Green Plains Partners Q4 Update - Thesis Unchanged, Still Trading Around Yield

| About: Green Plains (GPP)

Summary

Reliance on parent continues. The company now generates 92% of revenue from GPRE, and not much is indicating that this should change.

The risk of this was clear in the past few months where GPRE became exposed to the possibility that EPA might change the Renewable Fuel Standards which could hurt their overall business.

Therefore even if the dividends are likely to increase, I believe it is imperative to be aware of this and account for it when thinking about risk/reward scenario.

I initially covered Green Plains Partners (NASDAQ:GPP) here. The last quarterly update can be seen here.

My thesis was based on the following points;

  • This ethanol storage spin-off has an exciting annual yield (11.2%), but I believe that GPP is a perfect example of what the low-interest rate environment allowed to prop up.

  • The company is completely reliant on the parent as it generates 92% of the revenue from Green Plains Inc. (NASDAQ:GPRE), which in turn funds the operations and the distributions.

  • This makes GPP a leveraged bet on ethanol and the parent company. If the parent was to encounter any issue, the share price could plummet quickly.

  • Especially when the stock was trading at 60x its book value, which was substantially higher than other similar YieldCo structures.

Thus I believed that investors should avoid the stock. I think that all these points still hold despite the fact that it is likely that dividends are going to continue increasing in the near future.

Share Price Reaction

Q4price.png

As you can see the share price did not react in a significant way when the company published their operational results for Q4 on the 22nd of February. I believe that this is reasonable as the quarter did not bring anything new to the table.

The company continues to be completely reliant on the parent as 92% of the revenue is generated from it. That is up from 83.5% in FY2015. This shows that the company is unlikely to ever attain independence as GPP is not planning to create or acquire assets that would be able to significantly diversify the current operations. While the company did announce that they might acquire an interest in a joint venture, this would be just another ‘drop-down’ from GPRE and therefore might burden the company’s balance sheet further (the company is already operating with a negative equity caused by a significant debt load).

All this then presents a serious risk to the unitholders because should GPRE decide that it needs to redirect some of its efforts or that it will need to save money thus lowering minimum commitments with GPP, the company is going to be severely impacted. A good example of the level of discretion the parent has over GPP’s operations can be seen in GPRE’s latest conference call (which is concurrently a call for GPP as well). The following is likely the most telling.

Selman Akyol - Stifel - Analyst

...And then my last question, in terms of the 38 million gallons you reference you're holding, how should I be thinking about that in terms of throughput for the MLP {GPP} in terms of the first quarter?

Todd Becker - Green Plains Inc. - President and CEO

Look as I said, we haven't really made a decision on what will happen with those gallons yet but really just depending on -- and don't forget we're producing at maximum levels and we're not anywhere close to the [Mbc]'s and we're doing all good from that perspective...

You can see that GPRE makes a ‘decision’ regarding how much throughput will GPP have in the next quarter.

Finally, I believe that this risk is not reflected in the valuation of GPP (mainly due to the dividend yield that keeps the share price artificially high) as the current market expectations (market capitalization - book value) imply 13 years of continuous dividends at the current rate as seen below.

impliedyears.png

Regulatory Risk

One such possible scenario of the risk where GPP would be significantly impacted by what is happening over at GPRE could have been observed in the past few weeks.

EPA’s new chair under the Trump administration is in staunch opposition to the Renewable Fuel Standards a policy that sets the volume of renewable fuels that need to be used that year.

This is a key policy for companies such as GPRE as it will influence their production outlook. In late 2016 it looked that this policy will significantly improve ethanol’s outlook as the EPA announced that it raised minimum volumes for several renewable fuels above expectations. Thus GPRE’s shares started to appreciate, but that was only a short-lived trend until Trump announced that he has frozen every proposed regulation by the Obama administration in early January. This then means EPA needs to revisit the RFS for 2017 and could possibly change the proposed volumes if not to implement other radical changes to the system.

While this is unlikely the market reacted negatively to these developments (possibly due to long-term challenges that the new administration could pose to the renewables industry) and GPRE started to sell off among other renewable products such as renewable identification numbers etc.

What I found interesting in this is that while GPRE’s stock started to weaken and dropped more than 20% in under three weeks, GPP’s stock which is potentially overexposed to this issue due to the fact that the parent could just alter their commitments to GPP if they need to adjust their working capital etc. reacted only after a couple of weeks and did not sell off more than GPRE as seen below.

gprecompprice.png

I believe that this disconnect between the two share prices is unreasonable given the fundamental connection between the two entities. Ultimately unitholders should always remember that if GPRE is facing a significant risk, GPP is overexposed to this and that the price should reflect that.

Conclusion

The stock still continues to trade around dividend yield. While this is understandable as the parent might keep on increasing the quarterly distributions, I believe that it is imperative that investors are aware of this and reflect this in their risk/reward scenario regarding GPP as the parent has complete discretion over the entity.

As seen in the past few months the market might not be fully appreciating this due to the way GPRE reacted to news regarding the potential changes to RFS for this year and how this affected (or rather did not) GPP’s share price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Oil & Gas Pipelines, Earnings
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