They're both midstream companies, but their corporate structures differ - SEMG is a corporation, and issues a 1099 at tax time, whereas CNXM is an LP, and issues a K-1 at tax time.
CNXM was formerly known as CONE Midstream Partners LP and changed its name to CNX Midstream Partners LP in January 2018. CNX Midstream Partners LP was founded in 2014 and is based in Canonsburg, Pennsylvania.
Its assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities to service its customers’ production in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia.
SEMG was founded in 2000 and is headquartered in Tulsa, Oklahoma. It operates in three segments: U.S. liquids, U.S. gas and Canada. The Canada segment owns and operates natural gas processing and gathering facilities with approximately 530 miles of natural gas gathering and transportation pipelines in Alberta, Canada.
CNXM has averaged 14.73% in dividend growth in the past three years.
SEMG has a very high yield of 13.79% due to its poor price performance over the past year - it's down -45.82%, but management has kept the quarterly dividend steady, at $.4725.
Mr. Market has given both of these companies the cold shoulder over the past year. They've both lagged the benchmark Alerian MLP ETF (AMLP) by a wide margin, although CNXM has done better than SEMG over the past year, month and quarter. However, SEMG has outperformed CNXM so far in 2019, but it's still down slightly year to date.
We found two negative events for CNXM in 2018, both in June, and three analyst downgrades in Q1 '19:
1. Cushing Asset Management, LP rebalancing of The Cushing® 30 MLP Index as part of normal index operations. After the markets close on June 15, 2018, the 30 constituents of the Index will be rebalanced, and CNXM was removed from it, as of June 18, 2018:
However, Cushing added CNXM back to its index as of 1/2/19.
2. Divestiture - Noble Midstream, LLC, a subsidiary of Noble Energy, issued an aggregate of 6.5M common units representing its limited partner interests in CNXM at a price of $18.30. (This sale relates to the deal detailed in the next section.)
CNXM didn't receive any proceeds from the sale of the common units in this offering and the number of outstanding common units remained unchanged.
Its price/unit remained in the $19-$20-plus range, until October '18, when it began to get caught up in the Q4 '18 crude oil price swoon which pressured most energy companies' unit prices. Unlike many other energy stocks, CNXM's price never recovered.
On 1/31/19, CNXM reported Q4 earnings which underwhelmed the street - analysts were looking for $.51/unit in profit, and CNXM reported $.47/unit.
It was given three downgrades, from Outperform to Market Perform or Neutral, with Baird changing its price target from $25 to $18.00:
However, skip ahead to the earnings section, and you'll see major growth for CNXM in Q4 '19, as well as in every other quarter over the trailing 12 months.
SEMG also received three downgrades earlier in 2019, but it also received an upgrade from Goldman Sachs in early January, albeit from Sell to Neutral.
A Transformative Transaction For CNXM:
In January 2018, CNX Resources Corp. (CNX) CNX closed on the acquisition of Noble Energy's (NBL) 50% interest in CONE Gathering LLC, the GP controlling entity of CONE Midstream Partners (CNNX). CONE Midstream Partners LP (CNNX) was renamed CNX Midstream Partners LP (CNXM).
CNX became 100% owner of MLP IDRs and remaining undropped interests in CNXM's three DevCos:
The deal had many benefits for CNXM, including 63,000-plus Utica acres, with established fees for existing wells, a minimum development commitment of 140 wells in Marcellus and Utica over the next four years, giving a $385M backstop to CNXM, in addition to the other points listed below:
These minimum well commitments put shipper activity commitment on CNXM’s 100% owned southwest PA gathering system areas, and formed the basis for its management's 15% annual distribution target through 2020.
Their prices certainly haven't lagged because of weak coverage - CNXM has had robust coverage over the past four quarters, averaging 1.44X, and had a slightly higher 1.50X average in the previous four-quarter period.
We listed both of their most recent payouts in the table below, but CNXM's management has reiterated its 15% distribution growth target for 2019, so its August payout should be higher, at ~$.3872, which would push its forward yield up over 10.3%, with an even higher yield in Q4, if its payout hits ~$.40.
As noted in the graphic above, they also expect to have 15% distribution growth in 2020. But it gets better. They referenced 15% growth through 2023 on their latest earnings call. (See the Risks section for more details.)
CNXM: Do these look like the growth figures for a company which deserves to be downgraded? For example, in Q4 '18, the same quarter for which analysts downgraded CNXM, it had 54% growth in DCF, 56% EBITDA growth, 59% net income growth, and 15% revenue growth.
They followed that up in Q1 '19, with 47% DCF growth, 56% EBITDA growth, 26% net income growth, and 14% revenue growth:
In the past four quarters, DCF has grown by 31%, while the unit count stayed flat, and CNXM delivered 15% distribution growth. Coverage slipped slightly, from a very robust 1.50X, to a still robust 1.44X:
SEMG: SEMG's earnings growth has been more subdued than CNXM's, with somewhat negative CAFD growth in the two most recent quarters, and negative revenue growth in Q1 '19. However, net income jumped 90% in Q1 '19, and has averaged 113.5% growth in the trailing 12 months, while EBITDA has grown by 11.86%.
SEMG's US liquids segment comprised 66% of total segment profit in 2018, with the US gas segment contributing ~14%, and the Canada segment posting ~17%. Total segment profit was up more than 3% in Q1 '19 vs. Q4 '18, with higher margins in the US liquids segment, and higher volumes in the Canadian segment more than offset the expected decline in the US gas segment.
SEMG's biggest segment challenge is in its US Gas business, which had segment profit of $12.2M in Q1 '19, down $5M vs. Q4 '18. The decrease was due to lower volumes, as a result of reduced drilling activity in the Mississippi Lime and the expected decline in uncommitted volumes. There's also a customer merger, Midstates Petroleum and Amplify Energy, which should close in Q3 '19 and may potentially impact 2019 gas volumes.
Coverage has improved from 1.36X, to 1.43X, while the unit count has remained flat:
CNXM's management has increased its capex budget substantially in 2019, from $25--$280M, to $310-$330M, with an emphasis on funding long-term infrastructure assets, namely large compression units.
CNXM has several capital projects which should come online in 2019, further supporting its distribution growth:
SEMG's subsidiary SemCAMS Midstream announced this week that "it has entered into an asset joint venture with Keyera Corp. to construct a natural gas liquids (“NGL”) and condensate pipeline system to connect the liquids-rich Montney and Duvernay production areas of northwestern Alberta to the fractionation and condensate hubs in Fort Saskatchewan, Alberta. This pipeline system provides producers additional and alternative transportation solutions to meet growing production and is supported by long-term contracts with significant take-or-pay commitments" (source: SEMG site).
On 2/25/19, "SemCAMS Midstream closed on its acquisition of Meritage Midstream's Canadian infrastructure assets in the prolific Montney resource play. SemCAMS Midstream is a newly-created joint venture owned by SemGroup and KKR. SemCAMS Midstream owns approximately 1.1 bcf/d of natural gas processing capacity, including capacity from Meritage’s Patterson Creek Plant and the new Wapiti Plant. Capacity will increase to approximately 1.3 bcf/d later this year with the expected completion of the Smoke Lake Plant and Patterson Creek Plant expansion" (source: SEMG site).
At $14.91, CNXM is 12.3% below analysts' lowest $17.00 price target, and 23% below the $19.38 average price target.
Both firms have a higher yield than the average for other high yield midstream companies which we cover, with much stronger coverage also.
CNXM also has a much lower price/DCF of 7.31X, vs. the 9.21X average, while SEMG's price/CAFD is very low, at 5.10X, its price/book is only .51X, and its price/sales is only .45X, way below the group averages. Both companies also have lower than average EV/EBITDA valuations.
CNXM's financial metrics outshine SEMG's by a wide margin, and it has much lower debt leverage, on a net debt/EBITDA basis, than both SEMG and group averages.
Taxes - CNXM - IRA holders may have tax reporting implications if UBTI exceeds $1,000/year. At any rate, you'll get more tax-sheltering benefits from investing in CNXM in a taxable account.
SEMG issues a 1099 at tax time.
Dilutions - Since they pay out the lion's share of their cash flow, LPs must go to the equity and capital markets to fund growth. However, with their current coverage levels, these companies shouldn't need to issue more shares/units to fund growth any time soon.
In fact, CNXM's management stated on the Q1 '19 earnings call that their "capital buildout plan, the financial backstop behind it and the upstream activity it supported flows through to and supports our plan to raise distributions by 15% annually through 2023 without drops and without accessing the equity markets."
Debt and Liquidity:
CNXM's management estimates 2019 leverage to be ~2.9X in 2019, but falling to 2.3X and lower in 2020 and beyond. It has a $600M credit revolver, which its able to increase by up to an additional $250M, under certain conditions. There was $463M available on the $600M revolver, $.7M in cash, and long-term debt of $393.5M, as of 3/31/19.
SEMG's first major maturity isn't until 2021, when its $1B credit facility comes due. It had consolidated available liquidity of $1.6B, as of 3/31/19:
Given the negative sentiment toward these two companies, you may want to consider hedging your position via selling options.
Our Cash Secured Puts Table can give you more details for these two trades, and over 35 others, all of which are updated throughout each trading day.
This is an aggressive in the money September put trade for CNXM. The September $15 put strike pays $1.10, ~3X CNXM's most recent $.3732 quarterly payout. It gives you a breakeven of $13.90, which is right around CNXM's 52-week low of $13.86, and ~18.5% below analysts' lowest price target of $17.00:
SEMG has a less aggressive put trade available, with an October expiration. The October $12.50 put pays $.85, ~2x SEMG's quarterly payout, with a breakeven of $11.65, just below SEMG's 52-week low of $11.69, and ~10% below analysts lowest price target of $13.00.
You can see more details on our Covered Calls Table for this trade and over 30 others, all of which are updated throughout each trading day.
We rate CNXM a buy based upon its attractive yield, strong coverage, management's commitment for 15% distribution growth through 2020, and conservative debt profile.
We're on the fence about SEMG - its valuations certainly look cheap, but its financials need some improving, i.e., the 5.25X debt leverage. We may start a position via selling cash secured puts.
All tables by www.DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
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Disclosure: I am/we are long CNXM. 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.