No Crisis in Canada

10/11/2011 3:00 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Sound economic policy and strong, expanding demand for commodities has helped Canada avoid the worst of the recent crises, says Roger Conrad of Canadian Edge, who shares a couple top Canadian energy plays in this exclusive interview with

Roger, you follow Canada quite a bit. You write a newsletter about it.

And we here in the States look at Canada, and think, well what are they doing right…I mean, they’ve gotten out of the financial crisis. Their banks have pristine balance sheets. Unemployment there, I believe, is 7%. I think President Obama would kill for that. What’s going on in Canada right now that we should be aware of?

Well, the Canadians have obviously not leveraged their economy the way the US economy has, and that kind of goes back to being just more conservative generally as a country. That served them very well in 2008.

You mentioned the banking system. They never had a subprime crisis. The federal government there is pretty near balanced, and I think that showed up in the Canadian dollar in the last couple of months.

In past crises, the Canadian dollar has really taken a bath against the US dollar. It is thought of being a petrocurrency, so when people start worrying about recession and so forth, and oil crashes, Canadian dollar has traditionally gone right with it.

This time around, though, not so much. I mean some damage, but I think there is some appreciation of the Canadian economy and government and so forth, and the Canadian dollar is being something of a safe haven, so that’s a very big positive.

On the other hand, we have seen a lot of Canadian stocks really get hit very hard in this crisis, and I think even companies that are very stable, very big dividend payers…and I think again, that’s back to that flight to safety and flight to quality that has driven Treasury bond yields down to their lowest levels ever, despite the S&P downgrade of the US government.

Isn’t Canada’s economy…like 30% of their exports, or maybe even more, tied to the US. Or 30% of their GDP, I don’t know exactly what the number is.

Well, it’s been a lot higher. In fact, the number is a lot higher than that. Well over half of exports come from the US, and of course we share a very long common border.

There is a lot of cross-border trade in both directions. A lot of Canadians come down here and buy stuff. A lot of US consumers in the past have gone up there, a lot of cross-border tourism, so there is a major relationship.

What’s changed in the last five to ten years has been demand for Canadian commodities from Asia has really mushroomed, and we’ve seen tremendous demand, and in fact, it really picked up the slack for weak demand in the US during the 2008-2009 recession/crash/credit crunch.

So, Canada was able to weather what happened here much better, in part because of that emerging trade relationship, and that’s a big long-term opportunity for companies across the board—from railroads to truckers to terminals to pipelines to energy developers to energy cleanup companies to real estate companies—in areas where there is tremendous resource development. That’s a major focus on my advisory, Canadian Edge, on companies that are wired into that profit-making opportunity.

So, can you give me quickly one or two that American investors should look at, and maybe some that trade here as well?

Well, a lot of Americans want to stick with the New York-listed Canadian companies. There is nothing wrong with that. In my advisory, I look at a lot of companies that are also traded over-the-counter.

But just to give you a couple New York-traded companies involving energy, one would be Enerplus (ERF). Another one would be Penn West (PWE). They are both energy=producing companies. They both…

They used to be royalty trusts, right? And they converted into public companies?

They used to be royalty trusts. They converted into common stocks. Enerplus actually converted without cutting its dividend. So, it pays a little bit more than Penn West.

The main hallmark of both of these companies, though, is they trade right now well below the value of their reserves as calculated. They do this once a year. The last time was December 2010, and they are trading well below those valuations, even though energy prices haven’t changed a lot from that level.

And, these companies have both increased reserves. They’ve done some very nice drilling. Enerplus in the Bakken region, which is a light oil from shale area. They’ve been very big there. Also, in the Marcellus shale area. Penn West has oil-sands development. They also have light-oil development all throughout Canada, and some shale operations in natural gas as well.

So, these are companies that are on the move. They’re doing things. They’re generating tons of cash right now, even with energy prices being quite volatile. They’re putting that to work paying dividends. They’re putting that to work doing more development. Again, great ways to make a little growth with your income in energy.

Do you own either of these professionally or personally?

Professionally, yes. Personally, no, I don’t own either of them.

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