KeyStone’s Stock Talk Show, Episode 182

Great to be back with you again this week and to announce the launch of our Fall Live Webinars and special first time in person VIP in Person Events in Vancouver & Calgary for clients and new VIP clients are welcome. In the news this week we discuss new credit card surcharges you may be facing of up to 2.5% starting this week. In our YSOT segment I answer a question on Parex Resources Inc. (PXT: TSX), a cash rich, Columbian light sweet crude provider that pays a 4.7% dividend. Once again this week, Brennan takes a look back another speculative one time market darling that has seen its share price crater. The company, Cielo Waste Solutions Corp. (CMC:TSX-V), was a stock we recommended listeners stay away from as it never passed our initial criteria for investment. Cielo is down 90+% – Brennan will let you know why we said stay away and what we currently think about this spec operation. Aaron hits the mailbag to answer a listener question on how to treat Goodwill when analyzing any stock. Finally, Brett also answers a listener question on Corus Entertainment (CJR.B:TSX), a Canadian broadcasting company. The company currently operates 33 specialty Television Channels, 15 conventional television stations and 39 Radio Stations across the country, as well as producing television content that is broadcasted around the world. We will let you know if it offers value.


Welcome, my cohosts, Aaron and the killer B’s, Brennan and Brett!

We have something different planned for our Fall Webinars – we are doing our traditional series of 3 hour webinars which anyone can attend, but we are also offering special in-person 5-6 hour events with lunch and refreshments for VIP clients new and old in Vancouver and Calgary. Details in a moment.

Live DIY Stock Investing Webinar – “Build a Stock Portfolio During a Bear, Profit in the Boom”

Nov 2 7pm Pacific & Nov 8 – 7 pm Eastern

Who should attend:

Individuals or families who want further information on how to build a simple 15-25 stock portfolio, how to face a bear market, what types of stocks to buy and which to avoid, simple information on the pro’s and cons of GICs, bonds and other fixed income vs. dividend growth stocks all in an environment where interest rates continue to rise, a simple Starter Portfolio of 5-6 stocks including top dividend growth stocks, top recession resistant stocks, bargains appearing in U.S. technology, top gold related stocks and more.

  • 2022 Review & How to Position Your Portfolio for 2023 – Broad Risks & Opportunities? The 2022 drop in North American stocks marks the worst in 52-years – how did we get here and where are valuations today & the folly of macro Forecasting.

Credit Card Surcharges

Truss Reversal on UK Corporate Tax
More marketing ETFs


Listener Question: Parex is an oil & gas company you have recommended in the past – what are your thoughts on it today? – Sandy, Moncton, NB.

Parex Resources Inc. (PXT: TSX)
Price: $21.04
Market Cap: $2.30 billion
Dividend: 4.76%

Company Description:

Parex Resources is a Canadian based, oil-weighted producer focused on conventional, high productivity reservoirs in Colombia. With cash on the balance sheet, material free cash flow and active NCIB, Parex represents a “best-in-class” international E&P that should be a core name in any portfolio.

Near Term Outlook

  • Q2 revenues jumped 63.12% to $345.03 million from $211.59 million.
  • Income before income taxes rose 112% to $269.35 from $127.33 million.
  • EPS rose to $1.24 from $ 0.72.
  • Production combined (Crude (weighted) & Conventional Natural Gas) was basically flat 51.14 MBOE/day.
  • Huge financial growth – High light sweet crude will do that.

Production Guidance

  • Third quarter 2022 production was expected to average 53.0-55.0 MBOE/d – decent growth.
  • Full-year 2022 production to be 54.0-56.0 MBOE/d, with a projected exit rate of over 60.0 MBOE/d.

Recent Announcement

Recently – Parex provided an operational and capital return update – Q3 & 2022 Volumes Impacted By Weather And Blockades; New Discoveries Positive.

Production for Q3/22 is expected to average 51.1 MBOE/d (below previous guidance of 53.0-55.0 MBOE/d due to weather, operational timing issues and local blockades) with current volumes running ~55.0 MBOE/d ahead of a planned 60.0+ MBOE/d exit rate, 54.0-58.0 MBOE/d forecast for Q4 2022 and a 52.0-53.0 MBOE/d average for this year (down from 54.0-56.0 MBOE/d previously). In the Llanos Basin, a new deeper oil zone was discovered by a recent well (counting as an oil discovery) on the Capachos block that should be onstream this quarter

Conclusion – Our Take

With the current 11.8 million share NCIB fulfilled in Q3 20 22, Parex’s share count stands at 109.3

Million. We estimate US$225 million in cash at the end of Q3 2022 and a new NCIB expected

for 2023.

~1/3 of cash flow is expected to be returned to shareholders longer term via buy backs and the dividend – shareholder friendly.

Valuations: Stock trades at approximately 2.33 times this year’s expected cash flow and about 1.35 times EV/EBITDA. Low valuations – having said that, cash flow can fluctuate significantly with energy prices, which makes any oil & gas producer risky.

Parex has a cash rich balance sheet which bests most of its peers – the dividend is attractive, but one should almost never buy a commodity based business for the dividend. The stock ranks relatively highly if growth can accelerate in a volatile conventional energy sector. It will remain volatile.

Education Segment – Goodwill for Investors   

Viewer Question: Just wondering if one of the Keystone presenters has discussed how to treat Goodwill when doing a company analysis. For example, if you subtract balance sheet Goodwill as an asset, the book value of a share is decreased proportionately. Is Goodwill a red flag when doing/ranking companies?

  • What is goodwill?
    • Goodwill is an accounting term on a company’s balance sheet.
    • It arises as a result of acquisitions.
    • More specifically, it refers to the amount that an acquirer pays to purchase a company above and beyond the value of the company’s listed assets.
  • Example of goodwill.
    • Let’s say you are acquiring a company that manufactures paperclips.
    • Your accountants go through all of the company’s assets and determine that in total, the assets are worth $100 million.
    • But the acquisition price that you ultimately negotiate is $120 million.
    • The way this is going to be recording on your balance sheet, after the acquisition is complete, is you will add the $100 million to your assets and the residual $20 million is listed as goodwill.
    • This is also considered an asset that is listed on the balance sheet.
  •  Why did you pay an extra $20 million for this acquisition? 
    • The reason is because you believe that the business, in its entirety, is worth more than just the value of its assets.
    • This may be because the company you are buying has a strong brand, or great customer contracts, for a fantastic network of talent and operating processes that make it more competitive, or other forms of intellectual property.
    • For whatever reason, you believe that the company is worth more than just the fair market value of its assets.
    • This excess value is accounted for as goodwill.
  • The Question is if Goodwill is a Red Flag when ranking companies.
    • The answer is…not necessarily.
    • It really depends on the company, the industry, how much goodwill we are taking about and what the rest of the balance sheet and financial performance looks like.
  • There are risks to having too much goodwill.
    • Goodwill can be a sign that the company overpaid for acquisitions.
    • Goodwill also has to be reviewed annually and can result in non-cash write-downs or expenses.
    • Goodwill is not a real asset that with a tangible value that can be resold.
  • Our take on goodwill.
    • The truth is that it is important for a stock analyst to understand all of the items on a company’s balance sheet but goodwill and asset values in general are not the most important items that we look at…in fact…in many cases they are amongst the least important.
    • The reason for this is how asset values are recorded on a balance sheet.
    • For those who aren’t aware, the balance sheet is where a company records all of the values for its assets, liabilities and equity.
    • However, many investors believe that the asset values listed on a balance sheet reflect the true value of those assets in the event that the company were to be liquidated or those assets sold.
    • The fact is that they do not. Under accounting standards, most assets on the balance sheet are recorded at cost minus any depreciation.
    • The reality is that the asset values listed on the balance sheet can be very different from the true value of those assets were they to be sold.
    • The balance sheet is very useful when determining the financial healthy of a company, meaning does it have too much debt.
    • However, I do not use the balance sheet to value a company, meaning determine if a stock is expensive or cheap.
    • For that reason, goodwill is not one of the more important items that I look at and certainly not when ranking stocks.
  • Final thoughts. 
    • Most any company that does a lot of acquisitions is going to have goodwill on the balance sheet.
    • I always prefer a cleaner balance sheet but the existence of goodwill is not necessarily a red flag.
    • To evaluate if a company is paying too much for acquisitions I will typically look more to the earnings and free cash accretion and the company’s track record.
    • Even when looking at the fixed assets on the balance sheet, we typically don’t have an accurate and reliable measurement of the real value.
    • I’ve heard the saying once that “goodwill is the amount that a company overpays for an acquisition.”
    • I understand this and its true in many cases but I don’t agree that it’s the whole story.
  • Final example Alphabet.
    • Let’s take the example of Alphabet which owns some of the top technology platforms in the world including Google, Youtube and Google Cloud.
    • The total value of the company’s assets less its cash is about $230 billion.
    • The company produced nearly $100 billion in cash flow over the last year.
    • Clearly, there are brands, processes, technologies, talent and connections in place that make the total value of Alphabet much more than just the value of its listed assets.
    • This is why the company’s market value is worth many times more than its asset value.

YSOT Corus Entertainment (CJR.B:TSX) 

  1. Corus Entertainment Symbol CJR.B on the TSX trading at 2.28 a share, is a Canadian broadcasting company. The company currently operates 33 specialty Television Channels, 15 conventional television stations and 39 Radio Stations across the country, as well as producing television content that is broadcasted around the world.
  2. The company is profitable, having a profit of 29.6 million dollars or $0.14 per share in Q3 2022. Revenue is dominated by the television segment, which brought in 93% of the 433 million in the last quarter. Television brought in 128 million in segment profit, while radio only brought in 6 million, showing the clear dependency on their television segment. The Company paid a dividend of 0.06 per share in the quarter, bringing the trailing twelve-month dividend yield to 10.4%.
  1. It Seems great, right? Profitable and has a nice dividend yield. The problem is the company has stagnated growth. Making the lack of growth more concerning is the significant debt position of $1.27 Billion. The company isn’t crushed by debt as it is still producing free cash flow that exceeds the interest & financing costs allowing it to pay down its debt for years. Part of the reason it has been able to pay off debt is the lowing of its dividends in 2018 from 0.095 to the current 0.06; seeing dividends shrink is always concerning. Of course, lowering dividends is better than the company going bankrupt.
  2. As the company is struggling to find any growth, the valuations reflect that. The trailing price-to-earnings ratio is only 3.3 times, and a trailing price-to-free cash flow of  2 times. Looking forward, current analyst expectations are similar or lower for the fiscal year 2023 compared to the expectations for the fiscal year 2022. The price implies the broader market does not see a turnaround in growth any time soon. But what is management doing to turn it around? They are pushing content production; some recent highlights include 200 additional hours of Canadian content, 45 Greenlights and renewals, and partnering with Paramount Global to produce content and provide advertising representation for its Pluto TV Streaming Service, which is due to launch soon.

So, woud we buy it? No, even with the valuations low, it is hard to justify purchasing the company from a long-term perspective, as the growth is just not there, and debt risk, although lower than in previous years, is still considerable. If growth does appear, the company would be significantly more appealing. So, I’ll open it up to the rest of you.


Cielo Waste Solutions (CMC:TSX-V)

Price: $0.06

Cielo Waste Solutions Corp. operates as a waste-to-fuel environmental technology company in Canada. It converts and transforms waste feedstocks, including organic material and wood derivative waste into fuel, such as diesel, naphtha, and kerosene.

I covered Cielo on the podcast in May 2021 @ $0.88 and after there was a ton of buzz going on about the company and its “blue sky potential”. Where I even heard a young amateur investor tell me that it was going to $10.00…. So I thought that I would dig into the story….

And on the podcast I said that we wouldn’t touch the stock with a ten foot pole because it was behind management’s timelines on when it would generate revenue, the company had never posted consistent revenue or a dime of profit, it had a net debt balance, the CEO was selling shares in the $1.30-$0.90 range, and even on a hypothetical BEST CASE SCENARIO where the company could generate 17.5 million liters of diesel per year (I think the best they have done in a quarter is 80k liters….), the stock was still trading at 12x forward sales….. To us… the business model wasn’t proven yet, which we saw as a huge risk.

And as per usual, I had some feedback on YouTube…. with people telling me that I was missing the boat, the company is a world changer, and that they couldn’t trust my conclusions because I couldn’t say the businesses name right…

Evidently the company ran into issues with getting diesel generated causing it to only operate on a small-scale basis. And as the company continued to post losses and fail to prove its technology and business model, the stock collapsed, down 93% from when I covered the stock on the podcast at $0.88.

Ultimately, it’s just another cautionary tale of big promises on revolutionary technology along with loft business targets…. and under-delivering by management. In my opinion…. The company will be lucky if it doesn’t slowly creep closer and closer to bankruptcy in the coming year, like that of Xebec.


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