VSN - Veresen Inc.

[Cardboard]

It looks like that it is now pricing pretty bleak conditions in its base business and basically no value being assigned to their large LNG project on the U.S. West coast.

 

Their core business is pretty stable which consists of natural gas and NGL pipelines, midstream plants and they have 13 power plants. Based on my limited research, most of the free cash flow is currently being distributed to shareholders with $1/year dividends giving it a 8.4% yield.

 

With gas treatment and pipeline restrictions around the Montney, their investments in the Saturn compression unit and Sunrise gas plant should increase EBITDA providing them with a safer payout ratio.

 

The Jordan Cove LNG project has been delayed a few months due to regulatory approval which likely explains the majority of the recent price drop. If it goes ahead, this would be a game changer for the company and could be worth $8-10 a share based on estimates that I have seen from analysts.

 

So you are handsomely being paid to wait with some upside/very limited downside if the LNG project is a no-go while possibly looking at a double in a few years if it goes ahead.

 

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[Cardboard]

Maybe time to bring that idea forward again...

 

For disclosure, I didn't buy until this week. There was other opportunities which I found more compelling but, now this is interesting.

 

Since my initial post, the company has had only positive news for its new projects which you could not tell from the share price. The LNG project has received final environmental statement from FERC and is now awaiting final investment decision. Their Sunrise and Saturn gas projects are moving ahead in that partnership with KKR and demand for that new capacity is very strong with the Montney formation proving to be one of the most profitable area for natural gas production in NA. If you read about E&P companies in that area, you will realize how constrained treatment facility and transportation truly are. Finally, they have successfully re-contracted capacity for the Alliance Pipeline.

 

At higher prices, you needed some positive news from their LNG project to make it an attractive investment. However at around $8, there is enough value in their Canadian assets alone. Distributable cash in 2016 is forecasted to be just a tad lower than in 2015 or again just sufficient to pay the $1 dividend which the company says it will continue. Once Sunrise and Saturn start up, EBITDA grows quite a bit which will provide relief to the payout ratio.

 

So if free cash flow is currently $1 a share or a free cash flow yield of 12.5% and most likely to grow with these Montney projects that are desperately needed, then I think it is a compelling opportunity for such stable assets. And that $1 goes in your pockets each year in the form of lower taxed dividend income.

 

You also get for free a transformational project for the company if Jordan Cove LNG goes ahead. IMO, that project has two key advantages over the ones in the Gulf of Mexico: somewhat trapped natural gas in Wyoming with lower demand for it (they also own the key pipeline to get it to the West Coast) and much closer to Asian markets and no need to cross the Panama Canal. In any case, that Ruby pipeline is still a money maker for these guys.

 

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[benhacker]

Cardboard, I was curious about Veresen's Jordan Cove project because it seems similar to the Warrenton / OLNG project LUK is working on just to the North.

 

You have any thoughts on the valuation / probability you would place on Jordan Cove?  I've looked at some sell side here, and trying to handicap what the upside value is if LUK can make OLNG fly or sell to another party.

 

Any thoughts appreciated.  I'll poke more into Veresen as well.

[twacowfca]

Cardboard, I was curious about Veresen's Jordan Cove project because it seems similar to the Warrenton / OLNG project LUK is working on just to the North.

 

You have any thoughts on the valuation / probability you would place on Jordan Cove?  I've looked at some sell side here, and trying to handicap what the upside value is if LUK can make OLNG fly or sell to another party.

 

Any thoughts appreciated.  I'll poke more into Veresen as well.

 

Yes, more on the economics of both LNG projects will be appreciated.  Thanks

[Cardboard]

I don't know guys between the two. However, with their ownership of the Ruby pipeline (50%), they control the natural gas exit from the Cheyenne area. Then their plan is to build the Pacific Connector pipeline from the Malin Hub on the Ruby to Jordan Cove. Makes them tough to compete with.

 

The LNG project is not really part of my thesis at the moment. As I mentioned, I think that they have enough growth and demand up in Canada to make this interesting at this price. It would be icing on the cake.

 

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[Cardboard]

Being acquired by Pembina for a combination of shares and cash at $18.65:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aVSN-2465353&symbol=VSN&region=C

 

I sold between $11 and $15 to redeploy into other opportunities but, it shows that once you have a winner that it often pays to hold on to it.

 

And it also makes you wonder what these public corporations are thinking? Why is Pembina buying this now at high prices while it could have acquired it a year earlier for about $12 - $13?

 

Cardboard