Green Plains Partners: Time To Get Bullish, Safe 10%+ Yield Is Coming Very Soon

Summary

• Green Plains Partners has successfully shed their previously choking credit facility through refinancing and thus has flagged much higher distributions are coming very soon.
• Their commentary indicates that these are likely to result in a very high distribution yield of over 10%.
• Their cash flow performance continues to be steady and should be capable of adequately funding these with free cash flow.
• They also have a very healthy financial position to lend further support that has very low leverage and adequate liquidity.
• Whilst I have previously been wary of their units given their credit facility repayment schedule, now that this has been resolved, I believe that upgrading to a bullish rating is appropriate.

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Introduction

Whilst the distribution yield of Green Plains Partners (NASDAQ:GPP) is only a low 3.60%, management has flagged that a very high yield of over 10% is coming very soon after completing an important debt refinancing. This article explores this positive development and also provides a follow-up analysis to my previous article by covering their recently released second quarter of 2021 financial results.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

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Detailed Analysis

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Instead of simply assessing distribution coverage through distributable cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact on their financial position. The main difference between the two is that the former ignores the capital expenditure that relates to growth projects, which given the very high capital intensity of their industry can create a material difference.

Now that their subsequently discussed choking debt repayment schedule has been resolved, their steady underlying cash flow performance can take center stage. This has once again seen their operating cash flow edge slightly higher year-on-year to $24.2m versus $22.2m during the first half of 2020, which follows a similar year-long performance during the infamous and highly turbulent year of 2020. Thanks to their very thin capital expenditure requirements, when looking ahead they should continue having ample free cash flow to return to their unitholders as intended.

Even though I prefer utilizing free cash flow when it comes to funding distribution payments, this instance first requires consideration of their distributable cash flow. When announcing their debt refinancing, the previously linked announcement also stated an intention to increase their distributions in the third quarter of 2021 to a level that is covered 1.1x by their distributable cash flow. This was $45.6m during the past trailing twelve months, as per slide fourteen of their second quarter of 2021 results presentation and given their steady underlying cash flow performance, this should not materially change throughout the coming quarter. This indicates future distribution payments of approximately $40m, which would provide a very high double-digit yield of 12.94% on their current market capitalization of $309m.

Whilst this massive distribution increase would obviously push down their currently very strong free cash flow coverage, it should still at least be adequately covered given their average free cash flow during 2018-2020 was $48.4m, which had a still adequate low point of $44.1m. This means that they will likely retain approximately $4m to $8m of free cash flow after distribution payments and continue strengthening their financial position, which itself is very important to review since it was previously choking their distributions.

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The central element to any financial position is always the capital structure, which thanks to their ample free cash flow has once again seen their net debt decrease by an impressive $10.3m or 16.92% during the second quarter of 2021. This further materially strengthens their financial position and should see another similarly sized decrease again during the third quarter down to around $40m since their flagged higher distribution payments will not actually flow out until the early fourth quarter due to the usual timing delay. Even after increasing their distributions as previously estimated, they could still see their net debt decreasing by at least $4m per annum, which represents an approximate 10% decrease and provides an attractively supportive backdrop.

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Following their rapid net debt reduction, it is very easily apparent that they have reduced their leverage right down into the very low territory with a net debt-to-EBITDA of only 0.54 and interest coverage of 13.48. Even though this clearly does not require any further deleveraging, it stands to reason that their continuously decreasing net debt will see these further improve and thus given their subsequently discussed liquidity, they have no handbrakes restricting their ability to support these upcoming very high distribution payments.

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When conducting the previous analysis, their weak liquidity was choking their true distribution potential due to the credit facility that housed all of their debt having a quite onerous repayment schedule. Thankfully as mentioned earlier, this has now been refinanced with the maturity date extended all the way until 2026 and thus now provides them ample time to repay the remaining balance whilst also rewarding their unitholders with a very high income. This means that their liquidity is now at least adequate and given their prospects to still generate $4m to $8m of free cash flow after distribution payments, it could strengthen further in the future.

Conclusion

Although in the past I have been rather wary of their ability to navigate their once choking debt repayment schedule, I am very pleased to see their success and guidance for a very high double-digit distribution yield to start very soon. Now that their steady underlying cash flow performance is not being hindered, I believe that upgrading to a bullish rating is appropriate with there being a very real possibility of their units being added to my personal portfolio in the coming days.

Notes: Unless specified otherwise, all figures in this article were taken from Greens Plains Partners’ SEC Filings, all calculated figures were performed by the author.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in GPP over 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.