After taking a break to write an article about Surge Energy (ZPTAF.PK), I continue this series that evaluates all the midstream companies of North America, checking both their key metrics and their future growth catalysts. I took that break because I believe that Surge Energy is a bargain at the current levels for the reasons mentioned here, and all the value seekers have to take a look at this article.
A massive structural change has occurred in the oil market since 2008. U.S. oil supply from horizontal drilling in tight shale formations has created a reversal of the four decade-long decline we've seen in U.S. oil production. This reversal is not a minor blip. I'm talking about erasing a 40-year decline within five years.
The midstream companies belong to the beneficiaries of this booming shale oil and gas production, along with companies from the industrial and other sectors, analyzed in my articles here, here and here.
In this series, I'll analyze the small midstream companies. I determine as small midstream companies those with a market cap of up to ~$5 billion. 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.
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.
Let The Numbers Speak For Themselves
Now that the annual reports are out, let's check out the key metrics of the first five small midstream companies:
EV: Enterprise Value
CF: Annual Cash Flow
EQ: Stockholder Equity
Crosstex Energy LP (XTEX) and Crosstex Energy (XTXI) have been losing money for three years now. Their top lines also have zero growth on a year over year basis, while both companies pile up more and more long term debt as the ratios above prove. Actually, Crosstex Energy is shockingly leveraged, but the market seems to endorse it and the stock trades well above its book value.
Additionally, both companies have very low operating margins which do not surprise me either. This low operating margin is the reason why both companies keep losing money for three years now. In the meantime, Crosstex Energy LP offers a high annual yield, but who bites the bait to buy shares of this company currently? Not me. I am also curious to see how long the market will keep "praising" Crosstex Energy and its horrible balance sheet. To me, Crosstex Energy is an excellent short candidate.
Tesoro Logistics (TLLP) is another company with a scary balance sheet. The company is even more leveraged than Crosstex Energy, but the market has turned a blind eye thus far. Eventually, the stock trades with a sky high premium in comparison to its book value along with a high PE. The only good thing is the company's high operating margin, but this "piece of cheese" must not allure any prudent fundamentalist investor. The trap is over him. To me, Tesoro Logistics is another excellent short candidate.
DCP Midstream Partners (DPM) is mediocre in everything. Add on this mediocrity, a worrisome debt. The operating margin is still low, but it is gradually improving on a year-over-year basis, giving a slightly promising note to the balance sheet. After all, DCP has a lot of fundamental work to do, to be undervalued at the current levels. It is also worth noting that DCP Midstream Partners has not any exposure to the oil transportation, but it targets the low margin NGL and natural gas markets.
In early 2013, Copano Energy (CPNO) was acquired by Kinder Morgan Energy Partners (KMP). Copano has been losing money for three years now. The company's operating margin has also been negative for two years now, and the high debt is more than apparent. This did not discourage Kinder Morgan Energy Partners that acquired Copano with a good premium. However, I do not know how many highly leveraged companies of the midstream sector Kinder Morgan can save, by paying significant premiums. Not to forget, that Copano has zero exposure to the oil transportation, targeting only the natural gas market.
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) DCP Midstream Partners acquired the Seaway Products Pipeline from ConocoPhillips (COP) in 2011, renamed it "Southern Hills NGL Pipeline" and will transport NGLs from Conway, Oklahoma to Mont Belvieu, Texas in mid-2013. The pipeline will have a capacity of 150,000 bopd.
DCP Midstream Partners is also developing the new 720-mile Sand Hills pipeline that has an initial capacity of 200,000 bopd expandable to 350,000 bopd, and will transport NGLs from the Permian basin to the Gulf Coast. The second phase of this project is on track for a first-half 2013 start-up. The first phase of this project was completed recently and the company initiated service for the Eagle Ford Shale producers.
Front Range NGL Pipeline is a project that is being constructed by a Joint Venture between Enterprise Products Partners (EPD), Anadarko Petroleum (APC) and DCP Midstream Partners. It will initially move 150,000 bopd from the DJ Basin in Weld County, Colorado, to Mont Belvieu, Texas, helping producers in the DJ Basin maximize the value of their NGL production by providing connectivity to the premium Mont Belvieu market.
More information combined with detailed maps about the pipeline projects of DCP Midstream Partners are shown in my article here, that discusses the "Silver Bullets of the North American Energy Transport Infrastructure".
In late 2012, DCP Midstream Partners announced the construction of a new cryogenic plant that will serve growing demand from producers in the liquids rich Eagle Ford shale. The Goliad plant will have gas processing capacity of 200 MMcf/d.
2) Crosstex Energy LP and Crosstex Energy are building its Cajun-Sibon extension to the company's existing 440-mile Cajun-Sibon NGL system, connecting the Permian Basin, Barnett Shale, Eagle Ford Shale and south Louisiana to Mont Belvieu. The initial capacity is 70,000 bopd and Crosstex expects to put the extension into service first-half 2013. There is also a Phase II, which is expected to be completed in H2 2014, and extends the Cajun-Sibon pipeline capacity by an additional 50,000 bopd for a total project capacity of 120,000 bopd. More information combined with detailed map about this project is shown in my article here.
3) Copano Energy has not initiated any major project during the last 18 months. The fact that Kinder Morgan Energy Partners acquired Copano by paying a good premium, was the best gift for Copano's shareholders in 2013.
4) In late 2012, Tesoro Logistics purchased Chevron Pipe Line Company's Northwest Products System for $400 million. The Northwest Products System consists of the Northwest Product Pipeline which extends from Salt Lake City, Utah to Spokane, Washington, a separate five-mile jet fuel pipeline to the Salt Lake City International Airport and the Northwest Terminalling Company consisting of the Boise and Pocatello, Idaho and Pasco, Washington refined products terminals.
In 2012, Tesoro Logistics also acquired several assets from Tesoro Corporation (TSO). The most recent acquisition was the Anacortes Rail Unloading Facility for total consideration of $180 million.
There are also three more parts coming to cover all the remaining small midstream players of North America, including the Canadian ones. Once I am done with the key metrics and the potential upside catalysts for all the small midstream players, I'll express my opinion overall about the undervalued and the overvalued ones, providing also a capital allocation strategy.
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.