Don Lindsay, Teck’s CEO, is betting on a quick rebound in commodity prices, or so it appears. Despite Teck bleeding cash and watching commodity prices fall precipitously, Don has decided to maintain the 2015 Capital Expenditures budget. This includes 2.9 bn on the Fort Hills oil sands project, with oil well below $50. Needless to say, shareholders aren’t amused, and some managers are starting to ask questions.
Being a veteran of this space, Don has seen many cycles come and go, so he’s experienced enough to understand the risk he’s taking on for Teck. Or is he? One must wonder if Don presumes this is simply another cycle like all the rest, probably he does. With 2008 still fresh in his memory, where we saw a “V shaped” recovery, Don may be thinking we’ll see a repeat of that performance. It’s these assumptions which concern me. In business, even though you’ve seen 1000 cycles and 2000 downturns, you should never assume anything. You need to do your homework.
Just today, TD’s energy analyst came out with a report stating that she expects oil to remain low well into 2016, maybe even throughout 2016. When analysts go that far out with a bearish forecast, what they’re really saying is, “we don’t know how long this will last, the foreseeable future at least.” Why would she say that?
Here’s a few reasons:
Saudi Arabia has repeatedly stated that they’re purposefully driving out the marginal oil producers, and won’t cut production until this goal is accomplished. If I were in upper management of an oil sands company, that statement would have me very worried. Saudi Arabia could easily do this if it chose to, and by all accounts, it has chosen to. Wanna get apocalyptic? 3-4 years of low prices would literally mean the end of every tarsands player. Will it go there? Probably not, the Saudis don’t need to rid the world of every single marginal player, they just need to give production a much needed haircut.
Iran. Starting in about 2 months, Iran comes on line with a heavy dose of production, new production,ichiteck to add to the already massive oversupply. This factor alone could drive the price down below $40, or even $30.
And if this weren’t enough, due to the price being so low, all producers are in fact ramping up production in order to increase cash flow. You need to put out much more product at $45 than you do at $100, if you want to maintain your cash flow. So, producers are increasing their output. Sounds like the perfect storm when you add it all up. Yet this is the backdrop we have and that Don Lindsay is betting will clear up in the near term, justifying his bet on maintaining spending in 2015. Does he know something the rest of the world doesn’t? If he doesn’t, he’s about to make a very costly mistake, one that could literally bring down Teck Resources, Canada’s largest broad based resource company.
This is the kind of research required to give investors an edge, because even with these fundamentals in play, some advisors are recommending their clients by shares in Teck Resources. We’re not.
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