**November 29th Issue of The Market Observer**
In This Week’s Market Observer…
- · JMRD All-Cap Basket Company Update
- · Surge Energy: Quality asset acquisition bolsters sustainability; concurrent dividend bump
- · Pembina Pipeline – Mid-teens growth rate confirmed – reiterate outperform
- · Aston Hill Growth and Income Fund
- · Retirement Corner
- · Week at a Glance
- · Reads of the week
- · Economic Calendar
- · Earnings Reports
JMRD All-Cap Basket Company Update
This week we introduce Fiera Capital (FSZ) and Inter Pipeline (IPL) as All-Cap Basket Holdings. Fiera is currently the third largest publicly-traded independent asset manager in Canada and the ninth largest overall with over $70 billion in assets under management (including recently announced acquisitions). Fiera is positioned to pursue further growth and intends to grow AUM to $100 billion in the medium term. The firm is an employee owned investment manager that provides its services to institutional investors, mutual funds, charitable organizations, and private clients. On Sept. 3, FSZ announced an agreement to acquire Bel Air Investment Advisors and Wilkinson O’Grady, two U.S.-based private wealth managers, for $165 million. These transactions provide FSZ with an experienced US investment team and a platform for future growth in the U.S. market. The stock pays a quarterly dividend with a yield of 2.82% and with the capital markets recovery, expect earnings growth and a dividend increase in 2014
Inter Pipeline Ltd. operates in the petroleum transportation, natural gas liquids (NGL) extraction, and bulk liquid storage businesses in Canada and Europe. The Oil Sands Transportation segment transports petroleum products, including bitumen blend through Cold Lake, Corridor, and Polaris pipeline systems covering approximately 2,500 kilometers of pipeline and 3.8 million barrels of storage facilities. This segment also provides petroleum products blending and handling services. The NGL Extraction segment engages in the processing of natural gas to extract natural gas liquids, including ethane, propane, butane, and pentanes-plus. NGL are used as an energy product; and as a feedstock for the petrochemical and crude oil refining industries. The Conventional Oil Pipelines segment is involved the transportation of petroleum products and related blending and handling services. This segment transports crude oil through the Bow River, Central Alberta, and Mid-Saskatchewan pipeline systems covering approximately 3,700 kilometers of pipeline and approximately 975,000 barrels of storage facilities. The Bulk Liquid Storage segment engages in the storage and handling of bulk liquid products. This segment handles, blend, and stores approximately 250 different products primarily comprising petroleum, petrochemical, and alternative fuels. It operates 12 deep water terminals with a combined liquid storage capacity of approximately 19 million barrels in the United Kingdom, Germany, Denmark, and Ireland. Inter Pipeline recently converted to a corporation from a limited partnership and pays a monthly dividend with a current yield of 5.09%
An update on All-Cap Growth basket holding Surge Energy (SGY). Surge recently announced the acquisition of 3 private company’s and two dividend increases. The shares currently yield 8.2%
Surge Energy Inc.: Quality asset acquisition bolsters sustainability; concurrent dividend bump
Resuming research coverage
Acquisition summary. SGY is acquiring ~980 bbbl/d of low decline medium gravity Sparky oil at Wainwright for total consideration of $77 mln. Other attributes include an estimated 9% annual decline, netbacks of $42/bbl, 5.4mmboe 2P reserves (78% proved) and over 210 million barrels OOIP. Metrics for the deal are $78,000/boed, 5.1x P/CF and $14.25/bbl (2P). Closing is expected on or around Dec. 3, 2013.
Financing closed. Concurrent to the asset acquisition the company recently completed an equity deal of 9.7 mln common shares (including 15% over allotment) at an issue price of $6.55/sh for gross proceeds of ~$63 mln. Proceeds will be used to partially fund the acquisition.
Updated guidance. The 2013 exit has been increased to 15,000 boe/d (83% liquids). 2014 spending is now expected to be $112 mln (up from $109 mln) to provide for the drilling of 49 wells (from 46.5) and to deliver average production of 15,250 boe/d (up from 14,450 boe/d).
Sustainability metrics maintained even with a dividend bump. In conjunction with the acquisition the dividend has been bumped to $0.52/sh annually (from $0.50/sh). Corporate declines come down to 24% (from 25%) with unchanged netbacks (~$38.50/boe CF netback) and payout expected to remain at 93%. SGY remains positioned with a strong balance sheet and we estimate 2014 year-end net debt at ~$290 mln or 1.3x D/CF relative to the upsized $470 mln credit facilities.
Maintaining Action List Outperform rating & $8.50 target.
SGY continues to screen as one of the most sustainable models in the yield arena. The dividend remains rock solid supported by drilling success across all core areas and complementary acquisitions.
Pembina Pipeline Corporation – Mid-teens growth rate confirmed – reiterate Outperform
Pembina (PPL) is held in the DIG Basket and currently yields 4.94%
Rolling out a $1.5-bln 2014 capex budget
PPL released its 2014 capital budget of $1.5 bln, with $670 mln (44%) allocated to Conventional Pipelines, $60 mln (4%) to Oil Sands & Heavy Oil, $260 mln (17%) to Gas Services, $145 mln (10%) to Crude Oil Midstream and $365 mln (24%) to NGL Midstream – representing ~60% of 2014e capex geared towards NGL-related value chain activities and ~40% aimed at crude oil and condensate-related value chain activities. Overall, PPL continues to advance its ~$3.2 billion of commercially secured growth projects (unchanged), expected to be placed into service through late 2015. Meanwhile, the company continues to pursue a further ~$2.9 billion of uncommitted growth opportunities, potentially doubling its current capital program. Inside, we highlight the company’s major growth initiatives and recent developments.
Estimates – shifting capex into 2014
In line with guidance, we increased our 2014e growth capital assumption to $1.5 bln (was ~$975 mln) largely owing to timing differences related to major projects. Overall, our 2014e AFFO/sh remains unchanged at $2.40 – representing a payout ratio of 71% (group avg.: 70%). On the leverage front, our 2014e D/EBITDA rises to 4.2x (was 3.6x), falling in line with the high-payout group average of 4.2x.
Mid-teens growth rate confirmed – reiterate Outperform
With our estimates and growth outlook intact, we maintain our target of $39.00. Meanwhile, with ~$2.9 billion of unsecured growth opportunities (~$850 million related to the Cornerstone Pipeline), we estimate $4.50 (~11%) of unrisked upside to our current valuation (see sensitivity tables inside). Coupled with secured EBITDA growth of ~16% through to 2016 and a proven track record of firming up growth opportunities, we reiterate our Outperform rating.
Aston Hill Growth and Income Fund
We wanted to bring to your attention the latest news release from the Aston Hill Growth and Income Fund, which is held in a lot of JMRD client accounts. It has been three years since the current management team took over the fund and their performance has been excellent. The Fund’s investment objectives are to: (i) pay unit-holders monthly cash distributions, and (ii) preserve the NAV per unit, by investing primarily in equity and debt securities of issuers located in Canada and around the world. The Fund may invest in Canadian income funds, convertible bonds, debentures, high yield debt instruments, listed equity securities, and cash or cash equivalents and may also invest in any other yield-based security or asset class that develops over time. The Fund focuses on high quality undervalued companies that have the highest potential for cash flow growth. Income earned from dividends and bond coupon payments while growth comes from undervalued companies that have strong growth profiles.
The fund was up 13.2% year to date at the end of October. To learn more about the fund, please click on the link below, or go to www.astonhill.ca.
Reads of the week
Monday December 2nd – U.S. ISM Manufacturing, U.S. Construction Spending
Tuesday December 3rd – U.S. Total Vehicle Sales
Wednesday December 4th – Bank of Canada Rate Decision, U.S. ADP Employment Change, U.S. ISM Non-Manufacturing Composite, U.S. New Home Sales, U.S. Federal Reserve releases Beige Book
Thursday December 5th – Canadian Building Permits, Canadian Ivey Purchasing Managers Index, U.S. Initial Jobless Claims, U.S. Factory Orders, U.S. Personal Consumption
Friday December 6th – Canadian Unemployment Rate, Net Change in Employment, U.S. Unemployment Rate, U.S. Personal Income, U.S. Personal Spending, U. of Michigan Confidence Index.
Monday December 2nd – None
Tuesday December 3rd – Bank of Montreal
Wednesday December 4th – National Bank of Canada
Thursday December 5th – Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank
Friday December 6th – Bank of Nova Scotia