Petrocapita August 2010 Update


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Petrocapita August 2010 Update

  1. 1. Petrocapita Update August 2010
  2. 2. Summary In this hostile financial climate, long-term investors must now give more thought than ever to capital preservation and sustainable growth. It is not a profound observation that growth is not sustainable if it is driven by debt-fueled consumption. Sound fundamentals for growth include: – Favorable demographics; – Low national debt levels; – High savings rates; and – Persistent trade surpluses. Many emerging economies have all of these characteristics, while the so-called ‘developed’ economies have virtually none of them. Take Canada as an example. It can be argued that Canada suffers from many of the problems of the typical developed nation, though to a lesser degree than its G8 brethren. Canada is the best of the worst, so to speak. Still, it has familiar developed-economy problems, including: – Aging population, with unfunded liabilities for social benefits; – High debt-to-GDP levels; – Low savings rates; – Increasing government regulation and intervention in the economy; – Large fiscal deficits; and – An overly accommodative monetary authority. This raises the question: why should investors emphasize investments in developed economies such as Canada over emerging economies? The fact is that direct investments in emerging economies often come with higher levels of political risk – see Russia’s expropriation of oil assets, or Argentina’s punitive export tariffs on agricultural commodities during its 2008 food crisis. The challenge becomes how to obtain emerging economy growth with developed economy risk. That is the investment draw of Canada. Even though it faces many of the issues of the rest of the developed world, there is an opportunity to capture emerging market returns in Canada due to its uniquely bifurcated economy. 1
  3. 3. Summary (continued) Eastern Canada, represented by Ontario and Therefore, investing in Western Canada provides Quebec, is heavily exposed to deteriorating US exposure to emerging market growth in energy and demand through its automotive and aerospace agriculture within one of the world’s most politically industries. To put it simply, Eastern Canada imports stable markets. In addition, investors who have a what the emerging economies need and exports ‘value’ orientation have been provided what we what they make, putting it under pressure on both the believe are attractive entry points into the Western cost and revenue side of the equation. Canadian market by some recent events. Meanwhile Western Canada, represented by British In the energy sector, the credit crisis has caused Columbia, Alberta, Saskatchewan and Manitoba, is in financing to become scarce for junior oil & gas the enviable position of exporting what the emerging companies while low natural gas prices are reducing economies need and importing what they make. their profitability. They are being forced to sell assets What do we mean by this? It’s a well-understood to stay in business. This has created a buyers’ market process that energy and food consumption undergo for the acquisition of smaller oil production assets – rapid growth as a developing economy makes the assets that are highly cash-flow positive at current oil transition to a middle class standard of living. Energy prices. and agriculture are Western Canada’s dominant industries – and this region, with only 10 million In the agriculture sector, the regulatory barriers that inhabitants, is one of the world’s largest net exporters made it difficult to invest in Saskatchewan farmland of both energy and agricultural commodities. Here’s have recently been liberalized, allowing capital to an approximate breakdown: move in and acquire the cheapest farmland (on a productivity basis) in Canada and perhaps the world. Energy – Oil (13% of world reserves; 4% of world We expect China to overtake the US as the world’s production) leading economy, but we think Canada’s fortunes will – Uranium (8% of world reserves; 20% of world surprise many. Indeed, Canada’s uniquely bifurcated production) economy may serve as a bridge from the developed to the developing world – at least for investors wise Agriculture enough to cross it. – Potash (60% of world reserves; 30% of world production) – Wheat, coarse grains, oilseeds (21% of the world export market for wheat; 10% for oilseeds) – Farmland (80% of Canadian total) 2
  4. 4. DiSClAimer: The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Petrocapita Income Trust (“PETROCAPITA”) and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither PETROCAPITA nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to PETROCAPITA and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting PETROCAPITA or its relevant affiliate directly. #400, 2424 4th Street SW Tel: +1.403.218.6506 Calgary, Alberta T2S 2T4 Fax: +1.403.266.1541 Canada