Genesis Energy Provides Preliminary Numbers Due To Equity Offering

| About: Genesis Energy, (GEL)

Summary

GEL has announced an equity offering of at least 8 million new units.

The offering will be primarily for debt reduction.

This article provides some context to the numbers in the preliminary earnings release.

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

Q2-2016 Q1-2016 Q4-2015 Q3-2015 Q2-2015 Q1-2015 Q4-2014 Q3-2014 Q2-2014 Q1-2014 Q4-2013 Q3-2013 Q2-2013 Q1-2013
Revenues 378,414 491,011 572,334 656,327 526,857 847,282 964,114 1,015,049 1,019,719 961,035 1,090,293 1,068,694 1,014,808
Costs 318,566 433,141 527,536 626,947 502,036 816,656 928,846 983,792 984,317 397,735 1,066,203 1,035,333 984,803
EBITDA 133,463 133,826 137,583 126,901 87,278 82,377 82,523 81,783 70,130 66,580 62,020 56,531 58,999 60,754
DCF dollars 96,035 97,794 102,289 96,308 68,786 64,038 62,902 60,798 55,492 53,435 48,393 43,269 45,709 48,694
Average Units 109,979 109,979 109,979 107,617 99,174 95,029 93,873 88,941 88,691 88,691 88,691 83,878 81,973 81,203
DCF/unit $0.8732 $0.8892 $0.9301 $0.8949 $0.6936 $0.6739 $0.6701 $0.6836 $0.6257 $0.6025 $0.5456 $0.5159 $0.5576 $0.5997
Upcoming Distrib. $0.6900 $0.6725 $0.6550 $0.6400 $0.6250 $0.6100 $0.5950 $0.5800 $0.5650 $0.5500 $0.5350 $0.5225 $0.5100 $0.4975
Coverage 1.265x 1.322x 1.420x 1.398x 1.1097x 1.105x 1.262x 1.179x 1.107x 1.095x 1.020x 0.978x 1.093x 1.205x
The adjustments to calculate the GEL reported Coverage using units 'at the time of the earnings report'
Ending Units 109,979 109,979 109,979 109,979 99,629 95,029 95,029 93,291 88,691 88,691 88,691 88,691 82,941 81,203
Post quarter/Pre Release Offerings 8,000 10,350 4,600
Adjusted Units 117,979 109,979 109,979 109,979 109,979 99,629 95,029 93,291 88,691 88,691 88,691 88,691 82,941 81,203
Adjusted DCF/unit $0.8140 $0.8892 $0.9301 $0.8756 $0.6254 $0.6428 $0.6619 $0.6517 $0.62 $0.60 $0.54 $0.4879 $0.5511 $0.5997
Adjusted Coverage 1.180x 1.322x 1.420x 1.368x 1.001x 1.054x 1.113x 1.124x 1.107x 1.095x 1.020x 0.934x 1.081x 1.205x
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 DCF/unit $0.86 $0.89 $0.81 $0.69 $0.52 $0.63 $0.61 $0.58 $0.58
Broker2 DCF/unit $0.88 $0.69 $0.67 $0.66 $0.65 $0.63 $0.60
Broker3 DCF/unit $0.93 $0.89 $0.69 $0.67 $0.67 $0.68 $0.62 $0.60
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
LTM EBITDA 531.773 485,588 434,139 379,079 333,961 316,813 301,016 280,513 255,261 244,130 238,304 237,534 237,625 232,885
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
Debt/EBITDA 3.72x 4.16x 4.85x 3.29x 3.32x 3.49x 3.75x 4.12x 2.87x 2.94x 2.95x 2.95x 3.01x
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
Total Debt 3,088,575 2,922,054 2,854,033 1,685,200 1,699,004 1,601,039 1,385,673 1,542,907 1,341,240 1,283,572 1,112,104 1,019,935 971,865
Total Debt/EBITDA 6.36x 6.73x 7.53x 5.05x 5.36x 5.32x 4.94x 6.04x 5.49x 5.39x 4.68x 4.29x 4.17x
Interest Expense 35,535 34,387 33,859 29,617 17,905 19,215 19,325 20,441 14,069 12,804 12,300 12,587 12,255 11,441
Interest Coverage 3.76x 3.89x 4.06x 4.28x 4.87x 4.29x 4.27x 4.00x 4.98x 5.20x 5.04x 4.49x 4.81x 5.31x
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
Click to enlarge

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.