NATO Valuation I was reading some of the posts/analyst reports and wanted to comment on the value of NATO. If Cenovus, MEG, Kinder Morgan, etc - walked into the negotiating room with Canexus and quoted an EV/EBITDA multiple as thier baseline for estimating the value of NATO - I presume they would be laughed out of the room.
Value in this context is expressly the purview of the buyer and what they feel NATO is worth to them based on thier strategic goals and Net Present Value - not some EV/EBITDA mutiple assigned by some "expert" analyst at one of the brokerages. There are two types of buyers. A buyer who will use the facility to move thier own crude, and a buyer who will "rent" capacity to other oil producers similar to the "take or pay" model Canexus was adopting. Each "type" of buyer will focus on different economics for valuing NATO.
So - with that - I will share with you my simple analysis assuming the buyer is someone who will use NATO to transport their own produciton. As a side note, I have stopped posting on this site for some time since there were only a handful of people (ie. Nawar) that could provide a serious critique of the analysis. That said - take this for what it's worth and do your own assessment.
My sense - CUS will negotiate a value for NATO much higher than the market is anticipating once NATO is operational which will trump current market sentiment given it's current closing price at $4.67 a share. Based on today's closing price, the market is pricing NATO at around $300M to $350M (I won't get into the calculation - but you can build a sum of the parts model or use an analyst report to reverse engineer the implied value of NATO based on today's closing price).
a) If we use Kinder Morgan's/Imperial Oil Edmonton Rail Terminal as a proxy - thier inital cost was $170M, plus another $100M for pipeline connections assumed by KM.
(https://www.businesswire.com/news/home/20131220005830/en/Kinder-Morgan-Imperial-Oil-Build-Edmonton-Crude#.VCNGafldX0w)
By the way, the latter cost of $100M cost balloned to $284M as of August 2014. (https://boereport.com/2014/08/07/kinder-morgan-to-expand-the-edmonton-crude-oil-rail-terminal-now-under-construction/).
So thier total cost balloned from $270 to $454M. We all know how costs ballooned with Canexus. The point i'm trying to make - it isn't cheap to build a crude-to-rail facility and is fraught with risk. There are no guarantees with respect to cost and project delays. With labour shortages - there is a ton of execution risk that a buyer would have to factor into it's price for building thier own terminal. That's just building the facility. Buying 100s of acres of land near two rail lines is a completely separate question which creates a separate barrier to entry in this space unless you already own the rail-accessable land.
Let's peg the TOTAL cost (taking into account execution risk, etc) to build a facility given the KM and Canexus experience at $350M.
b) Time to market is also important. There is an OPPORTUNITY COST for building a crude-to-rail facility if i'm a buyer. According to this article:
https://business.financialpost.com/2014/04/17/rail-set-to-transport-500000-bpd-of-canadian-oil-by-year-end-but-costs-remain-high/?__lsa=50c4-0929
The costs to move oil by rail from Western Canada to the Gulf Coast range between $15 and $20 per barrel, compared to $7 and $11 on a pipeline. But companies that have thier own signficant rail infrastructure could cap thier costs at $10 per barrel. So if you are a buyer - do the arithmitic.
If NATO is at full capacity of 10.5 unit trains per week, each unit train moving 60,000 BOE, that is 30.2 MILLION barrels per year. If I own my own rail infrastructure and can cap my cost at $10 per barrel relative to manifest - that is $5 per barrel savings - or $151M per year that GOES TO MY BOTTOM LINE. If it takes 1.5 years to built a unit train facility (factoring in project delays) - my opportunity cost (money that I forego because I wasted 1.5 years building my own terminal) is $226M. That being said, if a slew of pipeline projects is coming online in 2018 - why would I even consider building a rail facility to go live in 2016 if I could take advantage of the lower cost pipeline in 2018? In other words - a more important consideration than the cost of building a unit rail terminal - is TIMING and the opportunity cost of buliding my own/losing that cost advantage for 1.5 years on my oil by purchaing NATO today.
Minimum Value of NATO
Cost To Build My Own Terminal - $350M
Opportunity Cost Of Building My Own Terminal - $226M
Minimum Value Of NATO to a CENOVUS or MEG - $576M
Of course - I have decades of oil reserves where if I'm Cenovus - the cost of rail is on par with the cost of pipeline according to thier CEO.
"The combination of running unit trains - which can span up to 120 tank cars - and using less or no dilutent.....we can get reasonably close to the same per barrel cost of transportation as pipeline"....
https://business.financialpost.com/2014/02/13/cenovus-looks-to-boost-oil-by-rail-economics/?__lsa=50c4-0929
Moreover, if i'm Cenovus, MEG, or other major, I don't have to worry about pipeline or rail bottlenecks since I have my own rail infrastructure. I can improve my netbacks for 2-3 years over my competitors who do not have thier own rail infrastructure - improving my bottom line. I can access the best markets for my oil in that time using two rail lines. In other words, there is SIGNIFICANT longer term value (10-20 year horizon) above and beyond the "minimum" cost calculated above to get my own terminal up and runnig. Let's say for argument sake - that discounted present value of that longer term value comes to around $250M-$500M over 20 years dependent on my heavy oil reserves and other factors proprietary to a private equity or potential buyer.
Minimum NATO Value - $576M
Other Value - $250M - $500M
Total Range - $576M to $1,000M
If I'm negotiating to purchase NATO from CUS - I would likely want to negotiate closer to $576., but may agree to a midpoint as high at $750M - $800M depending on how I value the longer term model and whether or not other majors or private equity do NOT bid up that price). If i'm a major, as long as my NET PRESENT VALUE is materially positive over the long term - buying NATO between $500 to $800M isn't necessarily out of the quesiton - especially if there are bidders hiking the price because they've come to the same conclusions with respect to building thier own facility.
For a brokerage to suggest a major will build thier own facility if they can't get thier price for NATO, in 2014, with the execution risk that it entails, is (in my humble opinion) - garbage - a "buy vs. build" decision is much more complex than an analyst would have you believe.
To summarize
a) The EV/EBITA analysis provided by the analyst community is utter garbabe since it's based on subjective assessment of an "experts" opinioin on appropriate multiple. Although convenient, its a silly way to gauge the true value of NATO but paletable to an unsophisticated investor.
b) The better gauage of value is what a buyer would be willing to pay for the assets that creates a positive NPV over the long-term duration of this asset and fits with thier strategic goals. Thats where you have to assume you are a research associate working for a private equity firm, and are asked to prepare a quote for your CEO to take to Canexus. The assessment above that I provided is overly simplistic - but directional to the way a buyer would be assessing NATO's true value.
Good luck.