For most of its existence, Inergy L.P. (NRGY) was known as a retail propane distribution company. Over the years, the company had picked up some natural gas midstream assets and in 2011 Inergy started to take bigger steps to transform from a propane distribution to a midstream energy MLP. The sale of the propane business in the third quarter of 2012 completed the transformation. Now it is time to take a look at where Inergy can go from here and gauge the investment potential.
Note: MLP companies such as Inergy and Inergy Midstream have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.
The Past Year
In December 2011, Inergy spun-out via IPO Inergy Midstream L.P. (NRGM) to hold about half of the company's midstream assets. The IPO sold about one-quarter of the NRGM units with NRGY holding on to the balance.
In August 2012, Inergy closed a deal to sell its retail propane operations to Suburban Propane Partners (SPH) for $1.8 billion. Suburban paid off about $1.2 billion of Inergy's senior debt and the balance of the purchases consisted of SPH units. Those propane company units were then distributed to Inergy unit holders.
Through the transition, Inergy went from a company which generated about half of its revenue from retail propane and half from its midstream assets to a company focused on acting as a midstream energy company with stable revenue generating assets and the general partner share and two-thirds of the NRGM L.P. units. In September 2011, Inergy's debt level was 4.6 times EBITDA. Now debt is 2.0 times EBITDA for Inergy and 3.5 times for Inergy Midstream.
Here is a quick outline of the midstream assets owned by Inergy or Inergy Midstream:
- A half-dozen natural gas or NGL storage facilities in the Northeast situated between the shale gas production areas and the demand markets of the Northeast. The company owns several pipelines to connect the facilities and into the major gas transport pipelines.
- A natural gas storage and transportation facility in the Houston, Texas area.
- An NGL processing facility outside of Bakersfield, California.
- An NGL supply, logistics and transportation business providing services in over 30 states. The company owns almost 800 tractors and NGL trailers.
- U.S. Salt, a salt manufacturing company using a salt brine process to develop underground salt deposits. U.S. Salt currently produces 7% of annual EBITDA for Inergy Midstream and also produces enough salt caverns each year to store 1 billion cubic feet of natural gas.
Inergy Midstream is currently in the process - the deal was supposed to close on Friday, Dec. 7 - of buying Rangeland Energy LLC and its COLT crude oil rail terminal, storage and pipeline facilities in the heart of the Bakken shale oil play. The facility can store 720,000 barrels of oil and the included rail loop can load and ship 120,000 barrels of oil per day. The deal is valued at $425 million.
At the analyst conference held last week, Inergy management stated that the goal is to turn Inergy L.P. into primarily the general partner company, assisting in the purchase of future assets for Inergy Midstream L.P. Investors should expect the remaining assets held by Inergy to be fairly quickly dropped down to Inergy Midstream.
In terms of growth, management expectations are that distributions from Inergy Midstream will grow at a rate of 6% to 10% per year. So far, three full quarterly distributions have been paid by NRGM and the penny per unit increase each quarter works out to a 10% annual distribution growth rate so far in the company's very short history. NRGM currently yields 6.5%.
After the disposal of the propane business, the Inergy L.P. dividend was reduced from 37.5 cents to 29 cents paid in November for the company's fiscal fourth quarter. The current yield for NRGY is exactly the same as for NRGM. During the analyst conference, it was stated that the distributions from NRGY should growth at 1.3 to 1.4 times the rate of growth from NRGM.
The NRGY/NRGM combo has put together a package of midstream assets with an eye towards the ability to grow or expand those assets to produce future revenue growth. The results from the changes over the last year have strengthened the companies financially and they are well positioned to provide moderate dividend growth to investors. Six to 10% distribution growth combined with the current yield makes for attractive investment potential. If the NRGY dividend does start to grow faster than the NRGM distribution, the NRGY share price should jump into the low $20s to bring the yield in-line with the distribution growth rate. Both NRGM and NRGY are attractive investment candidates, but with the yields currently equal, NRGY is the better choice for yield plus distribution growth.
Note: The orange line in the chart is NRGM.