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Pipeline Woes Spell Big Opportunity
04/11/2013 9:45 am EST
The controversy over new US pipelines is bringing new opportunities for this Canadian company, writes Gordon Pape of The Canada Report.
Canexus (Toronto: CUS) is one of those companies that is hard to get a handle on, which is perhaps why most investors are unfamiliar with it, despite the attractive yield.
Canexus's produces sodium chlorate and chlor-alkali products, largely for the pulp, paper, and water treatment industries. The Calgary-based company owns four plants in Canada and two at one site in Brazil.
In addition, the company provides fee-for-service hydrocarbon transloading services to the oil and gas industry from its terminal at Bruderheim, Alberta. This includes the transfer of oil sands bitumen from pipeline to rail tank cars.
With the uncertainty over the fate of the proposed Keystone XL and Northern Gateway pipelines, energy companies are turning increasingly to railroads to move their product. Canexus recently announced the expansion of its Bruderheim terminal capabilities to include pipeline-connected unit train operations (unit trains are devoted to moving cars to one specific destination, without being broken up en route).
Canexus plans to connect the terminal by pipeline to MEG Energy (Toronto: MEG) pipelines, which interconnect with MEG's Stonefell Terminal. In addition, Canexus plans to build out the rail infrastructure and above ground tank storage, to allow for daily unit train movement of up to 118 tank cars (about 70,000 barrels). The cost is expected to be approximately $125 million.
Canexus was previously an income trust. It converted to corporate status in 2011. The yield of almost 6% is very attractive, but more important, it appears to be sustainable.
Financial results for the first nine months of 2012 showed revenue of $353.9 million and distributable cash of just over $50 million (figures in Canadian dollars). About $44 million was paid out in dividends. Net income was $26 million.
In 2013, the company expects that cash operating profit will increase to between $155 million and $165 million, from between $135 million and $140 million in 2012. This would result in distributable cash of $100 million to $110 million.
This is also a growth story. The company expects to begin realizing the benefits of investments made in its hydrochloric acid growth projects at its North Vancouver chlor-alkali facility this year. It is also looking to increase the truck-to railcar transloading business at Bruderheim to 30,000 barrels per day of oil, up from an average of 8,000 barrels per day in 2012.
There will only be a "modest" contribution from the pipeline connected unit train expansion in 2013, because startup is not expected until the third quarter. But by 2014, this investment should pay off in a significant way.
Profitability is closely tied to the market for chlorine and hydrochloric acid. When demand dropped off in the second quarter of 2012, the company reported a lower than expected cash operating profit, and the share price briefly fell to below $7.
The expansion plans at Bruderheim are impressive, but as with all such projects, there is always the possibility of delays, cost overruns, etc. These uncertainties explain why the yield is almost 6% despite the company's good prospects.
Dividends are paid quarterly at the current rate of 13.68 cents per share. US investors will have to pay a 15% withholding tax on dividends, except in the case of payments to retirement accounts.
This stock is best suited for investors who are looking for above-average yield and who are willing to accept the associated risk.
The shares trade actively on the TSX and if possible we advise buying them there. Because of the light volume, we do not recommend buying them on the US Grey Market. If you must use the Grey Market, place a limit order and be patient.
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