This is the last part of this series that evaluates all the major midstream companies of North America, checking both their key metrics and their future growth catalysts. The midstream companies belong to the beneficiaries of the booming shale oil and gas production, and the majority of these stocks have risen significantly during the last 6 months. Are they running on nothing but thin air?
Truth is that the fundamentals can not justify the current valuations for the majority of the midstream companies. Ignoring the fundamentals, and investing as if there is no tomorrow is a recipe for disaster. I know that my opinion does not sound good to the bulls. However, those who follow me have not only reaped significant rewards, but also know that I always support my bearish and bullish calls with facts and fundamentals.
I determine as major midstream companies those with market cap from ~$15 billion and higher. The first Part of this series with the major midstream players is here.
Few days ago, I also analyzed all the intermediate midstream companies. The readers can check out the conclusions and the recommendations from this analysis here, here and here. The small players of the midstream sector will follow later.
Once I am done with these three groups (small, intermediate, major midstream firms), I'll unearth some unknown midstream companies, which are brand new entrants into the midstream sector, flying under the radar currently. This group of brand new entrants could hide the firms 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.
Talking about unknown midstream companies, I discussed the obscure Transportadora De Gas Del Sur (TGP) in late November 2012. Transportadora's largest segment converts natural gas to liquid petroleum which is sold to the world markets. The company's pipelines transport about 60% of all of Argentina's natural gas. Transportadora de Gas Del Sur has a total of 5598 miles of pipeline, 4754 miles of which is owned by the company and the remainder leased. Transportadora has yielded 25%, and all the other stocks of that article have yielded from 10% to 50% since then. My article is here.
Let The Numbers Speak For Themselves
Now that the annual reports are out, let's check out the key metrics of the last five major midstream companies:
EV: Enterprise Value
CF: Annual Cash Flow
EQ: Stockholder Equity
Although these ratios do not look as horrible as the ones at the first Part of this series, the debt is dominant in this group of companies too.
Williams Companies (WMB) is the most indebted company from the list above. Williams Companies is heavily dependent on debt, although all the companies of this list are highly leveraged. However, it seems that the market either ignores or underestimates this issue, and gives Williams the highest PE and PBV in comparison to the others.
In the meantime, the low operating margin is looming over Enterprise Products Partners (EPD) and Plains All American Pipeline (PAA). I do not like these two companies either, because they have marginal or low operating margins combined with high D/CF ratio.
TransCanada (TRP) seems to stand out a bit due to its high operating margin, although its remaining metrics are inflated and eventually they are not attractive. The metrics of Williams Partners (WPZ) are not 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:
1) In January 2013, Enterprise Products Partners and Enbridge completed the expansion of Seaway from 150,000 bopd to 400,000 bopd and there is a twin line (Seaway Phase 3) planned for 2014 that will further boost capacity to 850,000 bopd, increasing the flow from Cushing, Oklahoma, to Gulf Coast refineries.
Additionally, Enterprise Products Partners formed a JV to construct the Texas Express NGL pipeline by Q3 2013. It will have 280,000 bopd capacity, and it can be expanded to 400,000 bopd.
Enterprise Products Partners through another JV will construct the Front Range NGL pipeline (150,000 bopd), helping producers in the DJ Basin maximize the value of their NGL production by providing connectivity to the premium Mont Belvieu market.
Enterprise Products Partners and Plains All American Pipeline announced in Aug 2012 that they formed a 50/50 crude oil pipeline JV targeting to deliver crude oil into the Houston-area refinery market. The Eagle Ford crude oil pipeline (350,000 bbl/d) is expected to be placed into service in the first half of 2013.
Few days ago, Enterprise Products Partners announced that it has received transportation commitments to support development of a new 270-mile pipeline header system (the "Aegis" system) that will deliver ethane to petrochemical plants in the U.S. Gulf Coast region
Moreover, Enterprise Products Partners and Genesis Energy (GEL) are constructing a new crude oil gathering pipeline serving the Lucius development area in southern Keathley Canyon in the Deepwater Gulf of Mexico. The SEKCO Oil Pipeline is expected to begin service by mid-2014.
More information along with detailed maps about Enterpise's and Plains All American's future projects can be found in my articles here and here. They discuss the "Silver Bullets" of the North American Energy Transport Infrastructure.
2) In late 2012, Plains All American Pipeline agreed to acquire crude oil rail terminals located in the Eagle Ford, Bakken and Niobrara producing regions.
3) Williams Companies with Boardwalk (BWP) 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.
4) Williams Partners plans to contribute $380 million through 2014 to help fund Caiman Energy II's new Blue Racer Midstream venture that develops midstream infrastructure serving oil and gas producers in the Utica Shale. Williams Partners owns 47.5% interest in Caiman Energy II.
5) South Leg of Keystone XL is one of the latest projects for TransCanada. The construction began in August 2012, and it plans to transport 700,000 bopd from Cushing, Oklahoma, to Texas refineries. It is on schedule to be completed by the end of 2013.
TransCanada's Prince Rupert pipeline is another project that will carry natural gas from the Montney region in Canada to an export facility near Prince Rupert in British Columbia.
In late 2012, TransCanada announced that it entered into binding agreements with Phoenix Energy Holdings Limited to develop the Grand Rapids Pipeline project in Northern Alberta. This pipeline project includes both a crude oil and a diluent line that will transport volumes between Fort McMurray and the Edmonton/Heartland region. The Grand Rapids Pipeline system is expected to be in-service by early 2017. The system will have the capacity to move up to 900,000 barrels per day of crude oil and 330,000 barrels per day of diluent.
In late 2012, TransCanada's Mexican subsidiary has been awarded the contract to build, own and operate the El Encino-to-Topolobampo Pipeline in Mexico. This pipeline will transport natural gas, and it will be in-service by Q3 2016 with contracted capacity of 670 million cubic feet per day.
Needless to mention, that Keystone XL pipeline will be the company's next major project, if approved by the Obama Administration.
Bargain Hunting And The Black Sheep
I believe that the stocks for all the major midstream companies of this series have risen lately with the whims and emotions of traders and speculators. This is never a good indicator of value. All these companies compete which one is going to load more debt in a shorter period of time. Eventually, the black sheep is more than one, and I steer clear of all of them.
To me, there is not any buying opportunity among the major players currently, and I never chase prices or force any investment. I always wait for the right moment dictated by either price or market condition to pounce. After all, my capital allocation strategy orders me to save cash.
Among the 10 major companies mentioned in this series, I also believe that Energy Transfer Equity (ETE), Plains All American Pipeline, and Williams Companies are good short candidates.
Apart from piling up long term debt, the majority of the midstream companies have also been in a placement spree during the last 6 months by constantly diluting their equity base through the issuance of stock. The potential buyers need to bear in mind that the dilutive equity offerings are going to continue, especially for the stocks that fly at their highs.
Those who missed the recent ride had better wait. I would like to ensure the readers that my winning calls both bearish and bullish, will continue coming. 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.
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.