Pipelines industry investment potential

1. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
Independent Investment Advisor
STOCKS TO OWN NOW: gas pipeline franchise as measured not
only by mileage, but more importantly,
In short three main areas: by access to key supply regions and
major consuming markets as well as by
Energy [Gas producing & pipelines]; unparalleled connectivity to those
Semiconductor; PLAB markets. EP transports more than a
Biomedical. CELG, GILD quarter of the natural gas consumed in
the US each day through our 42,000
ENERGY AND GAS PIPELINES: mile interstate natural gas pipeline
system.
EL PASO, [EP]
El Paso Exploration & Production Company
El Paso’s Pipeline Group is the is a leading domestic natural,
nation’s leading interstate natural [Continued on page 3]
Figure
1.
El
Paso
Underground
gas
storage
plant,
Arizona.
1

2. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
Gnostam LLC performance Graphs
Chart
1
Gnostam
Performance
Gnostam
was
established
in
February
2004.
Since
inception
the
annualized
rate
for
return
for
a
client
portfolio
managed
by
Gnostam
LLC
has
returned
a
total
9.56%.
For
the
period
from
January
2007
to
date,
the
managed
portfolio
has
returned
an
average
of
1.53%
vs.
-­‐2.55%
of
the
S&P
500.
Please
see
table
below.
2

3. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
gas producer with a substantial footprint 56,000 miles of natural gas pipeline on more
in the emerging shale plays across the than 66 intrastate natural gas pipeline systems
United States and international (including offshore-to-onshore and offshore
developments in Brazil and Egypt. EP is Gulf of Mexico pipelines) deliver natural gas to
active in all phases of the E&P value the region's local natural gas distribution
chain: exploring for, acquiring, developing companies and municipalities and to the many
and producing natural gas and oil. large industrial and electric power facilities
located in the region.
El Paso’s pipeline network has its origin
in the South and South West regions of The profitability of pipeline business given its
the USA. Most of the major onshore natural oligopoly status is subject to
interstate natural gas pipeline companies regulation. EP has been very aggressive in its
(see Table below) operating in the penetration of the FERC and has many former
Southwest Region (Arkansas, Louisiana, FERC employees on its pay.
New Mexico, Oklahoma, and Texas) are
primarily exporters of the region's natural Main Operating Statistics for EP:
gas production to other parts of the
country and Mexico, while an extensive 26 Bcf/day capacity ~ 12% of US;
Gulf of Mexico and intrastate natural gas 18 Bcf/day throughput [28% of gas delivered
pipeline network is the main conduit for to US consumers which is by far the most
deliveries within the region. More than profitable part of the business];
Chart
2.
El
Paso
Piplelines
in
US
3

4. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
Portfolio
Changes
and
Recommendations
for
February
15th
2011
2011 will be a difficult year for investors. Too The following is a table of our best
much money has come into the market, buys:
especially money that chases returns, such as
mutual find money. There is almost no chance • Photronics [PLAB] 12.2 x
in my mind that the market will go much higher multiple;
than it is at the moment. I would sell most • Kulike & Soffa [KLIC] 11.9
stocks that are financial and related to housing, multiple;
and retail. Instead, buy rare metal miners, gas In Pharma:
pipelines and gas producers. Once the value of
solar stocks has come down, they may be a • Gilead, [GILD] 11.55 multiple;
place to look. • Celgene, [CELG] 18.96
multiple.
Gas pipeline strong buys are as follows: Gilead is a straight up buy.
Kinder Morgan, [KMI] In Oil and Gas exploration, valuations
El Paso, [EP] of the deep-sea drillers [<4,000 feet]
Williams Partners, [WPZ] are attractive. With the new Petrobras
Plains All America, [PAA] find, there has been a re-deployment
from the GoM to the deep offshore
Most of these will be subject to consolidation in drilling areas off the coast of Brazil,
my view. I would add the following utility, UGI, and rates are expected to climb by
which is a liquefied natural gas play. 11% in 2011. Best choices are:
In genomic equipment and services, Life • Helix Energy, [HLX] 12.7 x
technologies, [LIFE] while expensive has an multiple;
almost unique exposure to the high quality • Diamond Offshore [DO] 11.33 x
earnings from genomic research and genomic multiple;
tools. If I were a Pfizer, this is the type of
company I would want to acquire. Solar Plays that may be of interest:
Semiconductor Equipment has great potential LDK SOLAR, [LDK] $14.45
for producing superior returns in the first quarter MEMC [WFR] is a buy
of 2011.
FSLR is a short.
4

5. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
EP also has the best-positioned gas July. Also in the works are the expansions of
franchise in the US pipeline market for the existing TGP, SNG, and FGT pipelines.
supplying growth markets, namely NE, SE, Finally, a new Gulf liquid natural gas re-gas
Rockies and SW. plant is on track and it is al- ready fully
subscribed under 20-year contracts.
From 2007-2010 EP has grown its reserved
by 30% CAGR, with 3.4 Tcfe of proven Earnings are estimated at $1.15/share for
reserves. 2011, or 16 x valuation. Cash flow per share
is approx $2.55/share or 7 x which is a good
EP has hedged its gas exposure as follows: value for a cash flow stream which should
grow by approx 6.6% over next 3 years.
75% of gas production @$5.95~ 2011;
45% of gas production @$6.01 ~ 2012. Assuming everything goes as planned, these
developments should be accretive to 2011’s
Current price is approx $4 tcf. earnings. However, there’s a risk of delays
due to the time needed to receive all
EP’s crude oil hedges have not been as necessary permits, as well as ongoing
successful, with 85% of crude production for restrictions related to fish and game habitat
2011 hedged at between $86-$91/bbl, and nesting in production sites.
against current price of $105.45.
EP has capex requirements for pipelines of GILEAD SCIENCES: [GILD]
$8bn, and $13.7 bn debt, with an operating
cash flow of $1.8 bn in 2010, lower than in In approx 20 years, Gilead has
2009 because of lower commodity prices. become a leading biopharmaceutical
However cash costs $/Mcfe, were $1.78 company with a portfolio of 13
which is a truly low cost of raw material, marketed products, a growing pipeline
[sold at $5.95] or a gross margin of 234%. of investigational drugs and more than
4,000 employees in offices across four
Given the concerns over nuclear safety, this continents.
is a stock to own for the long term, even if it
does not offer high immediate capital Gilead’s primary areas of focus include
appreciation. HIV/AIDS, liver disease and serious
cardiovascular/metabolic and respiratory
Revenue and earnings should rebound this conditions.
year. Declining contributions from the El
Paso Natural Gas and Tennessee Gas The most profitable drugs in the world, are of
pipeline systems led to slightly lower top-line course those which do NOT cure patients,
volumes for 2010. Meanwhile, rising costs but alleviate if not prevent the symptoms of
weighed on profit- ability and sent the the diseases they are indicated for, such as
bottom line down 24% on a year-to-year for HIV, and multiple sclerosis for example,
basis. However, at this point, El Paso’s [MS].
pipeline division has largely completed its $8
billion multiyear growth projects, and we The magic of the these retroviral drugs for the
look for those deals to begin bearing fruit in companies who commercialize them is that
2011. Multiple capital projects are expected they are used un a combination of
to go into service this year. The 680- mile approximately 2-3 drug combinations, and
Ruby Pipeline is slated for completion in that, as they do NOT provide a cure, but slow
5

6. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
Table
1:
Current
retroviral
drugs
on
Market
and
patent
expriry
Figure
3.
How
a
retrovirus
affects
a
living
cell
6

7. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
down the symptoms, they have to be taken by integration of viral DNA into the
patients pretty much for the rest of their lives, DNA of the infected cell. There are
thus offering far more profit potential than several integrase inhibitors
cures or vaccines. currently under clinical trial, and
raltegravir became the first to
WHAT ARE Antiretroviral Drugs? receive FDA approval in October
2007.
Medications for the treatment of infection by ▪ Entry inhibitors (or fusion inhibitors)
retroviruses, primarily HIV. When several such interfere with binding, fusion and
drugs, typically three or four, are taken in entry of HIV-1 to the host cell by
combination, the approach is known as Highly blocking one of several targets.
Active Antiretroviral Therapy, or HAART. Maraviroc and enfuvirtide are the
The American National Institutes of Health and two currently available agents in
other organizations recommend offering this class.
antiretroviral treatment to all patients with ▪ CCR5 receptor antagonists are the first
AIDS. Because of the complexity of selecting antiretroviral drugs which do not
and following a regimen, the severity of the target the virus directly. Instead,
side effects and the importance of compliance they bind to the CCR5 receptor on
to prevent viral resistance, such organizations the surface of the T-Cell and block
emphasize the importance of involving patients viral attachment to the cell. Most
in therapy choices, and recommend analyzing strains of HIV attach to T-Cells
the risks and the potential benefits to patients using the CCR5 receptor. If HIV
with low viral loads. cannot attach to the cell, it cannot
gain entry to replicate.
TYPES OF DRUGS: Maturation inhibitors inhibit the last step
in gag processing in which the viral
Antiretroviral (ARV) drugs are broadly capsid polyprotein is cleaved, thereby
classified by the phase of the retrovirus life- blocking the conversion of the
cycle that the drug inhibits. polyprotein into the mature capsid protein
(p24). Because these viral particles have
▪ Nucleoside and nucleotide reverse
a defective core, the virions released
transcriptase inhibitors (NRTI) inhibit
consist mainly of non-infectious particles.
reverse transcription by being
Alpha interferon is a currently available
incorporated into the newly synthesized
agent in this class.[2] Two additional
viral DNA strand as a faulty nucleotide.
ones under investigation are bevirimat [3]
This causes a chemical reaction
and Vivecon.
resulting in DNA chain termination.
▪ Non-nucleoside reverse transcriptase
inhibitors (NNRTI) inhibit reverse
transcriptase directly by binding to the GILEAD FINANCIALS:
enzyme and interfering with its function.
▪ Protease inhibitors (PIs) target viral Revenues for 2010 were $7.95 bn. Q4
assembly by inhibiting the activity of 2010 revenues were $1.998 bn. The
protease, an enzyme used by HIV to main drugs that are under patent and
cleave nascent proteins for final marketed are:
assembly of new virons.
▪ Integrase inhibitors inhibit the enzyme Triple, [HIV], Vireo [HIV, Hepatitis], Let
integrase, which is responsible for iris [Pulmonary-arterial hypertension],
Tami flu, [influenza], Arena, [angina],
7

8. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
Embosomed [fungal infection], Cays ton Novartis.
[Cystic Fibrosis].
GILEAD AS AN INVESTMENT:
The current market size of the HIV
market is, $12 bn. The current share of Still a buy at these prices. Huge cash flow,
this market by Gilead’s patented drugs is 2.8 billion in cash from operations, with a
around 54%, and rising as in the US 64% deep intelligence of where to use this cash
of all diagnosed HIV patients are on to buy the next generation of block buster
Gilead products. drugs.
The market size will decline from 2012 as Today Viread is taken by eight out of 10
some of the drugs will come off patent newly diagnosed AIDS patients, usually as
and will be available generically. part of two combo pills that Gilead sells. Its
combined sales last year were $4 billion.
Gilead continues to develop its drug Gilead didn't introduce a totally new drug
pipeline, especially in the area of class based on stunning biological insight,
Hepatitis, HIV and Cystic Fibrosis. as Glaxo did with AZT (the first AIDS drug),
Merck with its cholesterol drug Mevacor or
RECENT DEVELOPMENTS: Genentech with Avastin for cancer. But it
made HIV drugs more convenient and less
On March 22nd, GILD’s potential HIV horrible to take. Gilead liberated patients
treatment elvitegravir met its key goals in who once had to take as many as a dozen
a late-stage study. pills scattered throughout the day. Now
some can take one daily pill that contains all
Patients received once-daily doses of the three of the drugs needed to control the
drug candidate over a 48-week period or virus.
a twice daily dose of raltegravir, which is
made by Merck & Co. under the name This has given Gilead a $40 billion market
Isentress. Elvitegravir met the primary capitalization, bigger than that of Eli Lilly
goal of "non-inferiority", or working as (nyse: LLY - news - people ), whose sales
well as Isentress. are four times greater. Over five years its
stock has outperformed those of Google
In short GILEAD has an amazing product Exxon and every big drug company except
pipleline and has proven to be able to for Celgene ''What's still unappreciated,''
truly innovate in the area of high value says Gilead Chief Executive John Martin, ''is
added drug development. that you want to simplify therapy so people
take all the pills. If you take a partial dose,
The market value of the HIV retrovir the virus develops resistance and comes
market is expected to shrink, as the early back.
Glaxo and Abbott drugs come off patent.
It costs on average $10,000-$15,000 per
patient per annum. This is well below the
cost of interferon and Copaxone [MS
drugs] which can cost between $30,000 -
$50,000 per patient per annum, and
which have long patent protection cycles
for TEVA and the other drug companies
in the MS space, namely Biogen and
8

9. Gnostam
LLC
March
26th,
2011
PO
Box
960
Inverness,
CA
94937
Newsletter
Disclaimer:
The information and any statistical data contained herein have been obtained from sources which we
believe to be reliable, but we do not represent that they are accurate or complete, and they should not be
relied upon as such. All opinions expressed and data provided herein are subject to change without notice.
Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or short
positions or deal as principal in the securities discussed herein, related securities or in options, futures or
other derivative instruments based thereon. The securities mentioned in this report may not be suitable for
all types of investors. ALL investments involve different degrees of risk. You should be aware of your risk
tolerance level and financial situations at all times. Furthermore, you should read all transaction
confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making
any investment decisions. You are free at all times to accept or reject all investment recommendations
made by the Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not
a guarantee for the successful performance of an investment and we are expressly prohibited from
guaranteeing accounts against losses arising from market conditions.
Past performance is no guarantee of future results, and current performance may be lower or higher than
the performance data quoted.
Investment Disclaimer All investments involve different degrees of risk. You should be aware of your
risk tolerance level and financial situations at all times. Furthermore, you should read all transaction
confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making
any investment decisions. You are free at all times to accept or reject all investment recommendations
made. All products sold are subject to market risk and may result in the entire loss to the client's
investment. (For example: excessive withdrawals may result in the depletion of your account). Please
understand that any losses are attributed to market forces beyond the control or prediction of Gnostam
LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the
successful performance of an investment and we are expressly prohibited from guaranteeing accounts
Gnostam
LLC
5731
Kirkwood
Place
N
Seattle,
WA
98103
USA
E-­‐mail:
pcorsano@gnostam.com
www.gnostam.com
9