The global economic recovery may heave and splutter, but China’s appetites aren’t going away. Nor is its reliance on Canada for sustenance. This week the premiers from Canada’s three resource-rich provinces–Alberta, British Columbia and Saskatchewan–are visiting China and Japan; according to The Wall Street Journal’s China Real Time Report, they’re pushing investment in Canada and establishing a trade representative’s office in Shanghai. In the words of Saskatchewan Premier Brad Wall, “We literally have what these countries need and in Biblically proportioned reserves.”

We are reminded again of these highly consequential realities by USD300 billion-plus sovereign wealth fund (SWF) China Investment Corp’s (CIC) new partnership with Penn West Energy Trust (TSX: PWT-U, NYSE: PWE). Last Thursday’s announcement follows April’s news that China Petroleum & Chemical Corp (NYSE: SNP), also known as Sinopec, agreed to buy ConocoPhilips’ (NYSE: COP) 9 percent stake in the Syncrude venture for USD4.6 billion and the February completion of PetroChina’s (NYSE: PTR) purchase of a 60 percent stake in Athabasca Oil Sands Corp’s (TSX: ATH, OTC: ATHOF) MacKay River and Dover projects for CAD1.9 billion.

China is also using Canadian vehicles to gain access to South American resource development, signing a CAD1 billion deal with Quadra Mining (TSX: QUA, OTC: QADMF) for a stake in the copper miner’s operations in Chile, which is the source of 35 percent of the world’s copper output.

Penn West and the CIC last week announced the formation of a CAD2.6 billion joint venture that includes the purchase of 5 percent of the issued and outstanding shares of Penn West by the CIC.

Penn West’s contribution includes 237,000 net acres of oil sands leases in the Peace River region of Alberta valued at CAD1.8 billion; current production from the assets is about 2,700 barrels of oil equivalent per day of bitumen and associated gas. Penn West will own 55 percent of the partnership. CIC will pay CAD817 million for its 45 percent stake, CAD312 million at closing and CAD505 million to be applied to Penn West’s future capital and operating expenses. Penn West will operate the partnership assets.

But prior to last Thursday what’s known as the Seal oil sands play hadn’t been factored into Penn West’s production potential. The high costs of oil sands development and the volatile energy markets precluded any serious moves. The CIC’s cash and future capital commitment will lift the assets from the “explore” to the “production” phase of the equation.

Another benefit of the CIC’s infusion is that Penn West now has the flexibility to spend more on the Cardium play. More debt repayment and balance-sheet strengthening are also likely. As of March 31 Penn West’s long-term debt was CAD2.75 billion, down 28 percent from year-earlier levels. The CIC also committed to buying 23.5 million Penn West units at CAD18.48 per for gross proceeds of CAD435 million.

This is a significant transaction for Penn West, a company that has already undergone a rapid transformation; asset sales have streamlined the operational focus while providing cash to pay down debt. The deal with the CIC will help Penn West lift output and cash flow by giving it the wherewithal to strengthen existing production while getting new reserves closer to market.

This is good news for investors concerned about the trust’s post-conversion distribution policy. As we forecast in the May CE, a cut is likely. But Penn West management “will do what it can to minimize it when the time comes. Rising oil prices will help a lot to achieve that goal, which, ironically, does leverage Penn West somewhat to what happens to the economy.”

The CIC’s cash–yet another sign of an intensifying Sino-Canadian relationship–will help this minimization effort.

As for the state of global commerce, the crisis gripping the euro area harkens back to the fall of 2008 and Lehman Brothers’ implosion, the domino that led to the worst financial crisis in 80 years, which, in turn, made a serious but otherwise normal downturn the Great Recession.

Indicators of global financial stability such as the HSBC Financial Clog Index–which measures interbank stress via the TED spread and the LIBOR-OIS spread, financial institution default risk via US financial CDS spreads, mortgage agency credit spreads via Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) credit spreads, and equity volatility via the Chicago Board Options Volatility Index–shot to levels previously unseen.

The Clog Index peaked above 2,000 in October 2008. We’re nowhere near those levels right now; it shot from around 150 to above 300 in early May but has settled in the 250 range. And Canada’s credit markets continue to operate; new issues from government mortgage agency Canada Housing Trust (CAD3.8 billion), Toronto Hydro (a CAD200 million four-year note) and the Canadian federal government (a CAD1.4 billion bond) are expected this week, while Toronto-Dominion Bank (TSX: TD, NYSE: TD) priced a CAD600 million one-year, floating-rate note.

There are positive sides on the American side of the border as well, particularly as it concerns employment. Let’s keep in mind, however, that we’re still as close to disinflation or deflation–which can be as destructive to the economy as rapidly rising prices–as we are to an inflationary spiral. Nevertheless, things are better today than they were in the fall of 2008.

That the positive developments we’ve seen are the clear result of aggressive monetary and fiscal largesse on the part of governments the world over leaves the obvious reality that private demand has to eventually revive for long-term growth to take hold. And real recovery will only follow a necessary period of painful deleveraging.

As was widely acknowledged almost two years ago, the experiences of recent years aren’t of the type that allow for easy transition back to “normal.” And when we get there “normal” is not going to look like it did in 2006.

China, for example, is now the world’s biggest automobile market. Its long-term position in the new, emerging global economic order is fixed. Leverage to commodities China needs to maintain growth and a contented population and a sustainable payout make Penn West Energy Trust, a Canadian Edge Aggressive Portfolio Holding, a great way to ride the uncertainty.

You Cruise, You Win

Roger Conrad and his KCI Investing colleagues have been combing the globe for their next luxury investment cruise: Any ports of call must be ripe with investment potential, of course, but they must provide a rich slice of the world’s treasures and unique insights into human luxury. And after the brutal year we just finished, who couldn’t use some luxuriant down time learning how to prepare their portfolios for what this next decade has in store.

Save the dates: Thursday, October 21, through Monday, November 1, 2010. Explore the wonders of Turkey and the Greek Isles while learning about the newest investment strategies from Roger, Elliott Gue, Yiannis Mostrous and GS Early.

While you enjoy unfettered access to the finest minds in investing today, Seabourn Cruises will upgrade the way you think about luxury cruising as you are feted aboard the brand new Seabourn Odyssey. From its all-included open bar of premium liquor, wine and beer to its almost better than 1-to1 staff-to-passenger ratio, to its maximum capacity of only 450 passengers, you will understand why it immediately jumped to the top of the luxury cruise line ratings charts when it hit the water in 2009.

For those of you lucky enough to have sailed with this keen crew in the past, you know you are in for a meticulously planned journey into the business, investment and cultural offerings of the region. KCI in partnership with Joseph H. Conlin Travel Management is offering this journey solely to KCI subscribers and their friends.

For more information and reservations, please click here.

The Roundup

We highlighted Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CGXPF) in the December 2008 Canadian Edge feature as a “Recession-Proof Trust.” Canada’s largest movie-theater operator has since posted record-breaking quarter after record-breaking quarter during a run characterized by a solid pipeline of films, prudent deployment of assets to upgrade technology and aggressive expansion of revenue streams from screens.

Along with sparkling first-quarter 2010 numbers driven by such gems as “Avatar” and “Alice in Wonderland” Cineplex Galaxy management announced it would convert to a corporation on Jan. 1, 2011, without changing the substance of its distribution policy a whit.

Cineplex once again reported record quarterly box office revenue and established first-quarter records for concession, media and total revenue. Total revenue climbed 22 percent year over year to CAD257.2 million, while overall attendance was up 13 percent to 18 million. Box office revenue per person increased 9 percent to a record CAD8.88, surpassing the CAD8.40 recorded in the fourth quarter of 2009.

More than 38 percent of box office revenue came from the two 3D/IMAX blockbusters, “Avatar” and “Alice.” The percentage of overall box office revenue derived from 3D and IMAX screenings rose to 33.9 percent from 7 percent a year ago. Cineplex Galaxy’s theaters include the highest number of 3D and IMAX systems of any other Canadian chain, the result of a conscious management decision to get out in front of Hollywood’s latest innovation.

Cineplex reported a 25 percent increase in “other” revenue, which includes the chain’s loyalty program and sales generated from Cineplex.com.

Net income was CAD9.5 million, up 158 percent from CAD3.7 million. Distributable cash was CAD0.477 per unit, up 17 percent from CAD0.381. The payout ratio for the quarter was 70.5 percent, down from 82.7 percent.

The units trade above our USD18 buy target. But if the market comes back to us, Cineplex Galaxy Income Fund is an excellent Income Portfolio alternative.

The last four Aggressive Holdings to report are discussed below. Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) will provide the coda to this reporting season later this week when it releases its report for its quarter and year ending March 31. Management will host its conference call Thursday afternoon.

We’ll review Just Energy’s performance as well as the numbers for fellow Conservative Holdings Artis REIT (TSX: AX-U, OTC: ARESF), Atlantic Power Corp (TSX: ATP, OTC: ATLIF), Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) and Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) in a follow-up Flash Alert on Friday.

Aggressive Holdings

Ag Growth International’s (TSX: AFN, OTC: AGGZF) year-over-year comparables are skewed by the fact that the Canadian dollar plunged during the first quarter of 2009 in response to the global recession; the loonie has clearly strengthened since then, breaching parity versus the US dollar and hovering above USD0.90 for much of the past 12 months.

The loonie bottomed at around USD0.77 in March 2009 and averaged USD0.80 in the first quarter of 2009; the Canadian dollar was worth an average of USD0.96 in the first quarter of 2010, 20 percent stronger than it was a year ago. Comparisons will be less distorted going forward. Stripping out the impact of a stronger Canadian dollar–if the loonie/greenback relationship was fixed–sales were up 5 percent as strong corn and soybean harvests in 2009 carried over into the first quarter of 2010.

Demand for grain-handling and storage equipment remains robust, driven by solid harvests and prevailing farming practices that call for more on-farm storage. Management is preparing production facilities to ramp up to meet what management expects to be surging demand over the balance of 2010 and into 2011.

Gross margin as a percentage of sales was 39.3 percent, down from 41.2 percent in the first quarter of 2009 because of the strong loonie. EBITDA (earnings before interest, taxation, depreciation and amortization) was boosted by significant realized gains on foreign exchange contracts and unrealized gains on the translation of US dollar denominated debt into loonie terms.

CEO Rob Stenson, in a statement accompanying the earnings release, noted

Order backlogs for portable equipment are at levels consistent with 2009 and the backorders for commercial equipment, both domestically and internationally, are significantly higher than the prior year. The US planting intentions report released by the United States Department of Agriculture in March forecast that US farmers would increase both corn and soybean acreage compared to 2009, which should be supportive of demand.

Net earnings were down to CAD6.4 million from CAD10.1 million as interest expense increased as a result of a late 2009 debenture issue. This debt capital hasn’t been entirely deployed, and until management invests in an offsetting, revenue-generating asset it’ll eat at the bottom line. Ag Growth International is a buy up to USD36.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) reported revenue, funds from operations and a payout ratio that were all largely consistent with year-earlier levels despite lower natural gas prices, a result largely driven by higher production but made possible by the company’s long-term track record of producing at low cost.

Perhaps the most exciting aspect of management’s first-quarter results presentation was the announcement of a new CAD50 million increase to the 2010 capital expenditure (CAPEX) budget, a move that’s calculated to take advantage of low costs in the industry to ramp up production.

The budget expansion will accommodate tests at existing acreage and participation in new land sales on the buy side as well as potential acquisitions. But organic growth through expanded horizontal drilling seems to be the best bang-for-buck move, given the success Peyto has seen in its Cardium assets. Horizontal drilling has the potential to bring down Peyto’s costs even more, as more gas is recoverable using the technique versus vertical drilling, and the cost of creating the hole are roughly equal.

As for first-quarter numbers, production grew 9 percent from 114 million cubic feet per day (MMcf/d) in the first quarter of 2009 to 124 MMcf/d, due mostly to horizontal drilling success in Peyto’s Cardium, Notikewin and Wilrich Deep Basin plays. Funds from operations (FFO) were flat, as increased production offset a 17 percent decline in realized natural gas prices. Operating costs were also steady.

Peyto recorded earnings of CAD36.9 million (CAD0.32 per unit) in the quarter. It paid out CAD0.36 per unit, for a payout ratio of 71 percent, up slightly from 70 percent a year ago.

Management noted during its first-quarter conference call that opportunities to exploit new production potential because of the prevailing low-cost environment aligns well with the company’s conversion to a corporation, which will take place on Dec. 31, 2010. There’s been no word yet on what the dividend policy will be, though management has noted the new Peyto “will retain the ability to return profits to shareholders in the form of monthly dividends rather than monthly distributions.” The only question is the amount. Peyto Energy Trust is a buy up to USD15.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) recently announced its corporation conversion via a series of transactions that includes the disposition of its remaining oil and gas production assets. The result will be two pure plays, Provident and its midstream natural gas liquids infrastructure business, the cash flows of which will be far less volatile than the commodity-linked production business that will be combined with Midnight Oil Exploration (TSX: MOX, OTC: MDOEF) to form the new intermediate E&P Pace Oil & Gas.

This is clearly the most significant development of the year for Provident and for unitholders, who will now have exposure to two entities with solid long-term potential.

As for first-quarter numbers, Provident’s FFO decreased to CAD59.1 million (CAD0.22 per unit) from CAD84.3 million (CAD0.32 per unit) a year ago as a result of “strategic divestments” of certain of the company’s upstream assets. Management noted quarter-over-quarter improvement in midstream operating results, though this was offset by higher realized losses on commodity hedges. Revenue decreased to CAD467.4 million from CAD470.8 million last year.

Provident distributed CAD0.18 per unit during the quarter for a payout ratio of 81 percent, up from 65 percent a year ago.

The midstream business contributed CAD47 million of the trust’s overall FFO, down 23 percent from the first quarter of 2009, as improved operating margins were overwhelmed by losses on derivatives contracts. Provident sold 113,279 barrels per day (bpd) of NGLs, down from 141,669 bpd a year ago.

As of March 31 Provident had drawn CAD100 million from its CAD980 million revolving credit facility; total net debt was CAD303 million. This leaves management plenty of room to expand its newly focused midstream operation. A CAD86 million capital budget will support a CAD17 million expansion of Provident’s facilities near Sarnia, Ontario, including the recently acquired storage terminal.

This asset, purchased from Dow Chemical (NYSE: DOW) in a deal announced in November 2009, is, in management’s words, “well situated to be a terminalling hub for NGLs from the rapidly growing Marcellus (shale) gas play.” Buckeye Partners LP (NYSE: BPL) and Kinder Morgan Energy Partners LP (NYSE: KMP) have announced plans to build pipelines to move NGLs to Sarnia from the Marcellus region.

Provident Energy Trust, evolving into a pure play on NGLs infrastructure with the fee-for-service cash stream to support a stable and generous dividend, is a buy up to USD9.

Trinidad Drilling’s (TSX: TDG, OTC: TDGCF) top line reflects the transitional nature of this first quarter; in its overview of the quarter management noted that results were weaker than year-ago totals, but that increasing utilization, stabilizing day-rates and strengthening industry conditions were reason for cautious optimism about the balance of 2010.

Revenue was CAD170.1 million, up 14.8 percent sequentially but down 11.2 percent from a year ago; the company was active for more operating days, but day-rates were lower because of the weak conditions that plagued the industry amid the Great Recession. Trinidad’s net loss decreased by 86 percent to a loss of CAD800,000 (CAD0.01 per share) from CAD5.6 million (CAD0.06 per share) in the first quarter of 2009.

Canadian operations were a particular bright spot, as the first-quarter drilling utilization rate increased strongly to 67 percent, up 52.3 percent from the previous quarter and 31.4 percent compared to year-ago levels. Trinidad’s Canadian utilization rates continued to lead the industry, which averaged 52 percent during the period. Activity for both the US and international units was flat sequentially and on a year-over-year basis.

Gross margin as a percentage of revenue declined to 40.1 percent compared to 42.5 percent a year ago, largely because of lower day-rates. Even though new activity ground to a halt in the first quarter planned programs were completed at previously contracted, higher rates; day-rates declined throughout 2009 and into 2010. Adjusted EBITDA was CAD52.9 million in the first quarter, down 18.7 percent because of weak day-rates.

The North American trends toward shale exploration and oil-directed drilling are supported by relatively stable crude prices; management expects these factors to persist in 2010 and eventually lead to higher day-rates. Still mindful of this low natural gas price environment, levels of storage and the skittish nature of global financial markets, Trinidad continues to focus on maximizing efficiency by controlling costs. Efforts that left it in good position to benefit once activity turned around in 2009 will serve it well in this still uncertain environment. Trinidad Drilling is a buy up to USD8.