The TSX composite index has been almost flat over the last two months, fluctuating briefly on improving commodity prices, certainty over the U.S. election results, and U.S. monetary policy. Volatility in the market will often attract investors to health care, utilities, and consumer staples stocks. Historically, consumer staples stocks have exhibited some of the lowest volatility in the market, which is true for Loblaw Companies Limited (TSX:L) and Alimentation Couche Tard Inc. (TSX:ATD.B).

However, in the last two months, Loblaw shares have outpaced the market’s decline, and Couche Tard shares have slightly underperformed the market. This may present a unique buying opportunity for investors.

Loblaw Companies Limited

Consumer staples stocks are known for their strong brands that are supported by established customer bases and staple products or services. Loblaw has over 2,400 independent and corporate-owned grocery stores and pharmacies across Canada servicing over 17 million customers every week. These include some of the most recognizable brands, such as Loblaws, No Frills, and Real Canadian Superstore, among others, as well as the Shoppers Drug Mart outlets and Joe Fresh apparel stores.

The company has been significantly improving its market share through innovation and acquisitions. One of its most recent developments was the expansion of its e-commerce business.

The company’s new click-and-collect program allows customers to shop online and pick up their order at a participating store. This program has been popular for years in the U.K. but is just kicking off in the U.S. and Canada. It charges a nominal fee for this service and offers participants premium pickup locations at the store. If this program is successful, the next frontier will likely be a grocery delivery service.

One of the company’s major acquisitions this year included the purchase of QHR Corporation. QHR is a Canadian healthcare technology company and a leader in the electronic medical records (EMR) market, providing software for healthcare providers and their patients.

As of Q2 2016, the company saw modest 2% growth in revenues year over year, but 7.8% earnings growth attributed to $83 million in net synergies and cost reductions. The company announced plans to build several dozen stores, investing about $1 billion in the expansion, while Choice Properties REIT, a real estate investment trust spun out by the parent company in 2013, will contribute $300 million.

Alimentation Couche Tard Inc.

Couche Tard’s network is comprised of 7,863 convenience stores throughout North America and 2,708 stores in Europe. It continues to grow organically with 33 stores under construction to open in upcoming quarters; however, it has become an expert at integrating acquisitions into the company.

Its latest announcement was the US$4.4-billion deal to buy Texas-based CST Brands Inc. It will acquire a network of more than 2,000 stores in the U.S. and eastern Canada, including an equity stake in large fuel retailer CrossAmerica Partners LP. This acquisition should provide some significant synergies between the two companies operations. It’s estimated the deal will generate pretax cost savings of $150-200 million within two to three years of its completion.

The company also completed the purchase of Ireland’s biggest convenience and fuel retailer, bought A/S Dansk Shell’s downstream retail business in Denmark, and signed an agreement with Imperial Oil to acquire 279 of its Esso-branded fuel and convenience sites in Canada.

The company continues to improve its financials, which include an US$85 million cost-reduction plan. In Q2 2016 it reported a 7.1% improvement in gross profit and an 8.9% growth in net earnings. Strong merchandise growth in Europe and fuel station sales in the U.S. and Canada were significant factors; however, the price of fuel and the high U.S. dollar continue to impact the company’s earnings.

Conclusion

If you ignore its latest purchase of CST Brands, 67% of Couche Tard’s revenues are generated from its U.S. operations. Investors that are bullish on the U.S. economy’s growth and increased spending by the U.S. consumer should consider this stock for their buy list.

Loblaw’s most recent announcement was that W. Galen Weston is stepping down as executive chairmen of George Weston Limited, the owner of Loblaw, and is handing the reigns over to his son, Galen G. Weston. This is positive news, especially for those investors that have followed the company and witnessed Galen’s relentless efforts to grow its brands.

The stock jumped on the news, but is still down about 7% from its highs in early August, which could present a buying opportunity.

The post Top Consumer Staples Stocks to Curb Portfolio Volatility appeared first on The Motley Fool Canada.

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The Canadian Radio-Television and Telecommunications Commission (CRTC) released its Communications Monitoring Report for 2016, which outlines the key trends in the sector. The results were pretty anticlimactic when determining the market share of the five largest telecom companies in Canada. Their percentage share of wireless subscribers was unchanged at 90%, including their share of revenues, which also remained at 92%.

What was noticeable was the 44% increase in mobile data usage by Canadians in 2015. The average monthly data usage per subscriber increased by 33% from the previous year. The average Canadian consumer is now using in excess of 1.3 gigabytes (GB), or more than the basic $25 per month for one GB of data.

Why is this important to consumers and investors?

For Canada’s telecommunications companies, this is significant trend; their wireless revenues continue to grow and outpace the majority of their other services.  The wireless service market sector is now the largest retail telecommunications service sector; it has grown more than any other sector since 2008. The following chart highlights a few metrics from the CRTC’s report.

Wireless services grew by almost 8% in 2015 and now represents 51% of all telecommunications revenues. It’s important to note that wireless revenues have the highest EBITDA margin of all other services at 40%.

An improvement in mobile applications and technologies continues to shift computing habits toward mobile devices.  Users have also become less elastic to the increasing prices as the average monthly fee grew by over 5% in 2015 to $64 per month.

What did remain unchanged in the report was the dominance of Telus Corporation (TSX:T)(NYSE:TU), Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI), and BCE Inc. (TSX:BCE)(NYSE:BCE) in the industry. The market share of the five largest firms remained at 90% and accounted for 92% of total revenues.

There still is some uncertainty, as the CRTC has started to crack down on the noncompetitive nature of the market. Lately, the cable and internet service providers (ISP) have seen the brunt of this legislation. Earlier this month, the CRTC ordered the major ISPs to reduce the prices they charge to retail competitors who buy space on their networks. As of now, the wireline service industry seems to be the target, but the wireless sector could be next.

Why Telus?

Of the three telecommunications companies, Telus has the largest portion of its revenues coming from one province. In 2015 it generated 53% of its revenues in the province of Alberta. Considering the economic conditions over the last two years in Alberta, it has increased in dividend by almost 30%, and the stock has gained about 20%.

One factor to consider is that Alberta has the highest wireless service revenues per subscriber at $76.48, or 10% higher than the next highest province, which is Newfoundland and Labrador. These numbers do exclude the northern provinces.

If your concerned about consumer retention, Telus has the lowest churn rate of Bell Mobility and Rogers Communications. The churn rate is the amount of customers or subscribers that cut ties with your service or company during a given time period. Telus had an annual churn rate of 1.3 times versus 1.5 and 1.6, respectively, for Bell and Rogers.

Rogers released positive earnings this week in large part due to strong wireless service revenue growth of 6% year over year. It’s expected that Telus will report similar results bolstered by its wireless growth and improvement in the economic landscape of some of its key markets.

The post How Canada’s Largest Telecoms Monetized a 44% Increase in Mobile Data Usage appeared first on The Motley Fool Canada.

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For the first time since 1999, the Global Industry Classification Standards (GICS) will adopt a new sector. The new real estate sector to be comprised of equity real estate investment trusts (REITs) as well as real estate management and development companies and their constituent sub-industries. Real estate will be elevated from an “industry group” within the financial sector to a standalone sector.

The new GICS structure will consist of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries. GICS is a joint classification system of MSCI and S&P which provides an organization framework for performance analysis to product development. It’s used by institutional investors, advisors, individual investors, and ETFs to distinguish between sectors when making investment decisions.

Why is this important?

Not only is this the first time since its inception that a new sector has been added, it also highlights real estate’s significance as a distinct asset class. No longer will REITs be niche or alternative investments, but rather components of a standalone asset class. They should receive increased visibility as institutional investors, financial advisors, and individual investors who had zero percent weight in the space adjust their holdings.

There are mixed opinions on how quickly REITs will be adopted into funds, ETFs, and algorithmic trading strategies. Some investment professionals have indicated that this will probably be implemented in the next six to 12 months, considering most financial software is wired to perform analysis on the existing 10 sectors. These analytical tools will have to be reprogrammed with the new framework.

Other have expressed the opinion that this transition could be fairly quick with quantitative and algorithmic trading software being updated fairly quickly as long as there is an obvious split between it and the financial sector.

What REITs could be involved?

 Three of Canada’s prominent REITs are RioCan Real Estate Investment Trust (TSX:REI.UN) Boardwalk Real Estate Investment Trust (TSX:BEI.UN), and H&R Real Estate Investment Trust (TSX:HR.UN). All have diverse portfolios of real estate that stretch across Canada and into the U.S.

Boardwalk and RioCan has seen their share prices decline by about 10% over the last three months as negative sentiment in the real estate market due to low commodity prices and dismal economics numbers have pushed investors into more risk-adverse investments. H&R’s share price has declined the least and is outpacing the S&P TSX REIT index over the last month. This could be directly attributed to an improvement in some of its U.S. holdings.

The low interest rate environment in Canada should make Canadian REITs more appealing to foreign investors. Their low correlation with returns on other equities and fixed-income investment provides additional benefits for investors looking to diversify their portfolios.

Conclusion

To the extent that this increased adoption of REITs persists, and as investors who’ve been significantly underweight in real estate look to achieve a market neutral position, the new capital flowing into the industry could be substantial. J.P. Morgan projected that active equity funds were so underweight toward REITs that the new sector could cause $100 billion to flow into the category.

The post How the New GICS Framework Could Affect Your Portfolio appeared first on The Motley Fool Canada.

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The province of Ontario has been in the news lately regarding the cancellation of its Large Renewables Procurement process (LRP II).  It also made headlines due to a $28 million payment to U.S.-based Windstream Energy LLC to compensate scrubbing an offshore wind farm planned for Lake Ontario.

To its credit, the province still generates about 36% of its energy from wind, hydro, solar, and biomass sources. Unfortunately, when its hydro, wind, and solar facilities are operating at peak capacity, there is often an oversupply of power, leading to negative pricing hours for generators.

This should affect the revenues of generators; however, most have secured long-term contracts for amounts ranging from $150-500 per megawatt (MW) hour. This results in the Ontario Power Authority or Independent System Operator making up the difference and passing a significant portion of the cost to taxpayers.

The first phase of its LRP II process that ended in April 2016 awarded 454 MW worth of contracts valued at approximately $1 billion. The goal of LRP II was to acquire another 930 MW of energy from renewable sources. Doing the quick math, this would grow its renewable load by about 7%, and if it held one of these processes annually for the next seven years, it could meet its target of 50% renewable generation by 2025.

Instead, the province negotiated a deal with Hydro Quebec to fill this void. The agreement is expected to save Ontario’s IESO about $70 million over seven years. The two government has cited “commercial sensitivities” for refusing to say how much Ontario will pay for the electricity. However, Montreal newspaper La Presse reports the agreement is worth $1 billion and calculates Ontario will pay five cents a kilowatt hour for the electricity.

Business as usual for clean technology companies

Despite these recent moves by the Ontario government, the clean technology industry is still booming. The S&P TSX Renewable Energy and Clean technology index up 22% year over year, ranking third behind gold and materials indexes. It ranks second over the last six months with a gain of 11%.

Two companies leading the way are Innergex Renewable Energy Inc. (TSX:INE) and Pattern Energy Group Inc. (TSX:PEG)(NASDAQ:PEGI). Over the last two weeks of trading, both companies have led their peers with gains of almost 5%.

Pattern Energy has a portfolio of 18 wind power facilities with a total interest of 2,644 MW in the United States, Canada, and Chile.  It announced this month that it acquired a 50% interest in a 179 MW wind power facility in Ontario. The facility operates under a 20-year power-purchase agreement with the Independent System Operator in Ontario. The company issued another $355 million worth of shares in August to fund its development pipeline.

Innergex was named a qualified applicant in the government’s first phase of the Ontario’s LRP process; however, it was not awarded a contract. The company has moved on and has been actively growing its portfolio in Canada and Europe. Most recently, its 40.6 MW Big Silver Creek hydroelectric plant in British Columbia began operating under a 40-year fixed-price power-purchase agreement with BC Hydro.

One company that will definitively prevail in Ontario is Hydro One Limited (TSX:H). The company now owns 98% of Ontario’s transmission capacity following its acquisition of Great Lakes Power Transmission this year for $373 million. Electricity generators must pay transmission costs to connect to the grid on top of any charges required to deliver its power to market.

Focus on the fundamentals

The bottom line is that both Pattern Energy and Innergex are supported by long-term contracted revenues in the form of power-purchase agreements. This enables the companies to apply high leverage to these projects and deploy capital to other opportunities.

Considering the federal government’s minimum price on carbon (starting at $10 a tonne in 2018 and increasing annually by $10 until reaching $50 a tonne in 2022), the provinces will continue with their objectives of reducing carbon-intensive generation.

Look for these companies to be successful proponents of some of these contracts.

The post Contrary to Ontario’s Opinion, Clean Technology Is Still Booming appeared first on The Motley Fool Canada.

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ProMetic Life Sciences Inc.’s (TSX:PLI) stock climbed by more than 10% this month on news that the Drug Safety Monitoring Board recommended that patient enrollment should continue for phase two trials of its PDI-4050 drug, which treats common diabetes-related ailments. Early results reported by the company listed a 100% success with all of the patients who completed the 12 weeks of treatment showing a significant reduction in liver fibrosis.

The company announced most recently that its phase two clinical trials in patients with metabolic syndrome and Type 2 diabetes was complete and met its primary and secondary end points. The fundamental physical criterion for the diagnosis of metabolic syndrome is waist circumference. The patients who participated in the trials experienced a clinically and statistically significant reduction in waist circumference.

Metabolic syndrome is a major risk factor for cardiovascular disease and for Type 2 diabetes and consists of the constellation of central (truncal) obesity, high blood triglycerides, low HDL (“good”) cholesterol, elevated blood pressure, and elevated blood glucose. Obesity is believed to cause a chronic inflammatory state, which leads to insulin resistance and so may in turn result in cardiovascular disease and/or Type 2 diabetes

According to the International Diabetes Federation, one in seven births is affected by gestational diabetes, and one in 11 adults has diabetes; the illness accounts for 12% of global health expenditure. By 2040, they forecast that 642 million adults will have diabetes. The Centers for Disease Control estimates that 34% of U.S. adults have the metabolic syndrome.

WHO’s case on sugar

 It may or may not have been a coincident, but the World Health Organization (WHO) announced this month that it’s changing its position on sugar consumption and the growing concern over childhood obesity.

On October 11, 2016, the WHO urged countries to impose a minimum 20% tax on sugar products. All countries are being urged to consider introducing a sugary drinks tax as an effective way of curbing the soaring obesity rate, especially in children.

“Consumption of free sugars, including products like sugary drinks, is a major factor in the global increase of people suffering from obesity and diabetes,” said Dr. Douglas Bettcher, director of the WHO’s department for the prevention of non-communicable diseases. “If governments tax products like sugary drinks, they can reduce suffering and save lives. They can also cut healthcare costs and increase revenues to invest in health services.”

ProMetic’s breakthrough

PBI-4050 is an orally active lead drug that targets fibrosis. Fibrosis is a process by which continuing inflammation causes vital organs to lose their function as normal tissue is replaced by fibrotic scar tissue. The drug is currently being tested on patients with idiopathic pulmonary fibrosis, chronic kidney disease, diabetic kidney disease, and metabolic syndrome, a major risk factor for cardiovascular disease and for Type 2 diabetes.

The first group of patients tested had Alström syndrome, which is a rare inherited autosomal recessive syndrome characterized by the onset of obesity in childhood or adolescence, and a severe form of Type 2 diabetes. The progression of liver fibrosis is much more aggressive in patients with Alström syndrome. The success of the drug on patients with Alström syndrome is important, as most patients with the disease display some of the most extreme features of Type 2 diabetes and liver fibrosis.

There still remains a lot of uncertainty of how the drug will fair in the later phases of clinical trials where the sample size is larger, and the processes becomes more scrutinous. The approval process may also slow if it expands trials in Europe and the rest of North America.

Conclusion

The upside potential is the drug’s eventual approval, but also the potential application of the drug to other unmet conditions where fibrosis is prevalent. Investors should consider this stock a speculative buy and place it on their watch list for any retracement in price or further news regarding the company’s clinical trials.

The post What Is Inflaming ProMetic Life Sciences Inc.’s Latest Increase? appeared first on The Motley Fool Canada.

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REIT Investors concerned about the recent policy changes by Bank of Canada and the future of some REITs in Canada should look no further than Chartwell Retirement Residences (TSX:CSH.UN). It is an open-ended trust that owns and operates 132 communities, or 16,547 beds/suites. It is also a partial owner and operator of another 46 communities or 8,224 beds/suites. The company reported a 93% occupancy rate as of Q2 2016: a 2% increase year over year.

Uncharted territory

Canada is about to witness one of its largest demographic shifts as its population of baby boomers embraces its senior years. Recently, Statistics Canada released their quarterly demographics estimates which highlight this fact; between now and 2026 the population over the age of 65 will increase by six million, or 5%.

These baby boomers are expected to be wealthier, having lived through one of the longest bull markets, with savings that will give them freedom and autonomy in their retirement years. Many will seek housing that provides a full suite of amenities that can manage their active lifestyles but provide the assurance that they’ll have access to sufficient health care and security.

Unfortunately, there is already a shortfall of seniors’ housing in Canada, and local municipalities are putting pressure on their elected officials to lobby the federal government to fund this shortfall. Several provincial health ministers said in interviews this month that they want to see increased federal health transfers that are weighted to prioritize regions facing the most pressing demographic pressures.

The Liberal’s election platform promised three billion over four years for home care. However, Federal health minister Dr. Philpott has said she has no plans to reverse next year’s scheduled change to the health transfer formula. That change will end the automatic 6% annual increase that has been in place since 2004. The new formula is said to be based on economic growth with a guaranteed minimum transfer increase of 3%.

The shortfall of infrastructure for seniors is not only housing, but also the transportation required for seniors who still consider driving their primary mode of transportation. More than two-thirds of Canadians aged 65-74 drive as their main form of transportation, while one-third of those aged 85 or older rely on driving.

Municipalities are concerned about the lack of infrastructure to support Canada’s aging population. A report on October 19, 2016, by the Conference Board of Canada from the Canadian Alliance for Sustainable Health Care and the Center for Transportation and Infrastructure said Canada has not adequately addressed the changing transportation needs of seniors, leaving many without a range of accessible, affordable, and appropriate transportation options to support active and healthy living.

Charting your retirement years

Chartwell should benefit from the growing concern over the shortage of housing and health services for seniors. Consider the company is one of Canada’s largest owners of retirement residences with about 26,231 suites, and if you consider the projected growth rate of 10% for the next 10 years, that still only leaves the company with just over 1% of the market.

Governments could start looking to the private sector as a way to bridge this gap and fund some of these projects. Potential incentives could include subsidies, land grants, tax credits, or assistance with permitting and site due diligence.

The company is unlikely to bank its growth plans on public funding or incentives, as it continues with its development pipeline of 2,129 suites with two projects now complete, six projects in construction, and four projects in pre-development.

Chartwell noted that it will continue to leverage its internal development program to partner with reputable developers and gain access to sites in strong markets. So far this year, the company announced five acquisitions for a total of $211.7 million.

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Consumer spending has been the primary driver of growth in the U.S., expanding at more than double the pace of the overall economy during the first half of 2016. While traditional brick-and-mortar retail sales have seen modest gains, the growth of online retail has increased almost 11% year over year.

This growth is continuing to attract the likes of some of the oldest brick-and-mortar businesses in the U.S. Most of these business already have an online presence, but are either looking to increase their market share or tap into new customer bases. For example, two leading online-only retailers, Jet.com and Dollar Shave Club, were purchased by brick-and-mortar businesses.

An alternative method to purchasing a multi-million dollar online retail business is to use a company like Shopify Inc. (TSX:SH)(NYSE:SHOP). The company’s platform allows businesses of any size to design a website and access numerous sales channels and e-commerce tools the company has developed through its partnerships.

As a result of the migration to online retail, the company has seen its customer base grow by almost 25% year-to-date and its share price soar by over 100% from its 52-week low in February. As of Q2 2016, it reported an astounding 93% increase in revenues year over year; its subscription solutions revenue rose 72%, and merchant solutions revenue jumped 121%.

The company attributed growth in its subscription solutions to its improved ability to customize its platform, user support, and pricing for larger retailers. The company branded this service as Shopify Plus, which caters to over 1,000 merchants, including the likes of Nestle, Boeing, Budweiser, Kanye and Red Bull. Shopify also made a key acquisition of Kit CRM Inc., a digital marketing assistant tool that its merchants can download to help promote their business.

The company’s merchant solutions are generated from processing fees from Shopify Payments. Shopify Payments is a fully integrated payment processing service that allows merchants to accept and process payment cards online and offline. The company is taking further steps to improve this business, announcing plans to integrate both Apple Pay and Android Pay into its platform.

Later this year, it will also offer the option for merchants to sync shipping and billing information from their Amazon.com, Inc. accounts. This is a pivotal move considering Amazon’s dominance in the market and its latest moves to drastically reduce shipping costs and delivery times for its U.S. customers.

Shopify is constantly improving or adopting new technologies to create a more seamless experience for its merchants. It’s most recent development is the expansion of its free workspace program, the Shopify Partner Accelerator. It will enable creative professionals from the e-commerce industry to collaborate on company projects and grow their technical and entrepreneurial skills. A new location added to this program in London should help attract some more business in the U.K., which currently represents about 10% of its business.

Its business model is still driven by its ability to attract new merchants, and with 59% of its customer located in the U.S., the company should be a direct beneficiary of growing U.S. consumer confidence in the economy and increasing spending habits.

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Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) have seen their cost per barrel of oil equivalent decline by 25% year over year with a target breakeven WTI price as low as US$30 per barrel.

Both companies have taken significant steps to improve their drilling and completion designs. These steps have not only reduced costs, but they have increased initial production rates. The largest margins are being realized from their U.S. assets, which continue to be focus for any near-term growth.

Since 2014 Baytex has improved its well costs by about 34% for its U.S. assets and 20% for its Canadian assets. However, the low-commodity-price environment has made it difficult to fund additional drilling in Canada. During the first quarter Baytex shut in approximately 7,500 barrels of equivalent oil (boe) per day, or 30% of predominantly low or negative margin Canadian heavy oil production.

Instead, Baytex has relied on its light oil and condensate production from its Eagle Ford assets. Light oil is priced primarily off a Louisiana Light Sweet benchmark, which typically trades at a premium to WTI. The company realized a 63% premium on its sales price from its Eagle Ford output compared to its Canadian assets.

For 2016, Baytex has focused on its assets in the Eagle Ford formation, which represents about 55% of its gross reserves, or 188 million boe. It has also recognized 144 million boe of possible reserves in the region. The company plans to direct 90% of its 2016 capital expenditures budget to its Eagle Ford and Austin Chalk assets. This is building on the company’s success of its 2015 capital development program and the significant advancements made to explore the multi-zone or multi-formation potential in these regions.

Crescent Point announced this week that it has entered into an agreement on a bought-deal basis to sell 33.7 million common shares at $19.30 per share. The $650 million of proceeds raised will be used to reduce bank indebtedness and fund incremental growth capital expenditures in the near term.

As at June 30, 2016, the company had $4.2 billion in long-term debt. About 45% of it is in the form of senior guaranteed notes with $50 million maturing in less than one year and $315 million maturing over the next five years. The company has been able to decrease its effective interest rate to 4.04% from 4.34% due to the management of its credit facilities, which it could further repay using a portion of these proceeds.

The company also announced that it is increasing its fourth-quarter capital budget by $150 million and issued its preliminary 2017 budget of $1.4 billion, which includes $450 million of incremental growth capital above its sustaining capital budget of $950 million. This will allow the company to maintain its current 20-rig drilling program over the next 12-18 months and further develop some of its more economical U.S. assets.

In the Uinta Basin in eastern Utah, the company improved drilling efficiencies in its vertical program by reducing the number of drilling days by 50% and continues to evaluate horizontal drilling potential in the region. It drilled one net horizontal well in the region during second quarter, following up on the success of its most recent Castle Peak horizontal well, which is expected to generate a payout in less than two years at a cost of approximately US$5 million.

The company expects to drill two more horizontal wells in the second half of 2016. This is important as these assets account for approximately 25% of the company’s potential reserves with less than 0.6% recovered to date.

Conclusion

Baytex’s operations in the Eagle Ford formation are the backbone of the company. With a breakeven WTI price of US$30 per barrel (a 33% discount from its breakeven price in Canada), these assets will continue to generate the largest margins for the company.

Crescent Point’s expansion in the Uinta play could result in some major upside. Building on its success of drilling vertical wells, its horizontal well program could yield significant output and growth of the company’s profits in the region.

The post Baytex Energy Corp. and Crescent Point Energy Corp. Are Focused on Their Rich U.S. Resource Plays appeared first on The Motley Fool Canada.

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Canadian billionaire investor Seymour Schulich, through The Schulich Foundation, announced in August that he purchased another two million shares of Pengrowth Energy Corp. (TSX:PGF)(NYSE:PGH), increasing his stake to 18.6% of the energy company.

He has also been adding to his share of Birchcliff Energy Ltd. (TSX:BIR). In July, he acquired an additional three million shares, totaling about 45 million shares, or 30% of the company. These two stocks have returned over 100% year-to-date, outpacing the S&P/TSX energy index, which has gained about 20% over the same period.

Why Pengrowth Energy?

Pengrowth Energy has some of the top-producing conventional and oil sands assets in Alberta and over $11 billion in potential development opportunities. However, the collapse in oil prices, the company’s insurmountable debt, and consecutive earnings misses pushed the stock to all-time lows in early 2016.

The company also suspended its dividend in 2016 to free up about $22 million in annual savings. The stock hit its 52-week low of $0.66 per share in early January and has since climbed to about $2.10 per share. In its latest corporate presentation, titled “Survive to Thrive,” management stated that its focus for the near term is on improving the company’s balance sheet through various cost- and debt-reduction strategies.

The company has $640 million in debt maturing in 2017, which it expects to repay using excess cash from operations, $300 million worth of dispositions, and the remaining drawn from its credit facility.

On a more positive note, the company’s risk-management program has been successful at sheltering some of its funds from operation (FFO) from the 70% decline in commodity prices.

The company has been able to mitigate about 40% of potential declines in FFO due to the falling oil price. It hedged about 82% of its production in 2016 at $83 per barrel and 96% of its natural gas at $3.26 per million cubic feet. In addition, the company has been able to reduce its operating costs by 12% to approximately $13.50 a barrel, which has improved its operating margins.

Why Birchcliff Energy?

Birchcliff Energy is one of the best-performing energy stocks in Canada with a compounded annual production growth rate of 30% since 2005. In Q2 2016, the company reported a modest 3% increase in production and a 70% decline in its funds from operations, primarily attributed to low commodity prices.

However, it has taken steps to reduce its operating costs by 24%, which are already some of the lowest in the industry. It also increased its capital expenditures in 2016 by 40% to $145 million, which will be focused in the Peace River area of Alberta.

In June, the company announced that it agreed to purchase Encana Corporation’s Gordondale assets. To fund the acquisition, Birchcliff Energy issued $690.8 million in shares, fully subscribed by a syndicated of lenders, that included $18.8 million in stock allocated to Schulich in a private placement.

As a result of the acquisition, the corporation has increased its annual average production guidance for 2016 by 25%. It also changed the company’s commodity supply mix from approximately 88% natural gas, 8% light oil, and 4% natural gas liquids (NGLs) to 77% natural gas, 10% light oil, and 13% NGLs.

Conclusion

Growth investors in the energy sector concerned about the near term should examine each company’s strategy for 2016 and 2017. Pengrowth Energy has over 30% of its debt maturing in 2017 and has indicated that any excess cash will be allocated to reducing this debt. The company has top-tier assets, but capital expenditure attributed to growth, which is down 86% this year, will come secondary to paying down debt.

On the other hand, Birchcliff Energy is increasing its capital expenditures in 2016 by 40%, taking advantage of a lower-cost environment. The Gordondale acquisition includes 992 potential drilling sites, which gives the company more options to employ its capital. It also adds a significant amount of liquids production with a relatively low base-production decline rate of approximately 20%, giving management more flexibility to increase company cash flows.

The post Canadian Billionaire Investor Seymour Schulich’s Bets on Oil appeared first on The Motley Fool Canada.

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The CBOE Crude Oil Volatility Index jumped about 6% today on news that prominent OPEC nations signed an oil-cooperation agreement, which could lead to a freeze in output levels. The index neared its 52-week low in mid-August, but has risen about 20% since.

While upstream energy companies continue to be at the mercy of this price volatility, Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) have relied on their downstream or refining businesses to maintain earnings stability.

Integrated oil companies, or those with refining operations, are able to capture the value from crude oil production and refined products, such as gasoline, jet fuel, and diesel, to partially mitigate volatility associated with crude oil–price fluctuations. This allows them to raise capital more efficiently, grow their dividends, and plan their businesses with greater certainty.

These two integrated energy companies have seen their share of attention in the first half of the year due to the Albertan wildfires and their indirect affiliation to Berkshire Hathaway Inc.’s (NYSE:BRK.A)(NYSE:BRK.B) buying spree of Phillips 66.

In Q2 2016 Berkshire and its subsidiaries purchased an additional 18 million shares, or $1.39 billion worth, of Phillips 66. This increases its stake to 15.2% of the company, which owns and operates of 14 refineries in U.S. and Europe. Two of the company’s refineries are jointly owned by Cenovus.

During this same period, Berkshire reduced its position in Suncor to 22.3 million from 30 million shares, or by approximately $300 million. The company did not disclose why it reduced its stake in the integrated oil company; however, in that same period it purchased additional shares of Phillips 66.

Refining margins are influenced primarily by 3-2-1 crack spreads, which indicate the gross margin on a barrel of crude oil that is refined to produce gasoline and distillates and by light/heavy and light/sour crude differentials. More complex refineries can earn greater refining margins by processing less expensive, heavier crudes. This method helps mitigate lower crack spreads associated with low benchmark crude prices.

In Q2 2016 Suncor reported a gain of $930 million in its refining division, which was 7% lower year over year, but offset the $1,995 million loss from its oil sands and conventional segments.

Higher refined-product differentials and a weaker Canadian dollar helped offset lower benchmark cracked spreads, as well as the sourcing of more expensive crudes at the Edmonton refinery due to the forest fires in the Fort McMurray region. The only segment of Suncor’s business that did not post an operating loss in the first half of the year was its refining segment.

Cenovus also report an operating income gain from its refining and marketing business of $143 million, or 75% of its total operating income. Operating cash flow was still 40% lower year over year primarily due to lower crack spreads and higher operating costs. Some of this decline was offset by increased utilization due to consistent performance at its refineries, improved margins on the sale of secondary products, widening crude oil differentials, and softening of the Canadian dollar relative to the U.S. dollar.

Suncor and Cenovus remain attractive investments for dividend-focused investors looking for energy companies that can mitigate some of the volatility associated with crude oil–price fluctuations.

The post Oil-Price Volatility Is Shifting Attention to These Integrated Energy Companies appeared first on The Motley Fool Canada.

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