Wednesday, May 27, 2020

Bought Gold (AAAU)

Have bought 10% gold in my portfolio, or around SGD 80k.  Average price is USD 17.058.

I am holding the Perth Mint Physical Gold ETF (AAAU).  It is backed by the West Australian State Government, and (theoretically) allows retail investors to redeem gold.  GLD only allows you to redeem 100,000 shares, and the gold is stored with HSBC.

Day to day AAAU moves in line with GLD.  It has a lower expense ratio (0.18% compared to 0.4%), so it degrades less:

AAAU is liquid enough to buy or sell occasionally, but if I was short term trading, I would use GLD.

Why buy gold?

  • Its in a long term uptrend, since late 2018
  • It will do well in a deflation environment (recession this year), and with stagflation later (inflation from money printing but no growth).
  • I am uneasy buying long term Treasuries with rates so close to zero.  We do not know if the Fed can allow negative nominal rates.
The time to sell will be when we get expectations of economic growth.  No sign of that now.  I may hold this for months, quarters, or even years.

Gold is money that can't be printed.  Before I become a die-hard gold bug and doomsday prepper, I remind myself of the risks:
  • Paper gold fell in the March panic.  Everything fell against USD and physical gold.
  • There is a constant counter-party risk: you never know if you can redeem until you do it.
  • When we start getting real economic growth again, gold once more becomes a 'barbaric relic'.

For the rest of my portfolio, I am still waiting for the current bear market rally to die before I begin to buy.  May be waiting a long time.

Thursday, May 7, 2020

What I am doing

I am using two strategies: 'dividend stocks' and 'market timing'.

Am now 40% invested, all in dividend stocks/REITs/trusts, mostly SGX listed. The big ones are Netlink Trust and Manulife US REIT, with smaller positions in Frasers Centerpoint Trust and Mapletree Commercial Trust.

I think the last month's rally is a bear market rally.  I am waiting for a correction to continue buying Frasers Centerpoint Trust and Mapletree Commercial, plus Brookfield Infrastructure Trust.  This will take me up to 60% invested.

I'm willing to catch falling knives when buying dividend stocks.  Even though they will be affected by the recession (except Netlink), all the SGX-listed stocks above should survive without raising capital, unless revenue drops by more than half.  Once the economy recovers in a few years, I should have a dividend stream that I can live off.  Then figure out what I want to do with the rest of my life.

For the remaining 40%, I follow Hedgeye for market timing. They have called the cycle well, moving to bearish in mid Feb, and warning of a likely 20% correction on 4th March.  I wait for them to call a turn in the cycle before buying.

I've been covering a lot of stocks here lately, so I have a list of things to buy when the market does turn.  The shopping list:

  • Inflation plays (growing inflation, slowing GDP): Oil (Equinor), TIPs, maybe Natural gas cos.
  • Growth plays (growing GDP, slowing inflation): Copper (SCCO),...maybe the travel companies (Groupo Aeroportuario, Booking, Safran, Rolls), maybe Delfi
  • Growth+Inflation plays (growing GDP, growing inflation): Interest rate plays (Banks, Computershare, Interactive brokers), maybe Oil above.
  • The travel companies may also be buys after some uncertainty from the virus clears up, then we are just dealing with a normal recession.
If you put a gun to my head and forced me to buy something today, it would probably be Delfi, Groupo Aeroportuario and Berkshire Hathaway.  I haven't found any high quality stocks that are cheap.

Sold Straco

Sold two days ago at a small loss of SGD 400.

1) Want to buy BIP instead.  Wait for a correction first.
2) Straco take longer to re-open that I thought.  Even when they reopen, will be at reduced capacity.  This is a company that has high fixed costs and relies on crowds.  China's domestic travel may be recovering, but I can't see international travel recovering.
3) There is an increasing political risk of anything connected with China.

Used the current rally to sell Straco.  Evenafter one month, I still think it is a bear market rally.  I wait for a correction to buy BIP.   Waiting is the hardest part.

Tuesday, May 5, 2020


Crude oil trading at negative prices is not sustainable.  How do I play it when it recovers?

Equinor (formerly Statoil) is Norway's state owned oil company.  It has very low production costs, operates in stable jurisdictions, and has reasonable finances.

I got this idea from Vitaliy Katsenelson's Contrarian Edge.

All numbers are from their 20019 Annual Report ending December (pre-virus, and pr oil crash).


What do they do, and where are they exposed to?
  • Almost all their profit came from Norway E&P, which consists of 70% oil, 30% Natty & NGLs (by revenue).
  • Next are their operations in the US (p38), which produced around 10-20% of their oil, natural gas and NGLs.   What and where do they produce?  By revenue, most should be GOM oil.  By BOE, most is Marcellus natural gas.  There is very little shale oil - there's some from the Bakken, but their Eagle Ford assets were sold off in a well-timed November sale.
  • Their International E&P (including the US) made a small loss.
  • This is offset by their Marketing, Midstream & Processing making a small profit.
  • They have a stake in 7 wind farms.  Makes for nice ESG photos, but meaningless for profits.
  • They own an insurance company!  I think it insures the parent against operational risks (eg: workmen's compensation).  Again, not meaningful for profits.
So basically: Norwegian offshore oil production, followed by US and international (mostly) offshore oil production, followed by natty.  Minimal US shale oil.


Net debt (including IFRS 16 Leases) are 22bn, of which 4bn is due this year.  Another 4.2bn is due in 2021 and 2022.  They recently raised 5bn very long term debt on good terms.  I am ignoring long-term financial investments, which are required for insurance.  2019 interest payments were 1.5 billion.  All debt is fixed rate.  Its in a mix of major currencies (p198), but "normally swapped into USD".

2019 operating profits covered interest payments by 6 and a half times.  CFO covered it 15 times.

Despite the large debt, I don't think they have to issue new shares.  I think their status with the Norwegian government allows them to issue debt cheaply.

Net Debt has dropped from 33bn in 2016 to 22bn now.

Its unclear to me how much of their production is hedged.

Production Costs

They state they have breakeven prices for different projects between $11 and $40.  Not sure if that is extraction or full cycle costs.

In March they stated they can be "organic cash flow neutral before capital distribution in 2020 with an average oil price around USD 25 per barrel for the remaining part of the year".  I interpret this to mean their overall cash breakeven is $31 Brent.


Charting their oil (not BOE) reserves:

Relationship with oil price

EQNR's stock price seems to follow Brent:


Good company that meets my criteria:
  • Operates in stable, lawful jurisdiction.  No geopolitical risk.
  • Low cost of production
  • Minimal exposure to US Shale oil.  Product priced in Brent (seaborne), not WTI (landlocked).
  • Reasonable financials, although a bit too much debt.
This is not an exhaustive look, I won't buy-and-hold forever.  And the oil industry is very difficult to study.  Who really understands break-even costs, or accounting rules for reserves and E&P?  If I buy, it is just as a trade for rising oil prices.

I would prefer to buy a basket of oil companies, but am unlikely to find many (any?) that fit the above criteria.

I use Hedgeye for timing when to buy.  I am not buying now.  The economy is still shit.  Oil producers may keep overproducing for a long time because of fixed costs and hedges.  And there's a chance Brent crashes, maybe below zero, after all the oil tankers fill up.


The Norwegian government owns 2/3rds of Equinor.  Norway has the worlds largest sovereign wealth fund, so I don't think they will push Equinor to pay dividends.

If I buy, I have to buy the ADR since Interactive Brokers does not access the Oslo stock exchange.  One ADR represents one share.  There is a fee of 0.5c per ADR for each dividend distribution.  Interactive brokers has Equinor as STL (Statoil).  Witholding tax for dividends should be 15% for Singapore residents (p8).

Friday, May 1, 2020

Brookfield Infrastructure Partners (BIP)

BIP is a trust that invests in worldwide infrastructure and pays out the cashflows as dividends.

Business Model

They raise money through debt or equity, then form joint ventures as a minority (but controlling) partner to invest in ports, rail, roads, power transmission, gas lines and others.

Brookfield likes to buy distressed assets, for example:


I want to check their long term financials to see how profitable successful their investment have been.  How do we do this?

Their consolidated financial results are meaningless because they hold small controlling stakes in many joint ventures  We need to look at their results on a proportionate basis instead (ie: their share of profits, debt, etc) from their supplemental information.  They key figures are below.


What returns do their investments generate?

Look at cash generation rather than asset values, since cash is more objective.  'Adjusted Funds from Operations' is 'Funds from Operations' minus maintenance capex.  Its not an accounting (IFRS) number, just an estimate they give us.  But most accounting numbers are estimates anyway.

AFFO has risen nicely:

The maintenance capex estimates for their different segments are interesting.  eg: Road and Rail are high maintenance, Energy Transmission almost none.  Useful for when looking at other infrastructure trusts.


One source of funding for investments.

They have high debt, but 88% of it is non-recourse (at the project level only, the company is not liable for it).  The non-recourse debt seems to be fixed rate (F-75 to F-77).  The corporate level debt is tied to LIBOR.

Debt has risen in line with AFFO:

Non recourse debt means their debt is essentially unlimited.  Each project, if it is run well, supports its own debt (and equity too...?).


Along with debt, how much equity have they raised for their investments?

To simplify: they have two types of units: normal units and preferred shares.  Both pay dividends.  The 'normal units' are the majority: they pay around 95% of the dividends:

  • The 'normal' unit pay distributions based on FFO.  The company targets 60-70% payout of FFO.  818m distributions were paid out in 2019
  • Additional 'Incentive Distributions' are also paid out to Brookfield Asset Management based on the normal distributions above.  Generally, 25% of any additional distribution is paid as IDS - see page F-92 (eg: If next year's distribution/share is $1 higher, an additional 25c is paid to Brookfield).    158m Incentive Distributions were paid out in 2019.
  • Preferred distributions pay out a fixed dividend for a certain period of time.  Currently issued units pay out 4.5-5.4%, expiring June 2020 to Dec 2023.   49m fixed dividends were paid out in 2019.

Putting it together

Most of their funding is from issuing equity.  From 2012 onwards, the cumulative money raised:

Since the preferred dividends are fixed, we deduct them from AFFO first.  They only make a small part of AFFO:

And since they issue a lot of 'normal' units, we want to look at this number (AFFO minus preferred dividends) on a per unit basis:

This is the key metric for measuring their performance.  Very impressive.

Asset Lifespan

Some of their assets have short lifespans, in particular:

  • Their Brazilian regulated gas transmission operations (NTS) form around 30% of proportionate 2019 CFO, and expire in 20 years:

  • DBCT has a remaining concession period of 30 years, and forms 8% of their CFO.
  • Westrail has 29 years and forms 4% of their CFO.
  • Their road tolls (Peru, Chile, India) form 4% of CFO and have an average of 15 years (p88). 
I estimate they lose an average of around 2-3% of their CFO (or AFFO) a year due to asset ownership expiry.  Over the next 30 years.

I am only looking at when legal ownership of the asset expires here.  I'm not looking at how much money they earn or when customer contracts are renegotiated.

Payout Ratio

How much FFO or AFFO is paid out as dividends?  The payout ratio has risen over the years:

At 94% in 2019, there is not much space for it to rise, especially when we account for the 2-3% every year needed to make up for expiring assets.  So long term dividend growth will be slower over the next ten years than the past ten.

This payout ratio covers all distributions, including preferred dividends and incentive distributions.

They say they target "retaining 15-20% of FFO", and a payout ratio of 60-70% FFO.  Maintenance capex is generally 20% of FFO.  Anyway, the payout ratio now looks sustainable, but I don't think they can raise it.

They note that their 2019 FFO "payout ratio exceeded our target range of 60-70% due to the time between raising and deploying the proceeds from the July equity issuance and the depreciation of the Brazilian real. Removing the impact of these two factors reduces the payout ratio to 70%".  And the 2018 ratio was affected by "the 2018 financing at our Brazilian regulated gas transmission business".


Some of their sectors, particularly ports and natural gas pipes/processing are market driven.  Others (eg: UK residential connections, toll roads) are regulated, but affected by the economy or volume.  Others, like electricity transmission have fixed revenues.  95% of their 1H 2019 cashflows are regulated or fixed.

Theres a chance that North American natural gas throughput drops a lot over the coming years, due to a shale oil production decline.  This forms about 7% of 2019's CFO.

Negative rates in Europe and Japan make more everyone willing to invest in infrastructure (or anything, for that matter).  Spoils the market.

They do not have direct exposure to China.  They have indirect exposure in some Australian operations (DBCT and Westrail).

Their financials are fucking impossible to understand due to consolidation.  Its hard enough to just list their assets.


This company has a good track record based on AFFO/unit.

I would probably be happy to buy at a 6% trailing yield, even before paying the 15% tax on dividends from a Canadian company.

They aim to increase dividends by 5-9%.  I would take the bottom range of this due to the currently high payout ratio.  5% growth is reasonable based on their track record.  They do not have gearing limitations like a REIT, so could grow forever.

There's a risk the dividend yield drops this year due to the economy.


Brookfield bails out Donald Trump's son?