Wednesday, November 19, 2014

SYY, CORR/FHN & RF Recommended as "Value" Plays/Bought 100 BIREF at $9.7547

Big Picture: No change

Stable Vix Pattern (Bullish):

Recent Developments: 

JUNK Bonds: 

According to, the chief fixed income strategist for Wells Fargo Advisors is advising its retail customers to lightened up on junk bonds, arguing that the potential returns do not justify the risks. 

I would generally agree with that opinion, and have stated as much many times here and in comments at SA. However, I am not as confident that a slow and measured rise starting late next year in the federal funds rate will negatively impact junk bonds much, as suggested by that strategist. If inflation remains subdued as economic growth accelerates some, then that combination will improve the credit profile of junk bonds generally while not causing much repricing of interest rate risk. The key factor to watch will not be the slow and measured rise in the FF rate but inflation and inflation expectations in my opinion. Still, even if a rosy scenario unfolds next year, a higher yield is necessary to compensate for the default risk inherent in junk credits, particularly those rated below "BB" and especially the "CCC" or below rated bonds where default risk can become acute fairly quickly as noted by David Stockman recently: David Stockman's Contra Corner Since I included a number of "CCC" rated securities when I constructed a junk bond ladder back in 2011, I am familiar with their default risks but the yield in that portfolio was over 12% with mostly higher rated junk bonds. 

Sysco (SYY) increased its quarterly dividend to $.3 from $.29 per share. The company has paid a quarterly cash "every quarter since its founding as a public company in 1970 and has increased its dividend 46 times in that period". SYY is a member of the S & P 500 Dividend Aristocrats, a list that includes companies that have raised their dividends for 25 consecutive years. 

Since I bought shares at $19.46 (3/2009), the dividend growth for SYY has slowed down considerably in line with a slowdown in E.P.S growth. I discussed that historic growth rate in this post: Item # 4 Sysco The annual rate was $.23 per share in 1999 and $.60 in 2005. (SYY) Dividend History - Starting in 2009, however, the quarterly dividend was increased by one cent per share, and the annual rate for 2015 will be $1.2, a doubling in 10 years, whereas the company more than doubled the rate  between 1999-2005. 

Over 25 years, the annualized dividend growth rate was 18.56% whereas that rate has slowed to just 4.71% over the past five years. Calculator The problem can be seen by simply looking at the historical E.P.S. numbers that can be found at page 19, Form 10-K. I would not buy SYY at its current price. 

I am content to hold what I own since this stock has made the transition to a bond like investment for me that increases my coupon every year.  

At a total cost of $19.46 per share, the dividend yield at the new quarterly rate is about 6.17%.  Even if the future dividend growth rate results in a doubling in ten years, that would bring the yield up to over 12%.  

Regional bank stocks have bobbed up and down in price during 2014 and have gone nowhere as a group. Many investors view regional banks as an industry that will benefit from rising rates, which I view as an over simplification.  Nonetheless, the SPDR S&P Regional Banking ETF (KRE) had a total return last year of 47.34% as interest rates rose from abnormally low levels to less abnormally low levels. Interest rates have drifted down in 2014 and KRE has gone nowhere.

Stephen's banking analyst, Matt Olney, was recently interviewed by Barron's. He was arguing that now was the time to start buying regional bank stocks, based on the theory that a "big part" of the benefits resulting from an increase in rates will be priced into the stocks before the increases happen. His two value picks are First Horizon (FHN) and Regions Financial (RF) and both of those stocks are owned in my Lottery Ticket Basket rather than my Regional Bank Basket. I recently added RF again to that basket.  Stocks, Bonds & Politics: Lottery Ticket Basket Strategy Update as of 10/31/14/Sold 70 AWCMY +52% Gain/Bought as Lottos: 35 CORR at $ 7, 35 IRET at $7.91, 30 RF at $9.33   

The preceding link also mentions the purchase of CORR as a LT, which I discussed in a SA Instablog. Lottery Ticket Basket Strategy-Bought 40 CORR At $7-South Gent | Seeking Alpha I gave several reasons in that post justifying the lowly risk classification for this stock, including this REIT's need to sell a lot of stock whenever it decided to acquire another "infrastructure" asset. 

Without going into any detail, CORR announced earlier this week a large acquisition for it: CorEnergy to Acquire MoGas Pipeline for $125 Million

This deal is discussed in an article published at Benzinga.

To finance that purchase in part, the company sold 13M shares at $6.8, with an over allotment option for up to another 1.95M. CorEnergy Prices Offering of Common StockProspectus 

That offering did knock the stock price down from a $7.23 close on 11/17: CORR Historical Prices 

The stock did go ex dividend for its quarterly $.13 per share distribution shortly after I purchased that odd lot at $7. CORR did raise the quarterly dividend to $.135 per share when announcing this latest acquisition. At a total cost of $7 per share, the new quarterly rate will raise the dividend yield to about 7.71%. 

1. Bought 100 BIREF at $9.7547 (The $500 to $1,000 Flyer's Basket Strategy)(see Disclaimer): After researching this company, I classified a possible purchase as part of the Flyer's Basket. This categorization is a judgment call based on a potential risk/reward analysis. Among the relevant risks are the lack of dividend support, the currency conversion risk inherent in buying foreign stocks, the relative short operating history of this company, the debt load and ongoing need for capital expenditures given its size and financial resources, and its operations involving the exploration and sell of natural gas and crude oil. The Flyer's Basket has a $1,000 limit on a purchase.

I may start adding other small natural gas producers to both the Lottery Ticket and Flyer's Basket Strategies. 

Snapshot of Trade: 

2014 Bought 100 BIREF at $9.75
Closing Price Day of Trade: BIREF: $9.82 -0.18 (-1.82%) 

Company Description: Birchcliff Energy (BIREF), founded in 2004, is an E & P company based in Calgary, Canada.

The company claims to have a "vast inventory of highly economic projects" with "operatorship and essentially 100% working interest" that enables it to "control our pace of activity". (page 1, Q3Report2014.pdf)

In the last earnings release, the company provided a table summarizing its 5 year plan:

(Page 4)

The company asserts that this plan is not dependent on wildcatting. Instead, Birchcliff believes that it has a "massive inventory of long life natural gas resources in the Montney/Doig Natural Gas Resource Play fairway". Based on its technical expertise in this area and the existing base facilities and infrastructure, the company asserts that it can "grow economically at very low natural gas prices". (page 5, third quarter earnings release)

I bought the ordinary shares priced in USDs that are traded on the U.S. Pink Sheet Exchange: Birchcliff Energy Ltd. (BIREF)

Toronto Listed Ordinary Shares Priced in CADs:

Closing Price Day of Trade: BIR.TO: C$11.06 +0.02 (+0.18%)

When I placed my limit order, the ask price for the ordinary shares traded in Toronto was C$11.07. I consequently placed a AON limit order at USD$9.76 for the ordinary shares traded on the U.S. pink sheet exchange:  

Company Website: Birchcliff Energy Ltd.

Prior Trades: None

Dividends: The company does not pay a dividend which is one reason for the Flyer's Basket categorization.

The company does have some preferred shares that pay dividends: Birchcliff (Series A at C$.50 per share, Series "C" at C$.4375).

Birchcliff Energy Ltd. Cumulative Redeemable Preferred Series A (BIR.PR.A:TOR)

Birchcliff Energy Ltd. 7% Cumulative  Convertible Redeemable Preferred Non-Voting Series C   (BIR.PR.C:TOR)

I have not looked into those preferred shares yet, but plan to do so soon. 

Chart: I included the share prices for both BIR.TO priced in CADs and BIREF priced in USDs in this Chart. It has been a wild ride for shareholders over the past year.   

Notwithstanding the recent slide in price, the Toronto listed shares were up almost 50% over the past year through 11/1914, while the USD priced shares were up about 40%. The U.S.D. priced shares have been hurt by the weakness in the CAD/USD exchange rate over that period of time which flows through into the BIREF price.

USD/CAD Interactive Stock Chart

For this particular investment, I would now like to see the CAD rise against the USD. The worst possible outcome is the double whammy: a further decline in the CAD's value coupled with a simultaneous decline in the ordinary shares priced in CADs. 

Recent Earnings Report: The company reported record production during the third quarter, averaging 34,235 boe per day. Production has increased at a 40% annualized growth rate since the third quarter of 2010 through the 2014 third quarter. Production per share has increased 105 boe per day to 228.9 boe per day over that time period (page 6)

"Funds flow" increased 74% in the 2014 third quarter (or $.48 per diluted share), compared to the year ago quarter, largely as a result of an increase in production and the rise in the average AECO natural gas price to $4.02 per Mcf from $2.44. (page 6) "Birchcliff receives premium pricing for its natural gas production due to its high heat content. (page 16)

AECO refers to the Alberta Natural Gas Price: GASAlberta Energy: Natural Gas Prices

For the third quarter, E.P.S. was reported at $.19, up from $.06. Through the first three quarters, the company has reported an E.P.S. of $.62 per diluted share. 

Page 2 Q3Report2014.pdf

Bloomberg has a C$.824 E.P.S. estimate for 2014 with a price to book at 1.6085 at the closing price of C$11.06.

Rationale: This stock was brought to my attention by the Canadian Robert Duvall at SA who is a trader. After looking into it, I was impressed with the production growth in conjunction with the low risk drilling profile. Still, this investment's success will depend on energy prices, primarily natural gas, and the frequently fickle pricing decisions made by traders and investors to a lesser extent.

Birchcliff also fits into my long term super cycle forecast for natural gas. The Natural Gas Super Cycle: Bought Back First Trust ISE-Revere Natural Gas Index Fund | Seeking Alpha That forecast is dependent primarily on a continued acceleration by utilities to replace coal fired generating stations with combined cycle plants that use gas and steam turbines. That trend is a potentially huge change in the historical consumption patterns for natural gas.

The combined cycle plants are large and are designed to provide energy to meet baseload and intermediate power requirements rather than the traditional role for gas turbine use as peaking units. In other words, the gas turbines will be devouring natural gas 24/7 when used as baseload. This trend is underway and accelerating, as I noted in the preceding article published at SA. A large number of these combined cycle plants are under construction now or in the planning stages in the U.S. and worldwide.

Half of power plant capacity additions in 2013 came from natural gas-U.S. Energy Information Administration (EIA)

A Report on Combined Cycle Projects in North America - Power Engineering

Risks: The price chart highlights the risks. I get a little seasick just looking at it:

I discuss other risks earlier in this post. I am taking a very insignificant risk with a 100 share buy.

I would add a caveat. My recent history is picking small cap energy names is at best spotty. I was on a roll a decade or so ago, spotting the potential in DNR (which went from $1.5 in 2002 to $36.6 in 2006 and in XEC. I have a busted Lotto Ticket now in KWK and my more recent successes originate in relatively small trading gains in GST and SYRG in my Lottery Ticket Basket. I am more comfortable owning large energy companies, and currently have positions in CNQ and COP. I have sold out of SU, Royal Dutch and Husky earlier this year.

There is certainly nothing in my background that involves or relates to evaluating energy producers. As an investor, I am a generalist and will buy securities in every industry group worldwide. I would add that my attention is spread out really wide, with over 400 positions, and consequently I do not have much time to monitor or evaluate everything relevant to those investments. And, I would not consider myself an expert on anything in particular (i.e. knowledge is a mile wide and an inch deep). Consequently, I spend a lot of time focusing on Big Picture issues and long term trends and then drill down, more of a philosopher than a financial analyst.

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