New Entrants In The Midstream Sector That Deserve A Closer Look (Part I)

by: Value Digger


A few days ago, I analyzed all the small, intermediate and major midstream companies. I determined as small midstream companies those with a market cap of up to ~$5 billion, while the intermediate ones have a market cap of up to ~$15 billion.

I suggest readers check out three articles where I summarize my opinion, my recommendations and a capital allocation strategy for all these midstream players. These articles also capture some excellent short candidates and you can find them here, here and here.

In this series, I'll unearth some largely unknown midstream companies, which are new entrants into the midstream sector. Most of them have low awareness and fly under the radar currently. The proactive investors may also identify the next acquisition targets, as the M&A activity is not at all dead in the midstream sector.

Let The Numbers Speak For Themselves

Now that the annual reports are out, let's start by checking out the key metrics of the first five companies. I would also like to point out that Access Midstream Partners is not a new entrant into the midstream sector, but I capture it into this series due to its recent name change. Access Midstream Partners is the former Chesapeake Midstream Partners.




















































EV: Enterprise Value

CF: Annual Cash Flow

EQ: Stockholder Equity

NGL Energy Partners (NGL) and Delek Logistics Partners (DKL) suffer from extremely low operating margins. This is a big negative for me. I do not like companies with marginal or low operating margins, which is a recurring issue for Delek and NGL. Both companies had a low operating margin in 2011 too, although things seem to be improve slightly for NGL during the last couple of quarters. We will see whether NGL's operating margin improvement will be sustainable.

Another major issue for NGL is its negative cash flows for the nine months of FY 2013, although things seem to improve on that front too. The operating cash flow has turned positive during the last couple of quarters. However, NGL's long-term debt rises by leaps and bounds due to the company's acquisition spree. This is definitely worrying me, so the high annual yield is not enough to make me bullish on NGL.

Delek Logistics Partners is not attractive for me either. Delek trades with a lofty premium although its fundamentals are not superior to the peers.

However, the worst balance sheet belongs to Access Midstream Partners (ACMP). This may be the reason why the company has not initiated any major growth projects lately. The stock looks technically good, but do not let the technical picture fool you. Apple (NASDAQ:AAPL) was also looking technically great at $700 but it is below $400 today.

Access has a satisfactory operating margin but it is also a heavily indebted company. The long-term debt doubled recently and totaled $2.5 billion in Q4 2012. All its key debt metrics have deteriorated, and the company has to address this issue soon by selling assets or significant dilution.

The recent tide of the midstream sector has lifted all the boats, including MPLX (MPLX). The small free float has also helped this movement upwards because Marathon Petroleum (NYSE:MPC) holds a 71.6% stake in MPLX. MPLX has a good operating margin, although the company is new and this may be just a blip. Most importantly though, MPLX has very low debt and cash on hand to fund its projects.

Oiltanking Partners (OILT) has an enviable operating margin during the last three years, but its key debt ratios are not at all enviable. This is why, a significant dilution will not surprise me. On top of that, the company is very richly valued currently.

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 April 2012, Oiltanking Partners announced a $104 million expansion project (Appelt I) to construct approximately 3.2 million barrels of new crude oil storage capacity at its Houston terminaling facility. The additional storage capacity is expected to be placed into service in Q4 2013.

In September 2012, Oiltanking Partners approved a $70 million expansion project to construct approximately 3.3 million barrels of new crude oil storage capacity at its Houston terminaling facility. The project, named Appelt II, will be located adjacent to Appelt I. The construction will begin by Q2 2013. The additional storage capacity is expected to be placed into service during the third and fourth quarter of 2014.

In March 2013, Oiltanking Partners announced its plans to significantly increase its ability to import/export liquefied petroleum gas (NYSE:LPG) at its terminal on the Houston Ship Channel. In connection with the agreement with Enterprise Products Partners (NYSE:EPD), which runs through 2026, the Partnership will construct a new vessel dock and add infrastructure to existing docks with the capability of handling significantly more LPG vessels at multiple docks. The $44 million expansion is expected to be completed by Q4 2014.

2) MPLX completed its initial public offering in October 2012. In December 2012, MPLX had $216.7 million of cash, primarily to prefund $177.6 million of planned capital projects. Most of this cash is being directed to the company's Patoka-to-Catlettsburg pipeline system expansion project, which continues to be targeted for completion in late 2014.

3) Access Midstream Partners has not announced any major expansion projects during the last 15 months.

4) NGL Energy Partners has been on an aggressive acquisition spree during the last 15 months. In 2012, it acquired five companies (North American Propane, Downeast Energy Corporation, High Sierra Energy) including the latest acquisition of Pecos Gathering & Marketing in November 2012.

5) Delek Logistics Partners completed its initial public offering in November 2012. The company plans to purchase multiple logistics assets from Delek US Holdings (NYSE:DK) over the next two years, beginning in the second half of 2013. According to the company, these assets have a combined potential EBITDA of $25 to $30 million annually.

Bottom Line

Stay tuned folks, because there are two more Parts coming. Once I am done with all three Parts of this series, I will provide my recommendations and a capital deployment strategy for a low-risk midstream portfolio with good returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.