What Private Equity is Buying and the Next Canadian Housing Bubble11 min read

Dear Readers,

Back in January, I told you that banks risked tons of cash lending to businesses in a very volatile sector.

I also told you that in reality they haven’t risked anything because no matter how much they risked, they would come out on top.

In fact, the more they risk, the stronger they become.

What’s worse is that they aren’t even supposed to be directly involved in this sector, yet they control it in other ways.

Today, their plan is unfolding and the little guys are suffering.

But if you know what’s happening, you too can put yourself in a position to profit.

First, let’s talk about the housing bubble heard around the world.

The Vancouver Real Estate Transfer

We know that Vancouver real estate is in a major bubble – one that could pop at any time.

In fact, one could argue – given the numbers in a recent Global News article – that BC’s lower mainland real estate is already in a bear market.

Via Global News:

“…According to (Zolo), the city of Vancouver currently has an average home price of $1.1 million, down 20.7 per cent over the last 28 days and down 24.5 per cent over the last three months.

The average detached home is $2.6 million, down seven per cent compared to three months ago.

Richmond is no different.

Zolo CEO Barry Allen says the market in Richmond has “gone off a cliff” with the average home now priced at $779,000, down 20.7 per cent from three months ago and 17.6 per cent from last month. Detached homes in Richmond took the hardest hit compared to other markets with a 10 per cent price correction over the last three months down to $1.7 million.

North Vancouver detached homes fell 10 per cent in price in three months down to $1.8 million. Their average home price for all properties fell 17.3 per cent in that time period to $1 million.

It’s more of the same in Burnaby and Surrey.”

shaw global real estate drop
source: Global News

That’s not all:

“Global News obtained MLS sales data from several key Metro Vancouver markets and found the number of homes sold during the first two weeks of August in Greater Vancouver dropped by 85 per cent on average.

Richmond experienced a 96 per cent drop in the number of sales and Burnaby North fell by 95 per cent. Vancouver’s West Side, West Vancouver, and Coquitlam also took major hits.”

Back in February, I explained how the Chinese have flooded their money and leverage into the Vancouver housing market in my Letter, “Why Vancouver Housing is So Expensive.”

 

Chinese real estate investment websites have been luring investors and buyers into Vancouver, touting the city as a foreign capital destination. But with the new foreign home buyer tax in BC, the illusion of a great foreign investment slowly disappears.

It’s not that a 15% price increase is enough to stop Chinese buyers from flooding the Vancouver market – heck, many have paid hundreds of thousands, sometimes millions, more than asking just to get in.

But a tax hike on foreign money gives the perception that foreign money isn’t as “welcome.”

And that’s not very attractive to a foreigner trying to find a “friendly” foreign place for their money.

Of course, the Chinese still have tons of capital to move abroad and you can be sure they will find other places for it.

But where?

Calgary, Alberta: The Next Chinese Destination

Less than a month ago, a close friend of mine found a beautiful lot in a new community and decided he wanted to custom build his dream home there.

This meant he would have to sell his current home.

At first, he was concerned about putting his house on the market; after all, Calgary’s housing market slump continued in July, with sales in the city down for a 20th consecutive month, according to the Calgary Herald.

But his new dream home was too hard to pass up.

So he took a leap of faith and put his current home up for sale.

Within a day, offers came flooding in.

All of them from Chinese buyers – one of them site unseen.

Despite the recent downturn in Calgary’s economy, real estate in the city could be on the rebound.

Just weeks after the Calgary Herald reported that real estate had dropped for a 20th-consective month, Global News tells us:

“The Calgary Real Estate Board (CREB) says Chinese investors find Calgary’s market more attractive for several reasons: the prices are a lot cheaper than Vancouver, Calgary has nearby tourist attractions like Banff and the Rocky Mountains and there have been improvements in accessibility to Calgary from mainland China in the last year.

“Three direct flights from China coming in a week now…we’ve become a much more accessible destination for people that are foreign buyers,” CREB president Cliff Stevenson said. “It should be noted that the U.K. and U.S. have been big sources for customers for places like Canmore for quite some time, so to have another country that has direct access…I think it’s safe to say in the future we would probably see some foreign investment from that.

… Realtors expect more Chinese buyers will come to Calgary in the future, especially if the price of oil rebounds.”

The Chinese Vancouver real estate boom could slowly be shifting into Calgary, and I bet that within the next year, we could witness a big jump in Calgary real estate.

And it’s not just because of Chinese buyers…

Calgary could be on track for a rebound…

Asset Sales

Just a few years ago, many of the world’s gold resources were put on massive fire sales – in many cases, you could buy an ounce of gold in the ground for less than US$5/oz.

That’s the boom and bust of a commodities cycle.

When the price of an asset appreciates, as gold did post-2008, investors and corporations scrambled to buy them – often paying ridiculous premiums to ride the rising tides.

But when prices fell, they also scrambled to sell them – no matter the loss.

boatondryland

This was the case for gold just a few years ago.

Today, that story has changed. Many of the gold assets that were put on fire sales just a couple of years ago have already quadrupled in value.

Those who participated and were brave enough to take that dive into gold have already made a fortune – and are likely to make even more as the years move ahead.

But I am not here to talk about gold.

I am here to talk about the transfer of wealth and the cycles that go along with it.

In short, it’s very simple: prices rise, then fall, then rise again – often to higher levels than the cycle before it.

The problem is that it is usually the unprepared – the average Joe – that follows the news* who gets caught buying at the top and then forced to sell at the bottom.

(*Remember: that more than 90% of the media is controlled by six oligarchs.)

The rich get richer and the poor get poorer.

At the beginning of this Letter, I said we will expose the one sector that banks and private equity firms are quietly loading up on.

So what is it?

Quiet Accumulation

Take a look at what’s happened in the last few months:

April 25, 2016: Husky Energy to sell assets for $1.7-billion

May 5, 2016: Chesapeake to sell some Oklahoma assets to Newfield for $470 million

April 29, 2016: Eni makes progress on $8 billion asset sales goal

May 10, 2016: Husky to sell southwest Saskatchewan oil assets to Whitecap for $595M

June 6, 2016: Devon Energy Announces Additional $1 Billion of Upstream Asset Sales

June 10, 2016: Penn West Petroleum Ltd. has struck a deal to sell Saskatchewan oil assets for $975-million, easing the risk of default for the debt-saddled producer.

June 15, 2016: Petrobras Said Close to $6 Billion Sale of Brazil Gas Pipelines

June 17, 2016: Chevron puts Burnaby oil refinery, B.C. distribution network on sales block

June 21, 2016: Calgary-based Encana to sell $625M worth of Alberta oil assets

August 3, 2016: Woodlands exploration co. to exit Texas with $390M asset sale

August 5, 2016: Chevron to Sell Up to $5 Billion of Asian Assets

August 8, 2016: Continental Resources To Sell Certain SCOOP Assets For $281M

August 19, 2016: Shell advises JPMorgan to sell $1bn NZ oil portfolio

August 18, 2016: Paramount Resources Ltd. Announces Closing of Musreau / Kakwa Asset Sale to Seven Generations for $2.1 billion

You get the point.

If we saw these kind of deals, at this rapid pace, in any other resource sector – say, gold – that sector would be on fire.

But this one isn’t yet…

That’s because the smart money is just beginning to load up.

Smart Money Piles In

Earlier on June 21, 2016, via EY:

“Private equity firms are readying to deploy capital into the global oil and gas sector with 25% planning acquisitions before the end of the year and 43% by the first half of 2017, according to an EY global survey of 100 PE firms active in the sector.”

And via Business Insider:

“…Private-equity firms are sitting on a $971 billion cash pile…and they are ready to plow money into the oil and gas sector.”

And via BNN on July 18:
“The largest energy-focused private equity firm in Calgary is ramping up its oil patch investing pace to take advantage of bargain prices and an expected recovery in oil prices next year.”

And that’s precisely what’s been happening.

Via Bloomberg:

“Since the great crash of oil in mid-2014, more than $100 billion has been raised by buyout firms and distressed-debt funds eager to scoop up energy assets on the cheap. But as the months rolled by, few opportunities cropped up as cash-starved drillers limped along with the help of their bankers.

Not any more.

What started out as a trickle has now turned into something much more, with Blackstone Group LP, Apollo Global Management LLC, and WL Ross & Co. all jumping in this year to buy a grab bag of assets at discounted prices.

Precise numbers are hard to come by, but in conversations with investors, bankers and analysts across the industry, there’s little doubt that private equity firms are ramping up their investments in everything from undrilled and developed oil and gas acreage to troubled loans.

oil and gas chartBillionaire Leon Black’s Apollo, WL Ross and EIG Global Energy Partners have snapped up more than half of the $1.6 billion in unsecured debt of Permian Resources…

…McClendon set up Permian Resources with backing from Houston-based private equity shop Energy & Minerals Group….

…While executives at Wells Fargo and other banks have met with buyout firms to unload their energy loans in recent months, according to people familiar with the matter, some private equity players are also snapping up assets directly from operators that are short on cash.

In July, Blackstone paid about $500 million for acreage in the Permian. This month, it expects to wrap a deal to buy a partly developed oil field in the North Sea.

The firm, which didn’t make a single investment for 15 months after it raised a $4.5 billion fund in early 2015 for energy assets, has spent $1.8 billion between the fund and its main buyout pool on oil and gas plays this year.”

There’s more.

Here are just some of the headlines that’s been quietly swept under the rug:

The following is very IMPORTANT.

Recall the Letter I wrote at the beginning of the year titled, The Big Banks Secret Oil Play: Why Oil Prices are So Low:

“…We know that oil’s crash has put a heavy burden on many debt facilities that are associated with oil. We also know that the big banks are all heavily leveraged within the sector.

If that is the case, why are the big banks so calm?

The answer is simple.

… Most of the loans associated with oil are done through asset-backed loans, or reserve-based financing.

It means that the loans are backed by the underlying asset itself: the oil reserves.

So if the loans go south, guess who ends up with the oil?

According to Reuters, JP Morgan is the number one U.S. bank by assets. And despite its energy exposure assumed at only 1.6 percent of total loans, the bank could own reserves of up to $750 million!

Via Reuters:

“If oil reaches $30 a barrel – and here we are – and stayed there for, call it, 18 months, you could expect to see (JPMorgan’s) reserve builds of up to $750 million.”

No wonder the banks aren’t worried about an oil financial contagion – especially not Jamie Dimon, JP Morgan’s Chairman, CEO and President:

“…Remember, these are asset-backed loans, so a bankruptcy doesn’t necessarily mean your loan is bad.” – Jamie Dimon

As oil collapses and defaults arise, the banks have not only traded dollars for assets on the cheap but gained massive oil reserves for pennies on the dollar to back the underlying contracts of the oil that they so heavily trade.”

And that’s precisely what is happening…

Debt for Ownership

Recall the headlines from earlier, such as:

“Distressed-debt investor targets energy firms to swap debt for ownership amid steep drop in crude prices.”

Here’s the continuation of that headline, via WSJ:

“…Wilbur Ross, known for big investments in downtrodden industries, is betting that the oil and gas slump has dragged on long enough to shake out weaker players.

His investment firm, WL Ross & Co., has purchased hundreds of millions of dollars in troubled energy debt in a bid to take control of distressed oil and gas companies if they are forced to hand over ownership to creditors, according to people familiar with the matter.

…WL Ross is angling to swap debt for ownership in Breitburn Energy Partners LP, which filed for chapter 11 protection in May, and has been buying debt of Permian Resources LLC, a Texas oil producer founded by late wildcatter Aubrey McClendon that might ultimately have to hand at least part-ownership to creditors in a restructuring, said people familiar with the matter.”

During the boom, oil and gas companies began to develop a number of oil and gas assets that were highly leveraged to higher oil prices – all using borrowed capital.

Since oil prices have fallen, these assets are now being sold for pennies on the dollar.

And it couldn’t be sweeter for the big money that’s now swooping them up.

They are not only getting a major discount for strong oil and gas assets, but many of the newly accumulated assets have been developed further using other people’s money and sweat equity.

The oil and gas sector is experiencing an incredible transfer of wealth – and the banks and big money are once again positioning themselves to reap the rewards.

And it’s only just begun.

I am not saying that oil and gas is going higher tomorrow – especially since private equity and banks have time on their side and often operate on a much longer time horizon.

But if you’re a long-term thinker, forget all of the news you’ve been hearing about the demise of oil and gas.

Oil and gas isn’t dead, its just sleeping – waiting for the day the big money wakes it up.

Seek the truth,

Ivan Lo

The Equedia Letter

www.equedia.com

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