encana

CAE INC., $14.74, Toronto symbol CAE, announced this week that it has sold five flight simulators to airlines in the U.S. and Asia. It will also build a new facility in Bogota, Colombia, to train pilots for the Viva Colombia airline under a long-term agreement. With these deals, CAE sold 41 simulators in its 2015 fiscal year, which ended March 31, 2015. It sold a record 48 simulators in fiscal 2014. The company has also won several contracts to upgrade flight simulators and train aircrews for the U.S., U.K., Australian and Italian air forces. CAE’s military businesses supply 40% of its revenue, which cuts its reliance on cyclical commercial airlines....

Low oil and natural gas prices continue to hurt cash flow at Cenovus and Encana (see box). In response, both have issued shares to fund new projects and cut debt. The extra shares diluted existing investors’ holdings. However, they strengthened both companies’ balance sheets and put them in a better position to profit when oil and gas prices recover. CENOVUS ENERGY INC. $22 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 824.5 million; Market cap: $18.1 billion; Price-to-sales ratio: 1.1; Dividend yield: 4.8%; TSINetwork Rating: Average) gets 35% of its revenue from its oil sands projects and conventional oil and gas wells in Western Canada....

ENCANA CORP. $15 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 839.6 million; Market cap: $12.6 billion; Price-to-sales ratio: 1.4; Dividend yield: 2.3%; TSINetwork Rating: Average; www.encana.com) recently sold 98.5 million shares for $14.60 (Canadian) each, increasing the number outstanding by 13%. (All amounts except share price and market cap in U.S. dollars.) As well, Encana has sold natural gas pipelines and compression facilities in B.C.’s Montney region for $461 million (Canadian). It will use the total proceeds of $1.9 billion (Canadian) to pay down its long-term debt of $7.3 billion (as of December 31, 2014), which is a high 73% of its market cap....

ENCANA $14.14 (Toronto symbol ECA; Shares outstanding: 741.1 million; Market cap: $10.3 billion; TSINetwork Rating: Average; Div. yield: 2.5%; www.encana.com) has sold 98.5 million shares for $14.60 each to raise $1.44 billion. The company will use these funds to redeem $1.6 billion worth of notes. As of December 31, 2014, Encana’s long-term debt was $7.3 billion U.S., or a high 90% of its $10.3-billion (Canadian) market cap. The stock sale has increased Encana’s total shares outstanding by roughly 13%. However, paying down debt will cut the company’s interest costs and help it conserve cash until oil and gas prices rebound. It could also use the savings to make acquisitions at bargain prices....

Big Bank Big Oil Split Corp. is a split-share company with two types of stock: capital shares ($9.32, symbol BBO on Toronto) and preferred shares ($10.21, symbol BBO.PR.A on Toronto).

The company holds shares of the biggest six Canadian banks, plus 10 large Canadian oil and gas and pipeline companies.

Split-share companies typically issue two classes of shares. Usually the capital shares get all or most of the capital gains and losses, as well as variable dividend income, and the preferred shares get a fixed amount of dividend income.

In the case of Big Bank Big Oil Split, the capital shares receive a monthly dividend of $0.05 a share ($0.60 annually), which gives them a 6.4% yield. The monthly dividend has been as high at $0.09, most recently in 2010.

The dividend income the company gets from its portfolio isn’t enough to pay capital and preferred share dividends and management expenses of 1.22%, in addition to providing a return for the capital shares. To make up the difference, the company has to make a profit by trading its portfolio. It also aims to raise its returns by writing call options on the portfolio’s securities.

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ENCANA CORP. $15.20 (Toronto symbol ECA; Shares outstanding: 741.1 million; Market cap: $11.6 billion; TSINetwork Rating: Average; Dividend yield: 2.3%; www.encana.com) produced 416,700 barrels a day (74% gas, 26% oil) in the three months ended December 31, 2014. That’s down 20.4% from 523,400 barrels a year earlier.

As well, Encana’s realized gas prices, which include the benefit of hedging contracts, fell 4.1%, while oil prices declined 0.9%. As a result, the company’s cash flow per share fell 44.0%, to $0.51 from $0.91.

Encana plans to spend $2.0 billion to $2.2 billion on new projects and upgrades in 2015, down from its earlier forecast of $2.7 billion. Even so, that’s more than its projected cash flow of $1.4 billion to $1.6 billion.

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Here’s the text of the quarterly letter I recently sent to our Portfolio Management clients: “A client of mine, Dr. J., recently said, “Pat, you advise investors to spread their money out across most if not all of the five main economic sectors. Why not just leave out the resource sector?” I think that’s a bad idea. It disregards the one key contribution that resource stocks make to a sound portfolio, as you’ll see below. But I’m sure many investors agree with Dr. J. After all, the weak performance of the resource sector goes back much further than the recent plunge in the price of oil (from $110 U.S. a barrel last July to a recent low near $45 U.S.)....

ENCANA CORP., $14.66, Toronto symbol ECA, fell 10% this week after the company issued 85.6 million common shares to a group of underwriters for $14.60 each. The company plans to use the $1.25 billion of proceeds to redeem $1.6 billion worth of notes. As of December 31, 2014, Encana’s long-term debt was $7.3 billion U.S., or a high 84% of its $10.9 billion (Canadian) market cap. If the underwriters exercise their option to buy an additional 12.8 million shares, Encana would receive $1.44 billion. Including this option, the extra shares would increase the total outstanding by roughly 13%....

ENCANA CORP. $15.20 (Toronto symbol ECA; Shares outstanding: 741.1 million; Market cap: $11.6 billion; TSINetwork Rating: Average; Dividend yield: 2.3%; www.encana.com) produced 416,700 barrels a day (74% gas, 26% oil) in the three months ended December 31, 2014. That’s down 20.4% from 523,400 barrels a year earlier. As well, Encana’s realized gas prices, which include the benefit of hedging contracts, fell 4.1%, while oil prices declined 0.9%. As a result, the company’s cash flow per share fell 44.0%, to $0.51 from $0.91. Encana plans to spend $2.0 billion to $2.2 billion on new projects and upgrades in 2015, down from its earlier forecast of $2.7 billion. Even so, that’s more than its projected cash flow of $1.4 billion to $1.6 billion....

AGRIUM INC., $144.38, Toronto symbol AGU, hit a new all-time high of $145.07 this week after reporting better-than-expected quarterly earnings. It also raised its outlook for 2015. In the three months ended December 31, 2014, Agrium’s earnings gained 4.1%, to $0.77 a share from $0.74 a year earlier (all amounts expect share price in U.S. dollars). These results exclude unusual items, mainly losses on contracts the company uses to lock in foreign exchange rates and commodity prices. On that basis, the latest earnings easily beat the consensus estimate of $0.60 a share. Revenue fell 5.7%, to $2.7 billion from $2.9 billion. That’s because Agrium had to cut production at its Vanscoy potash mine in Saskatchewan to complete a major expansion. An unplanned outage at its Redwater, Alberta, plant also slowed nitrogen-fertilizer output. Sales at its retail stores, which sell fertilizer and seeds to farmers, declined 2.1%....