Can Boardwalk Pipeline Partners' Rally Continue?

Boardwalk Pipeline Partners LP is up 30% from its lows; can the rally continue?

May 13, 2014 at 10:51AM

Back at the beginning of March, I took a look at Boardwalk Pipeline Partners LP (NYSE:BWP), just after the company had shocked the market by announcing 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.

In the original article, I concluded that the case for Boardwalk as a value investment is simple: The company was trading at a discount to peers, and the lower distribution allowed for more fiscal security in the future. Since writing my first article, Boardwalk's unit price has risen by approximately 30%. Is the company now overpriced, or is there further to go?

Results show progress
Thanks to the completion of a number of growth projects throughout 2013, Boardwalk's first-quarter earnings showed that the company continues to grow. Operating revenues were up 9% year on year. Net income also rose 9%, and distributable cash flow increased by 4%. Unfortunately, distributable cash flow growth was constricted, as both interest costs and maintenance capital expenditures expanded 11% and 113%, respectively, during the period.

Additionally, Boardwalk took a $10 million impairment charge as it postponed the Bluegrass pipeline project, citing the fact that the company, and its Bluegrass partner, The Williams Companies, had not obtained sufficient customer commitments for the project. Is Boardwalk meeting its self-imposed goals of lowering debt, the reason behind the distribution cut?

Boardwalk's management has stated that the company's debt-to-EBITDA target is 4:1. Adjusted EBITDA came in at $220.4 million for the first quarter, $881.6 million if annualized. The company reported net debt of approximately $3.36 billion for the quarter, down from $3.4 billion during the same period of 2013. This works out to a debt-to-EBITDA ratio of 3.8, although I must stress these are very ball-park figures.

Still, it appears as if Boardwalk is making progress paying down debt and expanding earnings. What's more, looking at the numbers, it seems as if Boardwalk's new lower payout is much better for growth.

For example, as mentioned above, capital spending and interest costs both increased throughout the period, but the company was easily able to cover these cost increases from cash flow, as the total distribution to partners only totaled around $110 million. The rest of the income was reinvested, reducing the need for borrowing.

Ultimately, as Boardwalk uses cash from operations to finance expenditure rather than debt, the company's interest costs should start to fall. Currently, they consume around 25% of EBITDA.

All in all, based on first-quarter numbers, it would appear that Boardwalk is meeting some of the targets management set out for the company last year and rising revenues are always a good sign. However, one key question remains: Is Boardwalk still undervalued, or is the company now expensive?

What about valuation
When I covered Boardwalk after the initial distribution yield cut, the company was trading at a trailing 12-month enterprise value to earnings before interest, tax, amortization, and depreciation, or EV/EBITDA, figure of 9.3x. In comparison, peers, Energy Transfer Partners (NYSE:ETP) and Kinder Morgan Energy (NYSE:KMP) were trading at EV/EBITDA ratios of 10.7x and 11.6x, respectively.

At present, Boardwalk trades at a EV/EBITDA value of 11.8x compared to Enterprise's ratio of 16.6x, and Kinder Morgan's 11.9x. So, it would appear that Boardwalk is still undervalued in comparison to its peers, although the lower distribution yield is an issue. Boardwalk yields 2.5%, while Kinder and Enterprise yield 7.3% and 3.8%, respectively.

Often overlooked
One thing that is often overlooked with partnerships such as Boardwalk, Kinder, and Enterprise is the fact that they 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% during 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 unit holders who won't see their equity eroded.

Foolish summary
Overall, based on Boardwalk's valuation in relation to that of its close peers, the partnership still appears undervalued. For this reason, it is reasonable to assume that the company's unit price can move higher.

Three stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays, while historic amounts of capital expenditures are flooding the industry, will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report, "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers