Veresen Inc (VSN.TO)

The dividend is now sustainable. They are going to make a final investment decision for a US project. It makes sense to step in here if you are comfortable with the project.

Cash flows have been tracking above the dividend level which, in this environment of crack spreads, has been good. Have a lot of accretive developments coming on including Jordan Cove, construction on a gas plant. He is modelling a 90% cash flow per share growth. Feels the name has a lot of risks at these levels. Too expensive relative to its peers. Dividend this year is not a sure thing.

(A Top Pick April 3/14. Up 17.83%.) He has put quite a bit of money into this one because it is the one with the highest yield. Was a little cautious at first because a lot of LNG projects got cut, but theirs didn’t.

He thinks they are overpaying the dividend, which he doesn’t like. This is not a major holding for him. In the space of pipelines, infrastructure and LNG plays, he prefers Altagas (ALA-T). They still need to get the off tick agreement for their Oregon LNG project, so it is still not a Go. There is probably $2 risk to the downside if they don’t get appropriate metrics on that project. The upside is probably $2.

New CEO who has done a great job of reshaping the business. Has been very creative with the deals he has done. This company is a high dividend business model, but also has significant growth. Generally it is a difficult juggling act to balance, but the CEO has done a great job of strategically generating cash flow that allows him to pay out the dividend and still fund organic growth. The Ruby pipeline deal is very cash flow accretive. The Encana (ECA-T) joint venture is also cash flow accretive and allows them to fund the dividend while they go out and build Jordan Cove. He expects these to drive the value north of $20-$21 over the next 2-3 years. Yield of 6.01%.

The future is all about Jordan Cove and bringing it in on time and on budget. It does not have a lot of energy price exposure in the near term.

In the energy space, people are hiding in the mid-stream names. He is not keen on this one. He has a small short position. They can sustain the dividend on the current level of business, but if volumes shrink in Western Canada, then this one could have some trouble. He has no long positions in this space.

Some tremendous growth aspects, but don’t get too enticed by the 7% yield as it is that high for a particular reason. There is a binary event to much of their future. He would pair it up with Enbridge.

Chart shows a series of lower highs and lower lows, but also recently broke through an area of support.

Likes how they have diversified themselves and doesn’t feel that the dividend is stretched. Likes the joint venture they did with Encana (ECA-T) and KKR (KKR-N) in their Montney play. This is not affecting the balance sheet, so they have been very ingenious as to how they have been able to deliver growth without affecting the interest rates. They are also working on an LNG project in Oregon. He is holding this one for the dividend.

With the buildout of Jordan Cove for the LNG project, their payout ratio now is around 90%. If you were to include in that the project development costs that are currently going in and being capitalized, that payout would be in excess of 100%. In the current environment, he doesn’t think the dividend can last a whole lot longer.

Veresen (VSN-T) or Keyera (KEY-T)? He likes this one because it has a higher dividend yield while Keyera has a lower dividend, but better execution.

The LNG plant in Oregon is a positive acquisition. The question is, can they afford to do it, and the answer is No. They are going to have to bring on some other partner. These midstream type companies are dependent on other producers’ cash flows, and you are going to see them react to the low price in oil. He feels there is more uncertainty on this company because of the project size, which is really big, without any clear answer on how they are going to pay for it. There are other, better midstream companies.

Continues to like the way it is positioned in the midstream sector in Canada. This has optionality with respect to a big LNG facility, Jordan Cove, that is going to get built in the US. If they get a commitment from a producer to take a significant amount of that capacity and develop it further, the stock could easily hit $17-$18. This is likely going to happen within the next quarter or two. A very short term oriented trade. The biggest risks are frac spreads. When you look at the prices they get for some of the liquids that they are breaking up in the US, those spreads have compressed very significantly, hardly because oil prices have gone down, and he thinks it will have a bit of a negative impact on their cash flow. Unless they get an agreement for the LNG facility, it could slide a little bit lower. Thinks the risk/reward is good enough that you want to hang onto this and clip a nice dividend.

Likes it. He was negative on alliance pipeline coming up for renewal, but now he thinks it is going to pull more volume through it. He thinks the LNG will get done. They have the permit. They may sell a portion of their pipeline. The CEO is doing a good job of turning the business around and selling off non-core assets. The dividend is safe.