Trolling For Values In The Pipeline Sector

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Includes: AM, AMID, BWP, CEQP, CNXM, DCP, OKE, SEP, TCP, TGE, WES, WPZ
by: The Troll under the Pipeline

Summary

MLP pipelines have fared poorly as an asset class over the last year.

Depressed share price has raised yields, and credit concerns.

There are some excellent values out there.

pipelineThe pipeline master limited partnerships historically have had a reputation for being safe, steady distribution payers. In the last year or so, most energy related MLPs have come down in price significantly. In many cases, the pipeline companies are off 40 to 50% from their 52-week highs. Yields are enticingly high. Kinder Morgan (NYSE:KMI), although not an MLP anymore, has roiled the markets with its dividend cut and created concerns about the safety of pipeline distributions in general. Now that the Fed has raised rates, access to easy capital may prove to be more difficult for many of the pipeline partnerships.

This article will explore a group of primarily natural gas pipeline MLPs to see if these still offer a safe and steady distribution with some distribution growth potential. Many of the pipelines are primarily in a fee-based business and do not have the same commodities risk that the MLPs engaged in exploration and production have. The mixed crude/gas and primarily oil or refined products partnerships will be looked at separately.

The MLP Business Model:

The business is typically fee based for transportation or a fee for a cut of liquids for Processing or Fractionating. If they are paid for processing in NGLs, this can give a Midstream company more commodity exposure than one might expect. The MLP structure allows earnings to be passed onto the investor without being taxed at the corporate level. The structure also lets the company pass on losses to the investor as well. While a pipeline asset depreciates, this protects a nice chunk of the investor's distribution and delay taxation. MLPs need to grow assets to provide both more distributions and new sources of deprecation. Historically, this growth has been debt financed or by issuing new equity. Equity prices are depressed and now new debt may not be so easy to get. The following Table of Midstream Natural Gas MLPs looks at distribution yield, coverage and debt.

Table 1: Summary of Gas MLPs, Sources: Yahoo Finance and individual company filings.

Ticker Current Price Distribution Current forward Distribution 2015 Total Debt Due Debt Covenant Forecast
MLP Name: Symbol 12/23/15 Annualized Yield Coverage Ratio DCF guidance DCF/Debt Long Term Debt In 2016 In 2017 EBITDA Debt x EBITDA
American Midstream Partners AMID $7.60 $1.89 24.9% 1.00 $55,000,000 0.11 $508,650,000 - - 4.5 4.4
Antero Midstream Partners AM $22.62 $0.82 3.6% 1.40 $165,000,000 1.43 $115,000,000 - - 4.75 4.5
Boardwalk Pipeline Partners BWP $12.63 $0.40 3.2% 4.54 $449,000,000 0.12 $3,690,000,000 $250,000,000 $575,000,000 5 5.0
Columbia Pipeline Partners CPPL $17.89 $0.69 3.9% 10.00 $385,168,000 0.14 $2,746,000,000 - - ?? 4.1
CONE Midstream Partners CNNX $9.97 $0.91 9.1% 1.45 $78,400,000 1.39 $56,500,000 - - 5 0.2
Crestwood Equity Partners CEQP $21.36 $5.50 25.7% 0.97 $380,000,000 0.15 $2,518,000,000 - - 5.5 4.6
DCP Midstream Partners DPM $24.56 $3.12 12.7% 1.17 $584,000,000 0.27 $2,162,000,000 - $500,000,000 5 3.2
Midcoast Energy Partners MEP $8.79 $1.43 16.3% 1.15 $75,600,000 0.09 $820,000,000 $140,000,000 $25,000,000 not reported not reported
Oneok Partners OKS $29.14 $3.16 10.8% 1.00 $1,170,000,000 0.17 $6,749,000,000 $650,000,000 - 5.5 4.3
Spectra Energy Partners SEP $45.14 $2.51 5.5% 1.20 $1,205,000,000 0.20 $5,891,000,000 $250,000,000 $400,000,000 not reported 4.3
Summit Midstream Partners SMLP $18.10 $2.30 12.7% 1.0.3 $149,105,000 0.16 $905,000,000 - - 4.5
Tallgrass Energy Partners TEP $41.82 $2.40 5.7% 1.12 $211,000,000 0.30 $696,000,000 - - 4.75 3.3
TCP Pipelines TCP $50.00 $3.56 7.1% 1.15 $296,000,000 0.16 $1,890,000,000 $100,000,000 $212,000,000 5 5.4
Western Gas Partners WES $46.56 $3.10 6.7% 1.13 $636,400,000 0.25 $2,588,000,000 - - not reported 3.5
Williams Partners WPZ $28.07 $3.40 12.1% 1.04 $3,000,000,000 0.17 $17,237,000,000 $377,000,000 - 6 4.8

The market prices are current as of 12/23/15. There is a wide range of Yields, so the market is valuing these companies differently. The ability to cover the distribution also varies. The table also has the EBITDA to Debt ratio, a key metric in the debt covenants as a guide to the Partnership's access to debt. The table also looks at the Distributable cash flow to debt. If the partnership had to hunker down and live within its mean, how quickly can it pay down near-term debts? In all cases, the risk of bankruptcy is incredibly small, all of the pipelines examined could meet their debt obligations with a near-term distribution cut even if they were completely cut out of capital markets.

Forecast Debt coverage. This can be a bit tricky to calculate so I have used the various partnerships' guidance in most cases. The Partnerships can take out additional debt and exceed their long term covenant values for several quarters while they build a project or acquire a new asset. As long as the project brings in the required additional EBITDA in the required time frame they are in compliance.

American Midstream Partners

American Midstream operates gathering systems and transmission pipelines primarily in Louisiana and offshore in the gulf. They also operate several smaller systems in Texas, Mississippi and Alabama. While no Long-Term Debt is due in 2016 or 2017, they have announced they will not raise the distribution. Given the slim coverage ratio and that they are near their debt limit, a distribution cut is a legitimate concert. The market seems to have priced them accordingly.

Antero Midstream Partners

Antero Midstream Partners operates a hodgepodge of midstream gas related assets for Antero Energy primarily in Appalachia. As a relatively new spin off, they have excellent coverage of their distribution and an exquisite balance sheet that they should be able to borrow against heavily to fund their capital expansion. Antero Midstream also has a fresh water supply and water treatment business for Antero Energy. This is unique to this MLP. As the companies drilling the wells need a steady supply of water, this appears to be a logical business for an MLP to own. If drilling suddenly stops or curtails, Antero E&P has wisely sluffed off this system onto its midstream partner. Since the Partnership also handles the water disposal, it's not clear what if any additional environmental risks this creates for the partnership.

BoardWalk Pipeline Partners

BoardWalk's main asset is the Texas Gas Transmission Pipeline from Texas extending to Lebanon Ohio. Laterals to Kentucky and Indiana for feeding power plants are under construction. BWP is an interesting case. They "Kindered" first when they cut their distribution to lower debt and fund expansions. Investors have not been rewarded. Currently, Debt is 5.0 x EBITA, which is at their limit, so BoardWalk must self-finance for a while longer. They seem to have embraced this and are not reporting Distributable Cash Flow in their quarterly filings as the other MLPs typically do. By mid-2016, expansion projects will start coming online and we will see if the positive effects are worth the distribution cut. This author now believes he purchased too early. There is a risk that MLP investors will never reward growth over distribution payments.

Columbia Pipeline Group

Columbia Pipeline Group is the MLP spin off from NiSource this year to take the Columbia Pipeline assets. Their pipelines connect the Marcellus and Utica Shale areas to Texas. These pipeline assets are almost completely booked on fee for capacity agreements, so Columbia gets paid the same regardless of actual volumes moved. The newest of the Pipeline companies reviewed in this article, there is not a lot of track record to follow. They appear to have plenty of DCF coverage to support their promised distribution increases.

CONE Pipeline Partners

CONE is also one of the newer Marcellus/Utica Shale area pipeline companies, formed in 2014. They have some room to grow their debt and very good DCF coverage. Their balance sheet looks to be in good shape for investors wanting a steady payment and to make the distribution increases promised in the prospectus. One can't say for sure they can hit their targets until 2020 but the next couple of years look very good.

DCP Midstream Partners

DCP owns a variety of gas transmission and gathering pipelines and gas processing facilities primarily in the mid-continent and Texas. As a significant gas processor, they must hedge their share of the NGLs recovered. DCP has decent distribution coverage and some room to increase debt. They can meet the near term maturing debt payments and are continuing to make the distribution while funding some small growth projects. Given their high yield, they appear to be one of the better deals in the field.

TCP pipeline Partners

TCP has several US gas transmission lines and one of the US-Canadian pipelines. They have modest amounts of debt coming due this year and next but are pushing their debt limits. (They can exceed their target for short periods while acquiring new properties) While they should be able to roll over the near-term debt, if credit continues to tighten, they could become a candidate for a distribution cut.

ONEOK Partners

Oneok is a massive gas and liquids pipelines and processing through middle of the country down to Texas. This is a well-established MLP and name in the sector. The coverage ratio is very tight at 1.0 but they have some room to continue to take on debt. Given their longstanding reputation, look for Oneok to maintain their distribution at all costs. This may mean slower growth going forward.

Spectra Energy Partners

Spectra operates an extensive pipeline network from Pennsylvania to Texas and one of the pipelines from Canada to the Colorado/Wyoming area. Spectra is one of the more conservative names in the field. They have slightly above average coverage of their distribution and room to borrow. Look for Spectra to continue with responsible growth. However, given the low yield, the market clearly already agrees with me that this is a very safe pipeline distribution to own and some of the upside potential is already priced in.

Tallgrass Energy Partners

Tallgrass owns an interesting set of pipeline assets tying the shale formations of Wyoming and the Dakotas to the Marcellus and Utica Areas. They have more than adequate distribution coverage and room on the balance sheet for more debt.

Western Gas Partners

Western Gas Partners primarily owns midstream assets in New Mexico and Western Texas that were dropped down from Anadarko Petroleum (NYSE:APC). They have both gathering and transmission capacity. They are expanding their processing capacity significantly as well. While Western Gas has on the lower end of acceptable DCF coverage, they have plenty of room to borrow and grow the partnerships asset base.

Williams Pipeline Partners

Another big name in the pipeline arena with a gigantic network of gas pipelines, WPZ is likely to remain committed to its distribution. With a razor thin coverage ratio, don't look for a lot of growth here. While debt is relatively high, they appear to have the loosest leverage ratio requirements of the MLPs reviewed today, giving them room under their current revolving credit facilities to borrow.

Conclusions:

There appear to be some opportunities in the Pipelines. A basket of pipelines have strong potential to be good distribution payers with some capital appreciation upside. Antero, Columbia and CONE are good for investors looking for the growth in distribution and capital appreciation. DCP, Spectra and Western gas all look like good choices for a higher but safe yield. Williams and Oneok can be included sparingly for those seeking higher yield but willing to accept some risks.

Disclosure: I am/we are long DPM AND BWP.

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.