Keyera (Symbol KEY, was KEY.UN)

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schmuck
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Keyera (Symbol KEY, was KEY.UN)

Post by schmuck »

Anyone know what happened to Keyera to drive it down sharply just before closing on friday?
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Re: KEY.UN

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Claymore Dividend Fund (CDZ) annual rebalance took place on Friday.
Patiently building wealth one dividend increase at a time…
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Re: KEY.UN

Post by Sensei »

Hi,

I was talking to some friends a while back and we were discussing the question, 'What keeps you awake at night?' I guess for me, besides some professional concerns, rising stocks or falling stocks.

Anyone know what is pushing KEY so high? The had a pretty good Q 2 report, but was it that good?
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Re: KEY.UN

Post by 2 yen »

Sensei wrote:Hi,

I was talking to some friends a while back and we were discussing the question, 'What keeps you awake at night?' I guess for me, besides some professional concerns, rising stocks or falling stocks.

Anyone know what is pushing KEY so high? The had a pretty good Q 2 report, but was it that good?
It's gone up almost $20 since I rebalanced. Gotta wonder if we mere mortals know the whole picture.

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Re: Keyera (Symbol KEY, was KEY.UN)

Post by j831robert »

2 Yen: Appears to me to be in the same game as Interpipeline and Pembina - all moving a lot of shares and, I suspect, Big Money buying (certainly so with IPL). Perhaps some buying on rumours of possible buy-outs. Time will tell I guess.
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Re: Keyera (Symbol KEY, was KEY.UN)

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One of the analysts on BNN said the following recently:
Announced earnings recently, which completely shocked everybody, and the stock took off. Has an exceptionally strong management team. Really, really good executors. They are an important component of the infrastructure for the natural gas/liquids market. Pays a good dividend. Trading in a pretty rich valuation because of an exceptionally strong management team. Thinks that a lot of the growth prospects are priced into the company, but they do have substantial projects that are coming online starting next year. Feels the company will grow into the valuation, but for the short term, in the next year or 2, your returns could be sub par and limited to mostly dividend type returns. If you own, he would tend to trim a little.
This was on my watch list for a while but I didn't want to bite when the P/E seemed more sensible to me.
KEY is a stand-out but IPL, PPL, and ALA all seem in a similar boat. S&P/TSX is up 13% on the year but these stocks are up 50%, 40%, 30% and 30% respectively.

I can empathize with being concerned about (inordinately) rising stocks: It is less clear to me when or if to act than when they are declining.
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Re: Keyera (Symbol KEY, was KEY.UN)

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While it is true the oil sands industry will want all heavy gas liquids that can be made available as diluent for shipping oil sands oil, there will be a point where midstream margins will get severely squeezed when natural gas prices recover. If NG ever hits $7-9 again, companies like KEY, ALA, PPL, etc. could (should) get hammered at that time. The odds of them continuing higher for any length of time seem contrary to common sense. I continue to stay away.
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Re: Keyera (Symbol KEY, was KEY.UN)

Post by j831robert »

Thanks AltaRed for providing both a rationale and a reasonable peg on which to hang possible disposal of our remaining IPL and PPL. Madame's TFSA hit $80K today and I really don't want to touch it any sooner than I have to
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Re: Keyera (Symbol KEY, was KEY.UN)

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AltaRed wrote:While it is true the oil sands industry will want all heavy gas liquids that can be made available as diluent for shipping oil sands oil, there will be a point where midstream margins will get severely squeezed when natural gas prices recover. If NG ever hits $7-9 again, companies like KEY, ALA, PPL, etc. could (should) get hammered at that time. The odds of them continuing higher for any length of time seem contrary to common sense. I continue to stay away.
This is a great comment and a healthy dose of reality. One question is, how will dividend stream be affected by such a scenario?

Thanks Alta!

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Re: Keyera (Symbol KEY, was KEY.UN)

Post by Sensei »

Hi,

Thanks for your thoughts. decided to trim back my KEY holdings by 50%. But I'll post on the Sell thread.
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Re: Keyera (Symbol KEY, was KEY.UN)

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AltaRed wrote:While it is true the oil sands industry will want all heavy gas liquids that can be made available as diluent for shipping oil sands oil, there will be a point where midstream margins will get severely squeezed when natural gas prices recover. If NG ever hits $7-9 again, companies like KEY, ALA, PPL, etc. could (should) get hammered at that time. The odds of them continuing higher for any length of time seem contrary to common sense. I continue to stay away.
Could you unpack this a bit? I don't understand the relationship between natural gas prices and the midstream margins.
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Re: Keyera (Symbol KEY, was KEY.UN)

Post by JaydoubleU »

I agree with j831robert that KEY belongs in the same camp as IPL and PPL. Call it midstream or call it energy infrastructure. There seems to be a perception that these are steady cash flow generators and therefore low risk; that reliable dividend growth is in the bag and nothing can go wrong. The whole sector is in a bubble, in my opinion, though I cannot say where or when it will end.

Debt levels are a concern: 14X debt to EBITDA?! 8.3X debt to CF?!

My own decision to sell IPL was simply made because it had run up so far so fast, and the fundamentals--everything except dividend growth--were horrible. I thought I'd prefer to look for opportunities in things that were less loved, and possibly undervalued, rather than the tulip bulb craze that everybody else seems to be in on.
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Re: Keyera (Symbol KEY, was KEY.UN)

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jonforest wrote:Could you unpack this a bit? I don't understand the relationship between natural gas prices and the midstream margins.
Companies who are in the midstream business strip the natural gas liquids out of the rich natural gas stream and market the gas liquids to chemical companies for plastics et al and to oil sands producers as diluent to 'thin' out their thick oil. If your supply cost goes up and your sales price is capped, profit margins suffer.

It is a very complex pricing business but let me use a simplified example. Gas produced out of the ground such as shale gas contains a lot of ethane, propane, butane, pentane and some heavier molecules in addition to methane (natural gas). Methane (NG) is sold by its energy content (950-150 Btu/cu ft) and the price is based on supply/demand for the NG itself. Stripping out the ethane, propane, etc. from the NG stream therefore shinks the amount of volume and energy in the NG stream that can be sold as NG, and by inference the supply cost of that ethane, propane, etc. stripped out has to be at least equal, on an energy content basis, to the price of NG. So, for example, if NG (at 1000 Btu/cu ft) can be sold for $4, then the minimum supply cost of its pentane content (3981 Btu/cu ft) that is stripped out is $15.32.... and so on. So before pentane can even be processed or shipped for sale, it has already cost its owner $15.32.

On the sales price side, natural gas liquids sale prices are generally capped by its energy content vis-a-vis the price of the equivalent Btus in a barrel of conventional crude oil....though natural gas liquids can and does sell at a slight premium in Alberta due to high demand to dilute heavy oil. That means the sales price of pentane, in the example above, is ultimately capped in price by the price of oil (in Btus) and the margin of profit for AltaGas for example, is the difference in the Btu supply cost of pentane and the sales price of the equivalent Btus for a barrel of oil.

So... should NG prices move up and oil price does not move, or if NG prices stay the same and the price of oil goes down, the profit margin of those pentane Btus goes down. Midstream producers have been in a sweet spot of low NG prices and high crude prices for many years now. I cannot imagine it getting much better AND it is quite possible to get much worse.

I do not forsee a situation in AB where the profit margins of the midstream could be lost completely (the oll sands desparately needs heavy natural gas liquids for diluent), but there are scenarios where the pressure is so severe that the cash flow of PPLs and ALA's of the world could be hammered pretty bad.
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Re: Keyera (Symbol KEY, was KEY.UN)

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Although it was grouped with the others with regard to inordinate price increase, as far as I know, IPL is not a diluent supplier. It transport it as one of its services.

For the others.. it has been at least 5 years since NG has been above $7.
I wonder if there is any catalyst on the horizon for a big price increase with the glut we currently have.
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Re: Keyera (Symbol KEY, was KEY.UN)

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AltaRed wrote:
jonforest wrote:Could you unpack this a bit? I don't understand the relationship between natural gas prices and the midstream margins.
Companies who are in the midstream business strip the natural gas liquids out of the rich natural gas stream and market the gas liquids to chemical companies for plastics et al and to oil sands producers as diluent to 'thin' out their thick oil. If your supply cost goes up and your sales price is capped, profit margins suffer. <<snip>>.
Thanks, AltaRed, that was very informative.
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Re: Keyera (Symbol KEY, was KEY.UN)

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Descartes wrote:For the others.. it has been at least 5 years since NG has been above $7.
I wonder if there is any catalyst on the horizon for a big price increase with the glut we currently have.
Agreed, it could be many additional years. I don't know when (or even if) it is going to happen but I am edgy about companies with large midstream components and for which those profit margins could be squeezed two ways, i.e. rising NG prices or falling crude prices (or both). Beyond that, the prefs of PPL and ALA (as two examples) are not even investment grade. I just don't like the odds of more upside versus the potential for major downside. Not trying to beat up on these companies because their managements have made the best of grand opportunities coming their way and that is entrepreneurship...but...but.....
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Re: Keyera (Symbol KEY, was KEY.UN)

Post by Arby »

Thanks AltaRed for your input. This discussion has spurred me to take a closer look at whether I should trim my holdings of ALA, which has grown over the years to become one of my largest individual holdings.

A couple of thoughts on ALA. From my limited understanding, ALA's income is roughly evenly split among three lines of business - gas, power, and utilities. I believe only the gas business is at risk of commodity margin squeeze. The gas business is further subdivided into gathering, storage, processing and extraction, etc. So is it only the processing and extraction segment that is at risk of margin squeeze?

Also, ALA hedges the commodity prices, so would the hedging mitigate against any future margin squeeze?
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Re: Keyera (Symbol KEY, was KEY.UN)

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I have not examined their financials to find out how much profit they make in the extraction and sale of gas liquids. It would be that business that is at risk....and potentially their power business if it is all NG fired. Hedging can work on a short term basis (1-3 years for example) but cannot offset long term trends that develop. All I can suggest is for holders of ALA, etc. to examine the financials for vulnerabilities and judge accordingly.
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Re: Keyera (Symbol KEY, was KEY.UN)

Post by schmuck »

Great stuff A.Red.
It would be interesting to know which in the group is exposed to the greatest risk...unfortunately, beyond my level op patience and competence to find out. Much easier to check the crazy performance over the last month:
Key +18.0%
IPL +9.9%
ALA +7.8%
PPL +7.2%

Sure, Key had a blowout quarter, but up 18%??
I sold it a couple of days ago when the yield was down to 2.8%, less than half of what it was when I bought it.
I trimmed IPL by a third almost a year ago, but still my largest overall holding.
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Re: Keyera (Symbol KEY, was KEY.UN)

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This discussion is useful and we are lucky to have someone with AltaRed's background contributing to it.

.. but I personally don't have a big concern about sudden NG price increases or their impact on these companies.
I would be more concerned with rising interest rates or a scaling back of oil sands development.
Neither of which I see as short-term threats right now.

I'm still uncertain whether to trim any of these holdings and so I will do nothing for now.
They were bought primarily for dividends and I am more inclined to see if there is further momentum in them.
With each passing year of low interest, the desperation of income investors increases, making stocks like these more valuable (than perhaps we, the "cognoscenti", value them).
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Re: Keyera (Symbol KEY, was KEY.UN)

Post by Sensei »

AltaRed wrote:
jonforest wrote:Could you unpack this a bit? I don't understand the relationship between natural gas prices and the midstream margins.
Companies who are in the midstream business strip the natural gas liquids out of the rich natural gas stream and market the gas liquids to chemical companies for plastics et al and to oil sands producers as diluent to 'thin' out their thick oil. If your supply cost goes up and your sales price is capped, profit margins suffer....
Thanks, I think. I'll have to read that about five more times and then maybe I'll understand it. :?
Cheers

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Re: Keyera (Symbol KEY, was KEY.UN)

Post by Shakespeare »

"Natural gas", as it comes out of the ground, is primarily methane (CH4), but also contains additional light hydrocarbons with 2, 3, 4, etc. carbon atoms. As each carbon atom is added, the boiling point decreases, so the higher carbon numbers are easier to liquify.

The gas is priced according to the amount of heat it will produce when burned. Each type of molecule has a different heat-production factor; these factors are all known so a mixture of molecules can be related to the price (and heat production) of pure methane.

The liquids can be removed from the NG stream at the wellhead and then sold. But pure methane, when sent through a long pipeline, will decompose somewhat and build up more liquids. These can be again stripped out at the destination and sold.

Some pipeline companies operate destination facilities that do that - the old FCE (now Veresen), for example. Those companies are more vulnerable to pricing changes than those that don't own liquid products plants.
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Re: Keyera (Symbol KEY, was KEY.UN)

Post by Arby »

After some reading today, I'm feeling more comfortable with my ALA holding. About 2/3 of ALA's 2014 EBITDA will come from the relatively stable power and utilities lines of business. About 1/3 of EBITDA comes from their gas business. It appears that ALA's gas business has only a small exposure to commodity margin squeeze. ALA's website says "All of our extraction and transmission facilities are long-life assets underpinned by long-term contracts with little exposure to commodity price risk." Most of ALA's midstream facilities are backed by long term cost-of-service or take-or-pay contracts.

Not sure if I'd be as comfortable with KEY, as it appears to be much more risky than ALA.
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Re: Keyera (Symbol KEY, was KEY.UN)

Post by Mike Schimek »

ALA: It amazes me to look at stocks like this, see it rise 40-50% in a year, at a P/E of 35ish with no year over year growth in income per share (emphasis on per share).

We truly are in a bull (and bubble) market, seems like people are piling in with no clue what to buy so they buy stuff they think is safe at (what seems to me like) extremely high prices.
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Re: Keyera (Symbol KEY, was KEY.UN)

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I put this here even though it is about PPL because you might find it germane to the natural gas concerns stated above..
Pembina Pipeline Corp. has struck a deal to build a West Coast propane export terminal in Portland, Oregon and is also tapping into the prolific North Dakota Bakken play with the acquisition of an ethane pipeline.
Calgary-based Pembina said on Tuesday it plans to develop a 37,000-barrel-per-day export facility in Portland’s port at a cost of about $500-million (U.S.).
..
The company also says it is positioning itself for future natural-gas liquids opportunities by acquiring the 700-kilometre, 40,000-barrel-a-day Vantage ethane pipeline and a stake in a Saskatchewan extraction plant for a total of about $650-million.
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