Category: Equity

Today’s financial insanity – Tilray

I’m not sure what to say about this chart other than “holy crap”:

With a market capitalization now of $21 billion, Tilray is worth more than (insert the names of any companies that actually have real businesses with real profits here).

Short borrow rates are 500%:

Put options at a strike of $100/share, expiring in November, trade for around $25/share.

The only reason why anybody with two brain cells left with a bid on this one are the auto-indexers and the people that are receiving a margin call of the century going short against this one.

Readers should not be surprised to know the purported business of this company is cannabis production. Their only quarterly report to date (as you can see by the stock chart above, they have not been public for very long) is here (Link to 10-Q).

I have not seen this insanity since the dot-com era of 2000. Be careful. It ends badly.

Somewhat disappointed by Enbridge buyout offer

I’ve been writing about Enbridge (NYSE: ENB) and their process of re-acquiring their daughter entities, including EEP, EEQ and ENF. They already formalized the arrangement with Spectra Energy Partners (NYSE: SEP), which I wrote about earlier.

For EEP, I was anticipating a slightly higher exchange ratio (0.35 vs. the 0.335 offered).

I own call options in EEP. Valuation-wise they should trade like call options in Enbridge, with a minor dividend differential (EEP will declare one more $0.35 distribution for the quarter which option holders will effectively receive by virtue of the exchange arrangement, which will be offset by Enbridge’s quarterly dividend).

Enbridge is getting a steal of a deal on EEP – once the Line 3 expansion project becomes operational (scheduled for 2019 and unlike Trans-Mountain, the regulatory way has already been cleared for construction), the amount of cash flows available will be even more immense than the existing $6.6 billion/year they are currently doing (just eyeballing their June 30, 2018 financial statements). Once stripped of all the politics and drama of pipeline construction, it is a pretty boring company to analyze, but one that is a reasonably valued blue chip component in anybody’s portfolio. The fact that there is so much protection in the industry will assist, in addition to them being able to raise rates at the rate of inflation, while paying down their debt in nominal dollars.

Enbridge is also the type of company that would be able to survive an economic recession – as long as the oil flows. And oil will be flowing for a very long time.

I’m holding onto my call options in EEP. They expire in 2019 so I am in no rush to liquidate the position – as ENB appreciates (and it will), the call option position will also reflect this. I can see ENB heading to around CAD$48-50/share by the end of the year which would put EEP at around $12.60 with a 0.77 CAD/USD. Once I’ve squeezed another dollar out of the position I’ll probably sell the options.

Trans-Mountain Pipeline / Enbridge / TransCanada

Nobody is laughing out louder today than the management of Kinder Morgan (NYSE: KMI) who have sold their $5 billion pipeline (TSX: KML) to the government of Canada, when a federal court effectively ruled the trans-mountain expansion project to a halt (the reasons of which are not too relevant to the analysis in this post).

(Update, August 31, 2018: See Kinder Morgan’s “laughing to the bank” announcement here)

I’m ignoring the fact that the original Trans-Mountain pipeline still exists and still operates and pumps oil down to the old Chevron Burnaby refinery now owned by Parkland Fuels (TSX: PKI). There is enough pipeline capacity to supply the refinery, but not enough for any meaningful export quantities. This doesn’t make it a complete disaster for Canada, but they sure paid a lot more for it what it is worth.

There are two big economic winners with this court ruling, and it is not Kinder Morgan (they had their victory back in May when the Government of Canada agreed to the sale).

It is Enbridge (TSX: ENB) and TransCanada (TSX: TRP).

The only way to get meaningful amounts of oil out of Alberta and Saskatchewan (other than by much more expensive rail) is now going through the Enbridge Line 3 project or the TransCanada Keystone Pipeline.

(Here’s a map of oil and gas pipelines in Canada)

The economic losers are the Government of Canada, and every major oil producer in Alberta or Saskatchewan: they still have to go through Enbridge or TransCanada pipelines and pay a very heavy differential to prevailing energy prices for a long, long time. Inevitably this will hurt the Canadian public as the purchasing power of their currency will be less than what it could be had we actually have a fully functioning economy, but these indirect effects are typically never measured nor felt as the absence of an effect is rarely lamented in the minds of most people.

Politically, there is one big winner: The BC Government. Premier John Horgan has a huge victory to show to the environmental activist wing of his political party (the BC NDP) and this will give him more clearance to operate in the province without internal opposition (which is historically how the BC NDP loses power).

I am somewhat surprised Enbridge and TransCanada are not doing better in trading today.

Spectra Energy Partners / Enbridge

Enbridge has sweetened its offer for Spectra Energy Partners (NYSE: SEP) from the initially proposed 1.0123 shares of Enbridge per SEP to 1.1 shares of Enbridge (a 9.8% increase).

Enbridge common shares are down 2% as a result, but SEP is up 3% as a result of the increased consideration. It appears the market baked in about half of the expected appreciation over the prevailing 1.0123 share ratio:

A factor quoted in the press release was the July 18, 2018 FERC Order – and you can also see this implied increase in value on the SEP:ENB chart above.

I will note that this is a fait accompli as the salient sentence in the press release is the following:

As the majority SEP unitholder (83% of total SEP common units outstanding), Enbridge’s approval by consent will constitute the requisite SEP unitholder vote required to approve the transaction.

Unitholders were more or less in it for the ride and short of a minority shareholder oppression lawsuit, it was going to get done at any “reasonable” price.

What is interesting is that Enbridge is concurrently attempting to consolidate its other master limited partnership, Enbridge Enterprise Partners (NYSE: EEP) and related entity (NYSE: EEQ). I have written about EEP in a previous analysis.

An argument by analogy (not air-tight by any means but does have merit) is that if SEP receives a 10% boost in consideration, EEP should be receiving the same, especially considering that EEP, in addition to the July 18, 2018 FERC ruling order, has under its belt a major positive ruling with the Line 3 expansion in Minnesota – one that was received after the initial proposal of 0.3083 shares of ENB per EEP unit. The other factor is that EEP unitholder approval is not guaranteed – EEP requires 2/3rds unitholder approval and Enbridge controls about a third of the vote.

A lot of Canadians are also invested in Enbridge Income Fund (TSX: ENF) which is also affected by this. However, Enbridge has an 82% interest in ENF so they will have to take whatever they are offered, within reason. ENF also does not have the benefit of having the July 18, 2018 partial reversal of the FERC ruling as it is mostly about Canadian operations (where the FERC doesn’t apply). I do not believe ENF holders that are waiting for a boost in the exchange ratio will end up with a happy outcome. Right now ENF:ENB is trading at 0.732 while the proposed exchange ratio was 0.7029.

My general expectation is that EEP unitholders will be offered 0.35 shares of Enbridge, or about a 14% boost-up from the existing offer. As Enbridge is likely to shade down in price as a result of the increased consideration for merging, I would expect the EEP price upon transaction announcement to settle around the $12.10 range. This is a relatively thin value play. I had a not inconsiderable amount of call options on EEP after the initial FERC announcement, but I added slightly to my position today – the downside risk is quite limited.

Looking at Sodastream

Sodastream (Nasdaq: SODA) is an Israeli company that markets those “make it at home” carbonizers where you can make frizzy water, juices, and so forth, at home. Pepsi announced it would be buying it out for $3.2 billion.

What’s interesting is the financial history of the company:

From 2013 to 2015, the company actually had declining revenues (down over a quarter) for a couple years and their profit levels went down as well. However, in 2016 they got back on track and managed to find a way to sell more and do it more profitably.

When looking at the stock chart:

Clearly in the middle of 2015 to the beginning of 2016, when things were at their financial worst, the market had valued SODA like it was some fad cupcake stock (wiki), but this would have been the perfect time to buy. A well-timed $12 investment would have turned into $142 presently.

The financial metrics of SODA at the end of 2015 (ended 2015 at $16 but crashed to $12 in January and February 2016):
Price/Sales – 0.83
Price/Earnings – 29

Today, Pepsi is paying (using 2017 financials, please realize I’m taking a shortcut and not using Q1 or Q2-2018 figures and taking the past 12 months) a Price/Sales of 5.9 and a Price/Earnings of 43.

Incredible. Let that sink in for a minute since people buying into Sodastream in late 2015 or early 2016 have made a fortune.

I’ll note that the balance sheet of SodaStream is not that special – it has a bit of cash in the bank, and no significant debt. They are not a book value play at all. The balance sheet (other than internalized Goodwill) is not a factor at all in this investment.

Finally, I will leave this following comment about investment psychology: Imagine you were convinced that Sodastream was going to turn around and start making significant amounts of money again at the end of 2015. You bought shares at $18 and took a heavy position in December 2015. Just a month later, your position was down to $12/share and it is a third (33%) under water. At that time, you must be feeling pretty stupid about your investment, not knowing that it would skyrocket over the next two years. The psychology of investing is a very odd one – at that point of maximum pessimism (at $12) people would probably question their own investment decision, whether the market sees something they didn’t. There were probably people that bought in at $18 and sold out at $12 because they couldn’t take a 33% loss on the way up to a subsequent 1,100% gain.