Incitec Pivot Ltd T.IPL

RE:RE:RE:Uncharted waters

[sclarda]

Rakaposhi wrote

Yes the world is complex and a lot of unexpected things will happen.  That being said IPL management by taking on the large $4 billion project on their own while keeping and increasing the dividend put this company in a situation where they needed everything to go as planned and the world economy to cooperate for several years as the project was being built. It should have been reasonably expected that over the several years of construction unexpected events would likely occur as they often do.

>>> I totally agree. But, roll back the clock 3 months and nothing was amiss. They were clearly on target to sell the storage, kill the DRIP and premium and have the buffer to complete the project. There is nothing like it that you can buy. And sometimes going bigger means a massive increase in margin. It's like having a restaurant. If you have 5 tables, you still need the kitchen, staff and all the other overhead. So better to go for the 10 or 15 table restaurant. Besides, they were careful to maintain their credit rating and had ample buffer on the loan book.

Better management would not have put the company in the risky situation that they did. If they wanted to do the project they should have taken on a partner at the beginning for at least a 25% share. 

>>> Based on what value? Don't forget that the reason IPL went this way was because they acquired the expertise in an earlier acquisition.

That would have given them $1 billion in cash.  Then they should have cut the dividend by one third at least 3 years ago which would have saved them aprox. $600 million in dividends. That cut would also have saved them another $400 million  in dividends over the next 2 years of construction.  By taking on a 25% partner at the beginning and cutting the dividends by one third they would have an extra $2 billion in cash over the construction period which would have payed for half the project.

>>> Dealing with a partner is messy too though. This is a visionary thing. Better to get through 50% of it and then bring some muscle along, as they are.

If they could not find a partner at that time they should not have gone ahead with the project on their own as the company was to small to handle this big of a project on their own especially without cutting the dividend significantly. Even Pembina which has 3 times the cashflow of IPL took on a partner for their propane project.

>>> Because they did not have the inhouse expertise but saw the value. Don't forget that IPL was first out the door with this. There are 6 other similar projects in AB and BC on the books or in process at the moment, all aiming at the same thing, so there is a lot of value in the idea.


Instead of doing a large project like they did which requires spending $4 billion over 5 years before any revenue is generated would it not have been better to do a smaller project of around $1.5 billion which would have only required around one third of the investment and would have been generating cashflow after a couple of years?

>>> No. See the restaurant example. Add permitting, construction, ... size matters and keeps unit cost down in the long run.

A project like that would have already been operating and bringing in cashflow which could help to pay for the next one.  Even better than building a smaller project would be to buy something already operating which would be generating cashflow right away and save the company all the hassles of building something from scratch. The recent purchase of more oil storage in Europe is a good example.

By taking a few much smaller steps than the one large one they did they would have had much less investment and risk and quicker cashflow generation not to mention avoiding the dillution of the DRIP and not having to make the large dividend cut they just did along with trying to find a partner for the propane project right when the world is in a huge crisis.

Better to take several small bites that you can chew on and digest than one big one that could choke you.

>>> Not true in this case, several small restaurants all require the same overhead.

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"I totally agree but roll back the clock 3 months and nothing was amiss."

Thats the whole point of my post. When a relatively small company that already has considerable debt takes on a major project spending $4 billion over 5 years without generating a cent in cashflow during that time you are betting on everything going perfectly in the world which will likely not happen in that long of a time frame.

"Not true in this case, several small restaurants all require the sameoverhead."

 It all boils down to return on investment.  The propane project will return aprox. 10% to 12% on investment if things go well as there is also no guarantee on where prices for the plastics will be when they actually do start producing in a couple of years. There are many smaller projects that could return similar amounts with a lot less risk. If they had done 3 or more smaller projects   that could also give a healthy return on investment. Even if the return was smaller doing 3 $1.3 billion dollar projects or even better buying already completed projects that  would have resulted in immediate cashflow and a lot less risk and investment.

For example   If they had purchased or built a couple or even more projects now and had spent $2 billion and were eyeing up a third they could put the third one on hold and even with a  8% return on the first couple billion of investment they would be bringing in $160 million more in cashflow. Instead they still need to spend another $1 billion this year and another $400 million or so next year with no income from the project for 2 years . Added to that is their already large debt.  If things get worse and their income goes down a lot  they could be in trouble and have to eliminate the dividend completely.

It appears that you have fallen in love with this stock and this project.  Judging where the shareprice is the market isnt as smitten and with good reason.