What is the Impact of Lower Crude Oil Prices on Canada

The Canadian economy will underperform the US economy over the next few years due to the impacts of lower crude oil prices according to a special report by Thomas Julien of Natixis. Here is the summary of the report:

The fall in oil prices is likely to result in mixed effects for Canada. On the one hand, the fall in petrol prices and the depreciation of the exchange rate against the US dollar in a context of accelerating US growth ought to stimulate household spending and give a boost to industries that are not exposed to the energy sector. The mining sector, on the other hand, which accounts for a significant share of the Canadian economy, will suffer from a persistently low level of crude prices. We therefore expect the continuation of the cyclical recovery in the short term, which is likely to be dampened in the medium term by a weakening in investment in the mining sector and probably a softening of the internal demand due to some deleveraging in the household sector. This configuration reinforces our expectations in terms of monetary tightening, which we expect will start at the end of 2015 (i.e. after the Fed). Based on this view and as oil prices can dip lower in Q1,we believe there is room for the exchange rate to depreciate further in the short term.

The three key points noted by Mr.Julien are:

  1. Canadian consumers will benefit from the lower gas prices.
  2. The mining sector will be hurt if the current oil price trend stays for sometime.
  3. The depreciation of the Canadian dollar against the US dollar will give a boost to non-oil industries that export to the US.

Though the favorable exchange rate would benefit non-oil industries labor costs are high in Canada compared to the U.S. especially in the manufacturing sector as shown in the chart below:

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Canada vs US Unit Labor Costs
Canadian exports to the U.S. have been flat in the past few years:

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Share of US Imports

Source: Should we be worried about Canada in 2015?, Jan 15, 2015, Natixis

Five Canadian stocks trading on the NYSE are listed below:

1.Company: TELUS Corp (TU)
Current Dividend Yield: 3.93%
Sector: Telecom

2.Company: BCE Inc (BCE)
Current Dividend Yield: 4.55%
Sector: Telecom

3.Company: TransCanada Corp (TRP)
Current Dividend Yield: 3.68%
Sector: Oil & Gas Transportation

4.Company: Enbridge Inc (ENB)
Current Dividend Yield: 3.01%
Sector: Oil & Gas Transportation

5.Company: Magna International Inc(MGA)
Current Dividend Yield: 1.58%
Sector: Auto Components

Note: Dividend yields noted above are as of Jan 23, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

IHS Energy 50: The World’s Largest Listed Energy Firms Lists

IHS acquired the prestigious energy and oil consultancy PFC Energy in 2013. Since then, the popular PFC annual ranking of the world’s largest energy and related-industry firms have been renamed as IHS Enery 50. This year’s ranking using 2014 data will be published next month. For now lets take a look at the 2014 rankings.

NOTE: All the data shown below including are based on 2013 data.

1. The Global Top 15 Oilfield & Drill Services Firms:

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Top 15 Global Oilfield and Drilling Services Firms

Even after falling nearly 50% with the crash in oil prices in the past few months, Schlumberger(SLB) has a market capitalization of over $104 billion.Competitor Halliburton’s (HAL) stock price has declined from $74 to $41 now. In November of last year Norwegian oil services company Seadrill(SDRL)  suspended its dividend payments causing a major crash in its stock price. Today the stock goes for about $10 a piece.France-based CGG SA (CGG) may have a rough ride for some time since Technip(TKPPY) ended its takeover plan.

2. The Global Top 15 Equipment, Engineering and Construction Firms:

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Top 15 Global Equipment Construction and Engineering

The above companies provide all the equipment and build the facilities and infrastructure needed by the big oil majors. Their share prices have also declined sharply in recent months. However investors can nibble at some of these companies at current levels.

3. The Global Top 15 Midstream & Infrastructure Firms:

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Top 15 Global Midstream and Infrastrcture Firms

4. The Global Top 15 Refining & Marketing Firms:

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Top 15 Global Refining and Marketing Firms

5. The Global Top 15 Exploration & Production Firms:

Top 15 Global Exploration and Production Firms

 

6. The IHS Energy 50:

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IHS Energy 50

Note:
IOC – Integrated Oil Companies
NOC – National Oil Companies

Source: IHS Energy 50, IHS

Most of these IOCs and NOCs have major declines in their market caps since last year. It would be interesting to see how this year’s ranking turns out. The Russian oil firms Gazprom and Lukoil trade on the OTC with the tickers OGZPY and LUKOY respectively.

DownloadIHS Energy 50 Full Report for 2014 (in pdf)

Disclosure: Long TKPPY

Knowledge is Power: Forecasting, Foreign Stocks, Commodity Sectors Edition

Wales Photo

Near Front Entrance of Caernarfon Castle, North Wales, UK

Buy European Stocks With Both Hands

European stocks were average to poor performers last year.However they can be good bets for this year for many reasons including upcoming elections in countries such as Greece, Ireland, Spain and the UK and more importantly yesterday’s major announcement from European Central Bank.

From a Bloomberg article:

Mario Draghi led the European Central Bank into a new era, committing to a quantitative easing program worth at least 1.1 trillion euros ($1.3 trillion) to counter the threat of a deflationary spiral.

The ECB president shrugged off determined opposition led by German officials with a pledge to buy 60 billion euros every month through September next year in a once-and-for-all push to put more cash into circulation and revive inflation. To assuage critics, the region’s 19 national central banks will make 80 percent of the purchases and take on any risk they carry.

A near-stagnant economy and outright declines in consumer prices forced Draghi’s hand six years after the Federal Reserve took a similar step — and three months after the U.S. central bank ended its purchases. The 67-year-old Italian’s gamble is that the benefits of QE — should it work — outweigh the threat of a backlash in Germany.

Source: Draghi Commits ECB to Trillion-Euro Asset-Purchase Plan to Fight Deflation, Jan 22, 2015, Bloomberg

Indeed by any measure 1.1 Trillion Euros is a ton of money that is bound to have a major impact on asset prices especially equities. Even before this bold move by the ECB, European equity indices were up nicely so far this year. The returns of the major European benchmark indices as of Jan 21, 2015 are listed below:

  • UK’s FTSE 100: 2.5%
  • France’s CAC 40: 5.0%
  • Germany’s DAX: 5.0%
  • Spain’s IBEX35: 0.5%

On the other hand the S&P 500 was down by 1.3% year-to-date.

Investors holding cash to invest can take advantage of the attractive prices of many European stocks. Ten stocks from Euro-zone are listed below with their current dividend yields for potential investments:

1.Company: ING Groep NV (ING)
Current Dividend Yield: Not paid
Sector: Banking
Country: The Netherlands

ING recently paid off the loan it took from the Dutch state and is on track to start dividend payments this year that has been suspended since the global financial crisis.

3.Company: Banco Santander SA (SAN)
Current Dividend Yield: $0.26
Sector: Banking
Country: Spain

Santander raised more than a billion dollar in new capital a few weeks ago but has cut its dividend by two-thirds. The fall in stock price presents an excellent opportunity for long-term investors.

3.Company: Siemens AG (SIEGY)
Current Dividend Yield: 3.57%
Sector:Industrial Conglomerates
Country: Germany

4.Company:Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 6.25%
Sector: Electric Utilities
Country: Portugal

5.Company:Air Liquide (AIQUY)
Current Dividend Yield: 2.58%
Sector: Chemicals
Country: France

6.Company: Total SA (TOT)
Current Dividend Yield: 6.12%
Sector:Oil, Gas & Consumable Fuels
Country: France

7.Company: Allianz SE (AZSEY)
Current Dividend Yield: 4.40%
Sector:Insurance
Country: Germany

8.Company: AXA Group (AXAHY)
Current Dividend Yield: 4.79%
Sector: Insurance
Country: France

9.Company: Anheuser-Busch InBev SA/NV (BUD)
Current Dividend Yield: 2.75%
Sector: Beverages
Country: Belgium

10.Company: Technip SA (TKPPY)
Current Dividend Yield: 4.44%
Sector: Energy Equipment & Services
Country: France

Note: Dividend yields noted above are as of Jan 22, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long TKPPY, SAN, ING, AXAHY