Do you like ice cream? Do you drive a car? Maybe you like an occasional glass of spirits? A yes answer to any of these three questions would indicate that you've probably experienced the sprawling reach of ethanol, which is used in - food products, from ice cream to tomato sauce, blended gasolines, such as E10 or E15, and the hard stuff, as distillers grains, which are used in the distillation process. Hmm, have a drink, get in the car, and drive to the ice cream parlor? Sounds like the sequence is off - it may be better to drive to the ice cream parlor and drive back home for that drink.
Green plains Partners LP (NASDAQ:GPP) is a fee-based limited partnership formed by its parent, Green Plains Inc. (GPRE), to provide ethanol and fuel storage, terminal and transportation services by owning, operating, developing, and acquiring ethanol and fuel storage tanks, terminals, transportation assets, and other related assets and businesses. GPRE owns 62.5% of GPP, and public unit holders hold 35.5%. GPP IPOd in June 2015 and is headquartered in Omaha, Nebraska.
GPP is the yieldco arm of GPRE - the companies mostly share management.
We've covered GPP in several previous articles. This article will update that information and also will offer updated information on parent company GPRE.
GPP and GPRE are part of the growing US ethanol industry, which has emerged as the world's top ethanol exporter over the past three years. In fact, the US exported 53% more ethanol the first two quarters of 2017, vs. Q1-2 2016. Brazil, Canada, and India were the three biggest customers.
Six countries, led by Mexico and Turkey, bellied up to the bar and consumed 60% of the company's distillers grains in the first half of 2017:
On the blended gasoline front, the number of gas stations offering E15 has more than doubled in 2017, to 919, as of 7/28/17. One factor pushing that growth is that retailers are able to offer a higher octane fuel at a cheaper price than E10.
GPP's Q2 presentation points out that an 11% blended rate, on a national level, would exhaust current US annual production. Is that national blended rate likely to happen any time soon? Probably not. But with more retailers offering E15, it's probably creeping up.
In December 2016, the EPA increased the required amount of renewable fuels by 6%, with a mandated 1.2 billion gallon increase over 2016, totaling a record 19.28 billion gallons of renewables - which include ethanol and other biofuels - to be used in the U.S. in 2017. However, it is now reviewing levels for 2018, which we'll cover in the Risks section of this article.
China plans to promote use of ethanol in gasoline nationwide by 2020 - its National Energy Administration announced this in September. It's the latest in a series of initiatives, including promoting electric cars to clean up smog-choked Chinese cities and curb surging demand for imported oil.
The government is spending heavily to develop an electric car industry and has raised sales taxes on vehicles with larger engines. (Source: phys.org)
Parent company GPRE is the second-largest consolidated owner of ethanol plants in North America, with capacity of over 1,480 million gallons/year.
GPRE also gets 20% of its revenue from its Ag and Energy segment and 9% from its Food and Ingredients segment:
GPRE has nearly doubled its ethanol capacity since 2012, with 21% capacity growth in 2016:
GPP's assets include 30 ethanol storage facilities, located near parent GPRE's 14 ethanol plants, eight fuel terminal facilities in seven Southcentral US states, 2,550 railcars, and trucking capabilities.
GPP's most recent distribution was raised to $.45. It currently yields just under 9% and has a trailing coverage factor of 1.16x.
You can track GPP's current yield and price in the Basic Materials section of our High Dividend Stocks By Sectors Tables.
Management has raised GPP's quarterly payout for seven straight quarters. GPP pays its distributions in the usual Feb-May-Aug-Nov. cycle for LPs, and issues a K-1 at tax time. It should go ex-dividend next in early November.
Note: Investing in LPs and MLPs may present tax complications when done in an IRA. Additionally, since LPs usually make tax-deferred distributions, you'd reap more tax benefits by holding them in a non-IRA account. Please consult your accountant about this issue.
Although GPP's trailing coverage factor is 1.16x, its coverage fell to 1.05x in Q2, as DCF was lower than previous quarters:
GPP doesn't have options, but you can see details for over 25 other income-producing trades in both our Covered Calls Table and our Cash Secured Puts Table.
Even though overall volume increased, GPP had a weak Q2 '17, as revenue, net income, and DCF all fell, due to lower volume from GPRE.
Management explained on the Q2 earnings call,
"revenues generated from the partnership’s rail transportation services agreement with Green Plains Trade decreased $0.6 million due to lower average rates charged for volumetric capacity provided. This decrease was offset by revenues generated from the partnership’s storage and throughput agreement and terminal agreements with Green Plains Trade, which increased $0.6 million due to higher throughput volumes related to ethanol storage assets acquired in September 2016, reduced by lower system-wide throughput volumes."
"Green Plains Trade experienced lower throughput volumes than expected due to the weak ethanol margin environment during the three months ended June 30, 2017. Revenues generated from the partnership’s terminal services agreements with other customers decreased $0.4 million due to lower third-party ethanol and biodiesel volumes at the partnership’s Birmingham facility and other terminals."
"Green Plains Trade is obligated to throughput a minimum of 296.6 million gallons of ethanol per quarter, according to its storage and throughput agreement with the partnership. During the second quarter of 2017, Green Plains Inc. slowed its production in response to the weak ethanol margin environment, resulting in throughput below the minimum volume commitment. The partnership charged Green Plains Trade approximately $1.0 million for a deficiency payment related to the minimum volume commitment. The deficiency payment may be applied as a credit toward volumes throughput in excess of the minimum volume commitment during the next four quarters. As a result, it was recorded as unearned revenue and included in adjusted EBITDA for the three months ended June 30, 2017." (Source: GPP site)
Sequentially, GPP's revenues, net income, EBITDA, and DCF have trended lower over the past two quarters, since Q4 '16:
Q4 '16 was the company's peak quarter for EBITDA:
GPP's ttm growth looks good, due to the acquisitions it took on over the past four quarters, which helped supported distribution/unit growth of 7.6%, and coverage growth of 13%. However, starting in Q3 '17, there will be tougher comps, as Q3 and Q4 '16 saw company earnings records, which haven't been equaled yet in 2017.
You can see how GPP's lower earnings figures mirrored parent GPRE's, which also had a huge Q4 '16, with subsequently lower figures in Q1 and Q2 '17:
GPP - Future Growth Prospects:
Parent GPRE expects to complete its Beaumont, Texas JV import/export terminal project this month - it plans to offer it to GPP, which should necessitate a conflicts committee review. If this dropdown deal goes through, it should improve GPP's Q4 '17 figures.
Looking ahead to 2018, GPP has another project set to come online in the first quarter:
"Effective June 1, 2017, the partnership’s joint venture with Delek Renewables LLC, NLR Energy Logistics LLC, signed a five-year lease with the Little Rock Port Authority to construct and operate an ethanol unit-train terminal within the 2,600-acre industrial park, which is served by two Class I railroads and has convenient access to major highways. The joint venture also executed five-year terminal throughput agreements with affiliates of its partners that will provide the terminal minimum volume commitments upon completion, which is expected during the first quarter of 2018." (Source: GPP site)
Management anticipates that this facility will be able to handle two to three unit trains a month, and approximately 100,000 barrels of storage will be built along with other infrastructure item. The cost to the project is coming well below initial estimates, which should increase returns for the unit holders of GPP.
Shared Management: GPP doesn't have its own management - it's managed by GPRE's management. GPRE owns 62.5% of GPP and public unit holders hold 35.5%. Could conflicts of interest arise, specifically in the price GPRE charges GPP for dropdown acquisitions?
As we pointed out in our previous article, "Yes, but that would be tantamount to GPRE shooting itself in the foot, since it's the majority owner of GPP, with a lot of money at stake. If GPP gets saddled with bad deals and fails, GPRE would stand to lose a great deal of money. As CEO Becker pointed out on the Q1 earnings call, "we still own 65% of GPP - today, it's worth over $400M of equity value to GPRE shareholders."
There were two management changes announced in September.
GPP announced on 9/5/17 that "Jerry Peters will retire as chief financial officer from Green Plains and Green Plains Partners LP effective September 11, 2017. John Neppl has been named to succeed Mr. Peters upon his retirement. Mr. Peters will continue to be a member of the board of directors of Green Plains Holdings LLC, the general partner of Green Plains Partners."
GPP announced on 9/6/17 that it "has accepted the resignation of John D. Chandler from the board of directors of its general partner, Green Plains Holdings LLC. Chandler informed the partnership he was leaving to accept a chief financial officer position at The Williams Companies. His departure is not due to any disagreement with the partnership’s operations, policies or practices." (Source:GPP site)
Political Risk: The environmental battle seesaws back and forth, with the renewable fuels contingent winning a case in July. However, moving forward, the EPA has proposed a reduction in the overall biofuel target for 2018, which could, in turn, reduce targets for subsequent years:
GPP continues to have negative Equity/Partners Capital, so there is negative book value. Technically, though, the publicly held common units actually had a positive Partners Capital amount of $115.198M, as of 6/30/17.
GPP is currently 4% below analysts' $21.00 low price target and 12% below the consensus target of $23.00.
GPP is up ~2% in 2017, but fell from $20.53 down to $17.90 in the week after its Q2 earnings report. Since then, however, it has caught a bid, and was up 12.7% as of 10/5/17.
We've updated this valuations table, which includes some midstream firms we've covered in recent articles, such as MPLX LP (MPLX), PBF Logistics LP (PBFX), Arc Logistics Partners (ARCX), Martin Midstream Partners LP (MMLP), Summit Midstream Partners LP, (SMLP), Delek Logistics Partners LP, Plains All American Pipelines LP (PAA), and Holly Energy Partners L.P. (HEP).
The company's 8.93% yield is a bit below the group average, while its 9.98 price/DCF is higher than average. Its distribution coverage is close to average, but its EV/EBITDA and price/sales are higher than average. We don't see any screaming undervaluations here. It has no price/book due to its negative book value.
GPP had negative Equity/Partners Capital of $64.2M, as of 6/30/17, which is why there are no ROE or debt/equity figures listed below. Positives are that it has the lowest debt leverage, the highest ROA, and the highest operating margin in this midstream group.
Since most of GPP's revenue comes from parent GPRE, we've listed GPRE's debt and liquidity figures below. GPRE carries a bit higher debt/EBITDA leverage, at 2.5x as of 6/30/17, than GPP does, at 1.94x.
In August, GPRE's management announced the completion of a $500 million senior secured term loan due 2023. The company will use the proceeds to refinance approximately $405 million of existing debt of its wholly owned subsidiaries, Green Plains Processing LLC and Fleischmann's Vinegar Company, pay associated fees and expenses, and for general corporate purposes. The term loan is guaranteed by the company and predominantly all of its subsidiaries, not including Green Plains Partners and certain other entities, and secured by substantially all of the assets.
There were no major shifts in GPP's balance sheet over the first two quarters of 2017 - long-term debt only dropped by 1M, while current liabilities dropped by $1.5M.
Total liquidity as of June 30, 2017, was $30.0 million, including $2.9 million in cash and cash equivalents, and $27.1 million available under the partnership’s revolving credit facility. The balance outstanding on the partnership’s revolving credit facility was $127.9 million as of June 30, 2017:
GPP's first debt maturity isn't until 2020, which gives management plenty of time to refinance. The company was in compliance with its debt covenants as of 6/30/17.
We took rolling four-week average ethanol production volumes from the EIA site in order to get a sense of whether or not volume picked up in Q3. Looking at these figures as a whole, US volume only increased ~1.9% in Q3 vs. Q2 and increased by ~1.7% vs. Q3 2016.
Those figures don't support a big Q3 '17 increase in earnings for GPRE or, subsequently, GPP, so we may not see any increases until Q4 '17, when GPP's Beaumont, Texas, dropdown acquisition could start contributing to earnings, provided the deal goes through.
We're rating GPP a hold. We want to review GPP's Q3 earnings and earnings call before moving forward. We like the long-term global growth prospects for the US ethanol industry, but seeing how GPP got whacked after its Q2 earnings release, there may be cheaper prices ahead.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
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This article was written by
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