Category: Uncategorized

22 Oct 2014

Issue 42 – AltaGas Getting Pushed Down by Energy Prices

Palos Income Fund By Charles Marleau

Here is a great example of the market throwing the baby out with the bath water. The name of the company “AltaGas Ltd” gives the appearance that this is an energy company. To further confuse investors, it is categorized as an energy company by the Global Industry Classification Standard (GICS). The truth is that AltaGas Ltd (TSX: ALA) should be considered a utility company. 15% of its earning are volatile and the remaining 85% is stable due to its diversified portfolio consisting of a third in utilities, a third in gas processing and the last third in power generation. In terms of growth opportunities, ALA has $9 billion in projects under development and under evaluation to take advantage of in the coming years. Below are a few of these which highlight the company’s attractiveness as a name to own:

  • (Gas project) They are currently evaluating a proposed project for two floating Liquefied Natural Gas (LNG)
  • platforms in British Columbia. These would be on a barge and among the first of their kind for an LNG project. A decision is expected on whether to undertake the project early 2015 and could be an approximately $3 billion project.
  • (Utility project) There is a proposed project to expand the Pacific Northern Gas (PNG) pipeline to supply the potential LNG projects coming up on the west coast. This could be an approximately $1.5 billion project and would increase capacity fivefold. This would serve the purpose of exporting to Japan.
  • (Utility project) In parallel to the expansion of the PNG pipeline, ALA is working on another project to export Liquefied Petroleum Gas (LPG) through the recently acquired Ferndale export terminal in Washington. A final decision is expected in early 2015.
  • (Power project) ALA has a 195 MW power generation facility which has initiated its final phase involving a 72 hour period of testing to meet specific parameters. It is structurally complete and one of the biggest projects in recent decades which could provide $400 million in EBITDA to the company.

The above non-exhaustive list gives you an idea of the types of game-changing projects that ALA is pursuing. The company will be achieving Canadian milestones in the LNG space and is the only one with a pipeline going through the Rockies. As you can see in the chart below, the stock pulled back 26% from its peak in concordance with the energy sector. The projects above are clear indications as to why this company should not be as severely impacted by the decline in oil price due to its segment diversification. We saw this as an opportunity and increased our exposure to a “must own” growing company. In a separate note, I have once again personally added another 10% to my Palos Income Fund position. This brings me to an increase of 36% to my position in the last four weeks.   What is New on the Macro Level? By Hubert Marleau

The Markets are Anxious; But is the Panic Rational?

Deflationary fear caused the recent selloffs in a wide range of markets including currencies, bonds, crude oil and equities. The slide into deflation created a mounting public backlash against fiscal austerity to a tipping point in the market. From the last 52 week high, the WSJ dollar index is up 7.5%, ten year US treasury yields have fallen 1%, crude oil price is down 20.0% and MSCI World Index is 10.0% lower. These four all-important markets have undergone defined corrections in a very short period of time, making many valuations alluring. History shows that markets are never in a bearish trend when price stability exists, economic growth is ongoing, and monetary accommodation is widespread. Sometimes there are no clear explanations as to why markets move up or down, for the interplay between news and response is complicated. That is why we use models to guide our investment decisions. In our judgment, the culprit of the correction must have been presupposed rich valuations, given that: 1)       World economic growth is expected to go forward despite the downward revision by the IMF for 2014 2)       Price inflation around the world is very stable, anchoring around 1.5% 3)       Easy money is prevalent in all industrial and emerging countries In any event, the judgment of our financial and economic models foretells some price stabilization with reduced volatility in the four all-important aforementioned markets.

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Chart 1: Palos Domestic Funds versus Benchmarks (Total Returns)*




YTD Returns

Palos Income Fund L.P.

PAL 100



Palos Equity Income Fund – RRSP

PAL 101



Palos Merchant Fund L.P. (Jun 30, 2014)

PAL 500



Palos IOU High Yield Fund  (Sep 30, 2014)

PAL 701

US $10.13


Majestic Global Diversified Fund (Oct 16, 2014)

MAJ 100



S&P TSX Composite


S&P 500


S&P TSX Venture


Bloomberg USD High Yield Corporate Bond Index 1 to 3 Year


Chart 2: Market Data*



US Government 10-Year


Canadian Government 10-Year


Crude Oil Spot

US $83.04

Gold Spot

US $1,238.30

US Gov’t10-Year/Moody BAA Corp. Spread

248 bps

USD/CAD Exchange Rate Spot

US $0.8869

* Period ending Oct 17, 2014

Chart 3: Palos International Fund (Total Returns)*



YTD Returns

Palos International Equity Income Fund PLC – CAD

CA $5.25


Palos International Equity Income Fund PLC – EUR

EUR 6.48


Palos International Equity Income Fund PLC – USD

US $5.97


S&P TSX Composite – CAD


S&P TSX Composite – USD


* Period ending Oct 14, 2014

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