Hello, I’m back with a summary of this week’s SA posts about MLPs and midstreams. The articles aren’t much better than they were last year. But, FWIW, here are my Reader’s Digest summaries. Please feel free to comment. Your comments may be more helpful than the articles themselves.
AR (not AM) – April 26 article by The Energy Realist, Neutral rating, 37 comments. This article was posted 2 days before AR released Q1 numbers so it needs a little update. The article doesn’t mention AM so I’ll keep this short. I own AR but intend to sell as soon as my gain from last year’s purchases goes long-term. In fact, I have written calls that expire just after my 12-month date. AR is a big Marcellus natural gas driller. TER’s thesis is simple – last year’s oil price debacle drove down oil and associated natural gas production. This has helped natural gas and NGL pricing. Now, with the economy improving, demand is increasing, especially for NGLs. AR is in the sweet spot – lots of NGLs and natural gas. TER’s take is that the game is over – oil prices have recovered and so will oil production and associated natural gas production. So he’s neutral. (Total aside – AR’s management made a mistake and signed contracts for midstream services from AM that contained large discounts for higher volumes. To meet those requirements and get those discounts, AR signed a JV to increase its production and meet the discount requirements. To me, this is typical oil men nonsense – as soon as prices improve, they increase production. That lasts a little while, but eventually the higher production tanks prices (again). So I’m gone as soon as I reach long-term status on my shares.)
BKEP – April 26 article by Elephant Analytics, Bullish rating, 5 comments. Back in December, EA posted a bullish article about BKEP’s preferreds but now he is focusing on the common. BKEP is a micro-cap MLP (market cap $ 137 million plus some preferreds). After a big sale last year (it sold its pipeline operations), BKEP is now focused on the distribution and storage of asphalt. The proceeds of the sale paid down debt, which reduces interest expense going forward. The point of the article is that both Democrats and Republicans support infrastructure work and that will support utilization of BKEP’s asphalt storage and distribution assets. EA estimates $ 55 million in continuing EBITDA and a 9X multiple gets him to a value of $ 4.20 per unit, compared to today’s $ 3.30. But even at that “value” he only sees the common units yielding 5% or 6% (the current yield is 5%), and I don’t see the market accepting a 5% yield very long. The preferreds yield 8.9% and EA likes them too.
CEQP – April 27 article by Long Player (subscription service available on SA), Bullish rating, 33 comments. I don’t see that LP has any prior coverage of CEQP, at least not in the last 2 years. As a 1st article, it’s a little puzzling. LP doesn’t say exactly what CEQP does; he mostly focuses on the basins it’s in. So CEQP is big in the Bakken – does it have problems if DAPL is shut down? No, per LP. CEQP’s shippers are already lining up alternatives to DAPL (interesting point – last year’s drop in oil process and production have freed up capacity on pipelines, plus there are always railroads and trucks – kind of optimistic in my view). President Biden has ordered a federal land permit freeze – does this affect CEQP? No – CEQP’s customers mostly aren’t; on federal land; some are on Indian Reservations, but not much on federal land needing new permits. CEQP has a lot of preferreds outstanding (aside – I own the preferreds), and since these are junior to CEQP’s debt, they help keep the interest rates on the debt lower. What’s missing from this article: 1. An explanation of CEQP’s “marketing, supply & logistics” operations, which makes up the vast majority of revenues. 2. Any discussion of valuation – multiples, whatever – there is no discussion of why CEQP is a buy now. 3. Any discussion of CEQP’s recent buy out of First Reserve’s interests in CEQP. Aside – as I said, I own some CEQP preferreds and CEQP is the only MLP I know of that treats the preferred distributions as business income on line 1 of the K-1 (second aside – totally not suitable for IRA investments). So if you also own CEQP common units, the loss that will probably show up on that K-1 should be available to offset the tax on the preferred distributions. So I’m tempted to buy some.
CLMT (sort of) – April 27 news item quoting a Reuters report that says RIN prices have soared to their highest prices since at least 2013. I only mention it because CLMT’s 2020 GAAP results were slammed because they had to accrue expensive RIN liabilities. The company says they have never had to cash-settle a RIN liability – they have always been able to eventually satisfy the RIN liability by blending. Also, CLMT is trying to redo one of its refineries to produce renewable diesel and if that works out (and it should, I think), that will offset the RIN liabilities. But I suspect the Q1 results will still get slammed by RIN prices. So far, the market hasn’t cared much. We’ll see if that continues.
DKL – April 29 article by Daniel Thurecht, Bullish rating?, 2 comments. The rating is Bullish, but the title of the article: “DKL’s Distribution Growth Will Soon Come to a Grinding Halt”. Doesn’t sound too bullish. But here’s the story: 1. Mr. T was previously neutral on DKL (November 2020 article); thru 9/30/20, results were good and he wasn’t sure that could be continued. Plus, in 2020 they slashed growth cap ex so their FCF coverage was good but he thought they would start spending more on cap ex, pressuring the coverage ratio. 2. Q4 numbers out, and the good numbers continued and it seems clear that they don’t intend to spend a lot on growth cap ex. So the distribution is safer than he originally thought. That’s the basis for his bullish rating. 3. With little growth cap ex, the growth in FCF will slow or stop, so the distribution increases will stop. 4. But the current distribution rate is already higher than average for MLPs so the lack of growth isn’t a problem. So overall, good coverage for the distribution, and adequate finances. No mention in the article of what DKL does, or its relation to DK or the IDR buyback last year.
EPD – April 27 article by The Asian Investor (nothing to sell), Very Bullish rating, 60 comments. TAI is new to SA this year; he says he’s looking for 50% annual capital growth and he mostly focuses on tech. If he wants 50% growth per year, I don’t know what he’s doing with a midstream. Anyway, this is an intro to EPD, if anyone still needs one. So he tries to explain the difference between producers and midstreams, and gives an explanation of DCF. Lots of growth in demand for energy from the developing world so fossil fuels aren’t going away any time soon. The prospects for natural gas are better than they are for oil, the prospects for NGLs are best of all, and EPD gets the majority of its gross margin from NGLs so it’s well positioned to prosper. All basic stuff. I read the post mostly to see if TAI would comment on the US withholding tax problems that foreigners have in owning MLPs (TAI says he lives in Thailand and Canada so he should have the problem, but he doesn’t mention it. And I wasn’t going to look thru 60 comments to see if anyone pointed it out to him.)
ET – April 25 article by The Value Portfolio, a long time ET bull. Bullish rating, 166 comments. This is a short article discussing the possible impact of a DAPL shutdown and concluding that the impact is manageable. Maybe a 5% hit to EBITDA and a 10% hit to DCF, and the shutdown wouldn’t necessarily be permanent. Plus, ET’s other projects are attractive. He doesn’t discuss the loan aspect of a shut down. Anyway, just stay the course.
ET – April 28 article by Long Player, Neutral rating, 311 comments. Some things don’t change; LP has another anti-ET rant this week. DAPL, ME2, whatever. Lots of people suing ET. ET is going to lose. Even if DAPL is not shut down immediately, the uncertainty is causing shippers (like XOM) to try to break their contracts with DAPL and use alternate transportation methods. I only scanned the article and didn’t even glance at the 311 comments.
EVA – April 26 article by Sarfaraz Khan, Neutral rating 10 comments. This sounds like Mr. Khan’s 1st post about EVA; at least, it’s just an intro to the company. Background: EVA takes leftover wood (more about that in a moment), turns it into chips, and sells the chips to utilities in Europe and Asia to supplement their use of coal in coal-fired power plants. The chips can also be used in power plants that use biomass as fuel but I don’t think that’s a big deal just yet. Story – lots of growth as European utilities have convinced their regulators that using wood is greener than using coal, and now Japanese and South Korean utilities are taking the same tack. EVA it the world’s biggest supplier of wood chips to this market, and its growth has been impressive. So impressive that the whole idea of using wood chips as an energy source is gathering lots of opposition, both because it generates lots of CO2 and because some of the wood comes from clear cut forests. Mr. Khan talks about 2020 results, the growth story, and probable new growth opportunities but thinks EVA is fully valued so he’s neutral. Something he doesn’t discuss is the IDRs – they are in the 50/50 splits and at some point EVA will issue more common units to buy them out. Plus, most of EVA’s growth comes from drop downs from its sponsor, and the IDRs may be causing EVA to overpay for the drop downs. At least, I think so. But what do I know? I sold EVA in the mid $ 30s and now it’s at $ 50. BTW, the article states that “between 2012 and 2019 … global coal consumption fell by 68%.” The number doesn’t really matter to the EVA investing thesis, but it’s wrong. There’s at least 1 other misstatement that I noticed in my quick read.
KMI – April 25 article by the Value Portfolio (subscription service available on SA), Bullish rating, 42 comments. This is TVP’s 5th bullish post about KMI in the past 6 months. He down shifted from Very Bullish to just Bullish earlier in April. This post is just a very short summary of the Q1 results so it’s not meant to be an overall review of the company. Q1 benefited to the tune of $ 1 billion from weird natural gas pricing in Texas due to the winter storm. Nonrecurring. Aside from that nonrecurring item, results were about as expected. I thought I read somewhere that KMI raised its projections for 2021 but by a little less than the Q1 surprise, meaning that they reduced their expectations for the rest of the year. But that’s not in this article, and maybe I got it wrong. Then, a final few paragraphs about KMI’s financial strength and growth opportunities. Again, just a quick Q1 update for his subscribers, I think.
KRP – April 25 article by Elephant Analytics (he has a subscription service on SA), Neutral rating, 6 comments. This is EA’s 3rd post about KRP in the last 6 months. Bullish in November ($ 7, up 60% since then) and again in January ($ 9.30, up 23% since then), now turned neutral based on valuation. KRP is an oil & gas royalty company that is organized as an LP but taxed as a corporation so no K-1. The dividends are generally ROC. EA tries to estimate the royalty income for KRP based on assumptions about production and pricing, and the Q1 dividend was greater than he expected, mostly due to higher oil prices. He now projects the annual dividend to be about $ 1.02 for 2021 and between 90 cents and $ 1.10 for the next 2 years. At today’s price (around $ 11), he thinks the units are fairly valued and, therefore, he has gone Neutral.
MMLP – April 26 article by Elephant Analytics, Neutral rating, 1 comment. As I said elsewhere, EA has a subscription service on SA and I guess this post was just an update for his subscribers. Otherwise, I can’t see why anyone would pay attention to MMLP. I shouldn’t say that, though. Other troubled MLPs that traded under $ 1 last year have done very well since their reverse splits, with UAN’s price up 350% YTD and SMLP’s price doubling – UAN because it makes fertilizer (boy do I miss TNH) and SMLP because of reduced financial concerns). So maybe paying attention to “nothing” MLPs can pay off. This is a review of Q1 results, which weren’t great, but which were better than expected. EA tries to project debt reduction amounts a=over the next few years and I guess he thinks MMLP is a survivor. But MMLP isn’t allowed to increase its 2 cents per year distribution until the leverage ratio drops to 3.75X and that won’t happen for years unless it sells something. So EA is neutral.
MMP – April 24 article by Julian Lin (subscription service available on SA), Neutral rating, 102 comments. Title: “Why I Sold MMP Stock”. Mr. Lin was previously bullish on MMP, now he’s not. He posted bullish pieces in late February (at $ 42). I went back thru 2019 and did not see any earlier MMP articles by Mr. Lin, so he was bullish 2 months ago and now he’s changed his mind. The article makes little sense when you compare it to his February piece. Both pieces stress the high quality of MMP’s pipelines, and management’s ability to maintain profitability as it grows. That is, its ROA has stayed high (above 10% based on DCP) even as it grows. So it’s making good decisions and executing well. The DCF coverage is low at 1.1X, and that bothers Mr. Lin. But his February piece said the ratio was 1.13X and he was OK with that because of MMP’s low leverage. Mr. Lin’s big problem, though, is that he has become bearish on oil demand. He thinks the demand for EVs and the growth in renewables will cap oil prices, hurting producers and pressuring their use of MMP’s pipes. Last week, he went neutral on EPD for the same reason, FWIW. Anyway, he thinks the lowest yield that MMP can trade at is 7%, which would equate to a 30% rise in price and that’s not enough for him, considering his view on oil demand. Based on the timing of the 2 articles, Mr. Lin missed any distributions, but MMP rose about 10% while he owned it.
Also MMP – April 25 artilce by Daniel Schonberger (nothing to sell), Neutral rating, 11 comments. I think this is Mr. S’s 1st post about MMP. In fact, I think it’s his first post about any energy company; he likes high yield but has no energy background so he’s stayed away. The article is very similar to Mr. Lin’s. Mr. S starts out describing MMP’s operations – wide moat, able to maintain steady profit margins as it grows, and some innovative things that MMP has done with its pipelines. Coming from a finance background, he’s not used to businesses that spend as much as MMP does on cap ex, but the steady profit margins indicates the money is being well spent. He thinks the balance sheet is stretched, but his comparisons are not the usual MLP metrics. He’s looked at the debt/equity ratio, the amount of cash on the balance sheet, and debt compared to operating income and FCF (the last one has obviously become common these days). He makes a good point – MMP’s balance sheet may look good in comparison to its peers but that just means the peers have even uglier balance sheets. He likes the 9% yield but is disappointed that MMP doesn’t intend to raise the distribution this year. And then he throws in an ending comment about renewables. So he’s not recommending it, but MMP is tempting.
NGL – April 29 article by Daniel Thurecht, Bullish rating but he doesn’t own it, 3 comments. Mr. T was neutral on NGL until February, when he turned bullish. (October headline – Things aren’t as Bad as They Seem at NGL, and that has pretty much been his approach since then.) I stopped reading after a while. 1. Since NGL has suspended all distributions, its coverage ratio is great. 2. Leverage isn’t too bad – about 9X operating cash flow or 7.6X EBITDA (?). There’s more but why bother. When Mr. T started, he was very ironclad is his rule that an MLP had to satisfy all of his standards to be investable. Now you have one that doesn’t meet any of his standards and he likes it. He does warn in several places that this is a high-risk investment that will either recover or go bankrupt. The article’s title says there’s 2 reasons why NGL may recover. The first was that US oil production is increasing. I couldn’t find his second reason.
OAS – April 25 article by Elephant Analytics about OAS that mentions its recent restructurings with OMP, if you’re interested. In March, OMP bought assets and IDRS from OAS for $ 229 million in cash plus 14.8 million OMP units. I haven’t seen any SA articles about the impact of the transaction on OMP yet.
OKE – April 27 article by Samuel Smith (subscription service available on SA), Bullish rating but he doesn’t own it, 44 comments. This seems to be Mr. Smith’s 1st post about OKE. Short article with a confusing rating. OKE has 4 strong points: 1. OKE’s business has competitive advantages – size and geographic location. 2. It’s got a strong balance sheet. 3. Good growth prospects that lead OKE to project a 12% increase in EBITDA this year. And 4. Its 7.4% yield is safe and the dividend has been raised every year for 18 years. (He refers to a 1.17X DCF coverage ratio as “solid” and I think a lot of people might quibble at that description.) All that supports the bullish rating. So why does he point out that he doesn’t own it? Because its EV/EBITDA ratio is too high. Other midstreams, such as EPD and MMP, have better assets and trade at lower multiples. I won’t argue with his opinion but I would think the rating should be neutral. Aside – Mr. Smith points out that OKE is not a partnership and you won’t get a K-1. I would add that the vast majority of its dividends are ROC, and the company thinks this is true for 2021 also.
Also OKE – April 27 article by Daniel Thurecht (still nothing to sell), Neutral rating, 14 comments. Totally different take from Mr. Smith. 1. Forget DCF – compare OKE’s dividend to its free cash flow and the coverage isn’t good. 2. I guess forget the debt rating – OKE has a leverage ratio of 5X EBITDA – too high. 3. Then Mr. T does one of his Monte Carlo simulations and concludes that you are likely to lose money of you buy OKE at today’s price. So least he agrees with Mr. Smith on that point.