CANEXUS CORP 6.5 PCT DEBS T.CUS.DB.D

RE:RE:NATO numbers

[Kherson]

Kherson wrote:

Nawaralsaadi wrote: I spoke briefly to the CFO at CUS this morning, and I wanted to clarify the EBITDA guidance for NATO as well as share some useful tidbits.
 
NATO Manifest/Unit EBITDA:
 
The $50m EBITDA annualized guidance does not include the EBITDA for manifest trains, the manifest trains side of the business will bring in an additional $8m to $10m. Thus both operations combined will bring in around $60m in EBITDA (there is scope for a higher amount if the unit train business runs  above the target contracted level of 10.5 trains/week ; they have capacity to run 12/13 trains a week).
 
Storage:
 
The company has two salt caverns almost ready to go, from what I understood only minor capex is required to develop those. He mentioned that the basin is short storage capacity for condensate, propane .. etc (the caverns are not just limited to pure oil storage). He also confirmed that there is enough space to build several other storage caverns the final number depends on the size (CIBC mentioned in a research report that up to an additional 12 caverns can be developed on the site). He mentioned they have already received interest from potential clients to use that storage space (but they are deferring progress there until the unit train facility is fully constructed). While I didn’t check with him on the caverns EBITDA, the EBITDA numbers I have read on Scotia and CIBC put annualized EBITDA for each cavern anywhere from $3m to $10m. The development cost for each cavern (not the 2 already developed) is $15m to $20m, thus we when consider that up to 12 of those can be built at the site, we are looking potentially at a very large storage business at NATO.
 
Future of NATO:
 
When I asked if Canexus would be open to partnering with an industry player down the line to monetize all or a portion of NATO, he mentioned that this was an option. He added that several investment bankers have approached them about the facility, however the company is focused right now on finalizing construction and all those options will be reviewed once the facility is fully operational.
 
Condensate:
 
He spoke with some detail about the condensate handling capability at the site, and it seems that this could be a large business for them down the line (especially if Keystone type pipelines are built I assume). Since he was short on time (he was going to take a plane) I didn’t dig too deep into the potential revenue/EBITDA from this side of the business, but in one of the CCs, the management indicated an initial target of 10K to 20K barrels of condensate being handled in the initial phases at a similar margin to the oil/bitumen side. I believe the current EBITDA estimate for the unit trains is not budgeting for any condensate revenues, contracting for condensate will start after the unit trains are fully contracted.
 
I must say, after having studied NATO extensively over the last few weeks, and after talking with the CFO (I plan to talk with him again later this week or next week). I believe NATO is certainly worth much more than the market is pricing, here is one scenario of how much NATO can generate in EBITDA by 2016:
 
Unit trains at 11.5 week: $55m
Manifest: $9m
Storage: $10m (2 caverns)
Condensate: $10m (30K per day)
Total: $84m
Such EBITDA will increase the company average chemical EBITDA by 70%, not to mention there is a scope for additional storage revenues, condensate handling and another unit train expansion above the numbers I calculated above.  
 
It is key to note that even if the pipelines are built, and the bitumen unit train volume was to fall, the facility storage business + condensate handling business and residual unit train business could still sustain a minimum EBITDA of $50m a year for decades. Thus applying a 10 EBITDA multiple on this asset can easily give us a $500m in value. It is worth noting most analyst value NATO at $400m to $700m.
 
CUS can easily sale half of NATO in 2015 for a minimum of $250m in my opinion, use $200m to reduce debt/buyback shares and possibly re-inject $50m in NATO (+$50m from their partner) to fully develop the storage business and grow EBITDA further.
 
We have merely 2 quarters before the tide turns and the market starts pricing growing cash flows, lower Capex and starts anticipating a monetization deal. CUS can easily trade above $7 by then, and buying the company here remains a steal.
 
Regards,
Nawar
 
PS. I didn’t discuss construction schedules/budget with the CFO, if there is a material change there such information won’t be released to me over the phone.