September 2007 Archives

In today's globeandmail.com, David Ebner wrote the following:

Suncor Energy Inc. and Syncrude Canada Ltd. have individual royalty deals with the government of Alberta, which sets the two oil sands giants apart from the rest of the industry that operates under what's called a generic royalty regime in the oil sands. Suncor and Syncrude, in fact, will likely pay far lower royalties starting in 2009, regardless of how much Alberta decides to hike royalties in general.

...

Regardless, when 2009 arrives, Suncor and likely Syncrude will see their royalty burden fall as they begin to pay on cheap bitumen rather than synthetic oil. Suncor had estimated that with oil at $50 (U.S.) a barrel, it would pay about 8.5 per cent of its gross revenues as royalty in 2007-08, which could fall as low as 5 per cent in 2009-2012. Syncrude hasn't yet officially decided to make the switch.

While it is true that both companies can elect to move to a bitumen based royalty, what is not clear is whether both companies would be required to make restitution to the Alberta government for the royalty lost, inflated by the long term bond rate, because past upgrader investments were allowed as part of the cost base for royalty calculations. The companies might be required to make a choice: You can choose either to remain with the royalty based on the synthetic crude oil (SCO) as you currently are with all the benefits you derived from having the upgrader costs as part of the cost base for royalty purposes; or to move to a bitumen based royalty and pay back the royalty deductions, inflated at the long term bond rate, you received from having the upgrader costs as part of the cost base for royalty purposes. This choice, in effect, places the company on a SCO or bitumen based royalty from day one, with several years to consider the option of bitumen or SCO based royalty.

Put differently, I suspect the Alberta government might put a clawback mechanism in place to recapture the earlier benefits of having upgrader costs deductible. I will comment further on the SCO and bitumen royalty when I provide my comments on the Alberta Royalty Review.

Disclosure: I am long Suncor Energy Inc. (SU) and Canadian Oil Sands Trust (COS-UN.TO).

Model Linda T is featured in the photograph, which is hosted at Flickr. If you click on the picture of Linda, you will be taken to where you can view a larger version and see even more pictures of her.

Two quick random thoughts:

• I read the Alberta Royalty Review Report today. I found the document interesting and agreed with much of the report; however, I do disagree with some key parts. I will comment further next week when time permits. All that said, I do believe that the Alberta Government will raise royalties on oil and gas. The report leaves the Alberta government no choice.
• I found Fast Money's Interview With Carl Icahn interesting because Icahn believes that market is on a precipice that could go either way. I have been cautious and not wanting to chase the markets after the rate cut.

Calgary model Amanda Grace is featured in the photograph, which is hosted at Flickr. If you click on the picture of Amanda, you will be taken to where you can view a larger version and see even more pictures of her.

The markets certainly have been interesting. Like many others, I was surprised that the Fed cut the federal-funds rate and discount rate by 50 basis points. I was even more surprised by the stock markets' reactions. Like many of the panelists on Fast Money--Jeff Macke, Guy Adami, Karen Finerman, and Pete Najarian with host Dylan Ratigan--I expected a smaller rate cut and a muted reaction. That was then, and this is now.

My hope had been that the markets would go down and I would be well positioned to realign my portfolio. I am net long by a wide margin, though I do have some short positions. Had the market gone down, I would have covered the shorts. As it is now, the shorts have risen. Fortunately, however, the longs have risen much more. I also wanted a correction to get longer gold, silver, and oil stocks because I am a bull on the longer term outlook of these commodities. Gold and silver have continued to go up. Gold is roughly $720 per ounce; silver, $13.00 per ounce, and oil (WTI) is roughly $81.87 per barrel. Thus far, I appear to be correct in my longer term outlook for these commodities though I might have missed an earlier buying opportunity. One stroke of luck, though, is that I had planned to purchase more oil sands related companies with cash sitting on the sidelines. A report was issued today urging the provincial government to increase its royalty rate. That report knocked the stuffing out the oil sands related companies. The damage there is not likely over. Although I did not get my desired outcome, I have done okay.

As an aside, if I read through the report in the near future, I will provide my thoughts.

All that said, what is my plan going forward? To be honest, I am not sure. I am reluctant to go chasing stocks after this pop. The market continued with its robust action again today, up 0.61% as measured by the S&P 500. Looking at the Asian markets right now, the results are mixed with a positive bias. I am inclined to do nothing and let things settle out. I still do not believe that the housing issue has been solved by the interest rate reductions.

As I wrote this article, I thought back to a recent Jim Rogers' interview on Bloomberg. He states his bullish argument for commodities much more eloquently and forcefully than I can for my argument.

In summary, I was certainly surprised by the Fed Chairman Bernanke's move on Tuesday and even more surprised by the stock markets' reaction. I did not get my opportunity to realign my portfolio. Since the cut in rates, I have done nothing and am just waiting for the markets to settle out. I continue to like commodities will look to increase my exposure on a pullback. But aside from planning that move, I am still watching carefully.

Calgary model Amanda Grace is featured in the photograph, which is hosted at Flickr. If you click on the picture of Amanda, you will be taken to where you can view a larger version and see even more pictures of her.

On Sunday, 16 August 2007, a warm fall day with the temperature at 22C (72F), Amanda and I met downtown for our photo shoot. We began by taking pictures downtown in the Eau Claire region; next we moved to Prince's Island, where the above picture was taken, and we finally ended up at Bowness Park. I thoroughly enjoyed working with Amanda.

Although Amanda is relatively new to modeling, she is a quick and enthusiastic learner. Moreover, she is a joy to work with because of her warm personality.

Photographing this time of year is great because of the colors and somewhat tricky because the temperatures this time of year can vary tremendously, making planning more challenging. My goal for our photo shoot was to capture Amanda with the fall colors. In the photograph above, you can see the green and yellow leaves on the trees. Further behind the trees are downtown skyscrapers.

If you require a model, I highly recommend Amanda. She is friendly, enthusiastic, and professional. You can read more about her at her Model Mayhem profile. When you do visit her Model Mayhem profile and view her credits, you will note that she is also an actor having appeared in both movies and commercials.

The photograph of Amanda Grace is hosted at Flickr. If you click on her picture above, you will be taken to where you can view a larger version. And if you click here, you can see more pictures of Amanda. I will be adding pictures over the next few weeks.

All four Canadian political parties are making a fuss about veiled Muslim women not having to lift their veils for positive identification when they vote. While I have some sympathy for that viewpoint—after all, voting is solemn act that decides the very leadership that governs our country. That said, I think all four political leaders are misguided.

According to Elections Canada, citizens can vote by mail. More specifically:

Special Voting Rules

Any elector who cannot or does not wish to vote at a polling station during an election or referendum may vote using a special ballot. With a special ballot, an elector can vote by mail or in person at the office of any returning officer. If the elector is away from his or her electoral district, inside or outside Canada, he or she can also register to vote with Elections Canada in Ottawa. Voting by special ballot is governed by the Special Voting Rules, set out at Part 11 of the Canada Elections Act. The Special Voting Rules apply to the following categories of electors:

1. Canadian electors temporarily away from their electoral districts during the election or referendum, whether in Canada or abroad
2. Canadian electors in their electoral districts who cannot or do not wish to go to an ordinary or advance poll to vote
3. ...

Note point two: Canadian electors...who...do not wish to go to an ordinary or advance poll to vote. So if you—can be anyone, not just a veiled Muslim woman—do not wish to show your face, simply vote by mail. Elections Canada and the rest of us will not know if you showed your face when you voted or not. In fact, we will not even know if it was truly you who voted.

Rather than singling out a specific group of people and making a large public display of it, our political leaders should simply change the rules for everyone. Then no group is singled out.

The concern I have with the current political discourse is that the political leaders have singled out a specific minority group. Instead of putting a negative spotlight on veiled Muslim women, I would much prefer to create a climate where we welcome all minority groups to participate in the political process.