Can This Pipeline Crawl to Its Feet Despite a Distribution Cut?

Pipeline construction in Texas. Source: Wikipedia

In February, Boardwalk Pipeline Partners (NYSE: BWP  ) , a master limited partnership (or MLP) that used to be one of the bigger pipeline names, cut its distribution by about 80%. In this paradigm, pipeline MLPs exist for one reason: distributing cash to shareholders. It was no surprise, then, to see Boardwalk's unit price shed half of its value almost immediately. 

But in the ashes of such a harsh distribution cut, could Boardwalk have found new life? In cutting its distribution so deeply, Boardwalk followed the 'GE school' of doing things: cutting deeply once and using the excess cash to rebuild the business, as opposed to cutting several times and continuing to have little balance sheet flexibility with which to alter the company's destiny. The big question, in Boardwalk's case, is whether Boardwalk is a buy after the distribution cut. 

Why Boardwalk cut 
Boardwalk was, simply put, a victim of the shale. Much of Boardwalk's infrastructure was, at the time, pipelines which moved dry gas and wet gas from the traditional supply area, the Gulf Coast, to the traditional demand area, the northeast. Sounds reasonable enough, right? Unfortunately for Boardwalk, but through no fault of its management, that supply and demand dynamic got turned on its head by the greatest shale gas discovery of our time: the Marcellus Shale, much of which is in Pennsylvania. 

By 2010, dry shale gas from the Marcellus was displacing most of the 'imports' to the northeast from the Gulf Coast. Supply from the Gulf Coast had already been in decline for a while, and higher-priced Gulf Coast gas just couldn't compete with gas from the Marcellus. Volumes in Boardwalk's pipeline system began to be challenged, and margins correspondingly fell. Compounded on top of that was the 2009 financial crisis, which froze and restricted access to credit markets for quite some time.

Management soon found itself in a dilemma: little to no excess cash in which to build new infrastructure, yet an almost certain decline in relevancy if it did not spend money to do so. Boardwalk did what it felt was the only option. It cut the distribution, and cut deep enough to ensure enough excess cash flow to turn itself around. The partnership now has a distribution coverage ratio of 1.32 times, with plenty of excess cash flow in which to retool itself into a more relevant pipeline name. 

The turnaround
With its excess cash, Boardwalk is investing in a few important projects which should provide growth in the coming years. First, Boardwalk is constructing a distribution system which will deliver dry gas to power plants in Kentucky and North Texas, two areas which have a more robust demand than does the Northeast, partly thanks to the energy renaissance. This project will be ready by the last quarter of 2014. Boardwalk is spending $300 million on this project.

Second, Boardwalk is working on retooling its existing pipelines to form a network which will move dry and wet gas from Ohio down to Louisiana, where the burgeoning petrochemical industry demands more and more natural gas with which to make its final products. Boardwalk is spending $115 million on this project and it should be ready by 2016.

Bottom line: Maybe 
Boardwalk does not give long-term distributable cash flow guidance, so it is difficult to gauge how quickly the distribution will rebound. Past performance shows mid to low single-digit growth in distributable cash flow. Hopefully we will see some acceleration from there in years to come. 

However, Boardwalk today has a yield of only 2.3%, which is paltry compared to most other pipelines, and I believe that it will take at least a couple years for management to just begin to significantly regrow the distribution. To be sure, Boardwalk has huge potential for capital gains if today's projects result in double-digit distribution growth tomorrow. Growth, coupled with an already cushy coverage ratio, means that Boardwalk will have a lot of room with which to increase that distribution. However, if you are looking for stable income, it's probably best to stick with more tried-and-true midstream natural gas MLPs which provide a much higher yield today. 


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