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MLPs
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This week's SA articlesAB – March 22 post by Value Quest (nothing to sell), Hold rating; 9 comments, 3 likes. AB mostly manages mutual funds and private accounts and it also owns a research arm that it is in the early stages of selling. It operates thru a operating partnership (OPCO); AB owns about 40% of OPCO and EQH (an insurance corporation) owns the other 60%. EQH also owns some AB units and is AB’s GP. Both AB and EQH’s prices have tanked recently, along with the prices of many other financial services companies. To the article – VQ reviews Q4 and 2022 as a whole. Q4 was a big drop from Q4 2021; for example, the distribution paid in February was a bit more than half of the year-earlier payout. VQ has some confusing explanations for the drop. VQ thinks the payout for 2023 as a whole will still equal the 2022 distribution, although he doesn’t really explain why. (Me – AB is a variable distribution MLP. And I can’t see how 2003 YTD gives VQ much comfort that AB will recover fully. He doesn’t really say, although he implies that new products will save the day.) Then, the risk factor - VQ discusses SVB’s failure and the fact that it had to sell bonds that it owned in a down market to meet depositor withdrawals. He lists this as a risk for AB, if customers want to withdraw their money when bond prices are down. There’s more, but I really don’t think this post was well thought out. AB is largely a fixed income house and you may have noticed that fixed income securities aren’t doing so well just now. So I expect some pain this year (with a lower payout to unitholders than last year), but I think longer-term, higher yields will attract more investors to AB’s funds. Mostly I don’t think VQ explained his position clearly. CLMT – March 23 post by Patient Tech Investor (nothing to sell), Buy rating and he owns some; 31 comments, 10 likes. Me - PTI has been bullish on CLMT forever. Maybe 2023 will be the year it starts to pay off. I have to give PTI credit – he estimates each quarter’s results before they are released and later he reviews what really happened. Once again, he was wildly over-optimistic about Q4, but he owns up to it, and explains where he went wrong. Partially, the problem was high natural gas prices (me – remember them?) that hurt operating margins at the refineries. But the biggest problem was winter weather – CLMT is converting a refinery to make RD and it’s in Montana. Apparently, sometimes it gets cold in Montana in the winter. This time, the weather wiped out all of December’s EBITDA. Anyway, PTI lost me in his discussion of what he expects for 2023, but he does think that CLMT could produce $ 800 million of annual EBITDA by 2025. This post only makes sense if you are interested in CLMT (I am) and if you regularly read PTI’s posts about the company. There’s a lot of details that wouldn’t interest most people. And like I said, PTI tends to be overly optimistic about the company. He may be wearing out his welcome on SA. A year ago, one of his posts would have gotten 200 or more comments. Not this time. DTM – March 18 post by DT Analysis (nothing to sell), Buy rating but he doesn’t own any; 4 comments, 9 likes. In 2021 utility DTE (Detroit Edison) spun off its midstream assets in a corporation (DTM). DT was a Hold on DTM until this past January when he upgraded to a Buy. DTM is down 13% since then. FCF coverage for the dividend in 2022 was strong. DT mixes the company’s disclosures of EBITDA and operating cash flow, so it’s hard to say exactly what he is expecting for 2023. Suffice it to say that he is projecting a nice increase to adjusted EBITDA this year. But the company is also projecting cap ex to almost double, which reduces the FCF coverage for the dividend. DT says this is only temporary, and once they are over the building phase, the dividend coverage should return to being strong. The leverage ratio is 4.3X EBITDA and in 2023 the increase in EBITDA will be offset by the additional debt borrowed to fund cap ex. But again, going into 2024, this ratio should drop as well. Me – It’s hard to say why DT is repeating his Buy recommendation, based on what he writes. I think he's saying that last week’s selling was overdone. EPD – March 21 post by Samuel Smith (subscription service available on SA), Strong Buy rating and he owns some; 178 comments, 49 likes. This is Mr. Smith’s 14th Buy-rated post about EPD over the last year. 3 reasons to buy the dip: 1. The distribution is covered 1.8X by DCF and EPD is back to raising the payout. 2. Strong balance sheet, with leverage below 3X EBITDA. 3. It trades at a cheaper EV/EBITDA multiple than KMI or MPLX. Not much to this article, I thought. ET – March 20 post by Peter Frorer (nothing to sell on SA), Strong Buy rating and he owns some; 225 comments, 76 likes. ET has changed; it no longer spends like a drunken sailor and is serious about getting an improved credit rating. It is generating significant cash flow in excess of cap spend and distributions, and is likely to get down to a 4X leverage ratio by the end of the year. That’s the simple summary, and I don’t disagree with it. But Mr. Frorer has some quotes in his article and I wonder where they came from. First quote (he uses quotation marks but doesn’t say who he’s quoting) “KW walks away from deals when Tom Long says no.” or “KW is free to pursue deals and then present the ideas to Tom and Marshall, but if one of the CEOs objects to the risks and/or the implications of such a deal brought to them by the chairman, then Kelcy drops the idea and walks away.” I’d love to know who said those things. Maybe these quotes are common knowledge; it wouldn’t be the 1st time I’ve missed something. But Mr. Frorer should have identified the person he was quoting. Then, Mr. Frorer also tries to do a leverage ratio for ET itself, eliminating the GAAP consolidation effects of including SUN, USAC and DAPL from the consolidated numbers. He then assumes that ET will use 100% of its excess cash flow this year to pay down debt, and that EBITDA will come in a bit higher than the company projects. And he gets to an ET-only leverage ratio of 3.95X. I don’t agree with his computations but the exact number doesn’t matter much. The direction of ET’s leverage is down. ET – March 23 post by DT Analysis (nothing to sell), Strong Buy rating and he owns some; 42 comments, 22 likes. I think this is the first post by DT that doesn’t follow his usual format. There is no discussion of the FCF coverage for the distribution, or the leverage. So what is this article about? The point is that ET might benefit from a banking crisis, if we get a continuing one. Why? 1. ET likes to acquire companies and maybe the price of those acquisitions will get cheaper if the operators can’t get regular financing. 2. ET is cash flow positive (FCF exceeds all cap ex and the distributions) so it doesn’t need the banks right now. 3. Maybe if things get really bad, ET will find an attractive deal but won’t be able to finance it, but that’s as bad as it will get. Me – Interesting idea; my take is that ET might do OK in a mild banking crisis, or at least not as bad as other leveraged companies, but not in a more serious banking crisis. If that sentence makes any sense. ET – March 24 post by Steven Fiorillo (subscription service available on SA), Strong Buy rating and he owns some; 55 comments, 28 likes. I think this is Mr. Fiorillo’s 10th Buy-rated post about ET over the last year. There isn’t much new in this article. 1. The EIA and BP have both recently published their long-term energy forecasts. Both see the world using more natural gas by 2050 than it does today, and slightly less oil than it does today. Fossil fuels aren’t going away. 2. ET is the biggest midstream in the US and it will benefit from growing global demand. ET works as a tollbooth, with fixed fee MVC contracts. So it’s safe. And 3. ET trades at cheaper multiples than its peers. Me – I don’t doubt that ET is cheap, but I have problems with Mr. Fiorillo’s computations. I don’t think he gets the de-consolidation right, and he ignores the $ 6 billion of ET preferreds. I think they have to get factored in somehow. He ignores them. IEP – March 20 post by Pacifica Yield (nothing to sell on SA), Buy rating but he doesn’t own any; 47 comments, 19 likes. PY posts more than 1 article each day; he seems focused on high yield. I know the following comment isn’t fair but I’ll make it anyway. I scanned his recent recommendations to get a feel for his risk tolerance – he recommended First Republic on March 13 because it had dropped 80% in the prior 3 days. It’s dropped another 57% since his rec. He’s got a few like that. I guess when you post as often as he does, you’re going to hit some snags. This post about IEP is a good example of the problem of posting so often. IEP pays a 15.7% yield, and PY says it’s safe because the company has $ 2 billion in cash, and Carl Icahn (the 85% owner of IEP) wouldn’t cut his own distribution. That’s nonsense – IEP can only pay the distribution because Mr. Icahn is taking most (or maybe all) of his distribution in additional units. Otherwise, IEP couldn’t afford the distribution. There’s not much in this article worth summarizing. Sorry. KNTK – March 22 post by Vader Capital (nothing to sell), Hold rating; 3 comments, 6 likes. VC is new to SA, having started posting last November. This might be his first post about a midstream. KNTK used to be Altus until it did a merger last year and changed everything. It is a corporation, so it really doesn’t belong on this board. But it’s short so I’ll take a shot. KNTK is a work in process; it’s adding new assets that should be placed in service by year-end, maybe disposing of some existing assets and spending a lot on cap ex. So 2023 is not the year to focus on – 2024 is the pivotal year. Guidance for 2023 is lower than people expected, and if energy prices stay challenged, there could be problems. 2 projects are expected to be placed in service by November, but KNTK started yet another project that will consume a lot of money this year. KNTK has a 16% interest in a JV called GCX; TRGP sold a portion of its interest in DCX last year, and if KNTK gets similar pricing, that could be a $ 500 million sale, and that might drive the stock price. But otherwise, 2023 will be another investment year, and VC says to wait for 2024 to buy. MPLX – March 23 post by Dividend Sensei (subscription service available on SA), Buy rating but he doesn’t own any; 68 comments, 26 likes. This one is way too long for me to do it anyjustice. I’ll list the points, but the discussion under each point goes on forever. Not bad if you’re interested in MPLX, but I’m already a believer so I didn’t need this much. Big picture – MPLX is the safest 9.2% blue chip yield out there, and DS goes on to prove his point. 1. You can trust the 9.2% yield. Lots of stuff about the payout, the balance sheet and the ratings agencies. 2. MPLX has steady growth projects for years to come. Lots of projections, concluding that MPLX should see a 6% CAGR growth in its cash flows thru 2028. Again, lots of stats. And 3. MPLX is a wonderful company at a good price. MPLX traditionally trades at 7.8X cash flows (Me – not sure which version of cash flows), and now it’s only trading at 6.7X. If it gets back to the normal multiple, as analysts believe it will, it will return 25% over the next year. On the downside, MPLX does not score very well on risk management. DS doesn’t explain this very well, except to say that it’s an S&P metric. Overall, 1. We’re almost certainly heading into a recession, based on historical reactions to the Fed’s actions. 2. MPLX is safe in a recession. 3. But even if the distribution is safe, investors may still lose money if the market continues to tank. If any of this makes sense to you, feel free to explain it to me. DS says several times that MPLX is the safest 9.2% non-speculative blue chip (Me – is there such a thing as a speculative blue chip?) but it might not meet everyone’s risk profile. NRP – March 18 post by Deiya Pernas (nothing to sell on SA), Buy rating and he owns some; 7 comments, 4 likes. Mr. Pernas psost very infrequently on SA – 28 times since he started 3 years ago, with long time gaps between posts. This is an overall review of NRP, coming to the conclusion that it’s got a potential for 35% upside. I thought the post was fairly simplistic with a few errors, but I get the overall picture and agree with him. (I own some NRP.) He thinks the thermal coal royalty business is gone by 2030, but the met coal royalty business has a longer tail, since it’s largely for export to places that need to make steel. He values NRP’s share in Sisecam Resources soda ash mine based on the price that We Soda is paying to buy out the public unitholders. Throw in a few miscellaneous assets, subtract the debt and preferred and you get a $ 70 value. Me – He significantly overstates the distributions that NRP gets from the soda ash mine, he overstates the number of preferred units outstanding, and a few other little things. But in the overall picture, these things don’t matter much. OKE – March 23 post by DT Analysis, Buy rating but he hasn’t bought any; 8 comments, 9 likes. DT posted several Hold-rated articles about OKE in the last year before raising to a Buy rating in December. It’s down 10% since then. This article has lots of numbers. Big picture – OKE dividend coverage (using free cash flow) is above 1X and the leverage ratio is below 4X. Plus, OKE is projecting pretty good growth in EBITDA for 2023, so OKE is a Buy. But the headline and the biggest part of the article is a bit annoying. Last July, OKE had an explosion at one of its NGL fractionation plants and it’s been down since then. They just settled with their insurance company and received $ 100 million in December and another $ 830 million in Q1 2023. Those numbers are included in OKE’s net earnings and EBITDA projections (with lots of disclosure, so people aren’t misled) and that accounts for a lot of the 2023 growth in cash flows. Even ignoring the recovery, the growth is decent (10% over 2022) but just not as good as the headline numbers would make you think. So DT warns not to place too much faith in the reported 2023 EBITDA growth. (Me – if DT was going to read the earnings release, he should have read all of it. Because of the explosion, OKE has had to pay extra to get third party fractionators to perform under OKE’s contracts. That extra cost in 2023 will offset about a third of the insurance recovery. None of this matters a lot; 2022 results were dinged by the third party costs, so they aren’t the best comparison, and 2023 will have both the recovery and the extra costs. DT’s point is valid, but he should have adjusted his 2023 numbers for both items, not just the insurance recovery.) OKE – March 23 post by Geoffrey Seiler (nothing to sell on SA), Hold rating; 5 comments, 9 likes. While I didn’t care much for DT’s post, this one was much better. Not as many detailed numbers; just that the dividend is covered by FCF and the leverage ratio is about 3.7X. But he likes OKE’s prospects and explains why. OKE largely deals with natural gas, and with prices tanking, you would think OKE’s volumes might drop. But a lot of OKE’s operations (particularly in the Bakken) are in oil-producing with natural gas being produced in conjunction with the oil. So as long as oil prices stay decent, OKE will still get the associated gas volumes. Plus, lower natural gas prices may increase demand for the natural gas from chemical companies, and OKE might benefit from that. Mr. Seiler talks about the explosion and the related insurance recovery and extra costs, but the big picture is positive. He has OKE trading at a 10X EV/EBITDA multiple if you adjust for both the insurance recovery and the extra costs, and Mr. Seiler thinks that’s on the high end. So even though he likes the company’s prospects, he’s a Hold based on valuation. Me – While I liked this post, it focuses almost entirely on OKE’s operations in the Bakken. OKE has many operations in many basins. Just n FYI. PAA – March 19 post by The Value Portfolio (subscription service available on SA), Buy rating and he owns some; 11 comments, 16 likes. TVP was Buy-rated on PAA back in 2020 and then stopped posting about the company for 2 years. He picked it up again this past November, and he repeats his bullish call here. This article is general in nature: 1. PAA is already doing very well, and its operations have a ton of excess capacity. As that excess capacity gets utilized, PAA will generate more revenue at very little extra cost. 2. Russia is losing global share in the oil market and the US may pick up that slack, increasing utilization of PAA’s services and transportation. 3. Current 9% yield, and the company is targeting additional annual raises to the distribution. So buy some. PAA (and PAGP and OKE) – March 20 post by High Yield Investor (subscription service available on SA), SA says the rating is Strong Buy on OKE, and HYI says that as well, but he owns PAA and not OKE because he has better midstream investments that fit his portfolio better; 23 comments, 15 likes. This is another in a series of posts comparing 2 midstream companies. 1. Business model – HYI doesn’t actually say who has the better business model. He likes OKE’s high return on invested capital but doesn’t say what PAA’s ROIC is. I think he’s saying that OKE’s business model is safer, and I would agree with that, FWIW. 2. Balance sheet – A tie; very similar leverage ratios and debt is declining at both companies. 3. Dividend outlook – Both companies are growing the dividend/distribution, but PAA is growing it faster. Me – and to compare 2 corporate securities, PAGP’s yield is 2 points higher than OKE’s and growing faster. 4. Valuation – most metrics favor PAA, but HYI thinks OKE is cheaper on an EV/EBITDA basis. Then he shows PAA trading at an 8.7X multiple and OKE at 8.75X. Clearly he likes both companies but his comparison is a bit confusing. I can’t do a 6-month report card this week because 6 months ago, I briefly stopped summarizing the SA articles. |
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