My Response To The Recent Article On HEP
Dividend Investing, Growth At A Reasonable Price
Contributor Since 2011
Over the week-end, Dividend Sensei wrote an article on HEP. My comment placed at the end of that article:
I have one major nit-pick - you have omitted the subtraction to HEP's DCF of the portion that goes to the general partner. This results in your DCF/unit number being too high - and significantly distorts (or over estimates) the coverage ratio. That statement is presuming that you are making the same kind of adjustments to DCF as that done by the major brokerages. I believe such an adjustment needs to be done so that one has apples to apples comparison between the MLPs both with and without IDRs (Incentive Distribution Rights) obligations.
After such an adjustment - I believe you will find your statement "the distribution coverage ratio (for HEP) remains among the best in the industry" no longer fits.
Even without that (IMHO) needed correction, I believe this article provides a good service to this audience by shining a light on a MLP that is often 'off the radar' of many investors.
The author's (I will use "DS" going forward) reply: No, the DCF/unit calculations I include are correct. They incorporate the IDRs that the MLP pays.
One of us is wrong. I initiated to correct the author via email - or whatever one should call the messages sent from one person privately to another here at Seeking Alpha:
I probably have an advantage over you - (1) I have access to MLP reports from multiple brokerages. (2) I have been producing data on MLPs since 2005. (3) I know to EXPECT phony numbers from the MLPs.
Take another look at both the net income and the DCF numbers. The earnings release shows both a pre-GP's take income and a post GPs take net income.
Note which 'income' number is used in another earnings release spreadsheet where the DCF calculation is shown. The DCF number you are using comes from a DCF calculation using the pre-GP take net income!
2016 DCF was just short of $2.70. And that $2.70 number matches with the DCF numbers done by Wells Fargo, Barclays and Goldman Sachs.
This may not be the proof you need to change your mind. Such proof probably does not exist. But . . . . it is a decent amount of evidence that I am right.
One more note - to get a good per unit or per share number for the year . . . it is generally accepted practice to use the weighted average unit or share count for the year and NOT the ending unit count.
DCF math is tricky math because one needs to hunt down the needed adjustment numbers. Most investors do not even attempt it. The few who do probably get it wrong.
The DS response - Thanks for the info. I used the Weighted Unit count because that's the average number for the year, and that's the metric I'm trying to report.
My response - The earnings release on 2-21-17 at the HEP web site showed the weighted average unit count as 59,872. You used 62.8 million in the article.
The DS response - Holy crap you're right! Thanks for the catch. I'll re-run the numbers and update them with the corrections.
DS changed - or correctly decreased the unit count in his DCF calculation - but did not correct the DCF numbers - resulting in a larger error in the published calculation.
My response - I am more or less privately showing you the data here in this little read blog.
This is the link to where one can find the information below. The important numbers are well hidden - but I have placed them in bond and italics. Note which 'income' number is used in another earnings release spreadsheet where the DCF calculation is shown. Clue - it is the pre-IDR or General Partners subtraction of income.
Years Ended |
Change from | |||||||||||||||
| 2016 | 2015 (5) |
2015 | ||||||||||||||
| (In thousands, except per unit data) | ||||||||||||||||
| Revenues | ||||||||||||||||
| Pipelines: | ||||||||||||||||
| Affiliates - refined product pipelines | $ | 83,102 | $ | 81,294 | $ | 1,808 | ||||||||||
| Affiliates - intermediate pipelines | 26,996 | 28,943 | (1,947 | ) | ||||||||||||
| Affiliates - crude pipelines | 70,341 | 67,088 | 3,253 | |||||||||||||
| 180,439 | 177,325 | 3,114 | ||||||||||||||
| Third parties - refined product pipelines | 52,195 | 51,022 | 1,173 | |||||||||||||
| 232,634 | 228,347 | 4,287 | ||||||||||||||
| Terminals, tanks and loading racks: | ||||||||||||||||
| Affiliates | 119,633 | 111,933 | 7,700 | |||||||||||||
| Third parties | 16,732 | 15,632 | 1,100 | |||||||||||||
| 136,365 | 127,565 | 8,800 | ||||||||||||||
| Affiliates - refinery processing units | 33,044 | 2,963 | 30,081 | |||||||||||||
| Total revenues | 402,043 | 358,875 | 43,168 | |||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Operations (exclusive of depreciation and amortization) | 123,986 | 105,556 | 18,430 | |||||||||||||
| Depreciation and amortization | 70,428 | 63,306 | 7,122 | |||||||||||||
| General and administrative | 12,532 | 12,556 | (24 | ) | ||||||||||||
| 206,946 | 181,418 | 25,528 | ||||||||||||||
| Operating income | 195,097 | 177,457 | 17,640 | |||||||||||||
| Equity in earnings of equity method investments | 14,213 | 4,803 | 9,410 | |||||||||||||
| Interest expense, including amortization | (52,552 | ) | (37,418 | ) | (15,134 | ) | ||||||||||
| Interest income | 440 | 526 | (86 | ) | ||||||||||||
| Gain on sale of assets and other income | 677 | 486 | 191 | |||||||||||||
| (37,222 | ) | (31,603 | ) | (5,619 | ) | |||||||||||
| Income before income taxes | 157,875 | 145,854 | 12,021 | |||||||||||||
| State income tax expense | (285 | ) | (228 | ) | (57 | ) | ||||||||||
| Net income | 157,590 | 145,626 | 11,964 | |||||||||||||
| Add net loss applicable to predecessor | 10,657 | 2,702 | 7,955 | |||||||||||||
| Allocation of net income attributable to noncontrolling interests | (10,006 | ) | (11,120 | ) | 1,114 | |||||||||||
| Net income attributable to Holly Energy Partners | 158,241 | 137,208 | 21,033 | |||||||||||||
| General partner interest in net income, including incentive distributions(1) | (57,173 | ) | (42,337 | ) | (14,836 | ) | ||||||||||
| Limited partners' interest in net income | $ | 101,068 | $ | 94,871 | $ | 6,197 | ||||||||||
| Limited partners' earnings per unit - basic and diluted:(1) | $ | 1.69 | $ | 1.60 | $ | 0.09 | ||||||||||
| Weighted average limited partners' units outstanding | 59,872 | 58,657 | 1,215 | |||||||||||||
| EBITDA(2) | $ | 277,545 | $ | 237,180 | $ | 40,365 | ||||||||||
| Distributable cash flow(3) | $ | 218,810 | $ | 197,046 | $ | 21,764 | ||||||||||
The DCF calculation from the earnings release:
Set forth below is our calculation of distributable cash flow.
Three Months Ended |
Years Ended |
||||||||||||||||||||
| 2016 | 2015 (5) |
2016 | 2015 (5) |
||||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| Net income attributable to Holly Energy Partners | $ | 41,361 | $ | 40,520 | $ | 158,241 | $ | 137,208 | |||||||||||||
| Add (subtract): | |||||||||||||||||||||
| Depreciation and amortization | 19,245 | 16,886 | 70,428 | 63,306 | |||||||||||||||||
| Amortization of discount and deferred debt charges | 895 | 503 | 3,246 | 1,928 | |||||||||||||||||
| Loss on early extinguishment of debt | - | - | - | - | |||||||||||||||||
| Increase (decrease) in deferred revenue attributable to shortfall billings | (1,113 | ) | (190 | ) | (1,292 | ) | (1,233 | ) | |||||||||||||
| Maintenance capital expenditures* | (1,861 | ) | (3,286 | ) | (9,658 | ) | (8,926 | ) | |||||||||||||
| Increase (decrease) in environmental liability | 135 | (1,837 | ) | (584 | ) | 1,107 | |||||||||||||||
| Increase (decrease) in reimbursable deferred revenue | (827 | ) | (495 | ) | (2,733 | ) | 176 | ||||||||||||||
| Other non-cash adjustments | 644 | 1,568 | 4,683 | 3,934 | |||||||||||||||||
| Predecessor depreciation and amortization | $ | - | $ | (118 | ) | $ | (3,521 | ) | $ | (454 | ) | ||||||||||
| Distributable cash flow | $ | 58,479 | $ | 53,551 | $ | 218,810 | $ | 197,046 | |||||||||||||
I know it is not clear as the nose on your face that the $281.810 DCF number is not the calculation for DCF available to the limited partners. One would have had to do the math before.
I have attempted to do a collective effort at DCF/unit calculations on the Investor Village message board. What I learned from a multi-quarter attempt at that effort. (1) 95% or more of retail investors can not do the calculation. (2) The 5% who could learned the process from me. (3) The process I learned still has faults - because I can not match the brokerage produced numbers all the time. (4) I could not have learned what I have learned if I did not have exposure to brokerage reports from multiple brokerages. That exposure is due to the collective efforts of other retail investors. That source is not open to the public.
The HEP spreadsheet I shared with you earlier this quarter:
Holly Energy Partners metrics
| From Q4-16 CC: HEP has over 90% of their revenues tied to long term, fee based contracts with minimum volume commitments | ||||||||||||||||
| Q4-2016 | Q3-2016 | Q2-2016 | Q1-2016 | Q4-2015 | Q3-2015 | Q2-2015 | Q1-2015 | Q4-2014 | Q3-2014 | Q2-2014 | Q1-2014 | Q4-2013 | Q3-2013 | Q2-2013 | Q1-2013 | |
| Revenues | 112.526 | 92.610 | 94.897 | 102.010 | 97.251 | 88.389 | 83.479 | 89.756 | 88.413 | 82.130 | 74.998 | 87.004 | 77.876 | 77.723 | 75.285 | 74.298 |
| Costs | 57.977 | 46.138 | 45.827 | 46.564 | 45.623 | 44.295 | 43.431 | 45.950 | 50.070 | 43.205 | 32.033 | 41.551 | 47.051 | 34.173 | 42.765 | 43.251 |
| EBITDA | 76.868 | 64.705 | 66.047 | 59.827 | 67,376 | 59.985 | 54.453 | 55.366 | 52.703 | 53.790 | 47.273 | 57.657 | 46.613 | 53.187 | 47.263 | 44.990 |
| Total DCF dollars | 58.479 | 49.257 | 55.709 | 55.365 | 53.551 | 50.306 | 47.299 | 45.890 | 41.835 | 45.581 | 43.495 | 41.808 | 34.263 | 43.865 | 36.065 | 32.385 |
| GP's DCF dollars | 17.172 | 15.222 | 12.667 | 11.886 | 11.502 | 10.830 | 10.196 | 9.810 | 9.333 | 8.940 | 8.393 | 8.001 | 7.485 | 7.128 | 6.680 | 6.231 |
| Gain on sale of assets | .574 | .112 | -.005 | 0 | 0 | 0 | .050 | .159 | 0 | 0 | 0 | 0 | -53 | 0 | 0 | 0 |
| Net DCF dollars | 40.733 | 33.923 | 43.042 | 43.479 | 42.049 | 39.476 | 37.103 | 35.921 | 32.502 | 36.641 | 35.102 | 33.807 | 26.725 | 36.737 | 29.385 | 26.154 |
| Units | 62.761 | 59.223 | 58.761 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 58.657 | 56.990 |
| DCF/unit | $0.6490 | $0.5728 | $0.7325 | $0.7424 | $0.7169 | $0.6730 | $0.6124 | $0.6151 | $0.5541 | $0.6247 | $0.5984 | $0.5764 | $0.4556 | $0.6263 | $0.5010 | $0.4589 |
| Upcoming Distrib. | $0.6075 | $0.5950 | $0.5850 | $0.5750 | $0.5650 | $0.5550 | $0.5450 | $0.5375 | $0.5300 | $0.5150 | $0.5070 | $0.5000 | $0.492 | $0.485 | $0.477 | $0.4700 |
| Calculated Coverage | 1.07x | 0.96x | 1.25x | 1.29x | 1.27x | 1.45x | 1.16x | 1.14x | 1.04x | 1.21x | 1.18x | 1.15x | 0.93x | 1.29x | 1.05x | 0.98x |
| WF DCF/unit | $0.67 | $0.56 | $0.70 | $0.71 | $0.69 | $0.64 | $0.62 | $0.61 | $0.55 | $0.62 | $0.59 | $0.57 | ||||
| Piper DCF/unit | $0.94 | $0.91 | $0.86 | $0.81 | $0.59 | $0.78 | ||||||||||
| UBS DCF/unit | $0.58 | $0.67 | $0.62 | $0.62 | $0.60 | $0.59 | ||||||||||
| The DCF/unit numbers from the brokerages fail to agree. My current formula gets me close. | ||||||||||||||||
| LTM EBITDA | 277,545 | 257,955 | 253,235 | 241,641 | 237,180 | 222,507 | 216,312 | 209,132 | 211,423 | 205,333 | 204,730 | 204,720 | 192,053 | |||
| Long term debt | 1,243,912 | 1,070,615 | 1,083,136 | 1,061,944 | 1,008,752 | 951,067 | 900,905 | 890,742 | 867.579 | 851,416 | 839,253 | 833,790 | 807,630 | 809,391 | 799,152 | 811,913 |
| Debt/EBITDA | 4.48x | 4.15x | 4.28x | 4.39x | 4.25x | 4.27x | 4.16x | 4.26x | 4.10x | 4.15x | 4.10x | 4.07x | 4.21x | |||
| Interest Expense | 16,294 | 14,447 | 10,493 | 10,535 | 10,107 | 9,486 | 9,056 | 8,768 | 8,733 | 8,585 | 8,329 | |||||
| Interest Coverage | 4.72x | 4.48x | 6.29x | 5.68x | 6.67x | 6.32x | 6.01x | 6.31x | 6.03x | 6.26x | 5.68x | |||||
Note: My 2016 GP's take (17.172 + 15.222 + 12.667 + 11.886) sums to 56.947 million compared to the 57.173 in the earnings release. It is not a match - but it is within 0.4%. Those things happen. There tends to be after the earnings release adjustments to the quarterly numbers.
Note 2: I normally redact the brokerage names. In this case, I believed this message could use the potential confirmation from the audience that the brokerage numbers I provide are accurately duplicating their numbers.
HEP closed today at the price of $34.03. The $0.6075 quarterly dividend comes to $2.43 . . . and thus a (243/3403) 7.14% yield. The Yield plus My CAGR projection of 7.00 comes to 14.14% -- which going by sector average for small caps (BWP, CPPL, DM, GEL, HEP, MMLP, NS, TCP, TEP and TLP), their average Yield + CAGR was 12.33%. Their average yield was 6.56% - with that average being skewed by ultra low payout BWP and ultra high growth DM. A 7% yield looks to fit in with other small cap components. CPPL, DM and TEP have higher "yield + CAGR" numbers - and the same three have higher LTM distribution growth.
If HEP was 40% under valued (which was the assessment of DS), then the resulting yield would need to be (243/ 1.4 times 3403) 5.10%. That would produce a yield + CAGR of 12.10 . . . and that is in line with the current sub-sector average. Thus . . . I do not have a problem with the DS valuation assessment. At the same time, inertia keeps high valued stocks highly valued and lower valued stocks lower valued. I would not make the assessment that HEP is headed to the required (1.4 times 34.03) $47.64 during 2017. It merits being headed towards that valuation without an expectation of reaching that valuation.
This was added to answer darnoc's question -- the data from my CAGR setting spreadsheet:
Co.
| 06 | 07 | 08 | 09 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | average | average | CAGRs | PI-CAGRs | |||||
| HEP | DCF | 1.35 | 1.54 | 1.65 | 1.73 | 1.75 | 1.83 | 2.10 | 2.08 | 2.35 | 2.51 | 2.67 | 2.87 | My | 7.00% | RRR-yield | 4.74% | |||
| growth | 14.1% | 7.1% | 4.8% | 1.2% | 4.6% | 14.8% | -1.0% | 13.0% | 6.8% | 6.4% | 7.5% | 7.92% | 9.78% | Last5 | 6.54% | P/DCF Ratio | 2.30% | |||
| Dist. | 1.25 | 1.35 | 1.45 | 1.53 | 1.61 | 1.69 | 1.77 | 1.88 | 2.00 | 2.12 | 2.26 | Broker1 | 4.30% | Broker2 | 0.00% | |||||
| growth | 8.0% | 7.4% | 5.5% | 5.2% | 5.0% | 4.7% | 6.2% | 6.4% | 6.0% | 6.6% | 6.11% | 8.08% | Broker3 | 0.00% | Broker4 | 0.00% | ||||
| Dist/DCF | 93% | 88% | 88% | 88% | 92% | 92% | 84% | 90% | 85% | 84% | 85% | 87.72% | ||||||||
When I average the DCF growth numbers from the 5 years of DCF volatility between 2010 and 2014 (1.2 + 4.6 + 14.8 - 1.0 + 13.0) - I get 6.52%.
2015 growth was 6.8%; 2016 growth was 6.4%; 2017 is projected at 7.5%; 2018 growth at 2.71% and 2019 growth at 0.7%.
There is little growth projected in 2018 and 2019 . . . but that could be due to lack of company guidance for those years.
It may also be the case that DCF growth primarily originates (deep thought warning) from drop down acquisitions at attractive Price/EBITDA numbers . . . and there is no acquisition guidance for 2018 and 2019.
I have provided the 2018 and 2019 numbers -- but ignore them.
I see a DCF growth trend in the mid 6s . . and distribution coverage improving . . which implies slightly better distribution growth in the short term. HEP has a goal of 8% distribution growth.
Some companies produce goals that they will - on auto-pilot - meet or exceed. The 8% goal does not look like one of those. I have the perception that the 8% goal requires some good fortune.
Disclosure: I am/we are long GEL.