This is the sixth in a series where I provide my example of "What is good due diligence for MLP (energy Master Limited Partnership) investors?" For many of you, this will appear to be hyper due diligence. You can opt to weed out some of the hyper diligence to arrive at the level that feels right to you. Prune prudently. For those who have read multiple articles in this series, it is time for you to be asking what - if any - part of my due diligence process would you omit.
MLP Midstream 6-16-16
The consensus Distributable Cash Flow or DCF projections were last updated on 5-30-16. The distribution Compound Annual Growth Rate or CAGR projections were updated 5-30-16. Yields are based on the Q2-16 distribution. Under the 'year to date' header, the change in the distribution is the change since Q2-15 - or the change over the last twelve months. The change in the target, EPS and DCF is the percentage change in the consensus 2016 projection that has happened since the beginning of 2016. The Dist/DCF number is the ratio of the Q2-16 distribution to the 2016 DCF projection. The 2016 DCF projection is an adjusted average of eleven DCF projections from the major brokerages covering MLPs. The CAGR is intended to be the percentage change in my CAGR projection since the beginning of the year - but I lack confidence that I have the timing of this stat right. The target prices and EPS projections are from Yahoo Finance.
Large Cap Midstream
|Current||Distrib/||Q2 Dist||Dist/dcf||Dist/dcf||Year-to-Date Percent Change|
|Buckeye Partners, L.P.||(NYSE:BPL)||69.85||1.1875||6.80||89.79||86.84||5.90||9.50||0.24||-2.19||0.38||3.26||0.00|
|Enable Midstream Partners||(NYSE:ENBL)||14.08||0.3180||9.03||102.58||100.16||53.04||59.96||-4.88||1.82||-10.79||1.76||-97.50|
|Enbridge Energy Partners, L.P.||(NYSE:EEP)||21.92||0.5830||10.64||105.52||100.95||-4.98||0.07||-40.34||-28.99||-3.07||2.28||-86.84|
|Enterprise Products Partners L.P.||(NYSE:EPD)||27.71||0.3950||5.70||77.83||74.18||8.33||11.42||-6.85||-5.09||-2.87||5.33||-3.64|
|Energy Transfer Partners, L.P.||(NYSE:ETP)||38.29||1.0550||11.02||107.93||91.94||13.52||19.77||-62.76||-19.96||-18.71||3.94||-66.10|
|Kinder Morgan, Inc||(NYSE:KMI)||17.60||0.1250||2.84||23.26||21.83||17.96||19.64||-6.67||-3.75||-5.70||-73.96||0.00|
|Magellan Midstream Partners LP||(NYSE:MMP)||73.57||0.8025||4.36||80.05||72.46||8.29||10.65||-5.69||-0.48||1.01||11.85||-10.11|
|Oneok Partners, L.P.||(OKS)||37.87||0.7900||8.34||100.32||96.93||25.69||30.93||13.20||11.34||3.28||0.00||-20.00|
|Plains All American Pipeline, L.P.||(NYSE:PAA)||26.28||0.7000||10.65||137.93||112.45||13.77||19.83||-31.67||-24.60||-24.54||2.19||-96.67|
|Spectra Energy Partners, LP||(NYSE:SEP)||46.31||0.6338||5.47||81.00||74.56||-2.91||-0.26||6.73||1.53||10.99||3.85||7.69|
|Sunoco Logistics Partners L.P.||(NYSE:SXL)||27.01||0.4890||7.24||87.32||72.99||5.10||8.90||-23.26||37.98||-3.03||16.71||-2.11|
|Williams Partners L.P.||(NYSE:WPZ)||33.05||0.8500||10.29||90.67||85.00||18.67||24.78||-48.65||0.00||-2.34||0.00||-33.33|
|Large Cap Average||7.70||90.35||82.52||13.53||17.93||-17.55||-2.70||-4.62|
|The Alerian MLP index ETN AMJ is 5.66% and with dividends is 7.51%.|
|The S&P500 index ETF SPY is 2.21% and with dividends is 2.72%.|
|The Russell 2000 index ETF IWM is 1.71% and with dividend is 2.00%.|
OKS has a year to date "Price plus Distribution" of 30.93% - which is well above average for this MLP sub-sector. The current yield is 8.34% - which is slightly above this grouping's average.
OKS has outperformed while having smaller than average declines in its EPS projection, an increase in its DCF projection, an increase in the consensus analyst price target, and a moderate fall in its five year forward distribution CAGR projection.
This is evidence (but not proof) that OKS' price movement is more correlated to price changes in the WTI than average. It would follow that OKS' fundamental performance should be more commodity sensitive than average - if stock performance is in alignment with reality. OKS is one of five MLPs in this grouping that does not have a 2016 DCF projection that is higher than their current distribution. Three of those five have current yields that are higher than 10% - and five out of five have yields higher than the sector average.
The large cap grouping of MLPs has outperformed sector average as a whole. So have the commodity sensitive Gathering and Processing MLPs. The Refinery Logistic group has underperformed.
The spreadsheet that follows summarizes key metrics in the income statement and balance sheet since Q1-13:
ONEOK Partners, L.P. metrics: 61% NGLs; 17% natural gas pipelines; 22% natural gas G&P; 85% fee based projection
|Total DCF dollars||347.561||339.805||302.800||276.927||217.211||306.044||293.303||271.999||211.230||244.958||259.148||271.999||193.216|
|GP's DCF dollars||105.608||107.198||105.178||97.875||95.844||95.192||90.135||85.882||76.922||73.089||71.812||67.145||66.045|
|Net DCF dollars||241.953||232.607||197.722||179.052||121.367||210.852||203.168||186.117||221.230||171.869||187.336||184.713||127.171|
|OKS 2016 guidance: EBITDA of approximately $1.88 billion and DCF of approximately $1.39 billion|
|Long term debt||6,692,238||6,695,312||6,145.603||6,145,972||6,185,660||6,004,232||6,039.997||6,042||6,043||6,044.867||6,046||4,800||4,802|
|Short Term Debt||902,217||546,340||944.992||1,528.134||1,483.125||1,062.946||7.650||7.6||132.6||7.650||47.0||429||0|
|On 8-18-15 OKE offered $500 million in 7.50% notes due 2023|
|On 3-17-15 OKS offered $300 million in 5 year notes at 3.80% and $500 million in 10 year notes at 4.90%|
|On 1-13-14 OKE offered $300 million in 5 year notes at 2.07% and $300 million in 10 year notes at 3.61% and $600 million in 30 year notes at 4.658%|
|On 9-09-13 OKS offered $425 million in 5 year notes at 3.20% and $425 million in 10 year notes at 5.00% and $400 million in 30 year notes at 6.20%|
Since the beginning of 2013, LTM (last twelve month) EBITDA numbers are up (444.586/260.455) 70% while the unit (MLPs call their "shares" units) count has grown 30%; the General Partner's take in DCF has grown from $66 million to $105 million; and interest payments on a growing amount of debt has grown 66%. DCF/unit growth depends on your start date. DCF is up 46% when compared to Q1-13 - when the distribution began in an uncovered condition. DCF is basically flat when compared to Q2-13. The distribution is up 10.5% over the last three years - or just over a 3% annual pace. There has not been distribution growth since Q4-14.
Pause for a second to ponder those numbers. This is a stock that Harry Truman would hate - because every metric needs a "two handed" assessment. For those of you who still have the idea that due diligence is borrowing the opinion of others - imagine the range of headlines the above stats could generate. (1) "Investment grade MLP with amazing EBITDA growth sells at over an 8% yield". (2) "Rising Costs of Debt and IDRs Kills Distribution Growth for OKS". I would like for the numbers to guide me towards my own opinion.
What can we learn from these numbers?
1. I have verified the DCF/unit (or Distributable Cash Flow per unit) calculations with the DCF numbers from three different brokerage analysts. The DCF calculation is simple - there is one adjustment to subtract DCF dollars - the IDR's or Incentive Distribution Rights - owed to the General Partner. Adjustments for 'normalization' have not been needed. I can consistently arrive at good numbers without going to that degree of complexity.
2. I can have a high level of confidence in my DCF calculation because my numbers frequently match those done by the professional analysts.
3. DCF/unit change since 2013 has been positive. Most MLPs have faced headwinds due to commodity price falls.
Let's move on to some attributes I know due to producing similar spreadsheets for many other MLPs. As you absorb the data from future articles in this series, you will have the data in which to arrive at similar assessments.
4. DCF/unit numbers by quarter are moderately volatile.
5. The 'annual' distribution coverage has been weak - but that is improving. Coverage is both a safety and growth attribute. OKS has become a lower risk investment with some potential for distribution growth.
6. Historically, the debt metrics for OKS are minutely better than average. That produced a relatively low cost of debt capital - but notice the large jump in the cost of debt since the beginning of 2014. There is definitely a mixed message here.
7. In a low inertia environment, a good forward DCF projection will be close to the LTM (last twelve month) DCF number. For OKS, LTM DCF is (.85 + .81 + .73 + .70) $3.09/unit. 2016 EBITDA guidance of $1.88 billion averages to $470 million per quarter - which implies earnings will slightly improve over the Q1 number. The 2016 DCF guidance of $1.39 billion averages to $3.475 billion - which replicates the Q1 number. The annualized Q1 number produces a projection of $3.39 before some needed downward adjustments.
8. You should note that distribution growth stopped with the coverage numbers turned bad. That suggests the distribution growth should begin again when coverage returns.
I have 11 2016 DCF projections from the 12 brokerages I use to create a consensus number. The projections range from $2.90 to $3.29. The average for the projections is $3.15 - and 8 projections are within ten cents of the average. The midpoint in my two projections (309 and 339) is $3.24 - is close to analyst consensus. The small spread in the analyst projections comforts me. I have a much more than average confidence in the $3.19 projection.
Now that I have a good DCF - let's move on the CAGRs - or a five year forward "Compound Annual Growth Rate" projection of the distribution.
Long term metric trends
The average calculation for growth is for ten years - for 2006 through 2015
The first average is the sum of changes for each individual year over ten year period - with that result divided by 10
The 2nd average is the difference between the current and beginning number, divided by the beginning number - with that result divided by 10
The distributions shown are annualized first quarter distributions
My average 2018 DCF projection for OKS is $3.46 and the median 2019 projection is $3.70. With those numbers, there should be moderate distribution growth returning to OKS in 2017. I show brokerages with tiny CAGRs. The right CAGR projection is a conservative projection - so my projection is tiny, too.
Now that I have arrived at a growth projection with which I can have a fair amount of confidence - it is time to make a numeric risk assessment.
When it comes to distribution coverage - it is on the cusp of coverage. Because of these attributes, I assess OKE with a 11.5% Required Rate of Return ("RRR" or risk assessment). Low RRRs are in the 10s and mainly go to BBB+ rated companies. Average RRRs for covered distributions are in the 11s and mainly go to BBB rated companies. Uncovered distributions result in RRRs in the 12s and mainly go to BBB- rated companies.
And with that - you should be sufficiently prepped for the ending spreadsheet that compares valuations:
Yield + CAGR Total Return Expectations
|Company||Q2-16||Consensus||Total||Bonds||DCF||My||Total Rtn||Consensus||Price Implied CAGR||Distrib||Price|
|Yield||CAGR||Return||Ratings||Accr||RRRs||- RRR||Ratings||RRR-Yld||P/DCF||/ DCF||/ DCF|
|Large Cap Midstream|
|Buckeye Partners, L.P.||BPL||6.80%||4.40%||11.20%||BBB-||2.50||11.00||0.20||2.1||4.20||4.08%||89.79||13.20|
|Enable Midstream Partners||ENBL||9.03%||0.10%||9.13%||BB+||3.00||12.50||-3.37||2.6||3.47||1.58%||102.58||11.35|
|Enbridge Energy Partners, L.P.||EEP||10.64%||0.50%||11.14%||BBB||2.00||12.00||-0.86||2.9||1.36||-0.15%||105.52||9.92|
|Enterprise Products Partners L.P.||EPD||5.70%||5.30%||11.00%||BBB+||1.30||10.00||1.00||1.7||4.30||3.05%||77.83||13.65|
|Energy Transfer Partners, L.P.||ETP||11.02%||2.00%||13.02%||BBB-||3.00||12.50||0.52||2.2||1.48||0.54%||107.93||9.79|
|Kinder Morgan, Inc||KMI||2.84%||6.00%||8.84%||BBB-||1.30||11.00||-2.16||2.4||8.16||-5.21%||23.26||8.19|
|Magellan Midstream Partners LP||MMP||4.36%||8.00%||12.36%||BBB+||1.00||10.30||2.06||2.1||5.94||12.30%||80.05||18.35|
|Oneok Partners, L.P.||OKS||8.34%||1.50%||9.14%||BBB||3.00||11.50||-1.66||2.9||3.16||0.97%||100.32||12.02|
|Plains All American Pipeline, L.P.||PAA||10.65%||0.10%||10.75%||BBB||3.00||12.50||-1.75||2.7||1.85||6.37%||137.93||12.95|
|Spectra Energy Partners, LP||SEP||5.47%||7.00%||12.47%||BBB||1.00||10.30||2.17||2.2||4.83||5.73%||81.00||14.80|
|Sunoco Logistics Partners L.P.||SXL||7.24%||9.30%||16.54%||BBB||1.10||12.00||4.54||2.1||4.76||3.81%||87.32||12.06|
"Total Return minus RRR" is my the buy, hold or sell number. Positive is buy - the stock is selling below what the valuation assessments suggest. Negative is sell - the stock is selling above what the valuation assessment suggest. Close to zero means the stock is correctly priced. In most sectors there is superior metric transparency compared to MLPs - and I produce TR - RRR numbers that are close to zero. Projected Total Return or "TR" = Yield + CAGR.
What does all of this math mean?
With a "Yield + CAGR" that is 228 bps below sector average combined with a RRR assessment that is average, OKS is between a hold and a sell based on current valuations. Given the major price appreciation already experienced in 2016, that conclusion should not come as a surprise. OKS has been swept up in positive momentum to a valuation that is too high by a nebulous degree. On one hand, the metrics I have provided give evidence that the lion's share of the 2016 price appreciation was merited. On the other hand, the "Yield + CAGR - RRR" is negative. And negative metrics are sell ratings. But there still is one metric - the PI-CAGR based on the Price/DCF ratio - that suggests OKS is still slightly undervalued.
Disclosure: I am/we are long EPD, MMP.
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.