This analysis of NGL Energy Partners LP (NYSE:NGL) was provided to TradingIPOs subscribers in advance of its IPO. On Thursday, May 12, the company announced that its initial public offering of 3.5 million American depositary shares was priced at $21 per ADS.
NGL Energy Partners plans on offering 4.025 million units at a range of $19-$21. Wells Fargo and RBC are leading the deal, with Suntrust, BMO, Baird, BOSC and Janney co-managing. Post-IPO, NGL will have 15 million total units outstanding for a market cap of $300 million on a pricing of $20.
IPO proceeds will be used to repay debt.
NGL Energy will own all non-floated units, the General Partnership and the incentive distribution rights. NGL Energy is comprised of the assets of three propane companies: NGL Supply, Gifford and Hicks.
From the prospectus: 'We are a Delaware limited partnership formed in September 2010 to own and operate a vertically-integrated propane business with three operating segments: retail propane; wholesale supply and marketing; and midstream.'
Before we get into the details, let's quickly look at anticipated yield, competitors and cash flows.
Distributions: NGL plans on paying quarterly distributions of $0.3375 per unit. At an annualized $1.35 per unit, NGL would yield 6 3/4% annually on a pricing of $20.
Three aspects make up a strong energy master limited partnership:
- Solid balance sheet to enable cash flow-positive acquisitions down the line. NGL does have a nice balance sheet on its IPO due to utilizing IPO monies to pay off debt and $25 million of debt on the balance sheet post-IPO.
- Strong parent company to facilitate dropdown acquisitions once public. Nope, not much parent-wise here.
- Sufficient annual cash flows to pay not only anticipated distributions, but also to cover debt servicing and capex. NGL falls woefully short here. Pro forma (taking into effect the IPO as if it occurred on Jan. 1, 2010), NGL did not have sufficient cash flows to have covered all three of these.
NGL did embark on an aggressive expansion capital expenditure plan in 2010, so possibly that was an aberration. However, forecasts for the first 12 months public (ending 3/31/12) find that NGL anticipates having cash flows post-capex and debt servicing to pay just 61% of the expected distributions.
This is as short on a percentage basis as I've seen in one of the MLP energy IPOs. Simply put, NGL should not be structured as a pass-through entity, as its cash flows are not sufficient to cover expenses and the distributions to holders. The plan is to borrow the monies to pay the full distributions. Looking at it another way, NGL is borrowing money to service debt, pay capex and pay unit holders. Not ideal borrowing money to service your debt, which is what is happening here, after all.
Solid yield; however, the underlying business is not generating sufficient cash flows to pay that yield to holders and service debt and fund capex. Of course, NGL would not be able to garner this pricing/market cap if it was coming public with a 40% smaller distribution, so it will borrow to cover everything. Not interested here at all with this lack of cash flow coverage.
A quick look at the actual operation here:
Retail propane: 54,000 customers, the 12th largest retail propane distribution company in the US, in Georgia, Illinois, Indiana and Kansas.
Wholesale: 68 million gallons of propane storage space for supply to third party sellers.
Midstream: Propane terminals for transfer to third party trucks. Three terminals in IL, MO and Ontario with annual throughput capacity of 170 million gallons.
$25 million in debt post-IPO. Expect this number to increase, as NGL plans on borrowing to cover expenses and to pay distributions to holders.
Forecasts for the 12 months ending 3/31/12: $884 million in revenues. Gross margins here are very thin at 6.5%. Operating margins of 1.8%, net margins of 1.5%. As noted above, cash flows will not be sufficient to pay expected distributions as well as capex and debt servicing.
Weakly structured energy MLP. NGL has historically not had sufficient cash flows to cover all expenses and the expected $1.35 per unit distribution. In fact, after expenses, capex and debt servicing, NGL anticipates only being able to pay 61% per unit to cover all distributions for the 12 months ending 3/31/11. It plans on borrowing to cover the rest. Not interested in range; cash flows simply not strong enough to cover the expected yield.