Friday, December 3, 2010

Weekly Roundup - COS.un, PEY.un, FFH

I have been corresponding with a number of individuals regarding investments after starting this blog.  Some have offered to pay for investment analysis and others are just deep value investors looking to share ideas.  I must say that I appreciate those who have contacted me and am always looking for others to discuss investment ideas (Especially here in Canada). 

Energy Trusts - COS.un & PEY.un

We'll one of those individuals sent me a note today regarding Canadian Oilsands Trust (TSX - Cos.un), and their big drop after the corporate conversion announcement.  For those who are not familiar with income trusts, many are converting back to corporations at the end of this year because the Canadian Government is ending their special tax treatment.  My friend was wondering if I was worried that Peyto (TSX – PEY.un), one of my core holding, will suffer a large market drop like COS.un did today (down 12%). 

I told him that Peyto had made that announcement a couple months back on Sept 28th.  They cut their dividend by 50% from $0.12/mo to $0.06/mo.  The reason for the cut was partially because of taxation, but they went deeper than that to retain capital to increase capex.  Peyto closed at $14.35 that day and immediately jumped and is up 21% since the announcement.  Their horizontal drilling is really a game changer, and the announcement discusses corporate plans.  I highly recommend everyone read it:

What I just love about Peyto is that they understand investment returns on every dollar the company spends.  If you have some spare time it would be well worth listening to Darren Gee, CEO of Peyto, speaking at the First Energy Conference in Montreal this past week.  You can access here:

If you don't have the time at least listen to what Darren says at the 24:20 - 25:20 mark.  To paraphrase somewhat he says, "Every company stands up here and say they can drill wells with 50, 60, 100% rates of return.  To investors that is meaningless.  What we want to see return on capital coming out the back end of the organization.  Who cares what the well economics are if they are eaten up by G&A, taxes, stock options, bonuses, etc." 

Now I couldn't agree more and most investors don't understand how real returns are generated. 

To get back to COS.un, it doesn't really make sense why the market tanked on COS.un as the conversion process has been known for several years now.  Secondly, COS.un differs from Peyto because they likely don't have any tax pools generated to offset taxes.  I would guess COS.un is partially or fully taxable.  Peyto should be able to shelter for around 3 years with existing tax pools and if they can spend enough capex they should be able to shelter for at least another 2-3 years after that.  Those tax pools at Peyto are a significant unrealized value.

COS must have some other issues and rising costs may be one of them.  I guess their cut wasn't expected to be that deep by most of the shareholders.  It also doesn't hurt that a handful of analysts have cut the stock. 

While I am not really interested in own COS.un, I wouldn't mind it at the right price.  I will have to do some reading this weekend and attempt to put a value on COS (if I have time).  A good place to look is what others have paid/sold their share in the Syncrude project.  If you have a reasonable analysis I would be interesting reading it.  And not some pie in the sky estimate.

Fairfax Financial - Prem Watsa 

Moving away from energy, I noticed some interesting comments from Prem Watsa, CEO of Fairfax Financial (TSX – FFH), this week.  He believes there may be a bubble brewing in commodities and agriculture.  Now Prem Watsa isn't afraid of going against the crowd and standing along (and appearing to be wrong) for long periods of time. 

He has for many years warned of the problems coming in the US and was hedged against them for several years.  He lost on those hedges for many years until the harvest finally came in during the financial crisis and he made billions on credit default swaps and equity hedges. 

I would take it he is referring to Gold/Silver/Copper as well as agriculture.  I personally agree and don't care to invest in whatever is popular.  There are always opportunities elsewhere. 

Now I personally don't own Fairfax (but do for some family accounts), but it it's getting temping.  FFH currently sells for book value, and their goal is to grow their book value at 15% per year.  During the past 24 years they have compounded book value at 26%.  If they can compound at 15% for the next 24 years their shareholders will be rewarded appropriately. 

Best Regards,
Kevin Graham

Disclosure: Long PEY.un, FFH


  1. I really like their recent aquisition of First Mercury. Though small, it's really we run and will add to the float over time. On another note, Watsa is a very fine individual, using his value investing skills for the benefit of kids. See link.

  2. Hi, I agree it is getting really tempting to own Fairfax, but being tempted means being emotional about an investment...
    Book value has increased a lot this year (about 15% so far), but almost a third of that increase came with the issuance of preferred shares...
    If he can invest these preferred shares for a higher return than the 5% he's paying investors for it (the first 5 years), why not...
    But that is a step aside from Berkshire practices, just to name another famous name.

    What do you think?

    I also like 3% yield on my investment, regardless of predictions of book value increases, and I have no clue what the dividend will look like in January... :)


  3. I do not think I being emotional at all. I have purchased some for a managed account recently. I plan on buying more. FFH is one of the last remaining bargains available, everything else is moving up.

    I think a 26% return over 24 years is no fluke. Couldn't care less how Prem Watsa manages his business with respect to the preferreds.

    FFH has over $1000/share in cash and float. They are very conservative and he is likely one of the best value investors out there. He has significantly outperformed Buffett during past two decades. The single most important factor is that Prem Watsa is a hawk with respect to risk/problems/bubbles.

    If I had to go away for and extended length of time I would have no problem fully investing in FFH alone (or WFC for that matter). When you come back it will be worth significantly more than what paid for it.

    I think FFH is worth double it's current share price. I like 15% yield in my investments, and don't care if it comes from dividends or capital appreciation.

    Thanks for the comments,