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Caisse de depot CEO says he hopes Bombardier contract dispute is resolved out of court

MONTREAL — The chief executive of Canada’s second largest pension fund, which owns a 30 per cent stake in Bombardier Inc.’s transportation division, said on Friday he hopes that a dispute between the company and Toronto’s transportation agency over a rail car contract will be resolved out of court.

Bombardier and Metrolinx, the provincial agency in charge of transportation in and around Toronto, have repeatedly clashed over lengthy delivery delays on a contract for light rail cars.

Michael Sabia, chief executive of the Caisse de depot et placement du Quebec, acknowledged that the plane and train maker needed to make improvements in delivering the rail cars, but said Bombardier was “making progress.”

Sabia said he did not think that the conflict with Metrolinx would have a long-term impact on Bombardier.

“I think it’s a difficult circumstance right now,” he told reporters in Montreal. “But one of the good things about black eyes is that they heal.”

Bombardier shares were down more than 4 per cent in afternoon trading.

Bombardier is seeking a court injunction at a hearing on March 21 in response to “unjustified threats to terminate” the contract for 182 cars, the company said in a Feb. 10 statement. Metrolinx previously filed a notice saying it wanted to terminate the contract.

“We’re very hopeful that (the) situation is resolved amicably through negotiations and not through a long period of legal action,” Sabia said.

Olivier Marcil, a spokesman for Bombardier, said by email that the hearing should “bring Metrolinx to resume good-faith discussions.” Marcil said Bombardier is achieving its project milestones in Ontario, after on Friday making its first delivery to the Waterloo transportation agency, for a separate light rail contract.

Bombardier in 2010 won a roughly $770 million contract to deliver 182 vehicles between 2013 and 2020. The light-rail vehicles are to be used in a new transit project crossing Toronto due to open in 2021, after Metrolinx pushed back its planned launch by a year.

© Thomson Reuters 2017

 

Canadian duo following in the footsteps of the Search Fund Mafia

They are not coast-to-coast yet but search funds — a way for entrepreneurs to raise seed capital from a group of backers and then seek out a target — now stretch to Calgary in the west from Montreal in the east.

Recently formed Legado Capital has the distinction of being the first such entity in Western Canada. Based in Calgary, the search fund is the brainchild of Jeff Blacklock and Carlos Meza and is backed by a group of U.S and Canadian investors.

The investors have given the two founders — who met while each was doing their MBA at the University of Calgary — enough cash to allow them to search for an acquisition, to do the required due diligence, to make the purchase and fund it with additional capital from the original backers — and then to run the business.

That plan, whereby the new team will manage, and grow, the business explains the company’s name: Legado, a Spanish word, means legacy in English.

Blacklock and Meza — both of whom are engineers — became converts to the search fund model after they tried to buy a private company on their own. The two, after realizing that buying a business was more difficult and more expensive than they’d imagined, visited Stanford University — the institution that developed the model almost 50 years back.

The idea was to meet the so-called Search Fund Mafia, a group of investors who have backed numerous search funds. Armed with that knowledge, new contacts, one of which is the entrepreneur-in-residence at the Harvard Business School, and with capital from half a dozen investors, the pair then rounded up half a dozen Canadian investors.

Blacklock said the search fund model appeals “because we have a group of active investors. Not only do we have people backing us up with cash, they are also backing us up with their experience and knowledge.”

In addition, the model furnishes the two with resources to seek out potential targets. “This model provides funding to do that,” said Blacklock, adding it “allows younger entrepreneurs, who have a lot of energy and brains to execute on a business. It’s really tough to buy a business if you don’t have a structure behind you to get it done.”

Last fall and back in Canada the two tweaked the model: they recruited a group of students from the University of Calgary to help seek out potential targets by doing “proprietary outreach.”

The students, a mix of undergrads and MBAs, represent the third leg of the search process and are meant to complement the other two: leads that come from their own contacts and those that are provided by agents, the merry band of accountants and lawyers.

Legado has focused on targets in health care; testing, inspection and certification; and technological services. Potential targets are companies that have an enterprise value between $10 million and $30 million, that generate EBITDA in the $2 million — $6 million range, that have three years of stable cash flow and that are scalable, a feature that allows the business to grow.

Ideally the owner of the target business is either seeking to retire or to reduce their involvement in the business. “We are operating in the area that’s too big for most individuals but too small for either private equity investors or capital pool companies,” said Blacklock.

So far the search process has seen one letter of intent signed — but rejected. Currently there are discussions with three parties to determine whether there is a good fit.

Financial Post

bcritchley@postmedia.com

Husky Energy weighs sale of some offshore assets in Eastern Canada, which could fetch billions, sources say

TORONTO/CALGARY — Canadian oil and gas producer Husky Energy Inc is weighing paring down its stakes in some of its Eastern Canadian offshore assets, in a move that could fetch as much as several billion dollars, people familiar with the talks told Reuters.

The company, which is controlled by Hong Kong billionaire Li Ka-shing, finds the assets less attractive in a low oil price environment, making it challenging to generate profits, the people said. Husky could invest the sale proceeds in South America, Africa or Asia, the people added.

The sources cautioned that the talks are at an early stage and Husky may decide not to proceed with the divestitures if it does not get attractive offers.

When asked about the potential sale on the company’s earnings call, Chief Executive Rob Peabody said Husky’s Atlantic operations were an important part of its portfolio and declined to comment on what he said was speculation.

Husky’s offshore assets include White Rose, seen as its crown jewel in the region, as well Flemish Pass and Terra Nova. Husky could potentially sell down stakes in Terra Nova, where it has a 13 per cent working interest, and Flemish Pass, but is also considering paring down ownership in White Rose, the people added.

Offshore projects started to fall out of favour with some producers during the energy downturn as they often require a greater investment, making it harder for companies to make the financial dynamics work.

Husky began producing oil from the Atlantic region in 2005. Production averaged 34,300 barrels per day in the fourth quarter.

© Thomson Reuters 2017

Ottawa is now $14 billion in the red, compared with a $3.2 billion surplus last year

OTTAWA — The federal government ran a budgetary shortfall of $14 billion over the first nine months of the fiscal year, compared with a $3.2-billion surplus over the same period a year earlier.

The Finance Department’s monthly fiscal monitor says federal program expenses between April and December rose $16.7 billion, or 8.8 per cent, compared with the same stretch a year ago.

A closer look at the numbers shows that major government transfers to individuals, including seniors benefits, were up $5.7 billion, or 9.3 per cent, while direct-program spending rose $8.9 billion, or 11.3 per cent.

Government revenues, such as those pulled in from income taxes, were down $1.9 billion or 0.9 per cent compared with 2015-16.

The Trudeau government is projecting a $25.1-billion deficit for 2016-17 as part of its plan to run several double-digit shortfalls over the coming years in an effort to lift the economy through infrastructure investments and larger child benefits.

The Finance Department also says Ottawa posted a $1.3-billion deficit in December alone — compared to a $2.2-billion surplus in December 2015.

Asia opens itself wider: Bizarre oil trades pose menace for OPEC in its prized market

OPEC pumped at will the past two years to defend its turf against rivals. Its recent volte-face has left it contending with additional threats in the world’s biggest oil market.

Crude that’s rarely or never-before seen coming to Asia is now sailing from all over the globe to the region, with the door to the market seemingly held open by its traditional suppliers from the Middle East. Would a South Korean buyer like a taste of Russian Urals oil it hasn’t touched in a decade? Sure. What about some West Canadian Select for China? Yes, please. Brazilian Lula with some American shale to the trading hub of Singapore? Of course.

These and several other unusual shipments signal the price the Organization of Petroleum Exporting Countries is paying to reach its goal of eroding a glut that caused the worst price crash in a generation. While Goldman Sachs Group Inc. sees the group succeeding in shrinking inventories, OPEC’s top members aren’t relaxing. As their output curbs have made Middle East crudes costlier and rival supply attractive, they are attempting to play defence by shielding their most prized customers from the reductions.

“Asian refiners have the choice to buy crudes from North America, the North Sea, the Caspian as well as North and West Africa,” said Ehsan Ul-Haq, an analyst at KBC Advanced Technologies. “Refiners will certainly look at arbitrage economics but with all key benchmarks showing a narrow spread with each other, there are numerous possibilities to meet their requirements.”

Saudi Arabia, the world’s biggest crude exporter and OPEC’s top producer, agreed to supply buyers in Asia all the oil they asked for March. Iraq and Kuwait did too. This was after nations such as Japan and South Korea were largely spared from cuts in the previous two months as well. The burden of output reductions is primarily being borne by other regions such as Europe and the Americas.

Akos Stiller/Bloomberg

Akos Stiller/BloombergKhalid Al-Falih, Saudi Arabia's energy and industry minister.

“So far, the market share lost in Asia by OPEC Middle Eastern producers is still modest, but this is a key market for them,” said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London. “So there will be limits as to how much they will give up.”

The latest strategy for defending their share of the Asian oil market isn’t without chinks in the armor. With most of the output cuts coming from Middle East producers, some buyers have been tempted to purchase rival supply they’ve shunned previously as European, African and American benchmarks have weakened against the Dubai marker. These include Canada’s Hibernia as well as Southern Green Canyon from the U.S.

“Right now, these very-long haul arbitrages are opportunistic plays on freight and benchmark crude differentials to replace barrels lost to OPEC production restraint,” Tchilinguirian said. “They cannot be viewed as regular feature of the market. Do not forget, Asian customers place a high value on the security of supply, and the longer the voyage the more delay risks in the timely arrival of barrels to the refinery.”

During the previous OPEC strategy of boosting production, the flow of rival shipments to Asia was hindered because Middle East crude costs weren’t high enough to make a large number of buyers turn elsewhere. But that tactic also meant global oil prices were mired in a downturn that was eating into the revenue of nations such as Saudi Arabia and Kuwait.

Speculation that the producers’ actions will curb a glut has generally lifted oil prices worldwide, with crude trading higher than $50 a barrel this year. That compares with an average of $32.75 over the first two months of 2016

OPEC and 11 other nations’ agreement to trim output took effect on Jan. 1, with an aim to reduce output by about 1.8 million barrels a day during the first six months of 2017. The group has achieved a record 90 percent initial compliance with the accord, according to the Paris-based International Energy Agency.

Speculation that the producers’ actions will curb a glut has generally lifted oil prices worldwide, with crude trading higher than $50 a barrel this year. That compares with an average of $32.75 over the first two months of 2016.

Still, some crudes have been boosted more than others. The premium of Brent, the benchmark for more than half the world’s oil, against Middle East marker Dubai crude was at $1.58 a barrel on Thursday, after shrinking to the smallest since September 2015 last month. U.S. West Texas Intermediate fell below Dubai in December for the first time since at least May.

“OPEC’s moves on production cuts will keep Brent-Dubai in a narrow range in the short term and we will continue to see such bizarre trade flows,” said Sri Paravaikkarasu, head of East of Suez oil at industry consultant FGE in Singapore.

With assistance from Dan Murtaugh

Canada’s inflation rate spikes to two-year high as gas prices soar 20%, the biggest hike in six years

OTTAWA — Canada’s annual inflation rate unexpectedly jumped to 2.1 per cent in January, its highest for more than two years, on a surge in gasoline prices, Statistics Canada data indicated on Friday.

Analysts polled by Reuters had forecast an annual rate of 1.6 per cent, below the Bank of Canada’s 2.0 per cent target. The January rate was the highest since the 2.4 per cent recorded in October 2014.

The main reason for the increase was a 20.6 per cent year-on-year jump in gasoline prices, the largest yearly increase since September 2011. Consumers paid 2.4 per cent more for shelter while food prices slipped by 2.1 per cent from January 2016.

All three new measures of core inflation the Bank of Canada established late last year showed underlying inflation below 2.0 per cent. CPI common, which the central bank says is the best correlation to the output gap, was furthest away from target, slipping to 1.3 per cent from 1.4 per cent.

CPI median, which shows the median inflation rate across CPI components, remained at 1.9 per cent while CPI trim, which excludes upside and downside outliers, increased to 1.7 per cent from 1.6 per cent.

© Thomson Reuters 2017

Narrowed to just 1¢ per share: Canada’s Husky Energy posts smaller-than-expected loss

Canadian oil producer Husky Energy Inc reported a smaller-than-expected quarterly loss, helped by lower production costs and higher margins in its refining operations.

Husky, controlled by Hong Kong billionaire Li Ka-Shing, said overall exploration and production operating costs fell 4% to C$13.92 per barrel in the fourth quarter.

Average realized U.S. refining margins more than doubled to $9.86 per barrel from a year earlier.

The Calgary, Alberta-based company’s average production fell 8.4% to 327,000 barrels of oil equivalent per day.

The company reported a profit of C$186 million, or 19 Canadian cents per share, for the three months ended Dec. 31, helped by a gain on asset sales and the reversal of a C$202 million impairment charge.

Husky posted a loss of C$6 million, excluding the one-time items.

Excluding items, Husky reported a loss of 1 Canadian cent per share, compared with the analysts’ average estimate of a loss of 2 Canadian cents, according to Thomson Reuters I/B/E/S.

Husky recorded a loss of C$69 million, or 9 Canadian cents per share, in the year-earlier quarter.

Up to Thursday’s close of C$16.40, the company’s shares had gained 22.6 percent in value in the past 12 months.