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Expectations Regarding Natural Gas Prices Should Be Handled With Care – Part 2: EQT Corporation

Summary Even though the expectations regarding the natural gas prices have become even more bearish recently, I continue viewing the current situation in the markets as an overreaction. Despite the positive expectations for deep Utica play and positive analyst ratings, EQT is a risky stock with a substantial downside potential in the worst-case scenario. The company is overvalued. It is struggling to generate cash while at the same time having an accumulating debt pile. The far-away outcome of deep Utica play should not overshadow the importance of the company’s present performance and financial strength. While remaining bullish on natural gas for the nearest future, I continue analyzing securities with exposure to this commodity. Even though the expectations regarding the natural gas prices have become even more bearish recently, my view on the current situation in the natural gas market has not changed – I still perceive the recent developments to be an overreaction to the real fundamentals, and I remain long natural gas despite the higher risk. The company to be analyzed in this article is EQT Corporation (NYSE: EQT ). Being a Credit Suisse’s recent pick for natural gas exposure, the company is pretty popular among investors. With a market capitalization of $9 billion, this natural gas producer might prove to be a good natural gas bet for a variety of reasons. Nevertheless, the outlook is not exactly clear for EQT, as it is for every natural gas producer at current commodity price levels. At a total natural gas and NGL (Natural gas liquids) sales volume of 155,194 Mmcf, natural gas accounted for more than 99% of total company’s sales, placing it in a good position to benefit from the possibility of this commodity rising in price. Marcellus Play EQT Corporation strongly depends on its Marcellus wells, which accounted for 83% of total natural gas sales in the latest quarter, and this number has been nearly constant over the last three quarters. Known for many years, the Marcellus Shale only started causing excitement in 2002, when the estimations of its natural gas reserves started increasing, confirming its status of one of the largest natural gas shale formations in the U.S, which is spread over Ohio, West Virginia, Pennsylvania and New York. Marcellus is the main asset of EQT Corporation, with the company owning approximately 630,000 gross acres in the Marcellus play. Marcellus has been a major contributor to the company’s proved reserve growth, making it clear that the company is not running out of its reserves anytime soon. (click to enlarge) Source: Company’s Website , (2015). The number of wells spud in the Marcellus play is increasing strongly. The company is ramping up production, as the number of completed, not-in-use wells only rose modestly compared with the number of wells online during the last quarter. (click to enlarge) Source: Company’s Quarterly Reports , (2015). Despite the positive expectations for the future potential of Marcellus play, the 22% after-tax IRR for the realized price of $2.50 sets the scene for skepticism, as the future price dynamics of the commodity are not clear. Deep Utica Play It is well-known how the bold, full-of-hope statements make it sometimes nearly irresistible for people to turn too optimistic on a company’s potential. The willingness to have a quick profit (arguably, the most vulnerable state of a man) resulted in a possible overestimation of the future prospects of Deep Utica Play, which is currently the main focus of the company and the media following it. Seeking lower production costs, the company turned its focus to the Utica shale, which is located just below the Marcellus. I will not go in too much detail here, but I would like to outline the complexity of production in the Utica Play. At the depth of approximately 13,000 feet, with only 1 well online and 2 in progress, there is a possibility of the company’s estimated costs of $12.5-14 million turning out to be underestimated. Source: Geology.com , (2015). Nevertheless, the estimated 21% after-tax IRR at a realized price of $2, combined with production and efficiency at the low-end levels is certainly better than that for the Marcellus play, taking into account the difference in the realized prices. Source: Company’s Website , (2015). It is clear that the company’s decision might prove to be very profitable in the long run, with the company’s CEO, David L. Porges, stating the following: “If the deep Utica works, it is likely to be larger than the Marcellus over time […] we’re going to be able to supply a big portion of North America’s natural gas needs from a relatively small geography.” At the same time, it is not clear whether the best-case-scenario will unfold, as it is strongly expected at the moment. “There have been fewer than 10 wells drilled and completed in the deep Utica around our acreage, so it is still too early to say that the play will be economic,” the CEO said during the earnings call in October. Even though it is not the time to turn entirely pessimistic on the company, the downside potential for the case of the company missing the Deep Utica Play expectations should be taken into the account. Good performance of Marcellus Play, combined with rising hopes for Utica have significantly contributed to the analyst ratings, with the shares of the company currently holding 10 ” Strong Buy” and 3 “Hold” ratings . With institutional ownership accounting for 85% , should the expectations be missed, the downside risk for the stock could be substantial. Even though the number of positions initiated is currently outperforming that of the closed ones, it is important to remember the downward trend the shares of the company have been following since the middle of 2014, when the price was nearly double what it is today. (click to enlarge) Hedging Activities It is important to mention the company’s hedging activities against the further natural gas price declines. In its latest quarterly report, the company emphasized the importance of its derivative transactions, role of which I expect to continue rising over the next quarters. Source: Company’s Quarterly Reports , (2015). Even though the total cash provided by derivatives does not seem to have risen too much over the last three quarters, cash-settled derivatives accounted for 14%, 37% and 24% of the total realized natural gas price during the last three quarters, with hedging-designated ones providing more than $65 million last quarter, which is impressive taking into account that quarter’s profit of $40.79 million. So far, it is hard to deny the management’s ability to hedge the risks of environment the company is currently operating in. Even though natural gas prices have a significant potential to rise in the near future, natural gas companies’ hedging operations should be paid more attention to, as long-term plans (such as the Deep Utica Play) might become irrelevant if they either do not play out or the company runs out of its cash resources. With only 1 Utica well online at the moment, the target cost of $12.5-14 million per well accounts for only 1% of the company’s total cash position at the end of the latest quarter. Nevertheless, Deep Utica might turn out to be a severe cash burning process in case the company struggles to earn money at the current price levels or its strategy turns out to be somewhat too optimistic. The company’s current hedging position for the rest of 2015 (outlined in yellow) is sufficient enough to cover almost half the amount of the company’s natural gas sales for the latest quarter. Nevertheless, it is hard to form solid expectations regarding the hedging effectiveness in the next quarter as we cannot predict the revenue growth and the adjustments to the hedging position throughout the quarter. Despite the fact that the accumulation of the company’s hedging position for 2016 is fast-paced, average fixed prices for 2015 and 2016 are declining significantly. (click to enlarge) Company’s hedging position at the end of each quarter, 2015. Source: Company’s Quarterly Reports , (2015). Fundamentals The falling natural gas prices have had a substantial impact on the financial positions of all producers, and EQT Corporation is no exception. Despite the company’s efforts to save the revenue growth, net profits have significantly decreased during 2015, with some hope emerging for the upcoming quarters. With natural gas outlook being unclear and much time required for Utica Play to start firing on all cylinders, even more attention should be paid to the company’s current hedging activities. COGS increased strongly in the latest quarter, making the gross profit margin fall to 77.5%, way below the 2-year average of 82.4%. Revenue, Gross and Operating of EQT Corporation, quarterly, Sep 2013-2015. Source: GuruFocus , (2015). Net income margins have become quite volatile lately, falling sharply in the latest quarters and keeping return on assets and equity ratios at close range. Net Margins, ROA and ROE ratios of EQT, Sep 2013-2015. Source: GuruFocus , (2015). Following the fluctuations of the company’s revenues, interest coverage ratio has shown concerning performance during the last five quarters, falling below 1 in June 2015. Even though interest expense has been nearly unchanged at approximately $37 million over the same time period, fluctuating EBIT might become a problem in the future. There is a fast-paced accumulation of deferred tax liabilities, which have been growing by 1.82% on average during the last five quarters, conquering almost 22% of the liability part of the balance sheet by September 2015. (click to enlarge) Interest Coverage Ratio (right axis), EBIT and Interest Expenses (in $ mln, left axis) of EQT, Sep 2014-2015. Source: Morningstar , (2015). Even though the debt/equity ratio of EQT Corporation has been decreasing lately and is fairly low at 0.64, it is important to remember that the large “E” in the D/E ratio is mostly there because of a large amount of fixed assets, leaving the current ones a lot of room for improvement. The company’s cash position has been increasing strongly over the last two years. Accounting for only 12.1% of total assets, it is not sufficient to cover the long-term debt of the company, however, and the accumulating current portion of long-term debt should be paid more attention to. Company’s free cash flow has been negative since 2007. (click to enlarge) Source: Gurufocus , (2015). Although the growing debt, worsening profitability and a low Altman’s Z-value of 1.36 are concerning factors, the debt maturity schedule demonstrates why it is too early to get too pessimistic about the company’s financial position. It should be understood, however, that the company might significantly decrease its cash position in the coming future if no net profit surprises follow. Source: Company’s Website , (2015). The argument in favor of a decrease in the company’s cash position sounds even more valid when the historical net changes in cash are taken into account. Net change in cash has been negative during 3 out of the 7 latest quarters. Among the remaining 4, positive net change in cash in 3 quarters can be attributed to large stock or debt issuance (it is easier to follow with the help of the table below). Debt is slowly becoming a problem for the company, while continuous stock issuance can drive the share price even lower. (click to enlarge) Net change in cash; net debt and stock issuance of EQT Corporation, March 2014 – September 2015. Source: Gurufocus , (2015). There is a certain amount of divergence between the stock’s valuation and current performance of the company. Even though it can be said that at a price/book of 1.69 (which is close to its 10-year low) the stock seems to be fairly valued, I am returning to my argument of over-optimistic expectations due to the trailing P/E ratio exceeding 42. Conclusion Despite the positive expectations for the future of Deep Utica play, the company is heading towards additional risk. The financial strength of the company is slowly decreasing, making it strongly dependent on the outcome it will face regarding the Utica play. Even though the strategy might prove to be a major success, there is a high probability of earnings disappointments and further balance sheet deterioration in the future. Accompanied by high valuation and negative free cash flow, growing debt and cash generation issues might leave the stock with a large downside risk should the natural gas prices continue their downward trend in the nearest future. High ratings among the analysts covering the stock make it vulnerable to potential downgrades, as the popularity of the stock might turn against it. Nevertheless, there are various possible reasons for the stock to outperform as well. Positive developments in the Utica play, possibility of a dividend increase (which, despite being a questionable decision, might be introduced by the company as a save-the-day solution against the falling stock price) and the overall bullish attitude towards the company might make it a market’s darling should the natural gas prices rise as I expect them to be, although the downside risk makes it a much riskier bet when compared with Gulfport Energy Corporation (NASDAQ: GPOR ), which I analyzed in my previous article. The far-away outcome of deep Utica play should not overshadow the importance of the company’s present performance and financial strength.

Gas Natural’s (EGAS) CEO Gregory Osborne on Q3 2015 Results – Earnings Call Transcript

Gas Natural Inc (NYSEMKT: EGAS ) Q3 2015 Results Earnings Conference Call November 10, 2015, 1:00 pm ET Executives Deborah Pawlowski – Investor Relations, Chairman and Chief Executive Officer of Kei Advisors LLC Gregory Osborne – Chief Executive Officer, Director Jim Sprague – Chief Financial Officer, Vice President Analysts Operator Greetings and welcome to Gas Natural Inc. third quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Gas Natural. Thank you. You may begin. Deborah Pawlowski Thank you, Adam and good afternoon, everyone. I apologize for the delay on the call today having just telephone technical difficulties. And we are glad that you are here for our 2015 third quarter earnings conference call. I do have with me Gregory Osborne, our President and Chief Executive Officer, Jim Sprague, Vice President and Chief Financial Officer and Kevin Degenstein, our Chief Operating Officer as well as Vince Parisi, our General Counsel. So we are going to go through a quick review of the third quarter results. Gregory and Jim have some formal remarks. Unfortunately we are really short on time today as well. So we won’t be able to go into a Q&A. You are more than welcome to give me follow-up call if you have any other questions. I can be reached at 716-843-3908. You should have the financial results released after market closed yesterday, otherwise it can be found on our website at www.egas.net. So for the Safe Harbor statement, as you are aware, we may make some forward-looking statements on this call during the formal discussion. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today’s call. These risks and uncertainties and other factors are provided on our earnings release as well as with other documents that are filed by the company with the Securities and Exchange Commission. These documents can be found on the company’s website as well or at sec.gov. So with that, I am going to turn the call over to Gregory to begin. Gregory? Gregory Osborne Thank you, Deb and good morning, everyone. I appreciate your time today and your interest in Gas Natural. It’s been another quarter of continue progress for us as we have made significant headway toward resolution of regulatory items and are moving toward completion of our asset rationalization program. Let me summarize some highlights for you. On the regulatory front, the stipulation and recommendation between Ohio utilities and the Commission Staff of the Public Utilities Commission of Ohio or PUCO was filed on October 30. All stipulations are subject to review and final approval by the Commission as is the case with this settlement. We believe this stipulation addresses the issues raised by last year’s investigative regulatory audit of Ohio utilities. We made excellent progress on our asset rationalization initiatives in the third quarter. As previously announced, on July 1, the first day of the quarter, we completed the sale of our Wyoming operations. The proceeds will approximate $17 million subject to closing adjustments and this sale resulted in a $3.4 million gain after-tax in the quarter. This is recorded in discontinued operations. We followed that sale with the announcement on August 5 that we reached an agreement to sell our Kentucky utility for just under $2 million subject to normal regulatory approval. Our Pennsylvania utility is also under agreement for sale. That divestiture is moving through the normal regulatory approval process and we expect to close it this quarter. Subsequent to the quarter-end, in October we sold our former corporate headquarters building for approximately $1.4 million monetizing another non-core asset. When the sales of our Kentucky and Pennsylvania utilities are closed, we would have completed our asset rationalization program. The divestment these non-core assets enables us to focus our energies and resources on our operations which have higher growth potential. In Montana and Ohio, we can leverage scale we the already have in those markets. North Carolina and Maine are both underserved markets where demand for natural gas is growing. Overall, we continue to grow our customer base with approximate 1,000 customers added in the third quarter, driven by increases in Ohio, North Carolina and Maine. And internally we are progressing with our SAP implementation. This will facilitate our access to data for decision making and provide consistency and productivity improvements across our utilities. There was still some noise in our financial results. So let me turn it over to Jim to review those details. Jim? Jim Sprague Thank you, Gregory and good afternoon, everyone. Thank you for joining us today. Our third quarter 2015 financial results reflect lower full service distribution throughput primarily due to warmer weather in most of our markets. Because of unusual expense items that impacted our results for the quarter, so we are going to present both GAAP and adjusted non-GAAP results. For the quarter, revenue decreased to $13.1 million, down $0.5 million on an 11% decline in full service distribution throughput. Let me break down the contributing factors by segment. Revenue from our natural gas operations segment decreased $1.2 million or 9% to $11.4 million. The primary driver of the decrease was lower prices paid for natural gas in Montana, North Carolina and Ohio. Since our cost of natural gas is a direct pass-through to our customers, it is neutral to gross margin. However, on a weighted average basis, the 17% decline in heating degree days and resulting lower full service distribution throughput has a direct impact on margins. Consolidated gross margin was $6.9 million in the quarter, down about 2%. In the natural gas operations segment, it was virtually unchanged as a $0.2 million downward adjustment of the sales volume used to calculate unbilled revenue in Ohio was almost entirely offset by a $0.2 million increase in gross margin in Maine attributable to higher transportation volume. Our consolidated operating expenses for the third quarter increased by $0.5 million compared with the prior quarter to $9.9 million. The increase was primarily due to a $0.4 million recurring asset impairment charge related to our former corporate headquarters building that we be sold in October as well as other nonrecurring professional service costs. Those costs were offset by a reduction in corporate expenses resulting from operational improvement initiatives. Adjusted EBITDA was $0.5 million, down just about $0.1 million from the third quarter of 2014. Loss from continuing operations on an adjusted non-GAAP basis was $1.4 million or $0.13 per share, compared with a loss of $1.2 million or $0.11 per share in last year’s third quarter. You can find reconciliation of GAAP to non-GAAP numbers in the news release. On a GAAP basis, loss from continuing operations was $2.3 million or $0.22 per share in the third quarter. Turning to the balance sheet. We had $3.9 million of cash at the end of the quarter, up from $1.6 million at the end of December. We expect to continue to grow our cash position as we move into the winter months. Upon final resolution number of our PUCO ratio, we plan to complete refinancing of our long-term debt, which does not come due until mid-2017. Subsequent to the end of the quarter, we obtained a $3 million short-term bridge loan. The helps with providing g additional liquidity until we get to higher cash flow of funds to ensure we can support our unusual expenses. Cash provided by operating activities of continuing operations was $12.2 million in the first nine months, up 42% over the prior period. This increase was primarily due to improvements in working capital management. Capital expenditures for the first nine months of 2015 were $8.3 million, down from $16.3 million in the first nine months of 2014. Currently we expect another $1.4 million in the fourth quarter of 2015. This year’s investments have been primarily focused on adding services to install Maine in order to systematically expand our customer base primarily in our growth territories. We have established a greater amount of discipline in our project selection and management processes, focusing our resources where we can effectively drive earnings. We are currently evaluating our plans for 2016, which will help determine the timing of the decline of these unusual costs so we can redirect cash to capital expenditures. With that summary, let me turn the call back to Gregory. Gregory? Gregory Osborne Thank you, Jim. We are executing our strategy to leverage our utility management operation and investment capabilities to capture greater market penetration and earn the highest level of turns where there are growth opportunities. I would like to thank you all for joining us for 2015 third quarter earnings teleconference. This is an exciting time for Gas Natural as we continue to execute our strategy to improve our earnings power. In closing, I would like to turn it back to Deb. Deborah Pawlowski So thank you again, everyone. And I apologize for our lack of time here today, but management is more than happy to entertain follow-up calls later this week. So if you give me a call, 716-843-3908, if you would like to schedule for a follow-up, I would be more than happy to accommodate. Thanks so much. Have a great day. Question-and-Answer Session Operator Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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The Global X FTSE Portugal 20 ETF: The Case Of The Double Edged Sword

Portugal may have decided to end its EU support too soon. The domestic corporate structure is too diversified, involving many holding companies. The private banking system has remained weakened by a 2014 default. For Europe’s smaller economies, European Union membership, as well as adopting the Euro has been a double edged sword. The idea was for commerce to have the same ease of access similar to the United States of America. Imagine, if you will, what it would be like if goods in Pennsylvania had to make border stops, use passports or visas and pay tariffs as they crossed the New Jersey, then New York, then Connecticut state’s borders! It’s difficult to imagine, but that’s essentially how European nations conducted cross border business before the EEC. Without those ‘technical, legal and bureaucratic barriers’, smaller European economies, such as Portugal, not only had an unimaginably large market for its products, but now had a new employment opportunities for its citizens as well as the potential to expand its manufacturing and financial services base. The ‘icing on the EU cake’ was being able to do away with unstable legacy currencies and adopt the Euro, further leveling the playing field. Indeed, the EU economy expanded pulling along the smaller economies but at an unsustainable rate. When the global credit market collapsed in 2008, the other edge of the sword cut smaller economies to pieces, causing a deep recession, high unemployment and unsustainable debt to GDP ratios, literally putting many governments on the edge of bankruptcy. Since then, the EU has had a slow, uneven recovery. However, having the support of the larger community, many smaller economies have pulled back from the brink of disaster. This is the point: is this the right time to establish a position in the smaller EU economies, such as Portugal? If the investor wished to, there seems to be one available ETF: the Global X FTSE Portugal 20 ETF (NYSEARCA: PGAL ) . The premise for risking your hard earned savings is based on the old Wall Street premise to ” buy low and sell high .” The question is whether the worst is over for Portugal and what the potential is, versus the risk. If a picture is worth a thousand words, the potential for capital appreciation might be interpreted by the fund’s chart since inception in November of 2013. (click to enlarge) The fund closed its first day of trading at $15.05. Within four months the ETF gained 22.8%. At that time, the entire EU economy was struggling with deflation. At the June meeting, ECB President Draghi imposed negative interest rates. Portugal was experiencing a nascent recovery. Portugal’s sovereigns had also recovered. Now able to finance the government on its own to meet its budget the government passed on a scheduled final EU bailout tranche. German Finance Minister Wolfgang Schaeuble noted that: Portugal is now managing without European aid and can stand on its own two feet. That’s a big success. However, within months, a subsidiary of one of Portugal’s major financial institutions missed a debt repayment. Banco Espirito Santo ( OTCPK:BKESY ) , the parent company, had its shares suspended from trading. The Portuguese stock market fell sharply. The default put the entire Portuguese banking system into question. This is an important issue to understand before investing in Portugal through the fund. However, Portugal’s economic stability goes further than the banks. It’s worth examining the fund’s holdings. First, it’s difficult to separate the fund into sectors. For example although classified as a Telecommunications services company, Sonacom (OTC: OTC:SOVTY ) also provides IT services with software and system information services. Sonae Capital (OTC: OTC:SGPMY ) is listed separately as a Consumer Discretionary company and also as a Consumer non-cyclical. Sonae is in the Hospitality and Recreation industry as well as retail food services, superstores, supermarkets, and drug stores. The Sonae brands fall under the management of one holding company. On a larger scale this is not out of the ordinary. However, this seems typical in Portugal’s small economy. Consumer non-cyclical and Discretionary Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Jeronimo Martins OTCPK:JRONY $7.520 1.86% NA 26.97 13.38 23.84 Retail food, distribution; supermarkets, drug stores. Portugal and Poland Sonae SGPMY $2.00 3.30% 38.03 11.46 6.04 61.62 Retail food; superstores, supermarkets, franchise outlets; sporting goods, fashion and electronics Sonae Capital SGPMY $0.101 0.00% 0.00% 150 6.49 42.82 Tourism and Hospitality; resorts, marina, catering, fitness and golf courses Second, the quality of the Financial Services metrics indicates the underlying weakness in the sector. It was difficult to determine any metrics of Banif Banco Internacion do Fuchal (Lisbon: Banif) as it is a privately held company. The bank provides a broad range of banking services from retail to corporate, as well as asset management and insurance. Another of the holdings is Banco Espirto Santo ( OTCPK:BKESF ) , the bank which triggered Portugal’s banking crises shortly after the government had successfully restored its credibility in the sovereign debt market. Financial Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Banco BPI OTCPK:BBSPY $1.46 0.00% 0.00% 82.27 9.54 57.63 Banking Services; corporate, institutional, retail, insurance, credit cards. Subsidiaries in Angola and Mozambique Banco Commercial Portugues OTCPK:BPCGY $2.85 0.00% 0.00% 67.95 11.94 149.69 Privately owned; financial services; asset management, mortgages, consumer credit, insurance Banco Espirito Santo Lisbon: BES $0.613 0.00 0.00 NA NA 237.84 Domestic, corporate and retail banking; credit cards, debit cards, savings accounts, management and insurance One bright spot is the Utilities sector, two of the holdings having respectable yields and one of those has a sustainable payout ratio. Utility Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Energias de Portugal OTC:ELCPF $9.64 5.39% 17.64% of cash flow 11.69 3.62 225.55 Electric and gas in Portugal and Spain Renovaveis OTC:EDRVF $5.22 0.61% 47.56% 34.57 7.25 81.00 Spain based; renewable energy; hydro, wind, solar, tidal and biomass; EU, Brazil, Canada and US Redes Energeticas Naciona OTC:RENZF $0.810 6.14% 14.6% of cash flow 9.52 2.47 206.08 High voltage transmission; electricity; natural gas transmission and storage Portugal’s Basic Materials is concentrated in cements and cement related products. What is a very interesting feature of Portugal’s industrial Sector is its presence in Africa as well as South America, particularly in Brazil. On one hand this is a ‘plus’ as these companies provide their services in regions with a high growth potential like Egypt and South Africa. On the other had the investments in Brazil presents a problem for the fund as Brazil’s economy has recently been brought to a halt, along with a sharp currency devaluation, because of the collapse of commodity prices as well as a political scandal. Basic Materials Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Portucel Lisbon: PTI $2.68 11.26% 104.94 14.42 9.26 47.89 Paper pulp, craft pulp Cimpor-Cimentos De Portugal OTC:CDPGY $0.320 0.55% nil 17.10 1.58 503.71 Cement and aggregate (clinker); ready-mix; Portugal, Egypt, Cape Verde, Angola, Mozembique, South Africa, Brazil, Argentina and Paraguay The Telecom Services are run-of-the-mill as far as the Telecom Sectors go. However it does present another example which lends to the confusion of how some holdings should be classified. Pharol (OTC: OTCPK:PTGCY ) is described as a ‘capital management company’ with a 27% holding interest in Brazilian Telecom Oi (Brazil: OIBR4) . Pharol seems to be more of a hedge fund specializing in the Telecommunications Services Sector, while also investing in other holding companies. Telecom Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business NOS SGPS OTCPK:ZONMY $3.53 1.86% 72.07% 45.12 8.81 98.06 Cable, Satellite, movies, series sports and children programming, mobile and landline voice, data Pharol SGPS PTGCY $0.338 24.10% NA NA NA 0.00 Capital management of Brazilian and Portuguese Telecoms Sonacom SOVTY $0.598 2.13% 30% of cash flow 14.15 12.63 0.94 Telecom mobile and landline; voice, data, television; also some IT software and system information Portugal’s industrials are focused on paper-pulp manufacturing. There are three paper-pulp manufactures in the fund, two of which fit into the Industrials Sector and one in Materials. There’s one major construction company, Mota Engil (OTC: OTC:MTELY ) providing engineering and construction including transportation infrastructure and then managing those projects after completion. Industrials Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Correios de Portugal OTC:CTTPY $1.295 4.89% NA 18.95 14.70 0.57 Courier services, parcel delivery; financial services, transfers, money orders, digital mail Altri SGPS OTC:ASGSY $0.890 1.68% 74% of cash flow 9.87 6.56 192.25 Paper pulp; generates electricity from waste biomass Semapa-Sociedade de Investimento e Gestao OTC:SEMMY $0.967 2.88% 40.50 14.29 3.18 NA Paper pulp, cement, pre-casts, recycling of cooking oil. Tunisia, Angola, Poland, France Mota Engil SGPS OTC:MTELY $0.445 5.02% 12.8% of cash flow 15.26 2.50 485.19 Engineering, Construction; Environment and Transportation construction and management Lastly, there’s one position in the energy sector, a holding company, GALP Energia (OTC: OTC:GLPEF ) . Galp Energia produces, refines and markets gasoline and petroleum products. Another segment provides oil exploration services in 40 countries. Energy Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business GALP Energia GLPEF $7.06 3.78% N/A N/A 12.74 65.61 Holding Company, energy exploration, production As far as the fund metrics, management fees total 0.61% compared to the industry average of 0.44%. It’s a small fund with about $37.5 million in net assets. Since its November 2013 inception its cumulative return is -26.85% and an average annualized return of -14.70%. The price to earnings for 2015 is 15.37 and price to book 1.35. When referring back to the price history chart, it looks like the fund might be a really good opportunity for a capital appreciation investment. However, upon closer inspection, it was really too far out in front of its potential when it reached its all-time high of $18.48. Further, the private banking sector really needed a restructuring before the government ended the EU restructuring program, as Portugal’s domestic banking crises demonstrates. Some events of the banking crisis are noted on the chart. The price earnings ratio of the holdings weren’t all that bad. Excluding from the count any holding for which the data wasn’t available, and any extreme numbers, it averaged out to 26.20 which doesn’t seem too bad. However, many holdings would not be marginable in US equities markets, in particular, being priced below $5.00 per share. This raises another point. The combination of a low P/E and a low stock price may be an indication of ‘fair value’. Hence, the fund may be close to fair value at this level. It’s unlikely that Portugal’s economy can generate enough investment interest in the foreseeable future in order for the fund to work its way back to the 2014 high. On the bright side, this is a situation where the EU benefits the smaller economies, as it’s a potential safety net for the economy, if it’s necessary. In the current situation, Portugal is now attempting to restructure a weak banking system without direct EU support. An analogy may be made here between Portugal’s economy and the Greek economy. They are in similar straits; however the Greek government has (with difficulties) stuck with the EU bailout program. Portugal may have to reestablish its commitment to the EU restructuring plan. This would be a good fund to ‘bookmark’, and follow the news and events; however, it might not be the right time to establish a position.