Q4 G7 GDP: U-G-L-Y

Canada’s gross domestic product contracted at an annual rate of 3.4 percent in the fourth quarter, the worst showing since 1991. Statistics Canada also reported yesterday that the US economy contracted at an annual rate of 6.2 percent in the fourth quarter, the European Union shrank by 5.9 percent and Japan by 12.7 percent.

Following up that last bit of dire news, the Bank of Canada (BoC) cut its overnight lending rate by another 50 basis points (bps) this morning to 0.5 percent, its lowest level ever. Canada’s commercial banks followed up the BoC announcement by cutting prime lending rates by 50 bps.

“The outlook for the global economy has continued to deteriorate since the Bank’s January Monetary Policy Report Update, with weaker-than-expected activity in major economies,” said the BoC in its statement announcing the move. “The nature of the US recession, with very weak auto and housing sectors, is particularly challenging for Canada.”

The BoC continues to forecast a building recovery by the second half of 2009 and into 2010, based largely on the anticipated impact of significant fiscal and monetary stimuli by global governments and central banks. The central bank is particularly upbeat about Canada’s prospects during the recovery period.

“Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies,” the bank said.

The BoC hasn’t much room left to cut rates but did say it could provide additional monetary stimulus through credit and quantitative easing. The BoC will outline details of such an approach in its April Monetary Policy Report.

According to Statistics Canada public spending was the only source of growth in the fourth quarter. And with Prime Minister Stephen Harper’s and Finance Minister Jim Flaherty’s fiscal stimulus programs slated to pass Parliament by the end of March, more help is on the way.

The full text of the BoC’s Tuesday morning statement is available here.

Twin Glimmers

The details of Korea’s February trade data offer a small bit of hope that the decline in global trade is slowing, or at least stabilizing. South Korea’s trade numbers are widely watched because they’re the first foreign figures released and usually provide a good indication of foreign trade and manufacturing activity in other Asian economies.

South Korea’s exports decreased 17.1 percent to USD25.8 billion from a year earlier, but that actually marks a slower rate of decline than January’s record 33.8 percent slump and bettered economists’ median estimate for a 24.5 percent drop. Preliminary data indicate that Korea’s February exports rose by 27.9 percent on a month-over-month basis, following a 14.3 percent drop from December to January. This sign of stabilization in exports is consistent with a nascent recovery in South Korea’s manufacturing Purchasing Managers Index (PMI).

The CLSA China PMI in February increased to 45.1 from 42.1 in January, the third consecutive month with an increase. The index registered a record low of 40.9 in November. A PMI reading below 50 indicates contraction.

February CLSA PMI was driven by strong gains in both total new orders and export orders. That total new orders again outperformed export orders suggests domestic demand has contributed significantly to the recent stabilization in the Chinese economy. The current output component increased to 43.9 from 39.7 and is currently above the average level for the fourth quarter of 2008, suggesting that the pace of contraction has at least slowed in the first quarter of 2009.

Its economy has slowed, but despite factory closures, plunging exports and production declines China remains the primary engine of resource demand growth. Much of that growth will come as a middle class, urban population develops. Domestic demand will help China outperform over the long term, a reality reflected in the government’s significant stimulus efforts. The USD587 billion spending package represents about 16 percent of China’s GDP; developed nations, including the US and Canada, have put together packages in the neighborhood of 2 percent of domestic GDP.

China is now the world’s largest consumer of commodities like zinc, nickel, copper and aluminum, driven by construction activity necessitated by the massive migration of people to cities. The need for resources has prompted extraordinary growth in China’s non-financial foreign investment from USD700 million in 2001 to USD24.8 billion in 2007 and USD40.5 billion in 2008.

As China National Petroleum Corp’s deal to acquire Verenex Energy (TSX: VNX, OTC: VRNXF) indicates, Canada, based on its wealth of natural resources, is a likely destination for significant Chinese capital in coming years. The Chinese are on the hunt for access to major resource basses to facilitate their growth.

Speaking Engagements

There are few better places to combine work and play than Sin City: Join Canadian Edge, Editor Roger Conrad and The Energy Strategist Editor Elliott Gue for The Money Show Las Vegas, May 11-14, 2009, at The Mandalay Bay Resort & Casino.

With Elliott’s and Roger’s sage advice, this is one trip to Vegas that won’t make a wreck out of you.

To attend as Roger’s guest, click here or call 800-970-4355 and refer to promotion code 012649.

And make plans to join Roger, Elliott, Gregg Early and Benjamin Shepherd at the 18th Atlanta Investment Conference. Sponsored by Friends for Autism, the conference is held in a mountain setting north of Atlanta from Thursday, April 23, to Saturday, April 25.

Roger, a steady hand through many market events such as the one we’re dealing with now, will talk about Canadian income and royalty trusts as well as his new service focused on exploiting the greatest spending boom in history, New World 3.0.

Elliott will detail the new direction for Personal Finance and provide insight into his approach to stock selection and portfolio management. What’s required now amid these difficult times are clarity and focus, qualities Elliott has demonstrated in these pages and through The Energy Strategist for years.

Gregg, a constant at PF for nearly two decades, will be there to address recent developments with the publication. He’ll also discuss the Smart Grid, an endeavor he’s exploring as part of his role with New World 3.0.

Ben, editor of Louis Rukeyser’s Mutual Funds and Louis Rukeyser’s Wall Street, the in-house mutual fund expert, will discuss efficient, cost effective ways to simplify the investing process.

Be sure to bring your questions. These guys love to talk markets and everything that impacts them.

Attendance is limited to 175 of the most enlightened, savvy individual investors. Go to http://www.aicatchota.com/ for more information. Meals are included for the Maple Leaf Memo discounted price of $459 for a single and $599 for couples. Call 770-952-7861 or e-mail altinvestconf@mindspring.com to register.

The Roundup

Conservative Holdings

AltaGas Income Trust’s (TSX: ALA-U, OTC: ATGFF) full-year operating results reflect the impact of the January 2008 Taylor NGL LP acquisition and integration as well as strong power prices.

The trust reported 2008 net income of CAD163.6 million (CAD2.38 per unit) compared to CAD108.8 million (CAD1.90 per unit) in 2007. Net income for the three months ended Dec. 31, 2008 was CAD39.6 million (CAD0.55 per unit), compared to CAD31.8 million (CAD0.55 per unit) for the same period of 2007.

Funds from operations were CAD53.8 million (CAD0.75 per unit) for fourth quarter 2008, compared to CAD37.8 million (CAD0.65 per unit) for the same period in 2007. Funds from operations for the year were CAD217.1 million (CAD3.16 per unit), up from CAD162.9 million (CAD2.84 per unit) in 2007.
Total debt on Dec. 31, 2008 was CAD582 million, up from CAD220.7 million on Dec. 31, 2007 on the Taylor acquisition. The trust’s debt-to-total capitalization ratio as at Dec. 31, 2008 was 37.8 percent versus 27.4 percent at the end of 2007. A Feb. 10 CAD100 million equity offering reduced that ratio to 32 percent, and AltaGas has negotiated a new CAD250 million credit facility.

The Harmattan complex is a big piece of the acquired Taylor assets, and the development of a co-stream system for natural gas liquids extraction will take up much of AltaGas’ time and capital in coming years after a favorable ruling by Alberta regulators. The project is expected to cost in the range of CAD100 million to CAD120 million and is expected to begin contributing to operating income in late 2010.

AltaGas Income Trust, with stable revenue and positioned to grab market share in this difficult environment, is a buy up to USD20.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) reported solid increases in occupancy rates and average monthly rates for 2008, factors that drove a 12 percent rise in funds from operations (FFO), a key measure of REIT performance.

Occupancy increased from 98 percent to 98.5 percent across CAP REIT’s assets, and average rents rose 2.8 percent. Same property net operating income increased 4.8, while overall net operating income, taking into account properties added to its portfolio during the year, was up 54 percent. Distributable income per unit and FFO per unit rose 4.1 percent and 3.4 percent, respectively. CAP REIT’s payout ratio strengthened to 88.2 percent from 91.3 percent in 2007.

The weighted average interest rate of CAP REIT’s total mortgage portfolio was 5.3 percent at Dec. 31, 2008, while the weighted average term to maturity was 5.0 years. Approximately 95 percent of CAP REIT’s mortgages are insured by Canada Mortgage and Housing Corporation.

Total debt-to-gross book value was 61.82 percent as at Dec. 31, 2008, compared to 61.55 percent on Dec. 31, 2007. The REIT’s interest coverage and debt coverage ratios improved as at the end of 2008, to 2.06 and 1.30 times, respectively, from 1.94 and 1.26 times, respectively, at the end of 2007. CAP REIT has CAD94.5 million available under its acquisition and operating facilities.

Canadian Apartment Properties REIT is a buy up to USD15.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) reported that all three of its business segments turned in record performances in 2008, which explains why it was able to boost its distribution by 20 percent while others were hording cash.

Net earnings for 2008 were CAD165.5 million (CAD2.62 per unit), up from CAD14.5 million (CAD0.24 per unit) in 2007. The fund reported strong operating results in its natural gas Gathering and Processing, Natural Gas Liquids Infrastructure and Marketing segments, and the comparables also improved because Keyera recorded an CAD80.2 million future income tax expense in 2007.

Distributable cash flow in 2008 was CAD139.4 million (CAD2.23 per unit), down 2.8 percent from 2007 levels007 ($2.35 per unit). Distributions to unitholders in 2008 totaled CAD105.5 million (CAD1.69 per unit). Fourth quarter distributable cash flow was CAD40.3 million (CAD0.64 per unit).

Keyera completed a public offering of CAD80 million of convertible debentures on Dec. 1, 2008 and has reduced debt by CAD105 million since the end of 2008. Keyera Facilities Income Fund is a buy up to USD20.

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) indicated in its earnings announcement that “acquisition activities are expected to be sharply lower” in 2009 as the fund focuses on internal development projects until the economic picture clears. The numbers for 2008 suggest the REIT has a pretty good idea of what it’s doing.

Northern Property reported 13 percent growth in FFO per unit for 2008, from CAD1.87 to CAD2.12. The payout ratio for the year was 71 percent. The REIT’s weighted average interest costs declined to 5.13 percent from 5.39 percent for the 2007 calendar year. Debt-to-gross book value rose from 53.8 percent to 57.7 percent on acquisitions, which were completed without new equity issuance. Northern Property REIT is a buy up to USD20.

Conservative Holdings’ Reporting Dates

·          Artis REIT (TSX: AX-U, OTC: ARESF) Mar. 18, 2009 (Confirmed)

·          Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) March 30, 2009 (Confirmed)

·          Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) Mar. 2, 2009 (Estimated)

·          CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) Mar. 4, 2009 (Confirmed)

·          Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) Mar. 11, 2009 (Estimated)

·          Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) Mar. 5, 2009 (Confirmed)

·          TransForce (TSX: TFI, OTC: TFIFF) Mar. 12, 2009 (Confirmed)

Aggressive Holdings

Enerplus Resources (TSX: ERF-U, NYSE: ERF) already announced a reduction in its 2009 capital budget and a distribution cut; it’s more than CAD1 billion in available credit suggests that its efforts to preserve cash and focus on growing the business will pick up later this year.

Enerplus management characterized its balance sheet strength as a “tremendous competitive advantage in the current economic environment,” and indicated it will focus that strength on expanding its ownership interests in resource plays in which it’s already involved.

The fund reported net income of CAD888.9 million for 2008, up from CAD339.7 million in 2007. Average production of 95,687 barrels per day was in line with guidance. Cash flow from operating activities totaled CAD1.3 billion, up 45 percent from 2007 levels. Distributions to unitholders totaled CAD5.06 per unit. The 62 percent payout ratio was down from 74 percent in 2007.

Net debt-to-trailing 12-month cash flow as of Dec. 31, 2008 was 0.5 times. General and administrative expenses were CAD1.88 per barrel of oil equivalent (boe), 6 percent below guidance and 17 percent lower than 2007 levels. Operating costs were CAD9.50 per boe, up 4 percent from a year ago.

Enerplus replaced 78 percent of 2008 production on a proved-plus-probable basis.

Proved-plus-probable finding, development and acquisition costs were CAD29.17 per boe. Enerplus’ Reserve Life Index is 12.1 years on a proved-plus-probable basis and 9.4 years on a proved basis. Enerplus Resources is a buy up to USD30.

Trinidad Drilling (TSX: TDG, OTC: TDGCF) earned fourth quarter net income of CAD21.8 million (CAD0.23 per share), up from CAD17.9 million (CAD0.21 per share) a year ago. Revenue for the period was up 40 percent to CAD205.3 million. Revenue for the year was up 20.4 percent to CAD757.9 million, while net income was CAD82.2 million, an increase of 3.3 percent.

The company reported a quarterly rig utilization rate of 61 percent in Canada, significantly above the industry average of 43 percent. For 2008, Trinidad’s Canadian drilling utilization rate was 57 percent compared to an industry average of 42 percent, while the US and Mexico operations utilization averaged 85 percent.

Last week, Trinidad cut its 2009 capital budget in half and cut its quarterly dividend by 67 percent. Those moves, combined with the fact that 45 percent of its fleet is contracted for 2009, position the company well to weather the downturn. Trinidad Drilling is a buy up to USD5.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) announced last week a deal with China National Petroleum Corp to sell Verenex Energy (TSX: VNX, OTC: VRNXF) for CAD10 a share. Vermilion holds a 42.4 percent equity stake in Verenex. Proceeds from the transaction would leave Vermilion essentially debt-free after the trust reduced net debt by 50 percent during 2008.

Vermilion generated fund flows from operations of CAD132.4 million (CAD1.73 per unit) in the fourth quarter. Full year 2008 fund flows was a record CAD574 million (CAD7.49 per unit), up from CAD385.9 million (CAD5.28 per unit) in 2007.

The trust reported production of 32,741 boe/d in 2008, an increase of 5 percent from 2007 levels. Fourth quarter 2008 production was 32,238 boe/d, compared to 31,927 in the third quarter of 2008. Vermilion added 8.5 million barrels equivalent of new proved-plus-probable reserves in 2008, replacing 71 percent of 2008 production through drilling and acquisitions while spending only 41 percent of fund flows from operations. The trust’s proved-plus-probable Reserve Life Index at the end of 2008 was 10.6 years. Vermilion Energy Trust is a buy up to USD30.

Aggressive Holdings’ Reporting Dates

·          Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) Mar. 6, 2009 (Estimated)

·          Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF) Mar. 13, 2009 (Confirmed)

·          Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) Mar. 5, 2009 (Estimated)

·          Newalta Income Fund (TSX: NAL-U, OTC: NALUF) Mar. 4, 2009 (Confirmed)

·          Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) Mar. 11, 2009 (Estimated)

·          Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) Mar. 4, 2009 (Confirmed)

·          Provident Energy Trust (TSX: PVE-U, NYSE: PVX) Mar. 12, 2009 (Confirmed)