How High Can This Undervalued MLP Raise Its Distribution?

Shares of Boardwalk Pipeline Partners have surged 43% since the February sell-off on its distribution cut. The $4.5 billion midstream partnership has not completely overcome its cash flow problems, but sentiment is improving on the most inexpensive investment in the space. A strong coverage ratio should support shares with the potential for a huge distribution increase in the future.

Jul 1, 2014 at 11:33AM

Boardwalk Pipeline Partners (NYSE:BWP) cut its distribution by more than 80% on fourth-quarter results in February, sending units down by 46% by the end of the day. At the heart of the distribution cut were contracts coming up for renewal in 2014 and 2015. Compressed natural gas spreads resulted in a $13 million decline in the fourth quarter of last year and are expected to hit distributable cash flow by 28% in 2014.

It was a bad day for unitholders, but the sell-off is an opportunity
While unitholders that bought in at the 52-week high of $33 are still seeing red, units have climbed 43% since the February sell-off. That is because the long-term outlook for the partnership is still firmly intact, and growth projects will soon start adding to distributable cash flow.

The partnership owns and operates approximately 14,195 miles of natural gas pipeline and 225 miles of liquids pipeline. The company also owns facilities with a storage capacity of 207 Bcf of natural gas and 17.6 MMbbls of liquids.

Shale gas supply at key receipt locations is projected to increase by 57% to 44 billion cubic feet per day from 2013 to 2020, including a doubling of production in the Utica/Marcellus Shale and the Eagle Ford shale. The company has had fewer assets servicing the Utica/Marcellus area but is building out its infrastructure with a major project from Ohio to Louisiana that should complete by 2016. 

The partnership completed $278 million in capital projects last year and has several more that it will complete over the next few years. The southeast market expansion project is the most promising on the partnership's schedule with 550 million Mcf/d fully contracted for 10 years. The project will take some pressure off cash flows by utilizing some of the excess capacity that is coming off contract in the Gulf Coast.

The southeast market expansion project is the company's largest since the $620 million acquisition of Boardwalk Louisiana Midstream in 2012. Clearly the partnership will announce other projects through the rest of the year, but the completion of the $300 million project could go a long way to improving the cash flow picture.

Boardwalk Pipeline Projects


While the Ohio to Louisiana Access project is further out, it is supported by longer contract terms and should be coming on-line just as LNG exports increase significantly. The project will build on current infrastructure from the Marcellus and Utica supplies down to the Gulf Coast.

The company is also looking to the opportunity to attach to new customer loads for LNG exports out of key terminals including Sabine Pass, Freeport, and Lake Charles. The Energy Information Administration projects LNG exports to increase demand by between 5.5 Bcf/d to 8.0 Bcf/d by 2020.

Management typically does not provide forward guidance on financials but did so during its 2013 fourth quarter call to explain the distribution cut. The expectation is for 2014 distributable cash flow of $400 million, which covers the $0.40 distribution by four times. A coverage ratio of four times the distribution is unheard of in partnerships, but management has elected conservatism to pay down debt and for future growth.

The sacrifice of near-term distribution for future growth sent the shares plummeting but created a huge opportunity for new investors. The table below presents valuation metrics for 11 midstream partnerships.

Bwp Valuation

While Boardwalk may offer the lowest yield, it also sells for the lowest price-to-DCF ratio, and its coverage ratio is more than twice the group average. Boardwalk Pipeline trades for less than half the price-to-DCF of larger peers like Magellan Midstream Partners (NYSE:MMP) and only lags the distribution yield by half a percent.

The company had $3.55 billion in long-term debt last quarter against EBITDA of $613 million over the last four quarters and a ratio of 5.8 times. That is relatively high and management has a goal of lowering its debt/EBITDA ratio to 4.0 times.

Revenue is expected lower by 2.6% for 2014 to $1.17 billion but then slightly higher in 2015. Distributable cash flow will improve once the partnership concludes a large project this year, but management will likely focus on paying down debt through this year and most of 2015. Even if the company is only able to maintain DCF of $400 million, once uncertainty clears around revenue, it could increase its distribution by 100% and still have a coverage ratio well above the group average. In fact, the partnership could increase its distribution by 180% to $1.12 and still be at the average coverage ratio.

Management's decision to cut the distribution in favor of future stability and growth is a good sign for unitholder rights. While other partnerships may increase the distribution to unsustainable levels to increase the incentive distribution right to the general partner, Boardwalk has made the tough decision to create a sustainable distribution.

Management has said that growth projects are not expected to offset revenue declines in the near term. This may mean that any increase in the distribution will have to wait until 2015 or later but it could be a big one when it comes. As is most often the case, the market will be watching the partnership's performance and will drive the unit price higher well ahead of a distribution increase.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Joseph Hogue has a position in BWP, MMP, KMP and EPD. The Motley Fool recommends Magellan Midstream Partners. 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