Category: Weekly Commentary

15 Dec 2017

Issue 50 – Happy Holidays

Dear clients, friends, employees and suppliers of Palos, we want to wish you all the very best over the holiday season. Most importantly, we would like to thank you for your trust and loyalty over the years. We greatly appreciate everything that you have done for Palos.

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08 Dec 2017

Issue 49 – Back on the Train

Canadian Energy companies are suffering from a lack of pipeline infrastructure. Canadian producers have become price takers as they have no flexibility to move oil to the market with the best price. However, when the differential between Canadian and U.S. oil rises above a certain spread, it becomes economical to send oil by rail around North America. The spread has now reached its tipping point and producers are now once again shipping oil by rail. Moreover, railroad companies have been discounting some shipments. For example, a trip to Texas can costs about $12 a barrel, compared with $10 via pipeline.

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01 Dec 2017

Issue 48 – Liquor Stores Getting Back on Track

Liquor Stores (TSX:LIQ) went public as an income trust in 2004 and quickly became a market darling. The company used its lofty valuation to make acquisitions and quickly became one of the largest liquor store operators in Western Canada. The opportunities quickly dried up in Canada, and the company went to the United States to seek greener pastures. The lack of discipline quickly got the company into trouble. LIQ’s payout ratio, debt level, and inventory management got out of control and became a serious drag to the company.

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24 Nov 2017

Issue 47 – Tax Selling Brings Black Friday Sales

The worst performing sector in 2017 is officially energy. Every segment in the sector is underperforming the broader market. The stock performance of the majority of all midstream, services, or producer companies has been negative. Most sectors in Canada and in the U.S. have achieved positive performance numbers this year. It is fair to assume that many investors realized significant capital gains in those sectors during the year. As November tax planning takes priority over fundamentals, this brings further selling to an already oversold energy sector. Investment opportunities arise as quality energy names are trading at historical discounts.

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16 Nov 2017

Issue 46 – In a Class of its Own

InterRent Real Estate Trust (TSX: IIP-U) really hit it out of the park this last quarter. I have written about this multi-family REIT many time in the past. InterRent reported 16% growth in funds from operations (FFO) versus Q3 of last year. IIP-U also achieved 11.2% net operating income (NOI) growth. Its peers are nowhere close to IIP-U and Palos continues to see NOI growth through 2018.

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09 Nov 2017

Issue 45 – Tourmaline is Changing Gear

For many years, Tourmaline Oil Corp (TSX:TOU) has been known as one of the fastest growing oil & gas companies in Canada. TOU has grown its production to 265 MBOE/d, which makes it one of the largest gas producers in Canada. For long, Investors favored TOU’s growth strategy and acquired the stock at a premium relative to its peers.

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02 Nov 2017

Issue 44 – The Tide Continues to Rise

The Tidewater Midstream and Infrastructure Ltd (TSX: TWM) is moving ahead with one of its three large projects. This has been a long time coming. Rome was not built in one day. Palos believes that patient investors will be well compensated. Joel Macleod and his management team have received approval to construct a 100 MM cf/d sour deep-cut Motney gas plant. The project is expected to cost $210 million and includes an extensive network of gathering pipelines. The project will be funded by its current line of credit and by its cash flows. Palos is comfortable with the financing strategy as the project is backed by two anchor tenants that have committed to 55% of the plant capacity under 5 year take or pay contracts. The plant is also very well located and will have a first mover advantage in the area.

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26 Oct 2017

Issue 43 – A Hidden Diamond in Brookfield Business Partners

Brookfield Business Partners LP (TSX: BBU.U) is invested in four different industries. Palos’ interest lies under the industrial operations, where BBU.U has an investment in a company called GrafTech (GFT). The company is vertically integrated. First, they produce petroleum needle coke via its fully owned subsidiary. Second, they use the coke to make synthetic graphite. GFT sells the majority if its synthetic graphite to the steel business via graphite electrodes.

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19 Oct 2017

Issue 42 – Canadian Pacific Full Speed Ahead

On October 17, 2017, Canadian pacific Railway (TSX:CP) reported its 3rd quarter earnings. Palos was pleased with with CP results as we saw profits rise. CP was able to keep operating expenses in check while operating efficiencies improved. However, what really got Palos excited was CP’s new full year earnings guidance. The full year earnings per share guidance was increased to double-digit figures versus high single figures. Secondly, the increase in guidance come on the back of its core business and not from land sales. The core business, freight shipping, is accelerating. The company now expects mid-single digit volume growth in 2017. This growth is being driven by transports of crude deferential, frac sand, potash, and metallurgical coal. Palos sees more dividend increases as the company executes on growth and efficiency.

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12 Oct 2017

Issue 41 – Los Angeles Orders More Buses

On October 10, 2017, New Flyer Industries (TSX: NFI) announced the introduction of its next generation battery-electric heavy-duty transit bus. The new and improved Xcelsior bus will now be available in 35, 40, and 60-foot models. The new Xcelsior has extended battery range technology that enables travel of 200 miles on a single charge. The motor also has regeneration energy recovery and the highest torque available which makes it compatible for steep grade cities such as San Francisco. In addition to zero emissions, passengers will experience the quietest bus ride possible.

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05 Oct 2017

Issue 40 – Cenovus Drops the Ball and Keyera May Pick it up

On March 30, 2017, Cenovus Energy Inc (TSX: CVE) announced that they were buying ConocoPhillips’ Canadian assets for $17.7 billion. The acquisition was mostly financed by debt, which brought its leverage ratio to new highs. CVE has now decided to sell some assets to bring its debt level back to normal. CVE has been somewhat successful in selling some assets, however, the company has a long way to go before it reaches its debt goal. Thus, we believe that Keyera Corp (TSX: KEY) could buy several gas plants from CVE in the Montney and Duvernay area. We think KEY would be interested in those facilities as they are well located in areas of growth. Secondly, the plants could easily be connected to KEY’s existing networks. If such a transaction occurs, this would bring a credible competitor to the area. Currently, the area is controlled by Pembina (TSX: PPL). Producers would be glad to see a new supplier in this area.

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28 Sep 2017

Issue 39 – Ethereum – Bitcoin 2.0

There has been a lot of hype lately about Bitcoin, blockchain and Ethereum. Despite their popularity, not a lot of people truly understand what they are. Let’s start with Bitcoin. Bitcoin is simply a digital dollar. Anyone can buy and sell Bitcoin, and as such, it serves the same purpose as regular currency. It can be used to purchase goods and services and many online retailers now accept cryptocurrencies as payment. That is however where the similarities end. Thanks to the blockchain technology on which it is exchanged, Bitcoin is not held in a bank account and does not need to be administered by a third party. So, middlemen, such as banks, brokers and bookkeepers, are removed from the equation. Blockchain is essentially a decentralized record (or ledger) of all transactions.

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21 Sep 2017

Issue 38 – Offshore Wind Power

Northland Power Inc (TSX: NPI) is emerging as a leader in wind power. NPI’s operating capacity is 1,754 MW, and of that amount, 696 MW is being attributed to wind. NPI is continuing to expand its wind portfolio, especially offshore. At the end of the year, NPI will be commissioning the Nordsee One offshore project. This will bring about a net increase of 285 MW to the portfolio. NPI is also working on their 252 MW Deutsche Bucht offshore project; its commissioning is planned to take place at the end of 2019. NPI is thriving and becoming a leader in the offshore wind power sector. After speaking with management, we believe the next offshore wind expansion will take place in Asia. We view this positively as this probable expansion would diversify the company’s offshore portfolio away from Europe.

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14 Sep 2017

Issue 37 – Storagevault

StorageVault’s (TSX: SVI) main business is owning, operating and leasing self storage facilities. Since SVI is the only public storage company in Canada, it is the only way for investors to get exposure to this space. We are attracted to this type of real-estate as it is the only one that can achieve 12% growth in net operating income (NOI). At the same time, SVI is consolidating the market by acquisition. Last quarter, SVI acquired a Montreal property for $8 million. Furthermore, on August 01, 2017, SVI announced the closing of the acquisition of Sentinel storage, which is made up of 24 properties, and is in the process of closing on 9 more properties.

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07 Sep 2017

Issue 36 – Gearing Up!!!

On September 5th 2017, Secure Energy Services Inc. (TSX:SES) announced some changes at the management level which we see as positive for the future growth of the company. Mr. Allen Gransch, formerly Chief Financial Officer of SES, will take the roll of Executive Vice President of Corporate Development. This will allow him to spend the majority of his time on acquisitions and green field projects. This change should translate into more deals and growth projects in the coming years. This is also a strategic and prudent way of grooming the future Chief Executive Officer of SES.

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