How Cheap Is Boardwalk Pipeline Partners LP?

Boardwalk Pipeline Partners LP (BWP) shocked the market at the beginning of February when the company announced that it was going to slash its quarterly unit distribution from $0.53, to $0.10. For investors, this move came as a surprise and removed one of the main attractions of Boardwalk's MLP structure: the previously promised 8.8% dividend yield.

After this move, Boardwalk's unit price was cut in half. However, after declines, Boardwalk now looks attractive in comparison to peers Kinder Morgan Energy Partners (NYSE: KMP) and Energy Transfer Partners (ETP).

In comparison to peers
Boardwalk has been under pressure from falling natural gas prices during the past few years, but the company is not alone. Energy Transfer Partners operates almost entirely in natural gas, operating around 47,000 miles of transportation pipelines, and the company is therefore a suitable comparison to Boardwalk. Meanwhile, Kinder Morgan's recent strategic push into natural gas storage and transportation makes it another suitable comparison. 

Now, if we look at both Kinder Morgan and Energy Transfer Partners, it quickly becomes apparent that Boardwalk, after recent declines, is the most attractive company. For a start let's take a quick look at valuations. I'm using the enterprise value to earnings before interest, tax, amortization, and depreciation, or EV/EBITDA, measure here to give a decent comparison as depreciation can significantly impact the earnings of these companies.

Source Yahoo! Finance. Figures based on numbers supplied during the last four quarters. TTM-trailing-twelve-months 

Going forward, we can see that Boardwalk is now the cheapest of the three companies with exposure to the natural gas market, although the company does offer the lowest distribution yield. Nevertheless, I believe that this low yield is actually a good thing long-term.

Pressing debt issue
One of the reasons that Boardwalk slashed its payout was to reduce debt -- in my opinion, a good move and something other industry players should follow. Reducing net debt is a top priority for Boardwalk as management has stated that their debt-to-EBITDA target is 4:1. Based on 2013 EBITDA, which came in at $650 million and third quarter net debt of around $3.3 billion, Boardwalk is somewhat over its targeted leverage ratio. What's more, this pile of debt is strangling cash flow as the company paid $163 million, or 25% of EBITDA out in interest during 2013. The partnerships' management also needs to consider, and take action against an increase in interest rates, which could be around the corner. Rising interest rates are perhaps Boardwalks most pressing issue, especially with such a towering debt pile.

No more units issued
Usually, master limited partnerships like Boardwalk would issue additional partnership units to fund growth alongside debt, which erodes per-share fundamentals and shareholder equity. This is the strategy that Boardwalk has followed in the past, increasing the number of units in issue by 16.2% over the past four years. Still, this pales in comparison to the number of units Energy Transfer has issued (125%) and Kinder Morgan (43%) from the end of 2009 to the end of the third quarter last year. Boardwalk's management has stated that no units will need to be issued this year. So, Boardwalk is now relying on its cash flow to fund expansion and reduce debt, good news for unitholders who won't see their equity eroded.

Others should follow suit
When it comes to spending, it would appear that Kinder Morgan also needs to cut back. The partnership was planning to spend $4.5 billion on growth projects during 2013, although distributable cash flow was going to be in the region of $2.1 billion after general partner payouts. The growth spending was to be funded by secondary unit offerings of $1.3 billion and debt issuance of $2.5 billion, as well as other interests, which will take net debt-to-EBITDA to 3.7x times -- this is not to mention the further deterioration of unit value through further unit issuance.  

While, Kinder Morgan's debt pile and cash flows are not yet an issue, there are accusations that the company could have understated its spending in order to boost cash returns to investors . Kinder Morgan paid out $1.7 billion in interest costs during 2013, around 40% of operating income. Meanwhile, debt costs for Energy Transfer Partners amounted to approximately 50% of operating income, excluding one-off items during 2013.

Foolish summary
So all in all, the case for Boardwalk as a value investment is simple, the company now trades at a discount to peers, and the lower distribution should allow the company more fiscal security in the future. More cash retained from operations will enable Boardwalk to pay down debt, reduce interest costs, and ultimately increase profits, something the company's peers, Kinder Morgan and Energy Transfer Partners, will potentially have to do in the near future.