Is Boardwalk Pipeline Partners a Strong Turnaround Play?

Boardwalk's hopes for a turnaround rely heavily on its success in its key growth initiatives, including the Bluegrass Project.

Mar 5, 2014 at 10:28AM

Investors on the hunt for promising turnarounds aren't afraid to buy when there's blood in the streets and accept a fair amount of volatility. In the oil and gas Master Limited Partnership space, no company fits this premise better right now than natural gas midstream operator Boardwalk Pipeline Partners LP (NYSE:BWP).

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Boardwalk Pipeline Partners has lost billions in market value in just a few weeks after the painful decision to slash its distribution by 80%. Since MLPs, like Boardwalk, are required to distribute the majority of their cash flow to investors, a distribution cut is a sure sign of severe trouble. Nevertheless, investors interested in turnaround stories see the potential for higher gains after such profound losses. Read on to find out what is key to Boardwalk making good on its turnaround efforts.

Boardwalk has serious structural issues
Boardwalk's problems seem to relate to its geographic location. Its pipelines and storage terminals are no longer in an advantageous position to serve its customers at profitable rates. Boardwalk's management cites 'basis differentials' as the primary influence for its transportation rates. One of the major determinants of basis differentials is the proximity of supply areas to end users, and Boardwalk's facilities aren't situated optimally to where new sources of natural gas are being identified in the United States.

Because of this, Boardwalk wasn't able to renew service contracts with customers at existing rates. Basis differentials on Boardwalk's pipeline systems narrowed significantly last year. Remaining capacity was either sold off at sharply lower rates, or in some cases, not sold at all.

This is why geographic positioning is so important to midstream operators. Natural gas Master Limited Partnership Energy Transfer Partners LP (NYSE:ETP) focused its midstream segment on the highest-potential fields in the U.S. like the Eagle Ford Shale in South Texas, the Permian Basin in West Texas and New Mexico, and the Marcellus Shale in West Virginia. The results speak for themselves, as Energy Transfer Partners' distributable cash flow soared 54% in 2013.

To engineer its turnaround, Boardwalk will have to build out infrastructure to expand into areas that are located closer to the best-producing natural gas regions of the country. This is where Boardwalk intends to concentrate investment going forward.

One such initiative is the Bluegrass Project, which is a pipeline expansion that will supply growing areas of demand in the southeast U.S. This is a massive undertaking designed to transport natural gas liquids from the highly productive Utica and Marcellus Shales to the company's Moss Lake terminals and fractionation facilities. In all, the project will handle up to 400,000 barrels of mixed NGLs per day, and is scheduled to be put into service in late 2015.

Financing initiatives allow for restructuring
Now that Boardwalk has cut its distribution, it has some financial flexibility to fund its strategic initiatives. After reducing its distribution to $0.40 per unit annualized, Boardwalk now has approximately $420 million in savings this year to allocate toward organic growth.

In addition, Boardwalk management believes its general partner, financial holding entity Loews Corporation (NYSE:L), is well-capitalized and has historically aided in financing its growth initiatives such as acquisitions and projects. Indeed, Loews has offered $300 million in debt financing that Boardwalk has at its disposal to fund growth initiatives this year. Specifically, Loews has indicated a willingness to provide financial support for the proposed Bluegrass Project, should that project receive approval.

Band-aid removal
Boardwalk made the painful but necessary decision to cut its distribution in order to shore up its financial position. While this results in unavoidable short-term pain, turnaround investors may see light at the end of Boardwalk's pipeline. Management is hopeful that the short-term weakness will subside once its growth projects come on-line. This is imperative if Boardwalk is to see its turnaround efforts materialize.

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