Teck Resources: Stay Away Despite Positives

Teck Resources (TCK) has been crushed this year due to the weakness in the commodity market as its shares are down over 65% so far. The cost control initiatives being implemented by the company have been offset by depressed global commodity demand and the strengthening U.S. dollar.

In fact, Teck was compelled to perform a negative pricing adjustment of $32 million during the second quarter of 2015 and primarily influenced by quarterly alterations in major commodity prices including, copper falling by US$0.13/pound and zinc declining by US$0.04/pound.

The end market will remain weak

The oil price decline owing to the market imbalance with expanding supply of oil from OPEC nations will lead to weakness in pricing.
Moreover, the oil production from non-OPEC countries is expanding faster than international demand with exceptionally elevated US inventories. However, demand growth slowed in 2014 with easing growth particularly in non-OECD nations and economic uncertainty in China.

Going forward into 2016, a more logical market demand is estimated with demand expansion greater than non-OPEC production and deteriorating rates of current fields needing over 5 Mbpd of new annual production.

Teck is not isolated from the global demand and pricing conditions and it is thus bound to suffer losses in the existing environment. However, the company has put in efforts to minimize losses by lowering its production for the quarter and applying key pricing hedges.

There’s expanding US production in spite of fall in the rig count with US shale continuing to play a major role and no solid conclusion on the capability of US exports. The overall economics of shale production in North America enhanced owing to superior operational efficiency, drilling productivity achievements, improved early production rates and smaller servicing costs.

Also, the U.S. has a huge inventory base with its crude inventory exceeding five-year averages and significant inventory of drilled wells but still not in operation. However, the long-term supply and demand fundamentals seem strong with approximately 1.0% to 1.5% of the estimated worldwide yearly demand growth.

In addition, approximately 20 MMbpd of excess supply is estimated to be required to offset the fall in production. Wood Mackenzie estimates nearly 40 MMbpd of key supply required from OPEC in the next 10 years, depending on an average long-term price of US$90.

Teck, on the other hand, is expected to have enough export capacity to successfully fulfill the prospective global oil and gas demand through rail capacity and strategic pipelines. Moving ahead, Teck is focused on acquiring long-term and strategic market access to U.S. deep water ports and Gulf Coast.

It has already acquired 425 kbbls of devoted storage capacity at Hardisty and currently evaluating methods to acquire pipeline capacity from Keystone XL to US Gulf. Teck has performed transmountain growth to Vancouver and energy east to east coast.

Teck has received Moody’s investment grade credit rating of Baa3 negative and primarily driven by the company’s major cost control initiatives, superior capital allocation approach, lowering of dividends, streaming and production restrictions in coal.

Teck is expected to be extremely well-positioned to successfully overcome the ongoing weaker global demand and commodity pricing environment through its strategic market diversification, production curtailments and cost control and thus has received an investment grade credit rating from the agency.

Conclusion

But, despite the positives, I think that it will be best for investors to avoid an investment in Teck Resources until and unless the oil market improves as the company’s performance is highly dependent on the commodity. Thus, it will be best for investors to wait on the sidelines and see how Teck performs in the next few quarters.
Published on Oct 1, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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