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Is TransCanada in play?

Activist investors south of the border appear to be taking aim at one of Canada's biggest pipeline companies. Also: notes on a company that probably should be in play.

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Sep 19, 2014

by Max Fawcett

TransCanada (TSE:TRP) CEO Russ Girling recently announced that his company expects the Keystone XL project to come in – that is, if it ever gets approved – at nearly double the originally forecasted cost. So why are his company’s shares soaring? Because, according to Reuters, TransCanada may be the next subject of U.S.-based activist investors looking to unlock value in a company. “Calgary-based TransCanada Corp. is emerging as a possible target, with several U.S. activist hedge funds reviewing the nearly $38 billion pipeline operator as a break-up candidate,” people close to the matter said. “Discussions about a potential campaign are still in the early stages, but some of TransCanada’s largest shareholders have been contacted by hedge funds interested in shaking up one of North America’s biggest pipeline companies.”

That interest may have been prompted by a June report from Citigroup analyst Faisel Khan in which he suggested that breaking up the company, spinning off its power business and placing the remainder of its natural gas assets in a master limited partnership (MLP) could push the company’s value up to $76. One of the hedgies that’s rumoured to have kicked the tires on TransCanada is Daniel Loeb’s Third Point, which recently went to war on the other side of the Herbalife trade with Bill Ackman. Loeb’s Canadian counterparts seem less willing to chase the deal, though – or talk about it publicly. As Bloomberg’s Rebecca Penty noted in her story, both FrontFour Capital (yes, that FrontFour Capital) and Leon Frazer & Associates, two firms that hold shares in TransCanada, aren’t particularly enthusiastic about a breakup. Neither is fund manager John Stephenson. “It makes little sense,” he told Penty. “This stock has been a stellar performer.”

Now, a company those activist investors might want to look at? That’s Bellatrix Exploration (TSE:BXE), if a recent note by AltaCorp Capital is any indication. Jeremy McCrea thinks the company’s shares are undervalued by nearly 100 per cent, in part because of its improving well performance and in part because of the fact that the bottleneck that’s keeping its production behind pipe is masking some tremendous per-share upside in production and cash flow. “Individual well paybacks that already are under 12 months on a gross basis continue to edge closer to half that time frame, allowing Bellatrix to have some of the best paybacks in the industry. Unfortunately, facility issues continue to mask the growth potential (which we estimate PPS at 20 per cent; CFPS growth at 32 per cent), but with leverage at 0.7-times, we suspect the company should be able to exceed that with at least one acquisition by YE. With management’s 3-yr CAGR of growing PPS, CFPS and PDP NAV by approximately 30 per cent year over year, the company remains an attractive buy for the long-term.”

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