Boardwalk Pipeline Partners (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.
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.
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 (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.
