February 18, 2015

On Wednesday, the S&P 500 was essentially unchanged while Toronto was down 0.5%.

In yesterday’s post I said that the yield on a 5-year Bank of Canada bond was 0.42%. Actually, I should have said 0.73%, and the latest update is 0.79%. If the rate remains unchanged then the RioCan pref shares would reset to 3.35% on $25 or a dividend of 83.75 cents per year. If the current price of $20.82 is based on the reset yield then that implies a yield of 4.02% and a spread of 323 basis points versus the original spread of 270 basis points.

These shares seem attractive at $20.82. There are no guarantees at all, but the hope in buying these is that the price would climb back somewhat towards $25.00. Failing that one would at least collect the small dividend.

This morning Cenovus Energy sold $1.5 billion worth of shares at $22.25. I find this interesting for a couple of reasons.

First, $1.5 billion is a huge amount of money. It’s worth asking where is the money coming from? What part of the system (if any) will have $1.5 billion less cash after this deal is done?

If institutional investors use “cash” to buy these shares then it would seem that the banks’ deposit bases will be reduced by $1.5 billion in deposits. That might mean the banks draw down their reserves at the central bank. If the banks loan part of the money for the shares then that money will effectively be created by the banks and loaned for the share purchase. It could be argued that people and institutions will sell other shares and bonds to get the cash to buy these shares. But in that case the buyers of those shares have to pay for the shares and no net cash leaves the stock and bond market. Of course once Cenovus, gets the money they will initially put it in the bank or pay down debt, so perhaps the banks will not be out any deposits after all.

Another question to look at is, what does this say about Cenovus Management? Cenovus is effectively selling about 9% of the company to new owners at $22.25 per share. In the past two years the shares had been mostly around the $30 range and got as high as about $34. So they could have got a better price last Summer. But, all in all with a 50% drop in oil prices, it may not be a bad deal to sell these shares at “only” anout a 30% discount to the $32 or so they could have got when oil was higher. At the end of Q4, Cenovus had $5.5 billion in debt and $10 billion in equity. So it’s probably a wise thing to issue the shares.

I have not looked at Cenovus as an investment and rarely if ever look at commodity stocks, I was just curious about where $1.5 billion is coming from and about the wisdom of the share issue.