Genesis Energy (NYSE:GEL) announced on 7-21-16 the commencement of a registered underwritten public offering of 8,000,000 common units representing limited partner interests. GEL expects to grant the underwriter a 30-day option to purchase up to 1,200,000 additional common units. This morning GEL priced the offering at $37.90 per common unit.
The preliminary numbers - which are not the full data set:
Genesis Energy metrics
|The adjustments to calculate the GEL reported Coverage using units 'at the time of the earnings report'|
|Post quarter/Pre Release Offerings||8,000||10,350||4,600|
|GEL reported Coverage||1.32x||1.42x||1.37x||1.00x||1.05x||1.11x||1.12x||1.11x||1.10x||1.02x||0.93x||1.08x||1.21x|
|Broker1 produces a DCF for 'maintenance cap ex incurred' number, which can be lumpy - while GEL DCF calculation appears to use a yearly average expense number|
|For example, GEL used a $1 million maintenance expense in Q3-15 while it spent $10 million. Broker1's DCF subtracted an additional $9 million from DCF|
|Long Term Debt||1,808,575||1,807,054||1,840,000||1,100,000||1,051,000||1,051,000||1,051,000||1,051,000||701,000||701,000||701,000||701,000||701,000|
|With the large acquisition from EPD - the forward ratio using 4 times Q4 EBITDA may be meaningful - and it is 1.808/0.533852 = 3.39x|
|There is $1.280 billion of secured credit facility debt - which is not included in the $1.808 billion - making Debt/EBITDA 5.12x when using $591 million pro forma EBITDA|
|My Debt/EBITDA numbers use only long term debt - this calculation replicates brokerage numbers. GEL's short/long term debt ratio is high - it merits different treatment|
|Short Term Debt||1,280,000||1,115,000||1,014,100||585,200||648,400||550,400||335,000||492,200||640,500||582,800||411,300||319,100||271,000|
|On 7-21-15 GEL offered 8,000,000 common units at $37.90 per common unit|
|On 7-16-15 GEL offered 10,350,000 common units at $43.77 per common unit|
|On 5-14-15 GEL offered $400,000,000 6% senior unsecured notes due 2023|
|On 4-10-15 GEL offered 4,600,000 common units at $44.42 per common unit|
|On 5-12-14 GEL offered $350,000,000 in 5.625% senior unsecured notes due 2024|
|On 9-16-13 GEL offered 5,750,000 common units at $47.51 per common unit|
|On 1-27-12 GEL offered $100 million 7.625% senior unsecured notes due 2018 via private placement|
GEL tells us this is a debt reduction equity raise. From the press release:
"We now believe the best way to promote unit price appreciation under current conditions is to exercise strong financial discipline designed primarily to maintain and enhance our financial flexibility across the business cycle. Although we believe we would otherwise naturally restore our financial flexibility with cash flows from operations, we feel we can accelerate that process by issuing additional equity, lowering the future growth rate of quarterly distributions, or pursuing a combination of the two."
Running the numbers for maximum debt reduction:
Let's use a unit increase of 9.2 million with a net price to GEL of $37.50 - the amount to GEL would be $345 million. Let's say that the total debt amount was the same as that of Q1-16 (but I will hope that is not true - that some of the retained DCF went towards some minor debt reduction).
Using the raised $345 million to reduce the total debt of $3.088 billion gets GEL to Q3-16 ending debt of $2.743. With flat EBITDA growth, LTM EBITDA would still be $531.773 million. Debt/EBITDA would fall to 5.16x from Q1's 6.36x.
That is still an ugly ratio - where the sector average is close to 4.50x. But it is less than the Q1-16 ratio for NuStar Energy L.P. (NYSE:NS) and the Q4-15 ratio for Energy Transfer Partners, L.P. (NYSE:ETP). One more number may provide context: Kinder Morgan, Inc (NYSE:KMI) indicated this week that it won't increase dividends until it gets its debt-to-EBITDA ratio down to 5x - which might not happen until late 2018. GEL should have its Debt/EBITDA close to 5x at the end of Q3-16.
For those wanting a longer look at the GEL numbers - I would refer you to my article of 6-23-16 - Examples In MLP Due Diligence - Genesis Energy.
There is little doubt in my mind that GEL is doing the right thing for the long term. At the same time, KMI is doing the right thing for the long term in its recent asset selling activities - and the market has punished KMI for it. Because of that recent precedent, I would anticipate the same kind of treatment for GEL. This equity raise will lower the projected distribution growth rate from the current growth trend that is 10.40%. The good news: At a yield of (annual distribution of $2.76 divided by after hours price of $37.90) 7.28%, GEL is already priced for distribution growth that may be closer to 6%.
My valuation assessment - if you can purchase GEL at a price near $38 and you already have a MLP portfolio that is predominantly in investment grade investments, then go for it.
Disclosure: I am/we are long GEL.
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.