Few days ago, I analyzed all the small, intermediate and major midstream companies. I determine as small midstream companies those with market cap of up to ~$5 billion, while the intermediate ones have a market cap of up to ~$15 billion.
I suggest all the readers to 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 unearth some 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. This is the second Part, and the first Part is here.
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 note that Martin Midstream Partners (MMLP) and Crestwood Midstream Partners (CMLP) are not brand new entrants into the midstream sector. However, I capture them into this series because they are small players whose strategy has changed completely during the last 15 months. They were rather sleepers, but the hibernation seems to be over. Both companies have taken significant growth initiatives lately, trying to expand rapidly.
EV: Enterprise Value
CF: Annual Cash Flow
EQ: Stockholder Equity
Martin Midstream Partners and Western Gas Equity Partners (WGP) top the list of the midstream companies with the worst balance sheets. Martin has a very low operating margin, which is coupled with scary debt ratios. Martin's expansion at any cost concerns me, and the high annual yield is like a bait to me. I am not going to bite it though.
Western is fundamentally ugly too. Western trades at a sky-high premium with whopping P/E and P/BV, despite its high debt metrics. I believe, both Martin and Western are good short candidates.
EQT Midstream Partners (EQM) is an interesting play. The eye-catching operating margin is not a blip, but it was hovering at the enviable levels of 50% in 2011 too. Moreover, this company isn't heavily leveraged and it has a conservative expansion strategy for 2013, keeping its debt levels under control.
Summit Midstream Partners (SMLP) is not a bad case either. The company has an attractive annual yield along with a very satisfactory operating margin. Its key debt ratios are also manageable.
Crestwood Midstream Partners isn't as attractive as Summit. In fact, Crestwood is worse than Summit from a fundamental perspective. Crestwood's alluring annual yield coupled with the rich operating margin are largely offset by the worrisome debt.
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 on an ongoing forward basis:
1) In September 2012, Summit Midstream Partners announced the acquisition of ETC Canyon Pipeline, LLC for $207 million. Canyon gathers and processes natural gas in the Piceance and Uinta basins in Colorado, and Utah. The gas gathering and processing system consists of more than 1,600 miles of pipe, 44,000 horsepower of compression, processing assets with a total capacity of 97 MMcf/d, and two NGL injection stations.
In January 2013, Summit Midstream Partners announced the acquisition of Bear Tracker Energy, LLC for $513 million. Bear Tracker is a privately held midstream energy company with assets in the Williston Basin in North Dakota, which includes the Bakken shale and Three Forks formation, and in the Denver-Julesburg ("DJ") Basin in Colorado, which includes the Niobrara shale. It is worth noting that the existing Bear Tracker contracts have an average remaining life of 11.5 years.
2) In October 2012, Martin Midstream Partners announced the closing of two separate purchase agreements. In the first transaction, it purchased certain specialty lubricant product packaging assets from Cross Oil Refining & Marketing, Inc. for $121.8 million in cash. In the second transaction, the Partnership purchased all of the remaining Class A equity interests in Redbird Gas Storage LLC for $150.0 million in cash. Redbird was formed in 2011 to invest in Cardinal Gas Storage Partners, which is a joint venture between Redbird and Energy Capital Partners that is focused on the development, construction, operation and management of natural gas storage facilities across North America. Prior to closing, Martin Midstream Partners owned both a 10.7% Class A and a 100% Class B interest in Redbird. Redbird is now a wholly owned subsidiary of Martin, which effectively owns a 38.1% fully diluted membership interest in Cardinal.
In January 2013, Martin Midstream Partners acquired Talen's Marine & Fuel, LLC, adding 10 marine terminal locations between Houston/Galveston, Texas, and Port Fourchon, Louisiana, with total incremental tankage of 300,000 barrels and an additional 4,000 feet of water-accessible bulkhead. This acquisition includes additional marine fueling barges and tug boats and delivery rolling stock. For 2013, Martin expects incremental cash flows of approximately $6 million to $7 million from its net investment of $47.4 million.
In February 2013, Martin Midstream Partners purchased from Florida Marine Transporters six liquefied petroleum gas ("LPG") pressure barges and two commercial push boats for approximately $50.8 million. Through these assets, Martin plans to capitalize on the natural gas liquids production volume from the Eagle Ford Shale.
3) EQT Midstream Partners forecasts expansion capital expenditures of $38 million for 2013. Approximately $25 million will be to complete the Low Pressure East Pipeline project, which will upgrade 26 miles of existing pipeline in Greene, Washington, and Allegheny counties of Pennsylvania. The project will add 150 MMcf/d of transmission capacity. The remaining expansion capital expenditures will fund new interconnects and dehydration upgrades, adding 300 MMcf/d of transmission capacity.
4) Western Gas Equity Partners is affiliated with Western Gas Partners (WES). As of December 31, 2012, Western Gas Equity Partners indirectly owned the 2% general partner interest and 100% of the incentive distribution rights in Western Gas Partners, and 49,296,205 Western Gas Partners common units. This is why, the recent growth projects of Western Gas Partners deserve a look.
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.
5) In August 2012, Crestwood Midstream Partners acquired gathering and processing assets from subsidiaries of Devon Energy Corporation (DVN) for $87.1 million. The acquired assets were located in the liquids-rich southwestern area of the Barnett Shale. As a part of the transaction, Crestwood and Devon entered into a 20-year fixed-fee gathering, processing and compression agreement covering existing and future production from an approximate 20,500 acre dedication.
In November 2012, Crestwood Midstream Partners through Crestwood Marcellus Midstream LLC acquired natural gas compression and dehydration assets from Enerven Compression, LLC for $95 million. The assets serve the Marcellus Shale development of Antero Resources Appalachian Corporation. The assets are currently operating under a five-year compression services agreement with Antero and are expected to contribute approximately $11-12 million of EBITDA to Crestwood Marcellus Midstream in 2013. Crestwood Midstream Partners owns 100% of Crestwood Marcellus Midstream, after the recent acquisition of the remaining 65% from Crestwood Holdings Partners.
In March 2013, Crestwood Midstream Partners announced an agreement with Antero Resources Appalachian Corporation to provide natural gas compression services on developing rich gas acreage in Doddridge County, West Virginia. The new seven-year compression services agreement will allow for Crestwood to construct, own and operate a compressor station on Antero's Western Area acreage, which is not dedicated to Crestwood under the existing 20-year gathering and compression agreement, which covers the Eastern Area of Dedication. The new compression services agreement provides for fixed-fee compression services and minimum volume commitments similar to the existing Eastern contract. A new Western Area compressor station will be constructed by year-end 2013, adding 120 MMcf/d of flow capacity at an estimated cost of $35 million.
There is one more Part 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 potentially good returns.
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.