This is the last part of this series that evaluates all the intermediate midstream companies of North America, checking both their key metrics and their future growth catalysts. These companies belong to the primary beneficiaries of the booming shale oil and gas production, and their stocks have risen significantly during the last 6 months. Investors are seeking yield in an industry they predict has a stable growth outlook. This flight to blue-chip dividend-paying stocks is real, because individual investors can't find an income return that's meaningful in the fixed income area.
However, the investors have to bear in mind that this rise cannot continue if the fundamentals are absent. This time will not be different, and this is not a never ending euphoria. The careful examination of the key metrics of the balance sheet combined with the growth catalysts for each case separately is necessary for all those who aspire to beat the index.
I determine as intermediate midstream companies those with a market cap from ~$5 billion up to ~$15 billion currently. This series includes the intermediate players of the sector, and the first and second parts are here and here. The major and the small players will follow later.
Once I am done with these three groups (small, intermediate, major players), I will unearth some additional midstream companies, which are brand new entrants into this sector and fly under the radar currently. This group of brand new entrants could hide the midstream companies with the highest potential along with some acquisition targets. This is why I believe that these articles will be very interesting for the proactive investors.
Let The Numbers Speak For Themselves
Now that the annual reports are out, let's check out the key metrics of the following five intermediate companies:
EV: Enterprise Value
CF: Annual Cash Flow
EQ: Stockholder Equity
As I have also noted in the first two parts of this series, I do not like the companies with marginal or low operating margins, let alone when the low operating margin is combined with high D/CF ratio. Add on this a high PE and the whole package is not attractive at all to me. This is the case for Buckeye Partners (BPL).
From a fundamentals perspective, Pembina Pipeline (PBA) carries quite the same characteristics like Buckeye Partners. Eventually, Pembina's high D/CF ratio should be a concern for any potential buyer.
Genesis Energy (GEL) is another company with an extremely low operating margin combined with high PE and high PBV. The D/CF ratio is better in this case, but this does not make Genesis look attractive at the current levels.
Western Gas Partners (WES) has a premium valuation but its operating margin and its D/CF ratio do not justify it. The company's operating margin is decent, and the D/CF ratio is well above the safety levels.
There are two eye-catching metrics on Boardwalk Pipeline Partners (BWP), the high operating margin and the high dividend yield. Are they a bait or not? To me, they could be a bait because this high operating margin may not be sustainable for long. The company's Q1 and Q2 2013 results will be interesting, disclosing more information about the sustainability of this margin. Boardwalk had an operating margin of 19% in 2011. Boardwalk suffers from a high D/CF ratio like almost all the companies of this third part. The company's PE is not considered attractive either.
Potential Upside Drivers
To give all a more complete idea for the aforementioned companies, I will also provide the most significant growth catalysts for each one of them, on a going forward basis.
Pembina's growth projects combined with an analytical map are shown in my article here that discusses the "Silver Bullets" of the North American energy infrastructure.
Pembina Pipeline is currently building Phase 1 of an NGL expansion of 52,000 bopd which will be completed by year end 2013. The company will also proceed with Phase 2 NGL expansion which is expected to add an additional 53,000 bopd of capacity and will be brought into service in early to mid-2015. Once complete, the proposed Phase 2 NGL Expansion will increase capacity on Pembina's Northern NGL System by 32% to 220,000 bopd.
Pembina is also currently working on Phase 1 of a crude oil and condensate expansion on the Peace Pipeline System of 40,000 bopd that will be completed by year end 2013. There is also Phase 2 LVP Expansion which is expected to add an additional 55,000 bopd of capacity and will be brought into service in mid to late-2014. Once complete, the proposed Phase 2 LVP Expansion will increase capacity on the Peace Pipeline by 28% to 250,000 bopd.
Boardwalk with Williams (WMB) will develop the "Bluegrass Pipeline" to transport natural gas liquids from the infrastructure-constrained Marcellus and Utica shale plays to the U.S. Gulf Coast, as well as the developing petrochemical market in the Northeast U.S. The "Bluegrass Pipeline" will provide producers with 200,000 bbl/d of mixed NGLs take-away capacity and could be increased to 400,000 bbl/d to meet market demand, primarily by adding additional liquids pumping capacity.
Genesis Energy will improve its existing terminal at Port Hudson, Louisiana, and build a new 18 mile 20" diameter crude oil pipeline connecting Port Hudson to the Maryland Terminal and continuing downstream to the Anchorage Tank Farm. The company also plans to build a new crude oil unit train facility at the Baton Rouge Maryland Terminal. At Port Hudson, Genesis will construct approximately 200,000 barrels of storage capacity to complement its 216,000 barrels of existing tank capacity. The Port Hudson upgrades and new crude oil pipeline are expected to be completed by the end of 2013, and the Maryland Terminal completion is scheduled for Q2 2014.
In February 2013, Western Gas Partners acquired a 33.75% WI in both the Liberty and Romegas gathering systems from Anadarko Petroleum (APC). The company also acquired a 33.75% WI in the Larry's Creek, Seely and Warrensville gas gathering systems from an affiliate of Chesapeake Energy (CHK). The assets in both acquisitions serve production from the Marcellus shale in north-central Pennsylvania and have current total combined throughput of over 1.2 Bcf/d.
Last summer, Western Gas Partners also acquired an additional 24% WI in Chipeta Processing LLC from Anadarko Petroleum. Chipeta owns the Chipeta natural gas processing plant complex, which includes three processing trains: a 240 MMcf/d capacity refrigeration unit, a 250 MMcf/d capacity cryogenic unit, and a 300 MMcf/d capacity cryogenic unit. As a result of that acquisition, Western Gas owns a 75% WI in Chipeta.
Bargain Hunting And The Black Sheep
From a technical standpoint, 13 out of the 15 stocks presented in this series have positive momentum currently. Only ONEOK (OKE) and ONEOK Partners (OKS) have not followed this positive momentum. They are laggards probably because their fundamentals are very poor. However, it seems that the tide has lifted almost all the boats from the midstream sector. This significant rise during the last 4-5 months could also result from an emotional buying spurt, which inflated the stocks more than the fundamentals can justify.
However, I am not a momentum trader but a fundamentalist investor instead. This is why I will refrain from dipping my buying toes into the majority of the 15 companies mentioned in this series. I am bullish only on Enbridge Energy Partners (EEP), and I may nibble some Sunoco Logistics (SXL) too.
Regency Energy (RGP), NuStar Energy (NS), Targa Resources (NGLS), MarkWest Energy (MWE) and ONEOK carry a lot of risk at the current valuations, and they are not for the faint hearted investors due to their fundamentals. To me, they are good short candidates.
After all, my capital allocation strategy orders me to save cash. Some selected small midstream companies along with few new and obscure entrants of the sector offer some additional buying opportunities, helping my diversification strategy. These firms will be analyzed in my future articles.
I would also like to warn the potential buyers about the increased possibility of a significant dilution coming soon for the majority of these intermediate midstream players, especially for these stocks that fly at their highs. The indebted companies primarily will most likely grab the opportunity to improve their D/CF ratios through an equity offering.
Those who missed the recent ride of the midstream sector had better wait. Stocks are not birds to be bought when they fly high. This is one of my investing principles that has saved me a lot of money during the last 25 years. I prefer the bottom fishing bets instead, when they are also supported by good fundamentals. You can check out my articles to confirm my good track record both on the bullish and on the bearish side. Needless to mention that more winning stock picks will continue coming.
Disclaimer: Data, facts and premises were determined through review of public documents, SEC filings, news releases and transcripts. The conclusions are my own. Readers may come to different conclusions using the same information. This analysis is not intended to offer investment advice to buy or sell specific stocks.