CorEnergy - Analysis On Recent Acquisition
Seeking Alpha Analyst Since 2019
Investing style is from a top-down approach while using Risk-Parity to amplify returns on less volatile assets. Most of my positions are buy and hold; however, will occasionally trade Derivatives.
Summary
- Background to CORR.
- The Deal Summarized.
- Now what?
Ticker: CORR / CORR.PRA
Six months ago, I came across a REIT that was absolutely crushed by the pandemic. Most of their revenue came from two major tenants that stopped paying rent, so as you would expect their stock plummeted and were forced to slash dividends.
Quick Background:
Their asset Pinedale was leased by UPL who stopped paying rent and filed for bankruptcy. As proceedings went on CORR decided to cut losses and sell Pinedale to UPL for $18m. Pinedale, at the time, consisted of ~31% of Total Revenue in 2019.
Second major tenant was Energy XXI GIGS Services LLC who was leasing the GIGS pipeline. Recently acquired for $245m about five years ago. GIGS comprised of ~47% of CorEnergy's Total Revenue in 2019. Lawsuit was in full swing to try and recover past due rent but suddenly froze as both parties looked to strike an agreement outside of the courts.
Crimson California Pipeline deal:
The potential acquisition of another income producing asset and the unknown possibility around Energy XXI made this stock intriguing. Could management turn this around and locate another income producing asset to resume paying adequate dividends?
Yesterday, CORR announced in a press release their acquisition of Crimson's California Pipeline Assets. Below is a snapshot of the Deal. Reminder, this was recently purchased five years ago for $245m.
Crimson Midstream Holdings Deal Overview:
- Total Deal Value: $350m
CORR Financing:
- $75.6m in cash - $105m in new loans- $120m in equity dilution
To give you an idea of how large the looming equity dilution is, CORR currently has $13.65m shares outstanding with a Market Cap of $139.3m.
The above is a steep price to pay given how management was thoroughly looking to acquire an income producing asset to resume paying adequate dividends. More importantly, the above does not even add up to the $350m price tag. So where is the shortfall?The press release and conference call mentioned the "contribution of the Grand Isle Gathering System (GIGS) to the sellers". Furthermore, during Q&A, when asked about GIGS and the past due rent, it was confirmed that Crimson was taking the GIGS asset from CORR and have already located a new tenant to consume the lease. Ouch. So, without even accounting for the past due rent, the remaining ~$50m is essentially reflecting the sale price of GIGS.
Now what?
After reading the press release, I was very skeptical of the deal and needed to be certain if how I was interpreting it was correct. The following morning's conference call reassured my skepticism and appeared to be in line with the general market’s opinion. After the call, CORR common shares dropped ~10%.
Is there at least one silver lining? Yes.There is hope for CORR, but it will be an uphill battle and long journey. The deal also mentions a shakeup to management. Dave Schulte will remain as the CEO. John Grier (founder and Board chairman of Crimson Midstream) will become the new COO and join the Board of Directors of CorEnergy. Robert Waldron (Current CFO at Crimson Midstream) will step in as the new CFO.
The market seemed to be losing faith in management’s ability, so a shakeup was a good move. This was a great deal for Crimson and the same people who were able to engineer and execute it now have an interest in the performance of CorEnergy.
I believe there will be more selling to CORR energy due to the market weighing the financial elements more heavily than the shake up to the management team. Next 120 days will be pivotal as more information is released. I am bearish on the stock in the short run but after the selloff bottoms and more info is circulated, there is potential to find a solid entry point (even after factoring in dilution) and go long.
Analyst's Disclosure: I am/we are long CORR.
As of today, I am currently long CORR but have trimmed my position significantly since the conference call this morning. No anticipated plans to Buy/Sell more within the next 72 hours. This is not financial advice and for informational purposes only. Please discuss if the aforementioned company's suit your specific financial needs with a licensed professional.
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