Digging up dirt on Suncor and ARC Energy Trust

Welcome to Media Co-op Investor!

The Media Co-op Investor Series aims to help the general public understand the stock market, how it works and the major companies which benefit from it.  

Every two weeks we examine an element or term in the stock market, how the Toronto Media Co-op has done fake-investing in companies on the Toronto Stock Exchange as well as highlighting specific large Canadian Companies, why their price has gone up and down and what they are all about.

To learn more go here.

This Weeks Term:  Bond vs. Equity Markets

Last week, we looked at what stock markets do.  This week, we dig a little deeper in to the types of markets that are out there.

Two weeks ago when talking about what the stock market is, I actually should have been using the term 'financial' markets, though often 'stock market' is used to describe the whole system as well.  In reality though, a stock market is just one type of financial market.

If you're like me, you made have heard of the terms 'bond market' and 'equity market' thrown around while having no idea what they are about.  Put simply they are different types of financial markets; one in which people can trade in debt (bond markets), the other in stocks (the equity market).

Bond markets are fairly simple to understand for anyone which ever purchased a Canada Savings Bond or a 'term deposit' (GIC) from their bank or credit union.   Put simply, people loan money to governments or corporations in exchange for getting more money back than what they put in at a later  date.

For example, in 1992, my grandfather bought me a government bond.  In 2002 it would have
doubled in value.  Before 2002, I hypothetically could have taken this to a bond market and sold it.  Why would I?  Maybe I needed money right away and didn't want to wait until the end of the term of the bond (2002).   Someone could have given me 90% of the bonds value in 2000 for example.  I would still have made a profit off the initial investment and wouldn't have had to wait the additional 2 years. When 2002 rolled around whoever bought it would have gotten 100% of the value having only paid 90%. 

Bond markets are usually not organized into exchanges like the stock market.   In other words there is no location, office or warehouse where everyone is buying and selling their bonds together.  Trading bonds is usually done in a manner called 'Over-The-Counter', meaning that a broker or dealer will call up a bank or government office and buy or sell a bond over the phone or e-mail. 

Equity markets on the other hand are another way of saying Stock markets, where shares of stocks are traded.  When people own a share, they own a fraction of a business.  While people make money on a bond by being paid a certain fixed amount on a fixed date, people make money on stocks by having the value of the stock go up and then selling it for the 'profit'.  Stock holders will sometimes also be paid a 'dividend'.  A dividend is a cut of the profits, paid by a company to shareholders usually about once a year.  Some companies pay a dividend while others do not.

What we invested in this week

This week we fake-purchased 15 of the largest Canadian energy stocks.  We theoretically-bought about $1000 worth of each companies stock.

How we did this week

Our energy stocks went down sharply these past two weeks as the TSX had a bad week across the board before rebounding on Friday.  Our Energy stock portfolio lost roughly $166 theoretical dollars or 1.1%. Financial and consumer stocks suffered similar fates.

On the other hand, mining stocks (like gold) have done very well.  

International economic data seems to be all over the map.  US orders for heavy machinery (besides autos) seems to be going up while new house starts in the US are down 29% over the last year.  The Canadian market is largely dependent on how the Canadian market does.

Meanwhile, overall investor 'confidence' seems to be high, meaning many investors think that the economy is doing well this month and that stocks will go up.  Two major American Stock indexes, the DOW and S&P 500 are doing better during a September than they have in almost 70 years.

While we did poorly, if you compared our investing skills to the S&P 500, we actually did really badly.
 
Today's Well-Known Company: Suncor

Suncor is one of the most well known and powerful Oil sands companies in Canada.  Founded in 1919 as the Sun Company of Canada it has gone through several incarnations before becoming Suncor in the 1970's. 

In 2009 it purchased Petro-Canada and operates both Petro-Can and Sunoco gasoline stations around the country.  The purchase made it the second-largest company in Canada. 

Suncor has faced numerous allegations of pollution both due to it's football-field sized tailing ponds which are created to dump the waste left over from extracting the oil from the oilsands and to the heavy use of greenhouse gases from it's refining and extracting processes. 

As most of it's heavy oil operations exist close to the Athabasca river, the first nations communities in these regions, mostly Cree, have claimed that Suncor's operations are causing numerous health problems for their populations.  In addition, the environmental destruction, also known as 'scrapping off' the earth, has meant that the hunting, fishing and gathering that these nations use to partially sustain themselves have been compromised as well.

While Suncor spent the week jumping for joy due to it's newsworthy-ability to turn one small tailing pond back into land (that may or may not be soaked in toxic chemicals),  it's share price continued to drop.

Of course the share price may have been affected by the nine charges that Suncor faced this month for violating the Alberta Water Act and Environmental Protection and Enhancement Act.  They have allegedly discharged stormwater from one of their upgrader facilities into the Athabasca River.  A similar incident occurred in 2007.

Stock also may be going down because Suncor is aggressively selling off a lot of their assets.  This month they sold a bunch of UK oil projects to Russian companies having already sold off oil and gas companies in the US Rockies, Western Canada and Trinidad and Tobago.

We bought Suncor shares at $34.41 on the Sept. 13th and have lost 6.5% since then or $55.  The stock is now at $32.19.

Today's Not-So-Well-Known Company: ARC Energy Trust

ARC Energy Trust on the other hand is a company which few in Canada have probably heard of.  It was formed in 1996 after buying 21 oil and gas properties from Mobil Oil Canada.

News on our good friends at ARC is hard to come by through a quick internet search.  However as a major income trust, they lead the backlash against the 2006 Conservative governments decision to tax income trusts in the neighbourhood of 30% starting next year, according to the CBC.

Income trusts are corporations which hold and buy assets (like oil and gas producing wells) and these assets generate a steady income.  They differ from a regular company in that a trust is usually limited in what it can invest in (if it's in oil and gas, it must stay in oil and gas) and in the fact that they usually pay out a cash payment (dividend) like clockwork, kind of like a bond.

Trusts exploded in Canada in 2002, mainly due to the fact that they were taxed extraordinarily low and converting from a regular company to a trust usually brought an major injection of investor money. 

However seeing the massive tax losses that were occurring, Federal Liberals (in 2005) tried and failed to control trusts before 2006 Federal Conservatives laid down a tax rate of 34%.  This caused a immediate fall in the stock value of many trusts though they have still remained popular.

We bought ARC Energy Trust shares at $20.19 and have made 1.7% or $13.  The stock is now at $20.53.

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