By GABRIEL LOWENBERG. Special to The Globe and Mail, Published Thursday May 15, 2014.
I like getting paid to wait.
Calgary’s Veresen Inc. is seeking to build an $8-billion liquefied natural gas (LNG) terminal on Coos Bay in Oregon. The venture was approved by the U.S. Department of Energy in March. The requisite next step, a green light from the Federal Energy Regulatory Commission, is expected in late 2014.
How much of this likely development is now priced into Veresen stock? In my opinion, not much. Yet, while they wait, Veresen investors are earning a healthy 6-per-cent dividend, supported by its existing business.
If the project gets approval, it will add value to Veresen’s equity. In fact, I believe the stock will double over the next few years as partners are announced, construction begins and shipments commence. Full operational capability is scheduled for 2019.
A little background is in order. Veresen, with a market capitalization of $3.5-billion, is the reconstituted Fort Chicago Limited Partnership. Its holdings consisted of slow-growth, high payout pipeline-gathering systems. Fort Chicago morphed into a corporation in 2011 and changed its name to Veresen. That year, Veresen purchased a major gas-gathering and processing asset from Encana for $920-million. Management has been focused on adding more predictable streams of cash flow.
In partnership with Tulsa, Okla.-based Williams Cos. and Enbridge Inc., Veresen owns a 42.7 per cent interest in Aux Sable, a gas-extraction facility. Veresen also has cogeneration, hydroelectric and wind power stations throughout North America. All of these assets support the current dividend payout of $1 per share, most of it coming from non-cyclical businesses.
The new Coos Bay development is not related to controversial, high-profile projects such as Keystone XL. It will use existing domestic U.S. pipeline capacity and a route expansion of 373 kilometres to be built and jointly owned by Williams and Veresen.
Williams employs 4,700 people and owns assets from the Gulf of Mexico to the Canadian oil sands, and has been in the pipeline/infrastructure business since 1965, when it purchased what was then the largest U.S. pipeline, Great Lakes Pipe Line Co., for $265-million. Few companies have more experience when it comes to building and obtaining permission for U.S. domestic energy infrastructure.
Why am I so bullish? Two reasons: One, the market has not fully recognized the probable earnings impact of the Oregon project, and two, because I have seen this movie before.
Here’s how it went: Houston-based Cheniere Energy Inc. is building new LNG facilities at Sabine Pass and near Corpus Christi, Tex., on the Gulf of Mexico. Cheniere is further ahead; it plans to commence commercial shipping in 2015 for Sabine, Corpus Christi will begin shipping in 2018. Those projects have been in development for a decade or so.
Cheniere, of course, is a much bigger entity. It has a market capitalization of $13-billion (U.S.), has raised $10-billion of project-construction debt, plus $5-billion of equity along the way. Importantly, it also has long-term 20-year contracts in place for future customers, but when I was introduced to it 10 years ago, it was where Veresen is now.
This is where Veresen will end up. Think about Cheniere as the trailblazer, making it easier for those that follow to win project approval. The next series of regulatory approvals will be less contentious than the first.
There are already several other planned LNG terminals in the United States, on the Gulf and East Coast. A competing West Coast terminal is also being proposed by a subsidiary of Leucadia, in addition to Chevron and Apache trying to develop an LNG facility in Kitimat, B.C. So, is there a genuine need for another western terminal to export LNG?
Given the rising trend line of Asian demand, the answer is yes. In countries such as Japan and China, natural gas prices are nearly four times higher than in North America. Asian countries see natural gas as a safer source of energy production; the 2011 Fukushima disaster saw to that – it took 48 Japanese nuclear facilities offline. Think about this as simple arbitrage – shipping lower-cost North American natural gas to Asia and realizing a higher price.
My bet is on Veresen and Williams being able to win regulatory approval and create shareholder value. And in the interim, the dividends keep rolling in.
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