Market Call:
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Genevieve Roch-Decter, Portfolio Manager, LDIC Inc.
FOCUS: Energy Infrastructure Stocks
Market Outlook:
We are positive on energy infrastructure in North America. There are large infrastructure bottlenecks in both pipelines and midstreams that need to be addressed.
We believe there will be over $100B spent over the next five years for North American producers to receive world prices for oil & natural gas. World prices for oil mean Brent pricing which is over $10-15 per barrel more than what U.S. Bakken and Canadian producers are receiving and $20 per barrel more than what Canadian heavy oil producers are receiving. World prices for natural gas means $15 to $18 per million cubic feet versus $3-4 per million cubic feet, which is what we are receiving in North America. As this $100B in spending unfolds we believe you want to be on the right side of the pipe, meaning owning the infrastructure: pipelines, midstreams, railroads/transportation & energy services. We also think you can make money owning a select few producers who are taking fate into their own hands and building out infrastructure. We believe active management will be key during this spending cycle and as such a buy and hold strategy won’t work.
TOP PICKS:
AltaGas (ALA TSX) Most recently purchased at $38
We like Altagas because it provides stable yield and impressive growth. We see EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) doubling from $300M to over $600M over the next 3 years and double digit dividend growth as the company brings on over $1B worth of hydroelectricity projects over the next year and seeks growth at Blythe (the recently closed natural gas-fired power generation facility in California). Additional upside will come from $2-5B worth of potential LNG and LPG projects Altagas is contemplating on the west coast (already announced JV with Japan’s Idemitsu). Altagas stock price will also benefit from multiple expansion as over 80% of its cash flow will be utility like by mid-2014 (ie. Long-term contracted or cost of service).
Canexus (CUS TSX) Most recently purchased at $8.96
We like Canexus because it has stable yield and growth. It has a low-cost chemical business generating over $100M in EBITDA a year. In addiction CUS is building out an energy infrastructure segment. In Bruderheim, Alberta Canexus is taking advantage of bottlenecked and thus discounted oil production (especially from the oilsands) and is building out a pipeline-to-rail and truck-to-rail transloading facility. The company just did an equity financing to double the capacity of this operation. The first phase will be in operation by the end of this year and by the end of next year we believe this operation could be handling over 100 thousand barrels per day and generating over $60M in EBITDA. We believe as EBITDA continue to grow the company will be able to increase its dividend. Q1/2013 payout ratio was 85 percent and the yield is 6 percent plus.
Badger Daylighting (BAD TSX) Most recently purchased at $44
We like Badger Daylighting because it’s got strong organic growth and pays a dividend. It’s North America’s largest provider of non-destructive hydrovac excavation for pipelines and utility companies. They manufacture hydrovac trucks that are able to expose underground pipes and utilities for repair work or when companies are laying down new pipelines. Company is 50/50 split between Canada and the U.S. and we see solid growth over the next few years as the company grows their fleet and revenue per truck and gains more work from the infrastructure build-out we have been talking about. Company has a strong balance sheet and pays a small dividend we believe could grow.
| Disclosure: |
Personal |
Family |
Portfolio/Fund |
| ALA |
Y |
Y |
Y |
| CUS |
Y |
Y |
Y |
| BAD |
Y |
Y |
Y |
Past Picks: This is Genevieve Roch-Decter's first appearance on Market Call
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