Issue 11 March 14, 2014 To subscribe to our Newsletters www.palosmanagement.com/register Portfolio Management & Advisors Charles Marleau, CIM President & Senior Portfolio Manager Hubert Marleau Economist & Co-Founder Yarith Chhiv, B.ENG, CFA, CAIA, FRM, FCSI Senior Portfolio Manager & Risk Manager Palos Weekly Commentary Robert Boisjoli, FCPA, FCA Chair of the Board Palos Income Fund George Kaneb, MBA Vice-President, Palos Merchant Fund Bechara Haddad Analyst Contacts Lionel Alcoloumbre Vice-President, Business Development Alexandra Kaneb Director, Client Services Palos Management Inc. 1 Place Ville Marie, Suite 1812 Montreal (QC) H3B 4A9, Canada T. +1 (514) 397-0188 F. +1 (514) 397-0199 www.palosmanagement.com By Charles Marleau WSP Global Inc. Does it Again WSP Global Inc. (TSX:WSP), formerly known as Genivar, announced another transformational acquisition on March 12, 2014. WSP is acquiring Focus Group Holding Inc. (Focus) an engineering and geomatics firm of 1,700 employees based in Alberta that principally serves the oil and gas industry in Western Canada. CIBC led the deal, with Raymond James (NYSE: RJF) as co-lead, issuing new stock in WSP at a discount to market price. Palos participated in the deal for the following reasons: 1) Focus’ engineering specialty has very little overlap with WSP’s existing business. 2) Our macro view on energy infrastructure is bullish. Palos is predicting a healthy pipeline of business in the coming years from this sector. 3) The acquisition is immediately 10% accretive to earnings per share. The 10% does not include synergies. WSP has history of successfully integrating acquisitions. 4) WSP bought Focus at 8.0x EBITDA, when WSP is trading at 11.0x. From the press release, one can clearly see that the acquisition was friendly and made with a common vision of both companies, of becoming a leader in oil & gas engineering work. Why else would the former CEO of Focus become the new CEO of WSP Canada? This is not the end of transformational and accretive acquisitions for WSP. Palos is expecting another acquisition by early next year. The expected acquisition will most likely take place in the United States (US). Using Raymond James as the co-lead to CIBC was a very strategic move on the part of WSP for it will enhance WSP’s ability to source deals in the US. Chart 1: Palos Domestic Funds versus Benchmarks (Total Returns)* Palos Income Fund L.P. Palos Equity Income Fund - RRSP Palos Merchant Fund L.P. (Dec 31, 2013) Majestic Global Diversified Fund (Mar 13, 2014) S&P TSX Composite S&P 500 S&P TSX Venture FundServ PAL 100 PAL 101 PAL 500 MAJ 100 NAVPS $10.34 $7.28 $7.40 $3.88 YTD Returns 2.74% 2.68% 0.00% 2.13% 5.08% 0.07% 10.96% Chart 2: Market Data* US Government 10-Year Canadian Government 10-Year Crude Oil Spot Gold Spot US Gov't10-Year/Moody BAA Corp. Spread USD/CAD Exchange Rate Spot * Period ending Mar 14, 2014 PALOS MANAGEMENT INC | WEEKLY COMMENTARY Value 2.65% 2.40% US $98.99 US $1,381.00 171 bps US $0.9012 Issue 11 Palos Merchant Fund By George Kaneb, March 14, 2014 To subscribe to our Newsletters www.palosmanagement.com/register Portfolio Management & Advisors Charles Marleau, CIM President & Senior Portfolio Manager Hubert Marleau Economist & Co-Founder Yarith Chhiv, B.ENG, CFA, CAIA, FRM, FCSI Senior Portfolio Manager & Risk Manager Robert Boisjoli, FCPA, FCA Chair of the Board George Kaneb, MBA Vice-President, Palos Merchant Fund Bechara Haddad Analyst Contacts Lionel Alcoloumbre Vice-President, Business Development Alexandra Kaneb Director, Client Services Palos Management Inc. 1 Place Ville Marie, Suite 1812 Montreal (QC) H3B 4A9, Canada T. +1 (514) 397-0188 F. +1 (514) 397-0199 www.palosmanagement.com IOU Financial Announces the Addition of Mr. David Cynn to its Board of Directors IOU Financial Inc., a core holding of the Palos Merchant Fund LP, has announced the addition of Mr. David Cynn to its board. It is our opinion that Mr. Cynn’s background in specialty finance companies will be an excellent resource for IOU. For further biographical information on Mr. Cynn, please see the press release below. customers include medical and dental practices, grocery and retail stores, restaurant and hotel franchisees and e-commerce companies. In a unique approach to lending, IOU Central’s advanced, automated application and approval system accurately assesses applicants’ financial realities, with an emphasis on day-to-day cash flow trends. It makes loans of up to $100,000 to qualified applicants within a few business days, with affordable charges favorable to cash-flow management. IOU Central’s speed and transparency make it a trusted alternative to banks. To learn more visit: www.ioucentral.com IOU Financial announces New Addition to its Board of Directors MONTREAL, March 7, 2014 – IOU Financial Inc. (“IOU Financial”) (CSE: IOU) is pleased to announce that Mr. David Cynn has joined its Board of Directors. *Principals of Palos are also be principals of IOU Financial Inc. Mr. Cynn is a Partner at Killearn Capital, a New York private equity firm focused on specialty finance companies. Prior to joining Killearn Capital, Mr. Cynn was a Partner at Lightyear Capital, a New York private equity firm focusedon financial services investments. Mr. Cynn, who spent over ten years at Lightyear, led that firm's specialty finance efforts. Prior to Lightyear Capital, Mr. Cynn worked in Morgan Stanley's Mergers and Acquisition Department for four years as well as two years in HSBC's Mergers and Acquisition Department. He began his career in Chase Manhattan's Management Development Program. From Super Oil Producer to Super Oil Power, Pipelines Are Needed Mr. Cynn received an MBA from the University of Chicago's Graduate School of Business where he graduated with high honors and received a BS from Cornell University. “Mr. Cynn brings a wealth of industry experience and we are excited to have him join our Board”, said Mr. Evan Price, Chairman of the Board. “His experience and expertise on the US financial market will constitute an important asset for the Corporation.” “I am looking forward to joining IOU Financial’s Board as the Corporation’s strong management and significant growth opportunities are unique in the financial service sector”, said Mr. Cynn. About IOU Financial Inc. IOU Financial, via its U.S. subsidiary, IOU Central, provides small businesses throughout the U.S. access to the capital they need to seize growth opportunities quickly. Typical PALOS MANAGEMENT INC | WEEKLY COMMENTARY What is New on the Macro Level? By Hubert Marleau Since 2000, Canadian crude oil production increased from 2.0 million barrels-a-day to 3.5 million. By 2025, Canada is expected to produce at least 5.5 million barrels per day of which the development of the oil sands could account for as much as 3.5 million barrels-aday. These estimates could prove to be conservative since proven oil reserves measured by the National Energy Board are estimated at 175 billion barrels, a number that is surpassed only by Saudi Arabia. Moreover, the estimates do not recognize huge oil reserves from shale rocks. In this connection, Canada surely figures as a super oil producer, for it is self sufficient in oil and capable of earmarking all incremental oil production for export and import replacement, supplanting foreign oil with western crude. As a matter of fact, the weight of crude oil and refined petroleum products on the Canadian economy is very significant. Firstly, crude oil and oil related products account for 30% of Canada’s overall export of tradable goods and the hydrocarbon energy sector is the largest private investor in Canada, accounting for one third of all business investments. Accordingly, there is a direct connection between how we do in the energy sector and in the overall economy. TD Economics has suggested that if major pipeline construction and expansion projects are not built, as much as $1.3 trillion of real GDP in 2010 constant dollar would be foregone. Issue 11 March 14, 2014 To subscribe to our Newsletters www.palosmanagement.com/register Portfolio Management & Advisors Charles Marleau, CIM President & Senior Portfolio Manager Hubert Marleau Economist & Co-Founder Yarith Chhiv, B.ENG, CFA, CAIA, FRM, FCSI Senior Portfolio Manager & Risk Manager Robert Boisjoli, FCPA, FCA Chair of the Board George Kaneb, MBA Vice-President, Palos Merchant Fund Bechara Haddad Analyst Contacts Lionel Alcoloumbre Vice-President, Business Development Alexandra Kaneb Director, Client Services Palos Management Inc. 1 Place Ville Marie, Suite 1812 Montreal (QC) H3B 4A9, Canada T. +1 (514) 397-0188 F. +1 (514) 397-0199 www.palosmanagement.com While the latter is very important, the Canadian Government wants the country to become an energy superpower; and this can happen if only Canadian energy producers become price setters as opposed to price takers. In order to achieve this objective, reserves need to to connected to sites and/or facilities that can supply existing markets and open new markets. Pipelines are key, for only they can permanently allow oil to flow in a manner to chase optimal prices. Gaining access to alternative markets would lessen dependence on the US and alleviate the negative effect of seasonal, cyclical and secular occurrences of supply gluts on export terms of trade. This is a principal reason that Canada is exercising diplomatic pressure on the United States, British Columbia and Eastern Canada to accept the expansion and/or construction of pipelines. A week ago, Canadian energy producers received a positive boost from the National Energy Board. It allowed Enbridge to carry oil sand bitumen and light crude oil to refineries in Quebec through a reversed pipeline known as Line 9. The reversal of the pipeline will carry 300,000 barrels a day of crude oil for a yearly tally of $10.9 billion. While the aforementioned numbers are impressive, they are minute compared to the potential economic impact of the several proposals pending for new pipelines that would connect Albertan oil fields with the US Coast in Texas, coastal cities in B.C. and refineries in Eastern Canada. These proposals include: 1) TransCanada Corporation’s Keystone XL project could transport 830,000 barrels a day of crude oil to Houston, Texas. 2) Enbridge could double the existing capacity of the Alberta Clipper oil pipeline that carries crude to Chicago, Illinois to 880,000 barrels a day. 3) An expansion of Kinder Morgan’s 60 year old Trans Mountain pipeline would deliver an additional 290,000 barrels a day of crude oil to Vancouver, B.C. 4) An approval of Enbridge’s Northern Gateway pipeline would bring 550,000 barrels a day of crude oil to Kitimat, B.C. for export to Asia. 5) The construction of the Energy East pipeline would deliver 850,000 barrels a day to Quebec. These transporters will need to demonstrate that their proposals have economic benefits, little environmental effect, enhanced geopolitical influence, improved trade negotiations and augmented national security. Our reading on the subject suggests that the odds of approval are much better than 50%. According to the polling firm Nanos Research strong support, at 62%, exists for the very controversial and heavily disputed Keystone XL. Moreover, several fiery derailments involving crude oil in the past year has led to the belief that pipelines are much safer. The Association of American Railroads reported on Thursday last that crude oil shipments by railroads increased 83% in 2013. The point is that if the proposed pipeline construction and expansion was to take place, as much as 3.5 million barrels a day of crude oil would flow in various directions to several markets producing a huge monetary flow of $130.0 billion in constant 2013 dollars to the Canadian energy sectors. If you have any questions about the weekly commentary, the securities that we follow, or investment ideas, please contact us at [email protected] Chart 3: Palos International Fund (Total Returns)* Palos International Equity Income Fund PLC - CAD Palos International Equity Income Fund PLC - EUR Palos International Equity Income Fund PLC - USD S&P TSX Composite - CAD S&P TSX Composite - USD * Period ending Mar 11, 2014 Last CA $5.66 EUR 6.46 US $6.52 YTD Returns 3.56% -1.24% -0.61% 5.26% 0.76% Disclaimer: No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted, or otherwise reproduced, disseminated, transferred, in any form or by any means. This publication is proprietary to Palos Management Inc. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. The information contained herein is not necessarily complete and its accuracy is not guaranteed by Palos Management Inc. The information provided in this material does not constitute investment advice and it should not be rely on as such. If you have received this communication in error, please notify us immediately by electronic mail or telephone. The overall views expressed in this report are prepared by Palos Management Inc. This document may contain certain forward-looking statements that are not guarantees of future performance and future results that could be materially different from those mentioned. Past performance is not a guarantee of future performance. “S&P” is a registered trademark of Standard and Poor’s Financial Services LLC. “TSX” is a registered trademark of TSX Inc. PALOS MANAGEMENT INC | WEEKLY COMMENTARY
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