Can This Troubled MLP Really Turn Things Around?

Buying into a stock at the bottom of a turnaround can be exhilarating, especially in a market like this one, where everything is seemingly overvalued. But turnarounds can be quite risky; after all, a stock has to have suffered a massive setback in order to qualify for a recovery to begin with. Therefore, transparency is crucial. Management has likely stated what its goals are, but sharing the plan to achieve those goals is equally important. Today we're putting Boardwalk Pipeline Partners (NYSE: BWP  ) under the microscope, examining management's goal to reduce its debt-to-EBITDA ratio.

The ratio
To determine whether or not an MLP's debt is serviceable, investors look to the debt-to-adjusted EBITDA ratio. In Boardwalk's case, management is targeting a ratio of 4.0 times, which means its debt load would be four times a full year's earnings.

Calculating debt-to-adjusted EBITDA is just a simple division equation: Take an MLP's most recent debt figure and divide it by the last four quarters of adjusted EBITDA. Almost every MLP now uses the adjusted EBITDA metric, so both numbers are relatively easy to track down in an annual filing.

Let's take a look at Boardwalk Pipeline Partner's history with this metric. For context, we'll throw in Kinder Morgan Energy Partners (NYSE: KMP  ) and Energy Transfer Partners (NYSE: ETP  ) as well.

Source: Company filings. 

You can see that Boardwalk Pipeline Partners does not have a great history with this metric. In fact, the closest it has come to 4.0 times debt to EBITDA was in 2010, when it registered a ratio of 4.94, and it has hovered around that number for the last four years. Even Energy Transfer Partners, which has had its own share of struggles, still posted better ratios for five of the last six years.

So, why does this metric matter so much? Beyond indicating an MLP's ability to service its debt, credit agencies incorporate the metric into their ratings. Typically, Standard & Poor's likes to see a ratio no higher than 4.0 to 4.5 times debt-to-adjusted EBITDA for investment-grade master limited partnerships. Love them or hate them, the rating handed down by agencies like Moody's and the S&P tie in directly to the interest rates on a partnership's debt, increasing the importance of a healthy ratio.

In order to improve on this metric, management needs to either cut its debt, or greatly boost its EBITDA, or ideally both. We got some insight into Boardwalk's strategy on the partnership's most recent call. Specifically, management is targeting projects with low EBITDA multiples that can quickly generate EBITDA without requiring massive sums of money to bring into service. Referring specifically to Boardwalk's Ohio to Louisiana access project, CEO Stan Horton had this to say:

Let me talk about annual revenue on this project, the annual revenue excluding fuel is expected to be $30 million to $35 million once the contracts fully ramp up. The total capital for the project is only $115 million. So on an incremental basis, they're fairly good returns.

Indeed, if you take the $30 million on the low end, this project generates an EBITDA multiple of 3.8, meaning it will take 3.8 years to pay for itself completely. That's exactly the sort of short timeline management needs to rectify its debt-to-adjusted EBITDA ratio.

This is just one project, but if management is able to make this the standard, it could achieve its goal of reaching 4.0 times debt-to-EBITDA, giving it the ability to secure better rates on its debt and further improve its balance sheet going forward.

Bottom line
Units of Boardwalk Pipeline Partners are trading on the cheap right now, but investors have plenty of time to let management prove a turnaround is really possible before they buy units. After all, master limited partnerships are more complex tax-wise than traditional stocks, and trading volumes can be a fraction of what they are at energy corporations. Simply put, it's not always easy to exit your position, so be sure to take the time to thoroughly research an MLP before pulling the trigger.

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