Knighthood was originally a professional association made up of those who could afford to make and maintain the heavy capital investment required by mounted warfare, consisting of land owners, modest farmers, craftsmen, etc. Yet from the late 12th century onward nobles became knights with increasing frequency, as a social and ethical dimension was added to the stature, ushering in a new class of knight, such as knight princes and the concept of heredity knighthood.
As we unwind from the losses and bankruptcies of the past three years we are seeing predictable results. Some knights became peasants (or even worse, in the case of Lehman Brothers (LEHMQ.PK) and Bear Stearns) while some nobles move to knighthood. It is appropriate then that reorganized SemGroup LP (SEMG), previously a noble leader in energy marketing transportation and storage, has passed the sword to Blueknight Energy Partners, L.P. (BKEP).
Blueknight is the former SemGroup Energy Partners LP, the publicly traded vehicle of Tulsa-based parent company SemGroup LP. SemGroup LP was exposed to huge trading losses on oil futures in 2008 and faced more than $2.4 billion in margin calls on their failed short positions. Once news of their cash situation surfaced SemGroup LP filed for Chapter 11 bankruptcy protection on July 22, 2008.
What has emerged from bankruptcy is a more conservative energy middleman in Blueknight. In addition to processing, storing and transporting crude oil, Blueknight also provides crude oil pipeline and trucking services as well as asphalt storage and processing services. While there is always the risk for volatility in theses commodities Blueknight appears to be well-diversified in both product and geography.
On paper Blueknight appears to be still be a serf among the blue-blooded likes of ConocoPhillips (COP) and Sunoco (SXL) -- a market cap of $155 million and three straight years of net losses -- but digging deeper uncovers a small cap gem worthy of consideration.
Blueknight actually had an operating profit in 2011 of over $33 million -stockholder conversions created the net loss. Furthermore, this was their first annual operating profit since reorganization, which means the company has not yet had time to develop a loyal analyst following. Their debt load is enviable at a debt/equity ratio of 0.247, and liabilities decreased 32% from 2010. This is the kind of situation that piques my interest as a value investor: Small cap with growth potential? Check. Profitable? Check. Flying under the radar? Check. The only item left to review is valuation based on fundamentals.
My three favorite stand-alone checks for value are Tobin's Q, Buffett Formula and Valuation by Multiples. Tobin's Q and the Buffett Formula are both available for free on ValueMyStock.com. Blueknight passes Tobin's Q with a 0.51, meaning their asset value is double their current market value, an indicator of an undervalued company. They pass the Buffett Formula with an 88% margin of safety, which is impressive but too optimistic for my taste. However, Valuation by Multiples gives me an achievable and realistic target price of $21.80 using Enterprise Products Partners LP (EPD), Plains All American Pipeline, L.P. (PAA), ConocoPhillips and Sunoco Logistics Partners L.P. as comparables. Add in the fact that Blueknight is currently yielding a 6.4% dividend and we have an undervalued company with both growth and investment income upside. This knight might not be slaying any dragons soon but might come awfully close.