be the first full quarter without the theater business and will contain a nearly complete quarter of results from the newly acquired Canada Safeway.  The acquisition of Canada Safeway presents both opportunities and risks for the stock.  If management is able to leverage the potential synergies created by the acquisition it has the ability to positively impact margins.  However, all acquisitions carry a certain amount of integration risks which can negatively impact margins and add to the cost structure.

Currently, I am in no rush to buy into the Canadian retail game and would much rather take a wait-and-see approach to Empire.  The third quarter results should give investors an indication on how the integration of Canada Safeway is proceeding and to what degree synergies have been leveraged.

The post Empire Company Beats Expectations, but It’s Not Good Enough for Investors appeared first on The Motley Fool Canada.

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On Friday of last week, The Bank of Nova Scotia (TSX: BNS, NYSE: BNS) reported earnings for its fiscal fourth quarter and year ended October 31, 2013 announcing a new record for annual net income.  The report of this record setting year was enough to put a little heat under the shares which rose as much as 3% in the days following the announcement as investors digested the results.  The stock had languished during the week leading up to the announcement falling nearly 4.0%.  Shares have since cooled and now trade near preannouncement levels.

The top and bottom line

For the year, net income for Scotiabank set a new record coming in at $6.70 billion which compared positively to the $6.47 billion reported for the prior year.  Adjusted and fully diluted earnings per share were $5.14 which was slightly ahead of the consensus analyst estimate of $5.13 and slightly beat the company’s stated goal of growing EPS by 5 to 10% with growth of 10.2%.  Revenues for the fiscal year also topped analyst estimates coming in at $21.66 billion versus $21.39 billion projected by the pros.

Fourth quarter earnings were also nearly in line with expectations with net income increasing 12% over the prior year to $1.70 billion.  Earnings per share of $1.31 were only slightly below the consensus estimate of $1.32 per share.  Revenues were slightly ahead of estimates coming in at $5.49 billion versus an estimate of $5.40 billion.

Leading the way

The Canadian banking unit led the way with a record year and the fourth quarter represented the second consecutive quarter of record net income.  The unit’s net income of $2.3 billion and $593 million supplied roughly one-third of the bank’s total earnings for the fiscal year and fourth quarter, respectively.  The Canadian banking unit is benefiting from its acquisition of ING Direct Canada which was completed just over one year ago.  The unit also saw higher margins, lower loan loss provisions and strong asset growth from its existing lines within Canada.

The Canadian unit could continue to be the shining star within the organization.  Management intends to further leverage the ING Direct acquisition in the future. In the spring of 2014, ING Direct will be rebranded as Tangerine.  The bank intends to build on the value proposition offered by ING Direct sought by self-directed customers with the expectation of growing deposits and forming new banking relationships.

Meeting expectations

With any company, management’s ability to meet internal goals is always important for investor confidence.  Mission accomplished for Scotia’s team.  Key objectives included earning a return on equity of between 15 and 18%, generating earnings per share growth of 5 to 10%, maintaining a productivity ratio of less than 56% and preserving strong capital ratios.  At the end of the fiscal year, management was able to check each one off as a success with return on equity of 16.4%, earnings per share growth of 10.2%, a productivity ratio of 53.5% and an all-in Basel III Tier 1 ratio of 9.1%.

Investors seemed pleased overall that management delivered on its promised objectives.  In laying out new medium-term goals, the bank stuck with similar objectives and targets.  The one minor change was to switch the objective of maintaining a productivity ratio of less than 56% to producing positive operating leverage.  Positive operating leverage will further enhance the productivity ratio and management believes it is a more granular measurement and better for tracking the overall business.

Final thoughts

Scotiabank boasts as being Canada’s most international bank; however it will again most likely lean on a strong performance from the Canadian banking unit to meet its objectives.  In order to achieve the necessary results, the bank will continue to take advantage of its ING DIRECT acquisition and build upon the existing deposit base.  In addition, management intends to become a customer’s primary bank by ensuring an easy and consistent experience across all business lines in order to further grow assets.   Similar steps are being taken within the international banking unit to land long-term primary banking relationships as well as ongoing efforts to reduce structural costs.

So is Scotiabank a sound investment for 2014?  If management continues to deliver on stated objectives, shares of the bank should continue to grind higher in a flat to positive market and provide some downside support if the markets turn sour.   This combined with a dividend that was boosted twice in 2013 and is now yielding 3.9% should allow investors to earn a reasonable 8 to 10% total return in 2014.

The post Can the Bank of Nova Scotia Build on the Record Earnings Achieved in 2013? appeared first on The Motley Fool Canada.

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It was not a big surprise to see another difficult quarter for Major Drilling Group International Inc. (TSX: MDI) as was evidenced by the 14% decline in shares in the days leading up to the release.  However, earnings came in much worse than analysts expected – 300% to be exact.  Revenues also missed coming in roughly 14% below expectations.

The numbers

Revenue for the quarter was down 53% to $92.3 during the second quarter compared to $199.6 in the same period a year ago.  Gross profit as a percentage of sales slipped 90 basis points to 32.5% and EBITDA as a percentage of revenue fell 700 basis points to 17%.  All of this combined for an ugly quarter with earnings swinging to a loss of $19.1 or $(0.24) per share compared to positive earnings of $22.3 million or $0.28 per share during the same quarter in the prior year.

While earnings for the second quarter were not good, there were some significant nonrecurring and noncash charges.  Due to current market conditions, the company took a $12.1 million goodwill impairment charge related to operations in Chile.  The company also wrote down and unrecognized by $5.5 million certain Australian and Columbian deferred tax assets due to the poor near-term outlook for taxable income.  Lastly, the company took a $700 thousand charge related to ongoing restructuring in order to reduce costs.

Mining industry continues to struggle

Gold prices continue to slump adding to the depression among the miners.  Many projects have been delayed or cancelled altogether.  The poor demand for drilling services will continue to increase competiveness for projects and put pressure on margins.

Major saw substantial declines in revenue across all geographical locations.  Revenue in South and Central America plummeted 66% while the Asian, Australian and African operations saw revenue fall by 43%.  The company’s Canadian and U.S. operations were also weak with revenue sliding 54%.

As mentioned earlier the company recorded impairments and write downs associated with goodwill and deferred tax assets.  Both of these entries are further evidence the company does not expect a recovery in the industry any time soon, especially as it relates to its Chilean, Australian and Columbian operations.

In addition to low commodities prices, the company is also being negatively impacted by geopolitical factors.  Such factors have slowed exploration in Argentina, Columbia and Mongolia.  In Australia, projects have been completely cancelled due to high costs and new mining taxes.

Is there a silver lining?

It is hard to find a light at the end of the tunnel in the mining industry, but when things look the darkest is when you may just find that gold nugget.  Currently, most of the pros are predicting more of the same poor performance for most commodities and miners.  It certainly looks like bad news for as far as the eye can see.  However, it may just be all of this bad news which may serve as the catalyst for a turnaround in the metals markets.

Many projects have been delayed or cancelled, yet the world has not stopped using inventories of minerals.  Sure, you can argue that current supplies will keep a lid on prices for some time to come, but at some point the supply numbers will turn in the favor of the miners.  There are signs of an improving economy in the U.S. and other countries around the world which will expedite the industry’s transition to a more positive outlook.

Final thoughts

The management of Major has done a respectable job protecting the balance sheet.  The company’s net cash position continues to improve and was up $18.1 million to $48.5 million during the quarter.  The company’s operating cash flow remains in positive territory producing $22.07 million during the quarter and $24.78 million for the first six months of the fiscal year.

Management’s focus on the balance sheet and cost cutting should keep the company on stable ground while the industry works through the current supply glut.  Once the industry begins to turn, Major should be in good position to compete for projects and the recent steps taken to improve the cost structure should serve to make Major a solid performer when the time comes.

For now though, Major is heading into what is traditionally the weakest quarter of its fiscal year.  Many miners have extended shutdown periods over the holidays and many budgets are not yet in place.  The lack of budgets will put added pressure on the month of January when shutdown periods typically end as many projects, even if approved, will take time to get started.  This has all of the signs of a disappointing third quarter and should give investors pause if considering an investment in Major.

The post Ouch! Major Drilling Disappoints Big Time appeared first on The Motley Fool Canada.

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Canada’s third largest bank, The Bank of Nova Scotia (TSX: BNS, NYSE: BNS) is set to report fiscal fourth quarter earnings before the market opens tomorrow.  Shares of the bank commonly known as Scotiabank have been on a tear rising by as much as 13% since the beginning of October before cooling off a touch last week.

Scotiabank is not alone in its rise as peers such as Bank of Montreal and Toronto-Dominion Bank have booked similar performance.  Many reasons can be attributed to the rise including a vibrant real estate lending environment and a central bank that continues to fan the fire by delaying interest rate increases.   Investors may also be taking comfort in the large dividends being paid by the major banks.  Even after the run up, shares of Scotiabank still yield just under 4%.

Now it’s time to deliver.  Expectations are built into the stock and any miss on Friday will not be a good day for investors.

Picking the minds of the pros

The analysts are currently overwhelmingly positive on the stock with the majority rating the stock a buy or strong buy.  There is also a notable contingent rating the stock a hold, but only one with an underperform rating.  Even with the recent rise in the price of the stock, shares remain below the consensus price target of $70.00 per share leaving potential upside of nearly 17%.

On the earnings front, analysts are currently expecting $1.32 per share which represents 9% growth over the same period in the prior year. Revenues are also expected to climb a similar percentage and come in at $5.40 billion.  Analysts have remained firm on expectations as ratings on the stock have remained nearly unchanged since the last report and they have only chipped a few pennies off the earnings estimate.

Coming off a solid quarter

On the surface, last quarter appeared to be a rough one as net income came in at $1.77 billion versus $2.05 billion during the same period in the prior year.  However, after adjusting both quarters for nonrecurring items, the bank reported net income of $1.68 billion for the third quarter of the current fiscal year which represented an increase of 17% over the prior years $1.44 billion.  The third quarter benefited from higher net interest income which was boosted by its acquisition of ING DIRECT Canada.  Increased fees, higher gains and lower loan loss provisions also contributed to higher earnings.

The bank saw revenue growth across its major business lines including the Canadian banking unit which produced year-over-year revenues that were up 6% after excluding results from the ING acquisition and nonrecurring items.  The international banking unit produced revenue growth of 7% after excluding a large gain by the banks associated corporation in Thailand.  The associated corporation in Thailand sold a subsidiary resulting in an after tax gain of $150 million.

Pairing organic growth with acquisitions

Scotiabank looks to build on its successful organic growth of assets and deposits produced so far this year by the Canadian banking unit.  Asset growth was supported by demand for Canadian mortgages and auto loans during the quarter.  The company has also made some key acquisitions including the aforementioned ING DIRECT Canada which is contributing to higher interest income.

The global wealth unit is benefiting from higher fee and brokerage revenue due to an early 2011 acquisition of Dundeewealth, Inc as well as more recent acquisitions of pension fund companies in Latin America.  These purchases include a 51% stake in Columbia-based Colfondos and a 50% stake Peru-based AFP Horizonte which were acquired in late 2012 and early 2013, respectively.

The international picture is a little more mixed.  Results were up on a year-over-year basis, but slipped quarter-over quarter primarily due to unusually high investment gains and stronger income from associated companies that contributed to the second quarter.  The unit saw strong loan growth in Latin America, but sees growth moderating going forward for both Asia and Latin America due in part to lower commodity prices, weaker currencies and predicted tapering of quantitative easing by the Federal Reserve in the U.S.

Final thoughts

Management is confident it will achieve its year-over-year earnings per share growth target of 5-10%.  This growth rate would seem achievable going into tomorrow’s announcement of final quarter results given the bank was running ahead of last year by 12% at the end of the first nine months on an adjusted basis.

Going forward, the environment may become more difficult for the bank in the short-term as taper talk by the U.S. Federal Reserve will certainly have an impact.  In addition, many are expecting a very competitive lending environment in 2014 putting a squeeze on margins.

Earnings for the fourth quarter would seem poised to at least meet expectations most likely supported by continued strength from its Canadian banking and wealth management units.  If the bank is able to surprise to the upside enough to put some of the fears of the future to rest for now it may be enough to restore positive momentum in the shares.  Otherwise, I would expect continued weakness in the near-term.

The post Will Earnings Help Scotiabank Shares Regain Upward Momentum? appeared first on The Motley Fool Canada.

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Major Drilling Group International Inc. (TSX: MDI) will be reporting earnings after the market closes later today.  As a leading drilling services company primarily contracted by the mining industry, the outlook is bleak at best.  According the company’s own website, it deems itself a good proxy for the mining industry.  Unfortunately for the company, the mining industry is in a deep hole that appears to be getting deeper, and now is not a good time to be a proxy.

Where do the analysts come down?
Analysts are currently expecting a major hit to revenues for the fiscal second quarter ended October 31, estimating a decline of approximately 46% to $107.1 million.  Despite the huge hit to revenue, the consensus earnings estimate still shows a profit of $0.05 per share.  Sentiment has become much more negative as the estimate has been cut from $0.07 just 30 days ago and $0.14 only 90 days ago.

Surprisingly, only one analyst has the stock rated a sell, and that is offset by another rating the stock a buy.  The remaining analysts fall into the outperform or neutral camp with a slight edge going to outperform giving the rating a modest positive bias.  At recent prices, the stock is currently trading near analysts target price of $7.75 per share, leaving little upside for the next 12 months in the minds of the professionals.

Taking a look at last quarter
Last quarter certainly represented the abysmal shape the mining industry finds itself as the company reported revenues plunged 54% to $108.2 million.  This was well below the consensus estimate of $132 million.  Earnings, while positive, still missed estimates by $0.03 per share as the company saw its net income plunge 90% to $0.04 per share after adjusting for a $2.0 million restructuring charge.

The news was not all bad, as management did a reasonable job controlling costs in the face of such negative head winds.  Gross margin only slipped by 170 basis points thanks to a highly variable cost structure.  In addition, the company trimmed general and administrative costs by 25% compared to the same period in the prior year and by 15% when compared to the preceding quarter.

Coping with the downturn
The company cannot control the activity in the mining industry, but it can control how it responds to the current downturn.  During the first quarter, management took a series of steps in order to help keep costs in line with the reduction in revenue.  The company reduced staffing levels by 45%, trimmed senior management salaries, and cut directors fees.  In addition, the company reduced its capital budget and downsized its environmental business.  By taking these measures the company still expects to produce positive cash flow in fiscal 2014.

The company is not just relying on cost cutting alone and is also taking steps to diversify its revenue base.  To this end, the company made its first entrance into the Alberta oil sands and is seeing incremental growth in the U.S. shale market.

Financial health
The balance sheet of Major Drilling is its strong point.  During the fiscal first quarter the company paid long-term debt down by $13.07 million leaving it with total debt in the amount of $30.6 million.  The company’s strong cash position of $61.1 million puts the company in a positive net cash position of $30.5 million.  The sound financial position even prompted management to declare a semi-annual dividend which was paid last month.

Final thoughts

Major Drilling is a good proxy on the state of the mining industry and therefore makes it one to watch whether you have a direct interest or not.  I would expect the second quarter will look much like the first as the capital markets remain very challenging for the junior minors and the larger miners remain conservative on exploration activities.  However, it will be interesting to see what impact the actions of management on the expense side of the ledger in the first quarter have on the bottom line.

The cost cutting measures and the financial strength of the company will help it weather the storm and when it passes, shares of Major Drilling will rise again.  Unfortunately, the current disruptive forces in the mining industry look to be with us for some time.  At this point in the cycle, it would seem premature to fight the downside momentum prior to seeing a turnaround in capital spending on mining projects.

The post Expect the Second Quarter Results of Major Drilling to Reflect a Mining Industry in Turmoil appeared first on The Motley Fool Canada.

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We have yet to see the first day of winter (on the calendar at least), but a recent cold snap drove electricity demand to new records in Alberta.  According to the Alberta Electric System Operator, Alberta’s electricity demand hit an all-time high of 10,677 MW on November 20 as temperatures reached levels nearing -25C.   The weather has moderated since that record setting day, but another deep freeze is in the forecast for early December which could push the lows back down to the levels seen on that record setting day.

In Alberta, coal and natural gas account for the majority of the installed electricity producing capacity, supplying approximately 82% split evenly between the two.  However, that differs greatly from the country as a whole, which generates the majority of its power through hydroelectricity.  On the other hand, just to the south is the energy thirsty United States whose sources of electricity are much more in line with that of frosty Alberta.

A sign of more to come?

The early cold snap may just be the beginning.  Many parts of the United States and Canada stand to have below normal temperatures from now until the thaw of Spring.  According to the trusty Farmers’ Almanac, much of Canada is expected to endure below-normal temperatures.

The weather prospects for the United States do not look much better.  While the coldest temperatures will occur in the less populated states in the Northern Plains, the cold air will stretch into the more populated Great Lakes region and the densely populated areas of the Northeast are also expected to have very cold and wet weather this winter.

Just what the doctor ordered

Natural gas prices have been in a state of depression for more than five years now forcing many predominantly natural gas companies to shut in wells and sell assets in search of a more liquids rich portfolio.  This along with the prospects for abundant supplies has also taken its toll on the shares of natural gas companies, many of which continue to trade near historic lows.  However, there is nothing like frigid winter with below average temperatures to spark higher demand in natural gas.

A loss for coal is a gain for natural gas

The cold winter may cause a short-term spike in natural gas prices, but before investing in natural gas stocks the longer-term prospects must be considered.  Thanks primarily to China and India, the use of coal as a primary energy source will continue to grow for the next several years.  However, the use of coal in heavy energy consuming countries such as the United States has come under a great deal of scrutiny and natural gas has proven to be a popular and economic alternative.  The U.S. Energy Information Administration expects natural gas-fired plants to account for 63% of capacity additions from 2012 to 2040 within the U.S.

Down, but not out

As previously mentioned, many natural gas stocks have taken a beating, but may be ready to come out of the corner fighting.  The cold winter could certainly provide a jolt and the longer term prospects of natural gas becoming a primary source of power production may keep them in the fight.

Five years ago, shares of Encana Corporation (TSX: ECA, NYSE:ECA) were flying high, only to come crashing down to now trade below $20 per share.  Like many, Encana is employing strategies to reduce its dependence on natural gas.  The company expects to finish 2013 with natural gas supplying roughly two-thirds of operating cash flow.  In contrast, the company expects 75% of operating cash flows to come from liquids in 2017 while maintaining its options on gas.  The strategy is already bearing fruit as liquids production increased 92% in the third quarter of this year as natural gas production slipped 10%.

Just like Encana, Talisman Energy Inc. (TSX: TLM, NYSE:TLM) is focusing its capital expenditures on oil and liquids rich gas plays.  Liquids production is on the rise going from an expected 35% of total production in 2013 to 45-50% next year and 55-60% in 2015.  Earlier this month, the company agreed to sell of part of its Montney natural gas assets located in British Columbia for $1.5 billion furthering its push towards liquids.  Even with this divestiture, the company still holds promising natural gas prospects in the Montney as well as a solid position in the Marcellus Shale located in the United States.  Coming with an investment in Talisman is famed investor Carl Icahn who recently announced an agreement with the company to add two of his own board members.

ARC Resources Ltd. (TSX: ARX) is also allocating the majority of its capital spending to oil and liquid rich gas development.  The company is currently pegging 2014 capital expenditures at $915 million with close to 80% targeting oil and natural gas liquids.  Despite the focus on liquids, production of natural gas is currently 62% of the total and represents 60% of total reserves.  The company holds a sizable land position in the Montney Shale located in northeast British Columbia and northern Alberta.  The company believes the Montney assets will be a driver of future growth and is committing approximately 65% of 2014 capital expenditures to these assets.   Despite the shift in spending, ARC shares should respond positively to long-term increases in the price of natural gas.

Final thoughts

Much of Western Canada is expected to be in a deep freeze for the remainder of this week.  The bitter temperatures from Canada are then expected to push south into United States bringing considerably colder air to much of the western two-thirds of the country which should provide near-term support for natural gas.  An unseasonably cold winter and the prospect of new generating capacity overwhelmingly being powered by natural gas may warm investors to stocks leveraged to the commodity giving shares a much needed boost.

The post Could a Bitter Cold Forecast Heat up Natural Gas Stocks? appeared first on The Motley Fool Canada.

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For many years investors have been putting their hard earned dollars into various types of energy investments offering stable cash flows in search of high and sustainable yields.  The vast majority of these investments were backed by the production, transport, or marketing of natural resources as well as the distribution and sale of conventional power.  Now there is a new energy game in town that has recently been gaining popularity with investors – wind power.

The first commercial wind farm in Canada was completed two decades ago, but until recently the installed capacity was minor.  However, over the last ten years the installed wind energy capacity has exploded rising from less than 500 MW to over 7,000 MW today.  According to the Canadian Wind Energy Association, the currently installed wind energy capacity is enough power about 2 million homes or 3% of Canada’s total electricity demand.  So has commercial wind energy production as an industry finally come of age?  Judging by a couple of recent IPOs, it appears to be catching the attention of investors.

The new kids on the block

Just since August of this year, there have been two public offerings of renewable energy company’s promising stable cash flows primarily from wind power in order to support a lucrative dividend.   First on the list was the partial spin-off of TransAlta Renewables Inc. (TSX: RNW) from parent company TransAlta Corporation (TSX: TA) (NYSE: TAC) which still owns 80.7% of the subsidiary.  Shares were offered at $10.00 per share in August and have been up by as much as 11.1% since the offering.

TransAlta Renewables operates 28 renewable power generation facilities and has one of the largest wind generating capacities among the publicly traded independent power producers in Canada.  Of the 28 facilities, 12 are hydro with a generating capacity of 105 MW and the remaining 16 are wind facilities with a generating capacity of 1,008 MW.  Last month, the company announced that it has agreed to acquire a 144 MW wind farm located in Wyoming which is its first project in the United States.

The other more recent entrant to the public marketplace is Pattern Energy Group Inc. (TSX: PEG).  Unlike TransAlta Renewables, Pattern is currently a pure play on wind power with total owned capacity of 1,041 MW.  The offering was met with good investor demand as the company priced above the expected range of $19 – $21 per share and hit the markets at $22.00 per share.  The stock opened nearly 10% above the offering price and peaked at nearly 20% above the IPO price.

Pattern owns eight wind projects in three countries – Canada, Chile and the United States.  Of the eight, two are still under construction which includes the company’s second project in Canada as well as its only project in Chile.  Both new facilities are projected to be in commercial operation during the first half of 2014 and will add approximately 385 MW of generating capacity.

Good dividend yields, but…

Both Pattern and TransAlta Renewables contemplated dividends as part of their offering prospectus.  Pattern has initiated its quarterly dividend at a rate of $0.3125 per share or $1.25 on an annualized basis giving the stock a yield of approximately 4.8%.  TransAlta Renewables is going with the monthly payout structure at a rate of $0.0625 per share or $0.75 on an annualized basis coming in with a juicy yield of approximately 7.0%.

Pattern recently shared its third quarter financial results in which cash available for distribution came in at $6.3 million for the quarter and $37 million for the first nine months.  The number for the quarter would have fallen well short of the required cash to pay all Class A shareholders if the dividend would have been in place during that time, however cash available for the nine month period would have covered.  Unfortunately, the short track record of the company makes estimating future cash flows difficult and we must turn to company forecasts to help formulate our opinion.

For 2014, the company is projecting cash available for distribution of $55.4 million or $1.56 per share which equates to an 80.1% payout ratio with a dividend of $1.25 per share.  So if you have faith in the projection, the dividend is covered.  Looking further down the road, investors must be aware that during the public offering the company issued 15,555,000 Class B shares to the parent company.  These shares are not eligible for dividend in 2014, but can be converted after 2014 to dividend eligible Class A shares once the project in Canada is completed.  Once converted, the company will be required to have an additional $19.44 million in cash available for distribution or a total of $63.85 million per year if everything else remains the same putting future coverage in question.

TransAlta Renewables used previous its operating history to demonstrate its ability to pay in the offering prospectus.  According to the company, it had $103.33 million in distributable cash during the 12 month period ended March 31, 2013.  Based on the current dividend the company would have paid out $86 million or 83%.  The company’s third quarter report for the period ended September 30, 2013 showed cash available for distribution of $20.05 million during the quarter and $101.38 million for the nine month period so the dividend seems safe for now if management can maintain a similar or improved performance going forward.

Final thoughts

If you believe wind will produce the energy of the future, one of these new names may fit a more aggressive portfolio for both growth and income.  However, it is early in the young life of these recently public companies and forward cash flows can be difficult to predict making neither a likely choice for conservatively managed portfolios.

Remember, the key to any dividend is sustainability and the share prices of these stocks will depend on it.  Trust me… You don’t want to be the owner of a stock when management announces a cut or elimination of its dividend.

The post Can Wind Electrify Your Income Portfolio? appeared first on The Motley Fool Canada.

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