By CentralBankNews.info
Pakistan’s central bank maintained its policy rate at 10.0 percent and said almost all major economic indicators had strengthened in recent months, improving the outlook for inflation to remain within single digits in the current 2014 fiscal year.
The State Bank of Pakistan (SBP), which raised its rate by 100 basis points in 2013, on March 1 forecast inflation in fiscal 2014, which began on July 1, between 10 and 11 percent
Pakistan’s inflation rate was practically unchanged at 7.93 percent in February from January’s 7.91 percent but down from 9.18 percent in December and 10.9 percent in November, a 2013 high. Inflation last year was affected by a rise in the general sales tax, the imposition of value-added-tax on some manufactured goods and the adjustment of electricity tariffs.
The larger-than-expected decline in consumer prices in the last two months has positively impacted market sentiment and was broadly in line with the SBP’s view that a pickup in economic activity reflected improved utilization of idle productive capacity rather than higher demand.
“In other words, growth of 6.8 percent in the LSM sector (Large Scale Manufacturing) is an indicator of aggregate supply, which bodes well for containing inflation,” an upbeat SBP said.
In addition to growth in manufacturing, the SBP said the fiscal deficit had been contained in the first half of the 2014 fiscal year, private sector credit has increased, the Pakistani rupee had appreciated and foreign reserves, a key concern of the bank for some time, have increased noticeably.
“All-in-all confidence in the economy to rebound seems to have increased,” the SBP said.
In the third calendar quarter of 2013, Pakistan’s Gross Domestic Product expanded by an annual 5.0 percent, up from 3.59 percent in the second quarter.
In its latest quarterly report, the SBP forecast economic growth of 3-4 percent for fiscal 2013/14, below the government’s target of 4.4 percent but higher than the International Monetary Fund’s February forecast of 3.1 percent. In 2012/13 the economy grew by 3.6 percent.
Pakistan’s foreign exchange reserves rose to US$ 4.6 billion by March 7 from $3.2 billion at the end of January but the bank said this was only a beginning as a substantial and consistent accumulation is required. Net capital and financial inflows of $428 million in the July to January period were still considerably below the current account deficit of $2.055 billion in the same period.
The Pakistani rupee plunged in 2008 and continued to depreciate slowly in the following five years but after hitting 108.5 to the U.S. dollar on Dec. 4, 2013, it has reversed course and strengthened in the last three months, especially during March.
Earlier today the rupee was trading at 99.31 to the dollar, up 5.3 percent this month alone and 5.7 percent so far this year.
“These trends, including exchange rate appreciation, have improved the inflation outlook with a higher likelihood of average inflation remaining within single digits for FY14,” the SBP said.
Try This ‘Moon-Shot’ Idea Out for Size…
The moon-shot idea isn’t new. History is filled with large, impossible thinkers challenging our perceptions about what we can do.
Trying to fly, complex computers, and landing on the moon are all examples of moon-shot thinking.
The idea is to aim for the impossible. Answer a problem that doesn’t exist yet. Rather than make something 10% better…make it ten times better.
You know, achieve the unthinkable.
That’s the thinking behind moon-shot ideas.
An overwhelming amount of technology we use today is because of big thinking.
The key to moon-shots is that someone doesn’t accept impossible. They poke, and prod, and they never take no for answer…
Moon-Shot – Solve For X
This is basically a website dedicated to brilliant ideas.
However this one in particular caught my attention. You see, in my world, I get cranky that my online groceries are delivered ten minutes outside my three hour window. And I get frustrated when it takes another fifteen minutes to get to work because of heavy traffic.
But I forget that my first world problems rely on very simple infrastructure; the humble paved road.
A bit of asphalt is what enables you and me to have what we want moved from one place to another.
However, there are parts of the world where something as simple as a sealed road for moving freight is impossible.
The thing is, many countries with limited road infrastructure have limited means of commerce too.
Look at the chart below:
The light areas show a solid road network.
The dark bits show no real paved road connections. As you can see two thirds of the world has almost no paved road network. Not only that, but this is also home to half of the world’s population.
Put another way, this chart shows three billion people only have a limited transport system.
Now let’s look at the next chart:
This shows the cost efficiencies when it comes to transport relative to speed. That means, how much it costs to ship something.
Shipping is the cheapest and slowest, while truck and train are pricier but a little quicker. And anything by air is clearly the most efficient, but expensive. Which means for developing nations, where good roads are least common, moving goods by air is simply not an option.
Many countries, like Africa and Australia for that matter, rely on trucks and shipping. This is great if you live on the coast. But what about for those who live inland?
This is one of the problems that limit Africa’s commerce for example. Yes, there’s also a bunch of other problems, but today I’m just referring to transport.
Something as simple as getting products from point A to point B is vital to develop an economy. Heck, even Australia faces these conditions. As a result of our sunburnt country, a land of sweeping plains, we have the longest road trains in the world (around 53 metres long) to move stuff from one side of the country to the other.
And we can only achieve this with a very small road network. For many other countries, establishing a road network will never be an option.
So how can these nations access goods without a developed road network?
Well get this. The guys at Skunk Works (which is a think tank for Lockheed Martin’s Advanced Development Program) have come up with an idea. You’re not going to believe this, but they reckon the answer is…giant airships, like the one below:
Check out this video for more on the technical details of the design, but the short version is, it has the downward thrust of a helicopter, the propellant and aerodynamics of an aeroplane and buoyancy of a hot air balloon.
The best thing is the cost of transportation is only a little more than road or train freight.
It’s also perfectly suited for remote regions. It can land on snow, water, sand and uneven ground.
And so it doesn’t float away, there are grip pads on the base which anchor it to the ground.
This idea is almost a decade old. It was first tested in 2006. However Skunk Works have fine-tuned it to a more commercial level. They say it can carry 500 tonnes of cargo. That means this airship could carry about three times more than the average cargo plane.
Is this massive airship the answer? I’m not sure. It seems crazy. But plenty of crazy things turn out to be commercially successful. That’s the point of moon-shot ideas. But I do know it could be the way to cut transport costs and connect remote areas to commerce.
The potential success of seemingly outlandish moon-shot ideas is the feature of Sam’s Volkering’s latest report. Check out what he says are the four moon-shot ideas for the new tech age.
Shae Smith+
Editor, Money Weekend
Ukraine, China Send Wall Street to Five-Week Low
The concerns outside the United States have crushed signs of progress in the United States. After five weeks, the S&P 500 hits a new low – shooting stocks to their lowest close since early February. Meanwhile, across the ocean from Wall Street, Ukraine and Russia are still in the thick of a crisis. With Russia on the border “ready to invade,” the threat of war is rising for Ukraine, as per its acting president. In sign of support for NATO allies, U.S. F-16 jets landed in Poland only hours later.
So far this year, Russia has kissed $50 billion in capital goodbye, according to Goldman Sachs (GS). By the end of the year – that will snowball into $130 billion (which is double the outflow of last year). The possibility of war is not the only concern – China’s economy is taking a turn for the worst – with a sharp slowdown over the first two months of the year.
Though investors fear what the downfall will mean for the global economy, the U.S. economy is looking brighter. For the first time in three months, retail sales rose – budding slightly of ahead analysts’ forecasts. This report also signals a very good sign after the harsh winter. What’s better, the unemployment lines are shortening! Last week, weekly job claims hit a new three-month low.
Meanwhile, Stanley Fischer, Federal Reserve Vice Chairman nominee shared a few words with lawmakers on the Fed policy. He confirmed that he backed the policy and it’s ability to strengthen the economy – also vouching that it isn’t out of touch with the realities of Main Street.
Stanley Fischer says, “Anybody who has studied, and particularly studies this crisis, knows the cost of unemployment and understands slow growth is not an abstraction. Slow growth is people not finding jobs. Slow growth is problems for families and meeting their, even their food bill. And if one does not understand that, one cannot seriously think of being a policy maker.”
Elsewhere, shipping costs are eating away at Amazon.com’s profits. Therefore, it’s been forced to add a price hike with its annual membership, Prime – the first hike seen since it launched nine years ago. In exchange for free shipping, the membership jumped a whole $20 – equaling a $99 annual price. Fortunately, investors support the change! It’s shares are skyrocketing, even in a down market.
It seems that a downmarket has crept overseas as well – European stocks fell to five-weeks lows, too. Maybe everyone has the same concerns about Ukraine and China.
The post Ukraine, China Send Wall Street to Five-Week Low appeared first on Wall Street Daily.
Article By WallStreetDaily.com
Original Article: Ukraine, China Send Wall Street to Five-Week Low
The What, Why and When of the Australian Dollar
Disappointing Chinese date is weighing heavily on Australian dollar sentiment. New vehicle sales and RBA minutes scheduled for Sunday/Monday respectively. Disappointing data and dovish minutes will compound negative investor sentiment, and could drive the AUD/USD towards January lows. Positive data and hawkish minutes would likely create some short term strength in the AUD/USD, but may not be enough to reverse the longer term downtrend. Keep in mind the reason the Australian Dollar had such a miserable week is because of the nation’s reliance on China. Roughly 40% of Australian exports go to China. Also being released next week is RBA minutes. A dovish release combined with bearish new vehicle sales would stir up negative sentiment and drive the pair closer to 0.8924.
Written by Daniel Elo, www.EconomicCalendar.com
FX Trading In This Geopolitical Turmoil
Article by Investazor.com
Besides all the macroeconomic indicators and central banks’ press conferences or juicy speeches by theirs governors there is something that can affect the markets even more. It is powerful because usually is rather unpredictable and it strikes when you expect the least. Also, you do not know how much is going to last and how destructive can be. You are probably thinking which is the answer and some of you have might even guessed it. Geopolitical conflicts are that kind of force you do not want to witness as an investor because sometimes can even lead to local wars and who knows maybe to the next World War.
I am writing this article in the light of the events which take place at this moment in Crimea and the existing tensions between the Ukraine and Russia on one side and between Russia and the West on the other side. These types of situations are rare, but have an extremely severe impact on the markets, so that’s why I consider it is so important to know the effects that geopolitical conflicts have on the markets and to act quickly. I will take as an example the Crimean conflict and I will emphasize which financial instruments gain from political disorder and which of them are dumped by investors.
Local currencies of the countries which are in conflict will be the ones being affected. The Ukrainian hryvnia and Russian ruble were tumbling to record lows in front of the US dollar before the Central Banks took action and raised the official interest rate. The second victim is the local stock market. The Russian capital market index, RUS50, dropped close to 12% in one day after the tensions escalated very quickly and the United States threatened Russia with economic sanctions.
The post FX Trading In This Geopolitical Turmoil appeared first on investazor.com.
Russia says doesn’t intend to lower 7% rate for months
By CentralBankNews.info
Russia’s central bank maintained its key rate at 7.0 percent, the level it was raised to earlier this month to calm nervous financial markets, and said it does not intend to lower the rate in coming months as the risks of high inflation still remain.
The Bank of Russia, which hiked its benchmark rate by 150 basis points on March 3 after markets tumbled on fears of an outbreak of war between Ukraine and Russia, said inflation accelerated to 6.4 percent by March 11, up from 6.2 percent in February, partly due to the depreciation of the ruble along with higher prices for vegetables, fruit and dairy products.
This could boost inflationary expectations and the central bank said its priority was to “contain the effect of exchange rate dynamics on inflation and to maintain financial stability.”
The central bank, which only last month expected inflation to gradually decline towards its target of 5 percent by the end of the year, said inflation rates are now unlikely to fall until the middle of this year due to the impact of the lower ruble and then decelerate to the target in the “medium term.”
Russia’s ruble has been weakening since early February last year and in 2013 it fell by over 7 percent against the U.S. dollar. On March 3 it tumbled 2.5 percent, triggering intervention worth $11.3 billion by the Bank of Russia followed by a further $300 million the day after to support the ruble. This helped control the fall but it has continued to depreciate, trading at 36.66 to the dollar today, down 10 percent since the beginning of the year.
“High inflation risks that brought about an increase in the key rate on 3 March 2014 still remain,” the bank said. “Unstable external conditions and a rise in financial market volatility are conducive to an increase in economic uncertainty.”
“Hence, the Bank of Russia does not intend to lower the key rate in the coming months,” it added.
Investors remain on edge in light of Sunday’s referendum in Crimea on whether it should join Russia and leave Ukraine. If Crimea votes to join Russia, as expected, Western countries may impose economic sanctions, further undermining investors’ confidence in Russian assets.
Russia’s economy was already slowing before the geopolitical tensions and the central bank said investment and consumption is likely to slow further due to the increased uncertainty and declining confidence, with the result that growth will be lower than expected.
In its policy report from February the central bank forecast growth this year of 1.5-1.8 percent, down from 1.3 percent estimated for 2013.
Demand from consumers has been the only real driver of economic growth in recent months as industrial production has been stagnating and investment low. But consumers have started to pull back due to slow growth in wages and deteriorating sentiment, the bank said.
In the third quarter of last year, Russia’s Gross Domestic Product expanded by only 0.2 percent from the second quarter for annual growth of 1.2 percent.
The impact on growth from the depreciation of the ruble is seen as limited by the central bank.
Mike Breard: Buy Small for Deep Profits
Source: Peter Byrne of The Energy Report (3/11/14)
http://www.theenergyreport.com/pub/na/mike-breard-buy-small-for-deep-profits
The Street’s eyes may be on North Dakota, but Mike Breard also keeps an expert eye focused on smaller oil and gas companies drilling elsewhere. In this interview with The Energy Report, the Hodges Capital analyst discusses several companies drilling excellent wells in Texas, Oklahoma and the Gulf of Mexico. Breard, a veteran oil and gas analyst, knows the first names of some of the sharpest managers in the industry. Stick with the winning teams, he advises, even when they change firms.
The Energy Report: How do you choose the energy names in your coverage list?
Mike Breard: I look for managers with great track records. For example, I attended the annual meeting of Matador Resources Co. (MTDR:NYSE), and there were 150 people there. Normally, only maybe 20 people attend the annual meetings of the junior energy companies, but these folks had been investing with the current managers of Matador in private deals for 30 years. They were so eager to get in on the newest venture of these guys that Matador stock has tripled during the past year.
TER: What is driving Matador’s success?
MB: Attention to detail. Matador does not control the most acreage in a play; they want the best acreage. The company studies an area for quite a while before deciding what leases to go after. Then, it does all kinds of additional technical studies on the leasehold before drilling—such as microspectrometry, which is taking pictures of the cores under a strong microscope to identify channels that will allow the oil to flow. It is drilling now in the Eagle Ford and the Delaware Basin portion of the Permian Basin.
Frankly, I do not care for small firms that invest in a dozen different plays all over the country—stretching their assets and manpower too thin. I prefer companies that stay in two or three regions and concentrate on developing the assets on hand.
TER: How is Matador stock doing?
MB: It was under $8.00 last March then hit a high of $24.25 in late November. When the price of oil dropped, the stock went down to $16. Recently it was over $25 and it could go a lot higher as people get used to thinking about oil staying in the high-$90s/low $100s. Matador has a lot of gas in the core area of the Haynesville. As gas prices rise, Matador could drill some profitable wells there too.
TER: How important are factors like debt:equity ratios and other types of metrics when you decide whether or not to invest in a junior energy firm?
MB: In the last few years, those metrics have not been as important. Large investors are just throwing money at the oil business. A company will announce a $500M debt offering and two days later, they sell $750MM. Money is the easiest thing to get in the energy industry right now. Of course, I do look closely at the debt situation, and I want a firm to have enough liquidity to drill wells and make acquisitions. But there are different ways of doing this. Take Comstock Resources Inc. (CRK:NYSE), for instance: it has not sold any new stock in years. It treats its shares as a precious commodity, while some companies do a stock or bond offering every year or two.
TER: Why is money so free right now?
MB: Cash is nearly worthless in terms of getting a return. Investors are seeing the large profits flowing from the Bakken, the Eagle Ford, the Permian, etc. Investors want in on that seemingly easy money. Energy is a growth industry.
TER: What are the top oil and gas plays in the U.S. for 2014?
MB: The Permian Basin is the hottest area right now. Drillers have been active here since the Santa Rita No. 1 well began producing in 1923, and numerous formations are productive. The Bakken, the Eagle Ford, the Marcellus, the Wattenberg, the Mississippi Lime, etc. are all good areas. More drilling is being done in the Utica and the Tuscaloosa Marine Shale, and these areas could blossom in 2014—2015.
One issue to consider, however, is that in some of the older plays, the core areas have been identified and firms are exploring the fringe portions. Now, as far as Wall Street is concerned, the older regions do not have much glamour left. Some hedge funds are insisting on a minimum leasehold of 100,000 acres and 1,000-barrel-a-day (bbl/d) wells or they are not interested. Size is not the only factor though. The reality of it is that if a firm drills a well for $0.5M and produces 50 bbl/d, the well can pay out in a few months, and the rest is pure profit. Those types of small, profitable operations are running well below the radar on The Street—which can make them good buys.
The oil stocks can be volatile, not based on what they are actually doing, but based upon the perceived price of oil and Wall Street’s cyclical fears. In November, many on Wall Street became convinced that the price of oil was going to fall to maybe $60/bbl. Oil stocks dropped substantially—even though the price of oil did not plummet. Now, many of these Wall Street seers are thinking “Oil is $100! We missed out; it is time to start buying!”
TER: What other firms do you like in the junior space?
MB: EPL Oil & Gas Inc. (EPL: NYSE) is now being managed by Gary Hannah, who has been in the business for 30 years. EPL was formerly called Energy Partners Ltd. Gary studied its assets, took over the company and paid off the notes in 2009. He is working in the shallow waters offshore in the Gulf. EPL made a big acquisition several years ago. It spent $15 million ($15M) the first year on technical studies, and $150M the next year on drilling and tripled the reserves. This is its business model. EPL is in the giant shallow water fields that were discovered 40 years ago, when we did not have the advanced seismic technology to properly assess the true potential. Now, EPL is finding all kinds of smaller reserves around these old fields and there is plenty of infrastructure in place. Zones between 12,000 and 20,000 feet have rarely been drilled. EPL has begun a $45M Full Azimuth Nodal seismic program to better understand the deeper water formations.
TER: Is there a lack of competition in the shallow basin area?
MB: There is a lack of interest. People are putting their money into the shale areas onshore and are shying away from the shallow waters. But the Gulf has ample production facilities and pipelines in place, and it really does not cost that much more to drill a shallow water well than it does to drill a Bakken well.
EPL is conducting studies and making acquisitions in this space. In 2012, EPL bought Hilcorp assets for $550M. They spent 2013 studying the prospect and will spend over $100M this year to explore and develop.
TER: How is the EPL share price performing?
MB: EPL’s high was about $43 last fall. When energy stocks generally declined, it dropped down. Then there was a storm in the Gulf that shut down some high producing wells. When EPL tried to bring them back on, it did not get production back as high as it was, which was disappointing. The stock fell to around $25 and has recently been back up over $30.
TER: What other juniors are you focused on?
MB: Comstock Resources Inc. was a big gas producer in the Haynesville when that region was hot. When the gas price fell, Comstock went looking for oil on property that it already owned in the Eagle Ford. It also bought property in the Permian Basin. But when it came time to drill the development wells, gas was at $2 per thousand cubic feet ($2/Mcf). Comstock realized that it could not afford to develop both properties. It sold the Permian Basin properties for $824M, which was a $231M profit in about a year. Then it paid down debt, started to buy back stock and began to pay a dividend, which is very rare for a small producer. The yield is now 2.5%.
Comstock then put $100M into exploring the East Texas Eagle Ford, primarily in Burleson County. It plans to drill 10 wells there this year on 21,000 net acres. It also bought 51,000 net acres in the Tuscaloosa Marine Shale, where the wells cost quite a bit more to drill. Comstock management plans to drill a couple of wells there in 2014, but it is waiting to follow the lead of nearby producers before stepping up drilling in 2015.
TER: Do you buy all these types of stocks on a short-term basis or are you a long-term holder?
MB: We have held some stocks for four or five years. It depends on how they perform. If a stock doubles in a week, we may sell it. If something bad happens, we may also sell it. But, generally, we’re looking for the longer-term plays.
TER: What other picks do you have for us today?
MB: Torchlight Energy Resources Inc. (TRCH:NASDAQ) is a small company with a property in the Eagle Ford that provides cash flow. It plans to sell that asset, if it can get a high enough price, because it is going more into the Hunton play in Central Oklahoma with a private operator, Husky Ventures Inc. Husky has drilled 35—40 wells in the Hunton after spending a lot of money on technical work to find the right spots to drill and has been very successful. Torchlight has four areas of mutual interest with Husky. Torchlight has two other properties in Kansas, where it can drill low-cost, low-risk oil wells. Torchlight is currently drilling in one Kansas play with Ring Energy Inc. (REI:NYSE).
Not too many people have heard of Ring, but it is run by the same managers that built Arena Resources and sold it to SandRidge Energy (SD: NYSE) for $1.6 billion ($1.6B). Arena drilled 850 shallow, low-cost wells with high rates of return in the Central Basin Platform of the Permian Basin. Ring is drilling the same type of wells in the Central Basin, but it also got into a similar shallow oil play in Kasnas. These wells will cost around $0.65M to drill and the payout can come in less than a year.
TER: How is Torchlight financing these activities?
MB: It sold $7M in equity recently. It is also looking at a mezzanine financing package or a line of credit. It has already set aside $6M to gain a half-interest in the Ring Energy play in Kansas and has put up its share for at least two more months of drilling with Husky.
TER: Do you have an interest in international energy sectors?
MB: We buy blue chips, including BP Plc (BP:NYSE; BP:LSE) and Exxon Mobil Corp. (XOM:NYSE). They pay decent dividends.
TER: Do you have any interests in the alternative energy sector?
MB: I have all I can handle with following conventional energy. I have, however, talked with managers at wind turbine companies. They have gas generators on the side to supply electricity when the wind dies down. Ironically, the alternative energy sector has created additional demand for natural gas.
TER: Do you have any other companies that you want to talk about today?
MB: Helmerich & Payne Inc. (HP:NYSE) is a drilling company that was the first to build modern AC rigs that they called FlexRigs. These are not like the old mechanical rigs with the dirty, dangerous drilling floor. In a computerized FlexRig, the operator sits high up in an air-conditioned cockpit guiding the drill bit while looking at computer screens that tell him the weight on the bit, how fast it is turning, etc.
A decade ago, the company’s competitors laughed, claiming that no one was going to pay extra for such a fancy rig. Now, HP has half the AC rig market share. The rigs are super efficient and made for pad drilling. The footage rate has increased by 10% in each of the last two years. While an average rig may drill a well in 30 days, an HP rig can drill it in 18–20. It charges more per day, but it is cheaper per well because the wells are drilled faster.
The company can build its rigs for $1–2M less than the competition and can charge 15% more. This provides a superior profit margin. It has been building two new rigs per month, and is going to three per month in April. And it is well-managed. The Helmerich family has been running the company since it was started in 1920. Hans Helmerich has just stepped down as CEO but he will still chair the board.
TER: Is the stock cheap?
MB: HP stock has been hitting all-time highs lately, and it has raised its dividend quite a bit. It is yielding 2.5%. It has the potential to go higher. Building three new rigs a month should add around $0.90/share on an annual basis.
In general, offshore drilling stocks have been way oversold, and they will likely be good performers later this year.
TER: Thank you very much for your time, Mike.
MB: Cheers.
Mike Breard graduated from Rice University in 1963 and got an MBA from Stanford in 1965. His first job was with Standard & Poor’s in New York. He later worked with Goodbody and Walston in NYC before moving back to Dallas. He worked for several brokerage houses in Dallas, including Eppler, Guerin & Turner and Schneider, Bernet & Hickman, as an energy analyst and institutional salesman before joining Hodges Capital in 1997.
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DISCLOSURE:
1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: Torchlight Energy Resources Inc.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Torchlight Energy Resources. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Mike Breard: I or my family own shares of the following companies mentioned in this interview: CKR, EPL, HP, MTDR, TRCH I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: BP, CKR, HP, MTDR, TRCH, XOM. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Euro Weakens on Draghi’s Comments
European Central Bank (ECB) President Mario Draghi said on Thursday his forward guidance may help to drag the 18-bloc euro currency lower and reduce interest rates, which could help inflation return to the goal set by policymakers.
“Our forward guidance … creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon,” Draghi said in Vienna yesterday. “At the same time, the real interest-rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal.”
The comments made by the ECB President dragged the euro lower from its two-year high against the greenback. The euro edged 0.02% lower trading at $1.3864 at the time of writing; the currency reached $1.3967 earlier in the day, the highest since October 2011.
Draghi stated at the last ECB monetary policy press conference, that the ”strengthening of the effective euro exchange rate…has had a significant impact on our low rate of inflation and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability.”
“Given that the ECB’s staffs’ average forecast for inflation in 2016 is already low at 1.5%, it clearly signals that a further significant strengthening of the euro would likely trigger additional ECB easing by increasing the likelihood that inflation undershoots their target,” Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi wrote in a note on Friday.
Hardman added “The EUR/USD rate may be able to rise towards the 1.45-level before triggering further ECB easing which would weigh more heavily upon the euro. ECB President Draghi remains optimistic that the ECB’s forward guidance will over time place downward pressure upon the euro as the real interest rate spread between the euro area and the rest of the world will probably fall. However, in the near-term the ongoing shrinking of the ECB’s balance sheet continues to support a stronger euro making ECB monetary policy appear relatively tight.”
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Gold Trades Higher Ahead Crimea Vote
Gold prices traded higher on the last day of the trading week, climbing to its highest in six months as the tension in Ukraine escalates, while Crimea prepares to vote on March 16 on splitting from Ukraine and joining Russia.
The yellow metal for immediate delivery climbed 0.5% higher to $1,376.64 an ounce, the highest level in six-months. The bullion is trading towards its sixth-weekly high, the longest since August 2011.While silver gained 0.2% to $21.2241 an ounce.
Gold have gained 14% on demand for a haven as the tension in Ukraine continues to weigh on the market which have already been weaken by the US central bank’s cuts.
In China, growth in the world largest consumer slowed down, while data released earlier in the week showed that China’s retail sales and industrial output came in lower than expected.
Gold – Fed Meeting
The upcoming fed meeting is in focus as members of the Federal Reserve would gather for its next meeting scheduled for March 18-19. The Fed has announced a $10 billion reduction from its $85 billion monthly bond purchase at each of its past two meeting, currently leaving purchase at $65 billion.
Holdings at the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust; came in at 813.3 metric tons on Thursday, the highest since December 20.
Gold – Crimea Referendum
As the crisis in Ukraine escalates, the country’s region Crimea will vote in a referendum on Sunday over splitting from Ukraine and joining Russia. The Western nations have warned that the ballot and annexation of Crimea is a violation of international law.
Ukraine’s Prime Minister spoke in front of the United Nations, requesting Russia for talks to put an end to the crisis between the two countries.
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Tom Varesh: If Canada Opens the Spigot on Drilling, These Oil Services Companies Could Climb
Source: Peter Byrne of The Energy Report (3/13/14)
One of Canada’s top-ranked industrial investment analysts, Tom Varesh of M Partners, tells The Energy Report where to find the best-positioned oil services companies in the oil fields of western Canada. With many pipeline and E&P projects approved and still more seeking approval, western Canada looks primed for an energy renaissance. At this point, it’s a case of “if you build it, they will come.” Find out about the companies doing the building, and get exposure before share prices start sprinting.
The Energy Report: Tom, are you positive about oil and gas?
Tom Varesh: Our focus at M Partners is on North America. We are specifically bullish on the oil and gas sector in western Canada. Many of its pipeline projects, oil sands projects and natural gas projects are now approved, and many other projects are in various stages of being green-lighted. We predict that 2014 is going to be a better year for the oil and gas sector than last year, and ’15, ’16, ’17 are set up to experience significant growth in this region because a wide range of projects are attracting a lot of capital investment.
TER: Are there impediments to ramping up this growth during the next two or three years?
TV: At a macro level, regulatory approvals have to be obtained for many of these projects to go ahead. At the micro level, the larger oil and gas companies have to decide on a timeline for pushing significant amounts of capex into the projects. The base price of the oil and gas commodities has to make sense to warrant large capex, but the discount that western Canadian producers get should shrink as a result of building out the pipelines and related infrastructural themes.
I cover infrastructure niche plays and construction dealership companies in the oilfield infrastructure segment in western Canada. Services are seeing a significant pick up in activity—it is basically all hands on deck for the booming economy in Alberta and other provinces in western Canada.
TER: Within this space, are there dominant firms that are making acquisitions and driving up the potential value of energy service juniors?
TV: The rollup theme is very prevalent. WesternOne Inc. (WEQ:TSX) and Enterprise Group Inc. (E:TSX.V) both have the currency to roll up private enterprises working in the service sectors in western Canada. Other acquisitive firms include Entrec Corp. (ENT:TSX.V) , McCoy Corp. (MCB:TSX),Petrowest Corp. (PRW:TSX) and Macro Enterprises Inc. (MCR:TSX.V), just to name a few. These are publically traded companies with access to the capital markets—with access to equity, debt or bank financing. And they are actively and steadily rolling up the smaller private companies.
TER: Why is there an influx of acquisition capital into this space?
TV: With more and more investors looking for alternative investment options that are not based in metals, capital is generally gravitating toward the oil and gas infrastructure sector. WesternOne and Enterprise Group have already benefited from recent successful capital raises and it’s full steam ahead for both of them.
These companies not only have the cash to make acquisitions, but they also have the ability to immediately invest in the operations of the acquired companies and grow their organic lines of business. Private companies are often starved for capital—and therein lies the opportunity. The acquisition strategy keeps picking up, and we expect to see double-digit organic growth from the acquiring firms during the next five years.
TER: Do you have a top pick?
TV: Enterprise Group is a great infrastructure play—it is very acquisitive. In 2012, it bought a heating business called Artic Therm. It also owns TC Backhoe, which does a lot of pipelining and cable laying for utility companies in Alberta. And it acquired Calgary Tunneling last summer. At the start of this year, Enterprise closed on Hart Oilfield Rentals. This group of service-related companies can cross-sell their services to their major oil field clients in western Canada.
TER: In terms of blending these acquisitions into the corporate structure, is Enterprise functioning as a holding company, or is it doing hands-on management with daily operations at its new acquisitions?
TV: I characterize Enterprise as a hands-on management entity. In the not-too-distant future, we will likely see a rebranding of this corporation and each of its businesses. The reason that Enterprise will rebrand is to demonstrate that it is very active in each of the business segments. Each of the managers or previous owners of those various businesses is still running operations under the Enterprise umbrella. The executive management team at Enterprise is making the capital allocation and the growth strategy decisions in concert with the managers running each business unit. It is a very collaborative effort intended to grow each business and to cross-sell the services.
TER: How has the Enterprise Group’s stock been performing over the past period?
TV: When we launched on Enterprise a year ago, the stock was at $0.35. It is now in the $1.10 range. That is great performance, and there is more to realize in the stock as it proves out the earnings potential of its recent acquisitions. Our current target price for Enterprise is $2.25—and it is our top pick!
TER: What other service juniors do you like here?
TV: WesternOne is an oil and gas infrastructure play with two distinct business lines. About 55% of its revenue is driven by its manufacturing business, Britco. Britco builds out modular work camps and offices for mining and oil and gas companies. One of its biggest repeat clients is Devon Energy Corp. (DVN:NYSE). And Britco is working on another contract for Devon in northwestern Canada. The other side of its business model caters to rentals and propane sales. It has a large heater rental business, which competes with Enterprise’s Artic Therm. But WesternOne provides the propane to run the heaters, unlike Artic Therm. It has a well-integrated business and it has been performing quite well since it did its initial public offering in 2006.
TER: WesternOne’s stock has fallen a bit over the last year. Why?
TV: WesternOne expanded into Australia at the start of 2013. It acquired a company similar to Britco that makes modular workforce camps. With the general downturn in mining, that business underperformed and dragged down the earnings. Management has taken steps to rationalize this business line, and it is on track to exit 2014 as a profitable entity. While the WesternOne stock went sideways during the last 12 months, we expect it to firm up as it becomes clear that the Australian business unit is turning around.
The neat thing about the WesternOne story is its high dividend, which currently yields 8%. This is a story where investors are paid to wait and the dividend has been stable since 2007. Indeed, the dividend has increased twice since the firm went public and it is now steady at $0.60 per year. The payout ratio is expected to be 60% this year—which is up from 41% last year (due to the losses in Australia). We fully expect the payout ratio to fall back into the low 40% range in 2014. Our target price for WesternOne is $9.35.
TER: What other firms do you favor in the energy services space?
TV: The two names we’ve touched on thus far are $100–$200 million ($100–$200M) market cap companies with high growth profiles. If an investor is looking for something in the large-cap space, we really like Finning International Inc. (FTT:TSX). Finning is strictly a dealership business model. It sells Caterpillar construction and mining equipment in western Canada, South America, the U.K. and Ireland.
TER: What are the fundamentals for success in the heavy equipment dealership business?
TV: Finning’s success is largely tied to what is going on at a macro level in the Canadian oil and gas sector. About 55–60% of its revenue is from western Canada, selling into the oil sands industry and the construction industry. Alberta and western Canada—the prairies—are going to lead Canada in terms of GDP growth. That dovetails nicely into the Finning story because growth is accompanied by infrastructure spending and buildouts. That means there are steady sales of construction and mining equipment in the oil sands and also in the conventional gas sector in Alberta.
In South America, Finning’s equipment is used to mine copper and gold. While metal prices have come off and that sector is facing a reduction in capital expenditures, we continue to like Finning because of its recurring revenue theme. During the last half-decade, Finning has sold so much equipment in Canada and South America that iron in the field has risen by nearly 40%. And that equipment generates recurring revenue for Finning’s parts and maintenance services, which generate high margins. Finning is on track to ramp up its product support revenue to 50% of its overall revenue. It ended 2013 with product support at 46% of revenue—which was up from the prior year’s 42%. Finning’s product support revenue will continue to grow so long as metal mines and oil sands keep producing. Finning is expected to generate significant free cash flow in 2014; I believe the company will increase its dividend this year. A solid investment, we say.
TER: Are the share prices of the three firms that we have talked about today tied to the volatility of the oil and coal and fossil fuel investment markets?
TV: These share values are tied indirectly to oil prices and, in the case of Finning, to copper and gold prices as well. To the extent that commodity prices remain strong, share price activity will remain strong.
TER: Thank you for your time. Tom.
TV: You’re welcome.
Tom Varesh was rated the #1 Ranked Industrials Analyst by Bloomberg in 2010 and 2011, and he is consistently ranked in the Top 3. He was the #1 Ranked Canadian Industrials analyst in 2010 by First Coverage Equity Research Analyst and has worked as an analyst for over 10 years at two different investment banks, Canaccord Capital (now called Canaccord Genuity) and M Partners. Varesh covers equipment dealership companies (infrastructure and agriculture), infrastructure services companies and equipment rental companies. He is often interviewed by and quoted in the National Post, The Globe & Mail, Bloomberg, BNN, CNBC and other media outlets. He was previously an investment advisor for four years at a Big Five Canadian Bank for retail, commercial and corporate clients.
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DISCLOSURE:
1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Tom Varesh: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Enterprise Group Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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