The headline numbers in Boardwalk Pipeline Partners' (BWP) most recent earnings report don't look good -- at least, not out of context. Operating profits and net income declined year over year as the company sold some assets for a loss. If you look at why Boardwalk elected to make those sales, though, taking the one-time loss today seems completely justified, especially considering all the opportunities the move creates.
Let's take a look at Boardwalk's most recent earnings results; get a better understanding as to why the company elected to make this seemingly small move; and consider the implications that move may have down the road.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$318 million||$367 million||$306 million|
|EBITDA||$148 million||$246 million||$190 million|
|Distributable cash flow||$202 million||$176 million||$129 million|
First, an obligatory statement about Boardwalk's business model: Because the majority of its clients are natural gas power plants, its results are seasonal. So sequential quarter comparisons aren't that helpful; instead, focus on the year-over-year numbers.
On paper, it would appear that the company's quarter wasn't that great. Revenue and distributable cash flow increased, but EBITDA and earnings per share both declined significantly. What those figures don't account for, though, is the asset sale the company completed in May. It sold its Flag City Processing plant and two gathering pipelines related to it, and took a $47 million asset impairment charge to get rid of them. Absent those charges, EBITDA for the quarter would have been closer to $195 million and distributable cash flow would have been $137 million not including the cash received for the plant. These results would have been more in line with its revenue numbers.
The reason behind the sale wasn't to shed an unprofitable asset, though. Rather, it was part of a broader strategy related to some of its other assets. Boardwalk's South Texas pipeline network and Flag City processing plant were designed to gather, transport, and process liquids-rich gas and condensate from the Eagle Ford Shale formation. However, because of shifting product demand, Boardwalk is going to repurpose the South Texas system to handle dry natural gas instead. This conversion will also likely have an effect on the company's largest development project, it's $720 million Coastal Bend Header pipeline that will supply the Freeport LNG export terminal starting in 2018.
Management elected to keep its distribution at $0.10. Investors can expect that the payout probably won't change until next year, when the Coastal Header Pipe is operational.
What management had to say
CEO Stanley Horton explained the rationale behind the Flag City sale this way:
In May, we've sold the Flag City Processing plant and two related gathering laterals that were part of our Boardwalk Field Services subsidiary. We retained the South Texas transmission pipelines including those between Agua Dulce and Edna. And we have been pleased with the operations at the Flag City Plant since it was placed into service in 2013.
However, market dynamics along the Texas Gulf Coast have changed with demand growth expected from exports to Mexico, LNG exports, industrial corridors in Corpus Christi and the Houston Ship Channel, and proposed power plants. This expected demand provides greater potential value for our South Texas pipelines, which we are placing back into lean gas service.
What a Fool Believes
The decision to convert its South Texas Gas system to dry gas has the potential to lead to the next big wave of investment for the company. At this time, there are four proposed LNG export facilities in Corpus Christi alone. Of those currently under construction, Cheniere Energy's Corpus facility should be operational by 2019. Between these facilities, petrochemical manufacturing investments, and potential pipeline exports to Mexico, this seemingly small pipeline system could play an integral role in the coming years. Management thinks it could invest an additional $1.5 billion in this system to meet this demand.
Once the company completes its current suite of projects, Boardwalk should be in a position to both grow its payout and invest in new projects. Investors, though, should wait to act until the company's current phase is complete.