Investors have been waiting for years for Boardwalk Pipeline Partners (BWP) to fix the issues of debt and profitability that forced management to cut its payout. The path to repair these issues has been agonizingly slow, however, as Boardwalk posted another quarter of results that don't suggest a return to a higher payout anytime soon.
Not that it will matter, though, because it's looking more and more like Boardwalk won't be a publicly traded entity much longer. Let's take a look at Boardwalk's most recent earnings report and see why management is considering a significant change in ownership.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$335.4 million||$337.5 million||$367.0 million|
|EBITDA||$224.4 million||$205.5 million||$246.2 million|
|Distributable cash flow||$159.9 million||$110.6 million||$176.1 million|
The vast majority of Boardwalk's business involves moving natural gas to power plants, which of course is a highly seasonal business and means that comparing Boardwalk's results to the prior quarter doesn't really tell us much. The only way to gauge its results is to look at the prior year's numbers. In this case, Boardwalk's results were down across the board because of an asset sale in the second quarter of 2017 and a renegotiated transportation contract in the third quarter that lowered firm volume commitments for this year and next in exchange for an extension all the way out to 2030.
The encouraging note in these recent results is that the company put one of its largest capital projects into service: The Coastal Bend Header gas pipeline. This first phase will deliver 0.7 billion cubic feet of natural gas per day to the Freeport LNG export facility. The second phase, set to be complete in November, will deliver an additional 0.7 bcf and will represent a significant uptick in revenue for the company.
Getting gobbled up by its parent company?
So there have been a lot of policy changes in recent months that have a direct effect on master limited partnerships. One of them was the Federal Energy Regulatory Commission's (FERC) recent ruling to change the way master limited partnerships can charge for services under what are known as cost-of-service contracts. The other was the recent changes to corporate tax rates, which makes the tax advantages of being an MLP less beneficial.
While CEO Stanley Horton mentioned on the company's conference call that the recent FERC ruling won't have a material impact on the company's earnings now. that decision and other changes have Boardwalk reconsidering its corporate structure.
[D]espite our view regarding the potential near-term impact on our revenues for the FERC's recent actions, the effect of the FERC's actions on the maximum applicable rates we may be able to charge in the future could result in our general partner being able to exercise its call right under the terms of our partnership agreement.
It's not just that its general partner, Loews Corporation (L 1.11%), has the ability to do so, It appears that both Boardwalk and Loews are seriously considering this option. Here's Horton again on the call:
Now this right has existed and has been disclosed in our SEC filings since our IPO and is further discussed in our 10-Q and in an amended form 13D that would be filed by Loews [ph] today. Now any decision to exercise the right is a Loews decision, not a Boardwalk decision. Loews has informed us that it is analyzing the FERC's recent actions and seriously considering its purchase right under the partnership agreement.
Boardwalk isn't the only one that is reevaluating whether this is the best path forward for midstream companies. Even some of the most prominent pipeline companies in the business have said the recent changes make the MLP structure less desirable than it was. So don't be surprised if we see Boardwalk and others make this move.
A good time to bow out
Back when Boardwalk cut its distribution in 2014, the plan was to shore up the balance sheet and free up distributable cash flow to grow the business. Four years later, its debt metrics have improved significantly, but EBTIDA is only 3% higher on a trailing-12-month basis. With results like this, it's hard to envision the company significantly increasing its distribution any time soon even as these new LNG supply pipelines go into service.
Considering how much recent regulatory changes have deteriorated the advantages of the MLP structure and how cheap Boardwalk's stock is right now -- it trades at an enterprise value to EBITDA ratio of 7.8, which is incredibly low for midstream MLPs -- it would be a perfect time for Loews to swoop in and buy up all the outstanding shares of Boardwalk. For investors that have watched its stock drop 62% since that fateful distribution cut, I don't think they will be too upset if Loews decides to buy them out.