Genevieve Roch-Decker is Portfolio Manager of LDIC Inc. Her talked is entitled "Making Money in Energy Infrastructure: Low Volatility but High Octane".
Energy producers are stocks like Suncor Energy (TSX-SU0 and Pengrowth Energy (TSX-PGF). Energy infrastructure includes pipelines, mid-stream and service companies like AltaGas Ltd. (TSX-ALA). The question is in risks and returns. She has owned Inter Pipeline (TSX-IPL) for 10 years and looks at this stock versus a stock like Pengrowth Energy (TSX-PGF). She feels that slow and steady wins the race. The turtle is IPL and the hare is Pengrowth.
She says that it is very difficult for energy producers to create shareholder value. They are fighting for production and they are a slave to a treadmill, to commodity prices and to debenture financing. Total return in Pengrowth over the last 10 years is a capital loss of 4% and for IPL is a gain of 565%.
The gain this year for energy producers is 4% with a yield of 3.2%. The return for Energy Infrastructure is 13.3% with a yield of 3.5%. The TSX composite return is 6.2% with a yield of 3%.
She feels that her company will do twice as better when they put their clients' money into energy infrastructure. Why is this? First is the take or pay contracts. Next is the visibility on earnings and dividend growth. Third is the low cost of capital and four is the high barrier to entry. Producers must guarantee money to a pipeline builder (in the form of contracts). Infrastructure producers create shareholder value.
There is a problem with price differentials with North American gas and oil. The North American price for gas is $2 - $3 MMCT and for oil is $95 BBL. The World price for gas is $15 MMCT and $110 BBL for oil. The problem is lack of infrastructure which is causing this. There also has been a huge surge in production and we are at a 15 year high. There is congestion in pipelines. Infrastructure is happing and will be over the next 5 years.
Her company is excited about energy infrastructure and they have 30% to 80% in infrastructure. One producer they like is Crescent Point Energy (TSX-CPG). Most other producers are a slave to infrastructure companies. Other companies that they like are AltaGas Ltd. (TSX-ALA), Pembina Pipeline Corp. (TSX-PPL), Inter Pipeline (TSX-IPL) and Keyera Corp. (TSX-KEY). She also likes producers of Suncor (TSX-SU), Pengrowth Energy (TSX-PGF), Canadian Natural Resources (TSX-CNQ) and EnCana Corp. (TSX-ECA).
AltaGas has LNG and uses railways. It also has pipelines through B. C. IPL has projects just in one province. They do not own Enbridge or TransCanada as they feel that they are too expensive. Enbridge is having problems with growth (Keystone).
They own Keyera Corp. (TSX-KEY), AltaGas Ltd. (TSX-ALA), Inter Pipeline (TSX-IPL) and Keyera Corp. (TSX-KEY). All had good third quarters this year and propane prices are strengthening.
Crescent Point Energy (TSX-CPG) dividend is sustainable. Some people say that they are borrowing and issuing stock to pay the dividend. She feels that they have the cash flow to pay the dividends. Whitecap Resources (TSX-WCP) has cut their dividend. This company does not have a good dividend model.
Infrastructure companies have had a great run-up. New expenditures over the next five years will generate great growth. They are invested Canexus Corporation (TSX-CUS). However, problem with this company is that the company did not properly explain what they were doing. They expect better cash flow next year. The chemical business in currently in a trough but will come out of it by mid-year in 2015.
They are invested in EnCana, but have reduced their exposure to this sector. They also have Paramount Resources (TSX-TOU). They are also invested in some cross border income trusts such as Eagle Rock Energy Partners LP (NASDAQ-EROC) and Parallel Energy Trust (TSX-PTL.UN). Argent Energy Trust (TSX- AET.UN) they held for the last year and got 11 to 12% dividend. They thought it was a non-positive investment and sold it.
There is the Douglas Channel LNG project. Small bands have signed with AltaGas. She thinks that B. C. will have a working plan for this project by the first of the year and make laws in the first to third quarter of next year. It will take a couple to 4 years to build the pipeline. These things always take longer than you think. Small producers in B. C. will be bought out so do not buy small producers.
The have Enterprise Group (TSX-E) and it is on the service side in a small cap fund. They have only a small position currently. They also have ShawCor Ltd. (TSX-SCL). It is also on the service side. They had a good year in 2013 and not so good for 2014. There has been a year over year decline in earnings. Stock price may go down.
Oil prices went from $70 to $30 to $110 and now are at $95 over the past 10 years. Do not buy commodities as no one knows where they will go. They are not only buying LNG companies but those involved with construction and engineering. Buying construction and engineering companies means you will make money. In the past LNG terminals were built to bring in gas because we were short of gas but these terminals were not used. (I think the point is that the construction and engineering companies got paid even though the terminals they built were not used.)
Husky Energy (TSX-HSE) is a producer and they are not into it. They like engineering companies like Stantec Inc. (TSX-STN) which are into construction and engineering. They also like Chicago Bridge & Iron Co. (NYSE-CBI) which is into constructions and engineering in US and Canada. There are equipment and labor problems in building the pipelines and for producers.
Lower interest rates will help build infrastructure. Companies are refinancing long term debt today at lower rates than they had before. There is some concern about the debt, but it is long term debt.
There is a current transition from coal into gas. In the US trucks are moving to use gas as fuel. This has started in Calgary also.
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