CorEnergy: Crimson Ride

Summary

• We exited CORR common and preferred shares after the last acquisition.
• Both sets of equities are lower, despite oil having moved up.
• We examine the recent update from the company and give investors our take.
• I do much more than just articles at Conservative Income Portfolio: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

When we last covered CorEnergy Infrastructure Trust, Inc. (NYSE:CORR), we went for the exit as the bullish thesis was decimated in our view. Our logic was based partly on the new transaction that they announced. But the 180-degree turn was mainly driven by an absolute write down of the company's Grand Isle Gathering System (GIGS) assets. In our mind these assets were rather bulletproof and we assumed they were worth far in excess of the market capitalization of the company when we initiated a purchase. This was even after disregarding the past-due rent. Of course, we were wrong on that and CORR offloaded the asset base at $50 million or less than 20% of what we thought they should get for it. As CORR rallied over $10.00 in the after-hours, we hit the bid as this was a rather favorable development for us. We were wrong on the thesis, but got to exit at a fantastic price (up 70% since our article). The company has since then updated the transaction information. The stock has also meaningfully retraced and has now lost almost 30% since the acquisition hype drove this higher. We look at the recently provided data and give you our thoughts.

The Update

CORR mentioned its balance sheet resiliency and the fact that it exited its troubled tenants.

Source: CORR Presentation

Little attention was given to the fact that the two troubled tenant assets were purchased for around $470 million (see here and here) and sold for about $68 million. CORR then gave more information on the recent transaction with Crimson Midstream.

Source: CORR Presentation

The assets consist of pipelines, storage facilities and right of way linking in California.

Source: CORR Presentation

CORR did address the elephant in the room, which here was the logic behind going into a state where new gasoline usage is less welcome than Kryptonite at the Kent household.

Source: CORR Presentation

As shown above, the near term looks better as demand returns. But the longer-term outlook is cloudy and faster electrification may make things dicey. Yes, investors are enamored with CPUC regulation and rate setting backing. But that is not going to be worth much in our opinion if volume usage decreases. We hardly see it likely that CPUC will mandate paying more and more for lower volumes. Mind you, we don't envision a full-scale movement to EVs and think that even EIA numbers above for implied EV growth may be optimistic. That said, prices are set at the margin and CORR is already gearing up to pick up volumes as other pipelines close. In other words, CORR expects to outlast the competition. It remains to be seen if this can be accomplished.

CORR than elaborated on how the company will look post transaction. A point to note here is that the transaction closes in two parts as the full acquisition requires CPUC approval.

Source: CORR Presentation

CORR's annualized EBITDA does improve with this transaction, but the significant amount of equity issuance dilutes returns for existing shareholders.

Source: CORR Presentation

CORR is guiding for a well-covered $0.20 dividend, moving up to $0.35-$0.40 over time. We would remind investors that CORR was paying $3.00 ($0.75 a quarter) at one point, not too long ago.

Data by YCharts

So, while a $0.10 a quarter dividend in the future is welcome, the value loss here has been immense.

CorEnergy Infrastructure Trust, Inc. DEP Preferred SHS (NYSE:CORR.PA)

We remain skeptical of getting into the common shares even though they are now down 30% since the acquisition "high". CORR.PA is more interesting for sure as it has higher position up the chain. As we weigh the change in the position of the security, two things stand out. The first is that prior to the Crimson Midstream acquisition, we believed that the net cash position of CORR (cash exceeding debt) was the best part about owning the preferred shares. Today, the company has a very large amount of net debt (about $203 million pro forma) but there is far more solid EBITDA backing. CORR has also issued a lot of common equity here and that is a partial offset to the new debt. Overall though, with two major assets sold for less than 15% what was paid for them, reduces our confidence to the point where we cannot buy the preferred shares.

Conclusion

CORR's Q4-2020 conference call and presentation did shed more light on what they were actually buying. We did not get much explanation as to why GIGS was written down to about what the past due rent was on that asset. The irony here is that oil prices are higher today than what they were when CORR acquired GIGS. It has been a crimson ride for investors in common shares and we don't see them recovering any time soon.

On the preferred shares front, based on the new guidance, the dividend coverage will comfortably exceed 2.5X, but the current yield still does not compensate us enough for the company's past. We are also uncertain of how secure and resilient this new asset will be. We are staying out of both for now.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.