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Niska Gas Is Likely Undervalued Currently

Summary NKA is being sold at a heavy discount to book value and free cash flows based on historical financial analysis. NKA will likely do quite well financially during the current volatile gas price environment. Even if NKA decides to cut dividends, the current price seems very attractive. Investors should not take a large position currently in the case that dividends are cut and the units become even more attractively priced. Niska Gas Storage Partners LLC (NYSE: NKA ) is a company that operates gas storage assets totaling roughly 250 Bcf of natural gas storage capacity in certain areas of North America. Being in the storage industry, the effects of supply and demand in the natural gas industry may not affect NKA the same way as it affects other oil and natural gas concerns. While natural gas supply is relatively stable over the short term, demand may fluctuate quite a lot due to seasonal, weather or other reasons. Therefore, storage assets can be useful when prices are unduly low and used to save gas supplies for when prices rebound to higher levels. There are a few ways that NKA protects itself from the fluctuations in gas prices or perhaps more importantly, fluctuations in the usage of storage facilities by gas and utility companies. Storage might be thought of as a hedge against price volatility and therefore, it may even benefit from exceptionally low gas prices than normal. The company enters into long-term firm (LTF) contracts in which customers pay the company monthly reservation fees for the right to use the storage facilities over a multi-year agreement. These LTF fees must be paid regardless of the actually utilization of storage capacity by the customers. Then there are variable fees that are charged based on usage of the facilities but they represent a very small portion of the fees received under LTF contracts. Therefore, on a qualitative live, the greater part of NKA’s revenue stream should be relatively stable and constant under most circumstances regardless of the direction of gas prices. The extraordinary situation would be if the supply of natural gas were to actually become in danger of being disrupted or if NKA’s customers were to experience financial failure on a large scale. This would put severe stress on the company’s revenue stream and thus severely cripple its ability to service debt. This scenario would happen if gas prices stay below profitability levels for the producers over a prolonged period of time. In the short term, it may even positively impact NKA’s profitability as low prices would beckon more usage of storage capacity. (click to enlarge) NKA’s largest operation is in Alberta with a facility in each of Suffield and Countess which act as a single hub known as the AECO hub. The weighted average contract life of LTF storage contracts in the AECO hub was 2.3 years as of March 31, 2014. As long as those customer companies manage to stay solvent, NKA’s revenues from AECO should be able to weather a fairly long period of low oil prices. Especially since the fact that TransCanada, a large customer of NKA re-implemented its contract making the weighted average life 4.2 years. The weighted average contract life of the LTF storage contracts at Wild Goose is 2.0 years. Salt Plains is 3.0 years. While LTF contracts comprise of the larger part of NKA’s total revenues, they also have Short Term Firm (STF) contracts which also accounts for a material part of their revenues. The company uses a combination of LTF, STF and other revenue optimization techniques to obtain as high an amount of revenue as possible depending on the market situation. The nature of LTF contracts is that the revenue stream is set during the window of when the contracts expire and is renegotiated for the years going forward. Thus, the revenue from this stream have little to do with the day to day fluctuations of the gas markets and is determined by the conditions prevailing when the contract is being renegotiated. The STF contracts are negotiated on an opportunistic basis and this source is more susceptible to the shorter term fluctuations of the greater market. The current scenario The poor performance in the recent quarter was largely due to the inability of the company to find attractive STF contracts. This is partially attributable to the fact that there has been a lack of energy price volatility due to a moderately cool summer in the areas served by NKA. The trend has now reversed and storage capacity will likely be in high demand due to the recent fallout in oil and gas prices. NKA’s facilities will be in short supply when producers become very uncertain about the future prospects of oil prices since storage capacity basically acts as limited type of insurance protection against uncertain prices. In that sense, although I never like to depend on predictions for the future, NKA’s future prospects for both STF and LTF contracts are looking very bright at the moment. The greater the spread in energy prices, the more valuable will be NKA’s storage assets. Restrictive ownership structure The company is effectively controlled by its sponsor HoldCo and there really isn’t any effective control given to the general public shareholders. Furthermore, the company states that if the manager or any of their affiliates own 80% more of the outstanding units, then they have the right to purchase all of the remaining units from the public unit holders at the prevailing market price. This makes holding NKA very unattractive if you were to have paid the full price of $16.00 for the units. However, at $4.00 per unit, the potential risk is much lower and the reward potential is much greater and more attractive. Should the controlling sponsors decide to acquire the entire outstanding units, there is far less risk of selling it for lower than your acquisition price when purchased at $4.00 per unit. Financial analysis Reviewing the historical performance of NKA, it would seem that the current market cap of around $140 million is unduly cheap. The cash available for distribution metric that NKA discloses should be a rough approximation of free cash flow to equity. If we take the year over year results so far, the stock is trading at merely two times free cash flow. The stock was roughly $16.00 per share and has now dropped to less than $4.00 per share based only on one quarter of poor results due to a shortfall in STF business. The company pays out $1.40 in dividends per year which amounts to roughly $51 million in total. The 2nd quarter call conference suggested that the dividend may be reduced or cut altogether going forward which is what caused the collapse in share price. Analyzing the historical financial data along with the current drop in prices, NKA appears to be extremely cheap at the moment not only due to the free cash flow record, but it also trades at such a small fraction of book value. (click to enlarge) Conclusion Even if the dividends were to be cut completely, I believe the unit price should still be worth roughly $6.00 per share when taking into consideration all the risks. Indeed, the share price will likely drop if dividends were to be cut but the fundamentals of the company are sound and should even do quite well under the current volatile oil and gas price regime. The investment is certainly a portfolio of depreciating assets and the maintenance capital expenditures will increase to roughly $10 million per annum going forward. However, this will not affect the fundamental cash flows to equity going forward to warrant a 70-80% drop in the price. There is ample protection in terms of discount to book value as well as the historical free cash flow performance to warrant a small purchase for me at the current prevailing market price. I’ve only taken on a small position because I want to have a lot of dry powder left over if they should actually cut the dividend and the price would fall further. However, I believe that at the current price, NKA is attractive even if it does cut its dividends.

3 Best-Rated Utilities Mutual Funds To Invest

Even during a market downturn, the demand for essential services such as those provided by utilities remains virtually unchanged. Utilities funds are therefore an excellent choice for investors seeking a steady income flow through consistent yields from dividends. This is also why they are primarily considered to be a relatively more conservative investment option. In recent times, their forays into emerging markets have led to appreciably higher returns and they offer superior returns at a relatively lower level of risk. Below, we will share with you 3 top rated utilities mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) as we expect the fund to outperform its peers in the future. To view the Zacks Rank and past performance of all utilities funds, investors can click here to see the complete list of funds . Fidelity Select Utilities Portfolio (MUTF: FSUTX ) seeks capital growth over the long run. The fund invests a lion’s share of its assets in common stocks of companies primarily involved in utilities sector, and companies that derive major portion of its revenue from operations related to this sector. The fund invests in both U.S. and non-U.S. firms. The fund considers factors such as financial strength and economic condition to invest in companies. The non-diversified utilities mutual fund has a three year annualized return of 17.8%. The utilities mutual fund has a minimum initial investment of $2,500 and an expense ratio of 0.80% compared to a category average of 1.28%. Fidelity Advisor Utilities A (MUTF: FUGAX ) invests a major portion of its assets in utilities companies or carry out operations related to the utilities industry. Factors such as industry position and market condition are considered to invest in companies throughout the globe. The fund seeks long-term capital growth. The non-diversified utilities mutual fund has a three-year annualized return of 16.9%. The fund manager is Douglas Simmons and he has managed this utilities mutual fund since 2006. Fidelity Telecom and Utilities Fund (MUTF: FIUIX ) seeks total return with current income and capital growth. It invests heavily in companies from telecommunications services and utilities sector. The fund invests in companies all over the globe by analyzing factors which include company’s economic condition and financial strength. The non-diversified utilities mutual fund has a three-year annualized return of 15.4%. As of October 2014, this utilities mutual fund held 36 issues, with 19.96% of its total assets invested in Verizon Communications (NYSE: VZ ). Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

GDXJ Re-Balancing Pummels These 5 Gold Developers

The Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ) is an ETF administered by Van Eck and created to replicate the Global Junior Gold Miners Index which is a basket of small-cap gold exploration, development and production companies. The GDXJ tries to maintain an average market cap of its holdings above $150 million. According to recent filings, the ETF’s largest holdings are Centamin ( OTCPK:CELTF ), IAMGOLD (NYSE: IAG ), Hecla (NYSE: HL ) and AuRico (NYSE: AUQ ), but included in the 69 total equity positions are exploration names such as Bear Creek Mining ( OTCPK:BCEKF ) and Focus Minerals ( OTCPK:FKSMF ). Needless to say, the ETF which mirrors the junior resource markets, hasn’t performed well. Year-to-date, it is down 18.18% but in the past 3 months the ETF is down over 40%. Recently, the GDXJ was re-balanced in order to maintain their average market capitalization hurdle. Given the performance of the underlying equities, the pre-revenue, development stories that have become less and less liquid were sold in favor of more liquid, higher market capitalization names such as IAMGOLD, AuRico and Alamos (NYSE: AGI ). As a result, some of these development companies have been crushed by this relentless selling. Asanko (NYSEMKT: AKG ), Premier Gold ( OTCPK:PIRGF ), Torex ( OTCPK:TORXF ), Rubicon (NYSEMKT: RBY ) and Midway (NYSEMKT: MDW ) were among them. Shares in those companies are down 23%, 25%, 22%, 17% and 15%, respectively over the past 30 days. Last Friday saw huge volume traded in these names as well. Asanko traded 28 million shares on Friday alone. The average daily volume traded over the past 3 months in Asanko is just 156,500 shares (the other names were similar). These companies have all outperformed the GDXJ year-to-date. Torex is up 24%, Premier up 19%, Rubicon up 8%, Asanko is flat on the year, Midway down 11%. The GDXJ on the other hand was down 25%. So perhaps the decision to cut these outperforming names wasn’t the best call afterall? Regardless, these teams have significantly de-risked their projects. Below is a summary of the milestones achieved this year: Torex – closed a $145 million equity financing and another $375 million project finance facility to build their Morelos project which is one of the highest-grade undeveloped open-pit gold projects in the world. They moved the construction of their project forward on time and on budget for a mid-2016 commercial production start-up. They also got $85 million worth of at-the-money warrants exercised (of $90 million) and made significant strides towards the development of their second mine, Media Luna. I doubt this company would get acquired before they complete construction and ramp-up, but come mid-to-late 2016 when the mine is running smoothly, I would expect a major to take them out (and likely at a significant premium). Since June 30, 2014, the GDXJ has sold 65.9 million Torex Gold shares in the market reducing their position by 57 Premier Gold – released a positive PEA on their Hardrock and Brookbank projects and followed that up with meaningful exploration results at their Cove Gold project. Recently, they were able to raise $9 million to continue de-risking these Canadian high-grade gold projects. Although earlier-stage, Premier could see a takeover bid come from one of the many companies looking for Canadian exposure to add to their project pipeline. Since June 30, 2014, the ETF sold 29.6 million shares, reducing their position by 73%. Rubicon Minerals – started the year with a $75 million streaming deal from Royal Gold, then followed that up with a $115 million bought deal financing. They continued to advance the construction of their Phoenix Gold project which they are touting as “Canada’s next high-grade gold mine”. With what management has delivered on so far and the expected production start-date of mid-2015, we believe that statement could prove to be true. Given the recent flight to safety by many global miners (see Osisko takeover battle), we view Rubicon as another likely takeover candidate given its postal code. 31.5 million shares of Rubicon have hit the market since June 30th, courtesy of the GDXJ. They reduced their position by 56%. Asanko Gold – had a truly transformational year. They successfully closed the acquisition of PMI Gold for roughly $180 million worth of stock in order to consolidate the two companies neighboring gold assets in Ghana. Shortly after, the company decided that the newly acquired, higher-grade mine from PMI would become the phase 1 project and outlined a path to get to 200,000 ounces of annual gold production by 2016. The company continued to de-risk the phase 1 development and worked on developing an integration plan for the second phase development which could see the company’s production double from 200,000 ounces to 400,000 ounces of gold annually, effectively catapulting the company into the mid-tier ranks. Next year looks to be another exciting year as the company completes construction and formally outlines the integration plan of the second phase of production. With Asanko’s board and management, this company could be a takeover target or could continue acquiring assets to grow their production profile. Asanko Gold saw its weighting in the GDXJ reduced by 37.9 million shares or roughly 77% since June 30th. Midway – broke ground on their heap leach gold project in Nevada and followed that up with the formalization of a joint venture with Barrick on the Spring Valley project which will see Midway carried to production at a 25% interest should Barrick chose to build it. Midway also announced the finalization of a project finance facility of $55 million and $25 million bought deal financing which allows the company to finish building Pan. The project is one of very few run-of-mine projects (means no crushing necessary) which enables it to be both technically straight forward as well as lower cost than other mines, making it a takeover candidate for anyone looking for simple heap leach projects in safe jurisdictions (of which there are many companies). Midway Gold saw the fewest shares hit the market with just 8.7% of its weighting in the GDXJ eliminated (roughly 1.1 million shares). Overall, the recent selloff in these names should be taken in context. All of the above teams are delivering on their promises, meeting or exceeding expectations, de-risking their projects and moving towards cash flow. An unrelated index re-balancing sale of these companies’ shares provide an opportunity for us as resource speculators. This is one of those times where I, as a speculator, finding myself questioning my investment thesis. Am I missing something? Does the market know something I don’t? In this case, I believe the selloff in the names is unrelated to the specific companies themselves or even the broader markets in general; it’s just a portfolio manager with a heavy finger. As a result, this re-balancing combined with the fact we are in the final days of tax-loss season provides an opportunity to gain exposure to high-quality gold development names. Disclosure: None Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.