Investors aren't very happy with Boardwalk Pipeline Partners (BWP). The natural gas pipeline master limited partnership (MLP) cut its quarterly distribution sharply, which triggered a common unit, or MLP share counterpart, price collapse of over 40%. But Boardwalk's plunge may have been overdone. The partnership might be as compelling an investment as better performing peers like El Paso Pipeline Partners (EPB) or Spectra Energy Partners (SEP). Here are three reasons why it might be time to get bullish on Boardwalk Pipeline Partners.
Better natural gas pricing suggests a bright future
Unfavorable natural gas pricing appears a major reason for Boardwalk Pipeline's recent disappointing 2014 outlook. A glut in natural gas inventories has hurt pipeline and storage providers. As supply levels climbed, prices fell and producers' desire to deliver, store, and transport increased volumes waned, reducing demand for the midstream transportation services that MLPs like Boardwalk provide.
Better natural gas pricing appears likely, however. Recent frigid winter weather has increased natural gas demand and drawn down inventories. The U.S. Energy Information Administration recently reported that gas stocks at the end of March, when the heating season draws to a close, are expected to fall to the lowest level since 2008. While these supplies will likely be restored eventually, higher natural gas prices should be supported in the meantime.
Growth in liquefied natural gas (LNG) exports may support higher prices longer-term. The U.S. government recently approved Sempra Energy's planned LNG export terminal in Louisiana, the sixth export facility authorization in the last year. Companies like Sempra are investing billions in LNG export projects that will need natural gas for processing. When these properties are up and running, the additional demand should provide gas price support, helping out transport and storage MLPs.
A parent company decision could support better times
Boardwalk Pipeline Partners might also see better times thanks to a relationship with Loews Corporation, its majority owner. Loews appears willing to accept some short-term common unit price pain for possible longer-term gain.
MLPs typically rely on borrowing or issuing additional units to fund growth since they distribute much of their operating cash flow. It seems Loews would rather not go those routes. The partnership maintains a watchful eye on its borrowings with a targeted debt level that appears inviolate. Boardwalk also appears disinclined to dilute current holders, anticipating that it will not need to sell any additional units in 2014. This leaves internally generated cash as the primary funding vehicle for expansion projects. Boardwalk's painful distribution cut may have been Loews' preferred way to generate funds for expansion in a difficult operating environment.
And the partnership clearly operates in a tough environment. Expectations are for a 28% decrease in distributable cash flow this year. Though the core business doesn't seem excessively strained. Less than half of the year's cash flow shortfall appears related to the partnership's contract business, which generates roughly 90% of total revenues, and Boardwalk is not the only sector participant facing difficult conditions.
El Paso Pipeline Partners is encountering its own operating issues. Recent quarterly distributable cash flow dropped about 10% from the prior year, but the partnership boosted its distribution 7%. It anticipates another 2% payout bump in 2014.
The MLP was able to support unitholders thanks to help from its parent Kinder Morgan, the largest midstream operator in North America. Asset purchases from Kinder Morgan are expected to provide El Paso with the growth necessary to offset a weak rate environment and contract renewal cycle. Wall Street apparently appreciates the MLP's ability to offer growth and hold its distribution in tough times. El Paso Pipeline units look fairly valued at around 11.6 times 2014 estimated distributable cash flow.
Can Boardwalk offer Wall Street similar longer-term growth that might compensate for the pain delivered by the distribution slash?
Growth from a major expansion project
The partnership's Bluegrass Pipeline Project could have the potential. The project aims to link two liquids-rich resource plays in the Northeast U.S. with expanding industries on the Gulf Coast. Natural gas producers in the plentiful Marcellus and Utica shale plays could then furnish hungry chemical plant and LNG processing users in the South.
Bluegrass, which could be in service by 2016, will likely be a huge boost for Boardwalk. Partnering with the Williams Companies, one of the nation's largest and most respected energy infrastructure providers, the MLP may have been wise in freeing up funds for future growth at the expense of current distributions.
Spectra Energy Partners shows the benefits that can be achieved via effective expansion. This partnership's distributable cash flow climbed over 37% in the last year due to astute acquisitions, mostly from Spectra Energy, the MLP's parent company. Thanks to a buildup of attractive assets, Spectra Energy Partners expects at least 8% to 9% annual growth in distributions through 2016.
The partnership eyes further advancement. Its $1.5 billion purchase of the Express-Platte pipeline moves the MLP beyond natural gas, now shipping oil from the Bakken and Western Canada to refiners in the Midwest. Planning to spend roughly $25 billion on a variety of energy infrastructure projects over the next decade, Spectra Energy Partners has an exceptional growth profile. The stock market has noticed. Spectra's units appear premium priced at roughly 14.8 times this year's anticipated distributable cash flow.
Final thoughts
While times may be difficult for Boardwalk, they might not be nearly as dire as its distribution reduction implies. The massive cut could be overshadowing some compelling reasons to be bullish on the MLP. Trading at around 8.2 times expected 2014 distributable cash flows, a noticeable discount to peers like El Paso Pipeline and Spectra Energy Partners, Boardwalk Pipeline Partners might want to be considered an equally acceptable investment option.
