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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Area51 who wrote (56332)	12/4/2015 10:12:31 PM
From: Spekulatius	Respond to of 78628

I purchased some SE and a slug of BWP and added a Bit of OKE today. The whole sector is getting destroyed, but some baby's get thrown out with the bath water for sure. KMI's leverage is indeed somewhat high, but I don't think they will go under. Worst case, they have to cut their dividend down to a token amount and self finance the extension projects until some normalcy returns to the sector.

To: Area51 who wrote (56332)	12/5/2015 9:53:39 AM
From: E_K_S	Read Replies (2) \| Respond to of 78628

Re: Crestwood Equity Partners LP (CEQP) - Could present a good 'speculative' Buy at current levels but still w/ big risk/reward. I own both KMI and CEQP and they are trading at all time lows. If you are new to the sector it a good time to start a basket of positions as all of the pipeline stocks have sold off. You first need to decide if you want to bother w/ K1 end of year reporting. These are not recommended for IRA accounts and present an extra layer of accounting in a taxable account. For those companies that do not generate K1 statements look at SE and/or KMI. As far as CEQP, they just completed a reverse split and have sold off on fears that they will cut their distribution amounts. The premise is that although much of their revenues are generated from fee based services, the volumes moved through their pipeline(s) are falling (some as much as 15%) due to producers shutting down wells and/or pushing out drilling new ones. CEQP is a 2nd tier gather & processor MLP (only a $1Bln market cap compared to $37Bln for KMI) so is vulnerable in any change in revenues and/or needs for financing. Several of their new projects are bolt-on accretive extensions that add incremental new revenue streams and if necessary can be pushed out depending on system utilization. I started buying this one when it yielded 12.5% (price adjusted $44/00/share) and now based on management's distribution forecast, yields 34%. That's not sustainable so either distributions will be cut or the stock price will move a lot higher. At $5.50/share, the company could cut by 50% and at normalized returns of 12% the stock s/d still sell at $18.75/share. So one could conclude that it is still 33% undervalued from Friday's close. CEQP has many moving parts that make up their revenue streams but the key is the total volume of NG gathered, processed and moved through their system(s). The last quarter 15% reductions in volume has spooked the market but management has been amending new supplier contracts to increase volumes at lower prices pegged to the price of NG. This will help stabilize the volumes processed and transported but total revenues will be somewhat less. Coverage is just below 1.0x (I think 0.97x) and bank covenants have conditions on EBITDA/Debt service that must be less than 5x (I think now at 4x). Some debt may need to be refinanced in 12-24 months and new incremental foretasted revenue growth may have stalled too. All not good in a sector that is pricing new debt much higher w/ very strict debt covenants. CEQP has 3 main divisions w/ their ARROW Gathering system one of the most profitable. This SA article describes how this one division alone can swing their revenue projections to a big positive from a somewhat negative outlook. It's not Oil and/or NG but moving water from new production wells. Those rates and revenues continue to rise. What Lies Beneath Crestwood's 35% Distribution Yield? Summary The outlook for Arrow Gathering, which generates the most revenue of any asset in the Crestwood portfolio, runs counter to the current bearish sentiment in the Bakken. Due to shifting drilling mechanics, while Arrow has seen a 67% decrease in rigs utilizing their system, volumes are still projected to grow based on base case rigs projections. A more bullish outlook for Arrow plays a dramatic role in offsetting loses in other areas in their Gathering & Processing segment. --------------------------------------------------------- I believe the value proposition is in the entire sector now (if you currently do not own any pipeline/gathers you might consider starting a position). There are other company specific special situations like CEQP but these have a much higher risk/reward profile primarily because of their smaller market cap thus more vulnerable to debt/leverage constraints. CEQP has three 50% JV partners w/ deep pockets (one each for their 3 separate divisions) but that does not help too much when the entire industry is having problems (especially w/ too much debt). Therefore, any future debt rescue will not come from these partners as they are already maxed out. It will have to be from distribution cuts w/ proceeds used to pay down current debt. A reasonable conservative plan for CEQP would be to (1) cut distributions by 30% ($1.65/unit annually), (2) apply those proceeds $116mln to pay down and/or refinance future debt (that would reduce LT debt by 5% and (3) select only those incremental projects that are immediately accretive and have their JV partners contribute 65% partner vs 35% CEQP as an alternative to adding new expensive debt. *That would still imply a distribution amount of $3.85/unit per year or at 12% yield a $32.00/share price for the stock or a 229% increase from Friday's close*. Therefore, management has a lot of options. CEO Phillips was previously president of Enterprise Products Partners L.P (a $45Bln market cap & another MLP I own) and can easily manage the company through the current environment. This IMO is a huge plus for CEQP! FWIW, I have been using a 12.5% distribution return as the 'normalized' level. If you do the math, you can calculate a ball park 'fair value' target for these MLP's. Even w/ a detailed analysis like the one I posted above, market sentiment is very negative now and may stay that way for months. I continue to watch Buffet to see if his energy company is adding any pipeline companies but he prefers those that operate in a 'regulated' price fixed environment. He was rumored to have bid on the NGLP pipeline asset last week that KMI and BIP acquired. EKS