High Yield, Midstream Growth Will Support This MLP

| About: Crestwood Midstream (CMLP)

Shares of Inergy LP (NRGY) are dropping in after hours trade, after the company announced a unit offering. Inergy will offer 9 million common units, as well as making another 1.35 million available for any over allotments. The partnership intends to use the funds raised to pay down debt, to fund the continued growth of its midstream segment, and for general purposes. With unit prices down nearly 4% after hours, NRGY may be worth a look.

Inergy is an MLP that operates in two segments: Propane and Midstream Energy. The retail propane business is the larger of the two segments, making up 57% of the forecasted 2011 EBITDA. The partnership has been consolidating the very fragmented US propane business, and is now the 4th largest retail propane distributor in the country, but only has a 3.9% share of the market. The top 10 retailers of propane control roughly 39% of the market, just to give some reference to the fragmentation in that market. The Midstream business is responsible for the remaining 43% of Inergy's 2011 forecast, and consists of 80 BCF in natural gas storage facilities in both New York and Texas, with expansion plans underway to bring that number to about 100 BCF. In addition to these storage assets, Inergy has salt mining operations in New York state and NGL fractionation facilities in California. The partnership purchased its GP late last year, eliminating the IDR it had been paying.

The distribution has been at a $2.82 annualized rate, or $0.705 per unit per quarter for the last 4 quarters. That is not to say that Inergy has not been growing, or positioning itself for further growth. The acquisitions of the Tres Palacios storage facility in Texas and Seneca Lake in New York have made the company the largest independent natural gas storage operator in the US, and the Marc I and North-South pipelines will connect all the Northeast storage facilities, which are located in the Marcellus shale and within 200 miles of New York City. As Inergy realizes the earnings potential of Tres Palacios, which closed in October, and closes on Seneca Lake this summer while bringing the North-South pipeline online in the fall, distribution growth should re-start. Based on the close Tuesday of $37.09, NRGY yields 7.6%.

Shares of Inergy were already trending lower, after posting a lackluster Q2 earlier in May that the company attributed to weak sales of propane. While the partnership has been moving to diversify away from total reliance on propane, strong midstream performance was not enough to prevent NRGY from falling. With unit prices at depressed levels after the Q2 report, the equity offering here is sure to irk investors, as it seems the company is accessing the equity markets with the units at the lower end of their range. The units had been above $38 for the first 5 month of the year, and above $40 until March.

That being said, NRGY has a history of bouncing after equity offerings, so this likely provides a short term opportunity to pick up a few percent in the name before the week ends. Longer term, the midstream storage business is composed of great assets, located in proximity to both New York City and the Marcellus shale. Continued growth in the Midstream segment should drive distribution growth at NRGY, while the partnership will likely continue to opportunistically consolidate the retail propane business. The 7.6% yield should keep the units from falling too much further.

Inergy has fared worse than other names in the MLP space in recent weeks, hurt by a poor Q2 and now an equity offering. However, by diversifying into the natural gas storage business with well positioned assets, and new assets coming into the partnership in the next few months, look for NRGY to catch up to its peers. The weakness Wednesday due to the equity offering is an opportunity for both a short term trade and a longer term investment in NRGY.

Disclosure: I am long NRGY.

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