Mr. P$nk initiates on EPN
Rating t3/F
REPORT BELOW SUBMITTED BY A FIELD OPERATIVE. Although Mr. P$nk, in His infinite wisdom, has done significant work on EPN and agrees with the conclusion, He did not prepare the work below nor makes any representations about its veracity. Read and act on your own peril. Enjoy!
El Paso Energy Partners- EPN
El Paso Partners currently boasts a valuation, which is somewhat, inflated versus its peer group. Statistically the stock should trade closer to $20 per share given price to book, PE, leverage ratio and low ROE. The stock seems to have been supported- somewhat manipulated by small share purchases and an unusually high payout ratio. The company’s net income to dividend has been negative for much its operating history. Recent growth has been acquisition based through purchase of parent EP’s field assets.
· The company has stated that it must raise 20M shares in a public offering- to buy assets from its parent- couldn’t get an I share offering done.
· Cash flow after dividend payout approximates negative $50M per year – last quarter annualized. Company’s subsidy of dividend payout seems to have inflated the stock price/ valuation versus its peers.
· The company has failed to replace 2 resigned directors with new independent outside directors- why do they fear hiring outside presently?
· EPN missed Q3 EPS consensus reported by .02 cents per share after adjustment for one time items associated with recent Gulf of Mexico weather- hurricane Lilly.
· If successful in raising $780M to purchase San Juan Gathering Assets- the company will still require substantial financing in order to effect over $600M in Greenfield projects- additional funding overhang.
Excessive valuation to Peer Group:
EPN boasts one of the highest Debt to capital ratios: 66% versus the average of its peer group 56%. The company trades at 26 X’s 2003 EPS vs. 15.7 for its peers, and the price to book 3.5 x’s versus 2.4 for the group. The stock seems to be held up by its dividend which seems excessive versus reported net income.
symbol Price Leverage Yield PE 03 EPS 03E Pay ratio TTM ROE Book Value P/Book
BLP 35.80 52% 7.0% 13.5x $2.66 .99 19.8% $12.91 2.8x
EPN 29.50 66% 8.8% 25.2x $1.17 4.26 4.9% $8.43 3.5x
EEP 44.13 51% 8.2% 19.0x $2.32 2.95 6.5% $19.50 2.3x
EPD 20.10 70% 6.9% 15.2x $1.32 2.53 8.8% $7.74 2.6x
KMP 32.55 49% 7.5% 16.0x $2.03 1.42 9.3% $18.47 1.8x
NBP 36.61 59% 8.7% 13.4x $2.74 1.34 11.0% $21.70 1.7x
PAA 24.17 50% 8.9% 14.1x $1.72 1.71 15.9% $8.73 2.8x
TPP 29.20 71% 8.2% 14.4x $2.03 1.45 15.8% $12.46 2.3x
WEG 32.20 39% 7.6% 10.3x $3.12 1.00 10.5% $20.22 1.6x
Average 56% 8.0% 19.1x 1.96 11.3% 2.4x
Source – prior to q2 eps – must be adjusted.
Negative Dividend coverage:
The aggregate cash dividend paid has exceeded net income in each quarter since 1996 Q4. The last 5 quarters are as follow:
2001 Q3 2001 Q4 2002 Q1 2002 Q2 2002 Q3
Net Income 12,040 18,300 19,130 28,750 23,800
CF Ops 32,100 -1,960 43,210 18,390
Capex -24,410 -351,740 -35,110 -56,210
FCF
Cash Dividend 22,550 32,250 33,720 39,500
Excessive valuation to Peer Group:
EPN boasts one of the highest Debt to capital ratios: 66% versus the average of its peer group 56%. The company trades at 26 X’s 2003 EPS vs. 15.7 for its peers, and the price to book 3.5 x’s versus 2.4 for the group. The stock seems to be held up by its dividend which seems excessive versus reported net income.
Very Little Institutional Demand:
EPN purposes to purchase the San Juan Basin gathering assets from parent EP for consideration of $782M / $114M EBITDA. The acquisition will close simultaneously with the successful completion of a 20M-share public offering of common partnership units – an increase of near 50% given the current 44M current partnership count. EPM company management has publicly stated that it has attempted without success to offer I class shares of stock to Institutional investors. See company S1 fileing.
Additional Offerings? :
EPN is in the process of constructing $600M of additional facilities. The company invariably will need to continue to tap the capital markets for financing.
Corporate Governance Issues:
EPN has recently begun to address issues regarding its shared board members with parent EP. The FERC has addressed concerns regarding the exercise of pipeline power. Some of the following excerpts from EPN corporate filings raise questions regarding the potential for forced asset sales and further operational investment which the company may be forced to implement. It is of note that the company has yet to hire any outside baoard members.
EPN- excerpts from 2Q/02 10Q:
Regulatory Matters In September 2001, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) that proposes to apply the standards of conduct governing the relationship between interstate pipelines and marketing affiliates to all energy affiliates. Since our High Island Offshore System (HIOS) and Petal Gas Storage facility are interstate facilities as defined by the Natural Gas Act, the proposed regulations, if adopted by FERC, would dictate how HIOS and Petal conduct business and interact with all of our energy affiliates and El Paso Corporation's energy affiliates. A public hearing was held on May 21, 2002 at which interested parties were given an opportunity to comment further on the NOPR. We cannot predict the outcome of the NOPR, but adoption of the regulations in substantially the form proposed would, at a minimum, place administrative and operational burdens on us. Further, more fundamental changes could be required such as a complete organizational separation or sale of HIOS and Petal.
In July 2002, the FERC issued a Notice of Inquiry (NOI) that seeks comments regarding its policy, established in 1996, of permitting pipelines to enter into negotiated rate transactions. The FERC is now undertaking a review of whether negotiated rates should be capped, whether or not a pipeline's "recourse rate" 11 (its cost of service based rate) continues to serve as a viable alternative and safeguard against the exercise of alleged pipeline market power, as well as other issues related to its negotiated rate program. Comments are due on September 25, 2002, with reply comments due on October 25, 2002. We cannot predict the outcome of this NOI.
In August 2002, the FERC issued a NOPR requiring that all arrangements concerning the cash management or money pool arrangements between a FERC regulated subsidiary and a non FERC regulated parent must be in writing, and set forth: the duties and responsibilities of cash management participants and administrators; the methods of calculating interest and for allocating interest income and expenses; and the restrictions on deposits or borrowings by money pool members. The NOPR also requires certain specified documentation for all deposits into, borrowings from, interest income from, and interest expenses related to, these arrangements. Finally, the NOPR proposes that as a condition of participating in a cash management or money pool arrangement, the FERC regulated entity must maintain a minimum proprietary capital balance of 30 percent, and the FERC regulated entity and its parent must maintain investment grade credit ratings. Comments on the NOPR are due on August 22, 2002. We cannot predict the outcome of this NOPR.
Also in August 2002, FERC's Chief Accountant issued, to be effective immediately, an Accounting Release providing guidance on how jurisdictional entities should account for money pool arrangements and the types of documentation that should be maintained for these arrangements. The Accounting Release sets forth the documentation requirements set forth in the NOPR for money pool arrangements, but does not address the requirements in the NOPR that as a condition for participating in money pool arrangements the FERC regulated entity must maintain a minimum proprietary capital balance of 30 percent and that the entity and its parent must have investment grade credit ratings. Requests for rehearing are due on September 3, 2002.
In December 1999, EPGT Texas filed a petition with the FERC for approval of its rates for interstate transportation service. In June 2002, the FERC issued an order that required revisions to EPGT Texas' proposed rates. It also ordered refunds to customers for the difference, if any, between the originally proposed levels and the revised rates ordered by the FERC. The changes ordered by the FERC involve reductions to rate of return, depreciation rates and revisions to the proposed rate design, including a requirement to separately state rates for gathering service. We believe the amount of any rate refund would be minimal since, as provided for in our tariff, we were not charging our customers at the maximum rate. In July 2002, EPGT Texas requested rehearing on certain issues raised by the FERC's order, including the ordered changes to rate design and depreciation rates, and the requirement to separately state a gathering rate. This request has been granted and is scheduled to be concluded by October 15, 2002. While the outcome of our rates and regulatory matters cannot be predicted with certainty, based on the information known to date, we do not expect the ultimate resolution of these matters will have a material adverse effect on our financial position, results of operations or cash flows. As new information becomes available or relevant developments occur, we will review our accruals and make any appropriate adjustments. The impact of these changes may have a material effect on our results of operations.
Other Matters As a result of current circumstances surrounding the energy sector, the creditworthiness of several industry participants has been called into question. We have taken actions to mitigate our exposure in this area; however, should several industry participants file for Chapter 11 bankruptcy protection, it could have a material adverse effect on our financial position, results of operations or cash flows.
In June 2002, we formed Deepwater Gateway, L.L.C., a 50/50 joint venture with Cal Dive International Inc., to construct and install the Marco Polo platform. The total cost of the project is estimated to be $206 million or approximately $103 million for our share. As of June 30, 2002, we have contributed $12 million to Deepwater Gateway.
At June 30, 2002, and December 31, 2001, our accounts receivable due from related parties was $75.4 million and $22.9 million. At June 30, 2002 and December 31, 2001, our accounts payable due to related parties was $21.8 million and $9.9 million.
We estimate a cost of approximately $53 million to construct and place the Falcon Nest Platform into service.
Cameron Highway In February 2002, we announced that we will build and operate the Cameron Highway Oil Pipeline System, a 380-mile oil pipeline in the Gulf of Mexico. Cameron Highway will deliver up to 500 MBbl/d of oil from the southern Green Canyon and western Gulf of Mexico areas to Port Arthur and Texas City, Texas. The new pipeline is expected to be in service by the third quarter of 2004. We have entered into agreements with operating subsidiaries of BP p.l.c., BHP Billiton, and Unocal under which each of them has dedicated production from the Holstein, Mad Dog, and Atlantis discoveries in the Deepwater Trend in the Gulf of Mexico to Cameron Highway. The total estimated cost of the project is $450 million. We plan to seek a partner or partners for up to 50 percent of the interest in the pipeline.
OTHER MATTERS: As a result of current circumstances surrounding the energy sector, the creditworthiness of several industry participants has been called into question. We have taken actions to mitigate our exposure in this area; however, should several industry participants file for Chapter 11 bankruptcy protection, it could have a material adverse effect on our financial position, results of operations or cash flows.
For the quarter ended June 30, 2002, revenues were $1.3 million higher than the same period in 2001 primarily due to our acquisitions of the Hattiesburg propane storage facility in January 2002 and the Anse La Butte NGL storage facility in December 2001. Also contributing to this increase were higher volumes on EPN Texas and Allegheny.
At March 31, 2002, and December 31, 2001, our accounts receivable due from related parties was $18.0 million and $22.9 million. At March 31, 2002 and December 31, 2001, our accounts payable due to related parties was $11.2 m. |
