New Entrants In The Midstream Sector That Deserve A Closer Look (Part III)

by: Value Digger


Few days ago, I analyzed all the small, intermediate and major midstream companies. I determine small midstream companies as those with a market cap of up to ~$5 billion, while the intermediate ones have a market cap of up to ~$15 billion.

I suggest all the readers to check out three articles where I summarize my opinion, my recommendations and a capital allocation strategy for all these midstream players. These articles also capture some excellent short candidates and you can find them here, here and here.

However, it is easy to forget about little and new midstream players. But remember, Kinder Morgan (NYSE:KMI) started out with just one pipeline and now it is one of the biggest midstream companies of the US. Sometimes it pays to check out the little and new guys. This is why my last articles unearth the new and little entrants into the midstream sector. Most of them have low awareness and eventually fly under the radar currently. The proactive investors may also identify the next acquisition targets, as the M&A activity is not at all dead in the midstream sector. This is the last part, and the first two parts are here and here.

Let The Numbers Speak For Themselves

Now that the annual reports are out, let's check out the key metrics of the last six companies of this series. I included Global Partners (NYSE:GLP) in this list too, although this company has a significant part of its revenue coming from the commercial segment. I did this because Global Partners has been also expanding its storing, terminalling and transporting activities lately.



























































EV: Enterprise Value

CF: Annual Cash Flow

EQ: Stockholder Equity

LT: Long Term

Southcross Energy Partners (NYSE:SXE) has the worst balance sheet among the five companies above. Southcross is losing money which does not surprise me because the company's operating margin is negligible. Add on this the fact that Southcross is heavily leveraged, and you get a very ugly mix. Southcross is followed at a close distance by American Midstream Partners (NYSE:AMID) whose high annual yield raises many eyebrows. I believe both companies will have to dilute significantly soon to make their scary debt ratios more manageable.

The best balance sheet belongs to Blueknight Energy Partners (NASDAQ:BKEP). A satisfactory operating margin is combined with very low debt and a decent annual yield. Although Blueknight is fairly valued, the upside can continue. I know that the stock has seen positive momentum lately, but the fundamentals can also support a further move upwards.

From a fundamentals perspective, Transmontaigne Partners (NYSE:TLP) is standing in the middle between Southcross and Blueknight. Transmontaigne is fairly priced. The good operating margin is coupled with a controllable debt, and the annual yield is attractive.

Rose Rock Midstream (NYSE:RRMS) has a very low operating margin which has been decreasing during the last three years. This is why the company's bottom line has remained unchanged, although its top line has risen significantly since 2010. It is also worth noting that Rose Rock has an almost non-existent long term debt. This low debt gives the company a lot of breathing space to fund some potential growth initiatives from its credit line, if necessary.

Global Partners is richly valued. The operating margin is very low and the debt weighs on the balance sheet. The company uses its satisfactory cash flows as a cushion to manage this problem, but the marginal operating margin is an overhang that must not be ignored.

Potential Upside Drivers

To give all a more complete idea for the aforementioned companies, I will also provide the most significant growth catalysts for each one of them, on a going forward basis:

1) Rose Rock Midstream operates the White Cliffs pipeline. In late 2012, White Cliffs Pipeline, L.L.C. announced that it received sufficient binding shipper commitments during its open season to move forward with its Expansion Project which will allow the company to provide additional crude oil transportation service from Platteville, Colorado, to Cushing, Oklahoma. This is an expansion project for an additional 80,000 bbl/d resulting in total capacity of 150,000 bbl/d, and it is anticipated to be in service in the first half of 2014. The White Cliffs Pipeline is the only pipeline that directly transports crude oil from the Denver-Julesburg (DJ) Basin to Cushing, OK. Following completion of the expansion, Rose Rock Midstream will continue operating the expanded White Cliffs Pipeline.

In January 2013, Rose Rock Midstream acquired a 33.3% interest in SemCrude Pipeline, L.L.C., which owns 51% of the White Cliffs Pipeline, from SemGroup (NYSE:SEMG) for $273.9 million. Following the acquisition, Rose Rock Midstream will effectively own 17% of White Cliffs' Pipeline.

2) In February 2013, Southcross Energy Partners completed its new Bee Line pipeline that will transport liquids rich gas from the central Eagle Ford shale area to Southcross' Woodsboro and Bonnie View processing and fractionation complex. The Bee Line pipeline has capacity of 320 MMcf/d.

In February 2013, Southcross Energy Partners also completed its Bonnie View fractionator, adding capacity of 22,500 bbls/d to the Partnership's total fractionation capacity. The Bonnie View fractionator expansion brings Southcross' total fractionation capacity in its South Texas complex to 27,300 bbls/d, complementing its 335 MMcf/d of existing gas processing capacity.

3) In February 2013, Blueknight Energy Partners acquired 30% ownership in a 70 mile crude oil pipeline project running from Pecos, Texas, to Crane, Texas. The new pipeline will enable west Texas producers to deliver crude oil to Gulf Coast markets. The Pecos River Pipeline is expected to commence operation in Q2 2013.

4) In October 2012, Global Partners acquired a 60% membership interest in Basin Transload LLC, which operates two transloading facilities in North Dakota with a combined rail loading capacity of 160,000 bbl/d. The total purchase price was $80 million.

In January 2013, Global Partners acquired 100% of the membership interests in a West Coast crude oil and ethanol facility near Portland, Oregon, from Cascade Kelly Holdings LLC. The total purchase price was $95 million. The transaction includes a rail transloading facility serviced by the BNSF Railway, 200,000 barrels of storage capacity, a deepwater marine terminal, a 1,200-foot dock and the largest ethanol plant on the West Coast.

In April 2013, Global Partners announced that it has received approval to develop and operate a compressed natural gas loading station in Bangor, Maine. When construction is complete, Global will provide large commercial, industrial and municipal customers with firm natural gas supply on a year-round basis. The station is scheduled to be open by the end of August.

5) In late 2012, TransMontaigne Partners acquired a 42.5% ownership interest for $79 million in Battleground Oil Specialty Terminal Company LLC, which is developing a new black oil terminal facility on the Houston Ship Channel for handling residual fuel, feedstocks, distillates and other black oils.

6) In January 2013, American Midstream Partners announced a long-term agreement with Silver Oak Energy to provide midstream services throughout Silver Oak's acreage holdings in the Woodbine Formation in Madison County, Texas. Under the terms of the agreement, American Midstream will construct and operate additional gathering, compression, treating, and processing facilities to support Silver Oak's production in the Woodbine.

Bargain Hunting And The Black Sheep

In my previous articles, I explained why the major midstream players are not a good buying opportunity at the current levels. Some of them look good technically, but I am not a momentum trader. I never chase prices or force any investment. I always wait for the right moment dictated by either price or market condition to pounce.

As a reminder, I picked Enbridge Energy Partners (NYSE:EEP), Spectra Energy Partners (NYSE:SEP) and Spectra Energy (NYSE:SE) out of the forty five midstream players (major, intermediate, small) of my previous three series. Actually, after recommending Enbridge Energy Partners below $28, I added recently Spectra Energy Partners and Spectra Energy in my bullish list. Picking only 3 out of 45 companies sounds strict, but I feel responsible for my publicly available stock picks. I always try to eliminate the potential risk by rejecting fundamentally weak or overvalued companies, and this is why I did not recommend the remaining forty two companies.

After analyzing sixteen midstream players in this series, here is my cash allocation strategy:

1) I will spread my bullish capital on EQT Midstream Partners (NYSE:EQM), MPLX (NYSE:MPLX) and Summit Midstream Partners (NYSE:SMLP).

2) In the meantime, prime short candidates are: Martin Midstream Partners (NASDAQ:MMLP), Western Gas Equity Partners (NYSE:WGP), Southcross Energy Partners, Access Midstream Partners (NYSE:ACMP) and American Midstream Partners.

3) The following two companies deserve to be on the radar for different reasons. NGL Energy Partners (NYSE:NGL) seems to improve a lot fundamentally (operating margin, cash flow) on a quarter over quarter basis. Rose Rock Midstream is strategically placed in the emerging DJ basin, while it has sufficient liquidity to pursue some further acquisitions.

Bottom Line

The majority of the midstream companies have been piling up long-term debt, and their key ratios are well above average currently. How long can they hide this debt overhang under the carpet? How long can the investor's complacency last to feed these ratios? This is why I am bearish for the majority of them. I feel that there is a tsunami of a midstream bubble in the making. Time will tell.

Disclaimer: Data, facts and premises were determined through review of public documents, SEC filings, news releases and transcripts. The conclusions are my own. Readers may come to different conclusions using the same information. This analysis is not intended to offer investment advice to buy or sell specific stocks.

Disclosure: I am long EEP. 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.