Short Boardwalk Pipeline Partners (BWP) remains a Hedgeye Best Idea, and we are reducing our Fair Value price to ~$10/unit after BWP’s disappointing results, guidance, and outlook.
We added SHORT BWP to our Best Ideas list on 12/2/2013 and issued a full report on 12/5/2013 (Link: Hedgeye Best Idea Short BWP December 2013). There we argued that, “BWP needs to cut its distribution to a sustainable level, which we estimate would be more than 50% below the current $2.13 per LP unit per year.” This morning BWP cut its distribution ~80% to $0.40/unit/year, and issued disappointing 2014 EBITDA guidance. The units are down more than 40% at the time of writing.
- What’s BWP worth now? We say Fair Value = ~$10/unit……In our 12/5/13 note, we gave a fair value range for BWP of $16 -18/unit. After the 4Q13 results and 2014 guidance, we now believe that our prior range is too high, given:
- BWP’s 2014 EBITDA guidance was weaker than we previously expected, primarily due to incremental weakness in BWP’s natural gas storage and PAL (parking-and-lending) businesses.
- We are more concerned with BWP’s 2015, 2016+ free cash flow outlook, given management’s reluctance to discuss it, as well as the weaker outlook for storage and PAL.
- We are less positive on Bluegrass going forward after a disappointing open season and management’s cautious tone/outlook when discussing the project.
- BWP’s leverage looks to be stuck ~5.0x EBITDA absent a significant equity injection or de-leveraging acquisition (but who wants BWP stock?). BWP will not de-lever in 2014.
For 2014, we estimate BWP LP EPU of $0.86 and LP EBITDA of $648MM, putting BWP at the current price ($14.30/unit at the time of writing) at 16.7x 2014 earnings and 10.7x EV/2014 EBITDA.
When thinking through BWP’s valuation, consider that BWP’s cash flows are at the front-end of secular decline - 2014 could be peak EBITDA; the Company has understated maintenance CapEx such that it’s DCF overstates its run-rate FCF; its over-levered at ~5.0x EBITDA with $525MM of principle due in 1H15; it likely needs a substantial equity injection in order to de-lever; it still has IDRs up to the 50/50 split; it has no "yield support" with an annual distribution of only $0.40/unit, and there is no hope of a distribution increase in the foreseeable future. Given all of these factors, we believe that BWP should trade at below-average multiples: at 8x – 10x EV/EBITDA, we value BWP at $7.00 - $12.50/unit.
The bull case for BWP will likely now shift to value buyers viewing it as a take-out candidate. Okay, we have some recent M&A comp transactions for similar long-haul natural gas transportation and storage assets. KMP acquired TGP and EPNG from KMI at ~8x forward EBITDA in 2012 and 2013, and SEP acquired the SE drop-down assets at ~9x EBITDA in 2013. We have a hard time believing that a potential buyer would be interested in BWP at more than 8x EBITDA given the potential future cash flow declines. Still, if we assume that a buyer could squeeze $50MM of cost synergies out of BWP, a bid for BWP at 8x PF EBITDA would be at ~$9.00/unit. Perhaps there is a case for a takeout, but not the current price.
- 2014 EBITDA guidance worse than expected……BWP guided 2014 EBITDA to $650MM vs. Bloomberg Consensus ~$780MM and our expectation of ~$700MM. BWP’s clean EBITDA (ex. base gas sales and other items) was $712MM in 2013.
- 2014 EBITDA is likely the high-water mark going forward; base business in secular decline……On the conference call, analysts repeatedly inquired about BWP’s outlook beyond 2014, to which management would give no color. The Company’s refusal to discuss 2015+, despite the fact that they should have revenue visibility on long-term contracts, gives us a good idea of what we need to know. Even with a full-year of the SE Expansion in service in 2015, we think it’s unlikely that this incremental EBITDA (we estimate ~$50MM) offsets continued weakness in BWP’s base transportation, storage, and PAL businesses. By our estimates, 2015 and 2016 will have more firm transportation contracts rolling off than in 2014, and 2014 transportation revenues will be down $40MM YoY on $75MM of contracts rolling. Transportation revenues could be down at least that much again in 2015 and 2016. Beyond that, 2019 could be a cash flow bloodbath, with ~2.5 Bcf/d of contracted capacity rolling off on Gulf Crossing and Texas Gas (see our 12/5/2013 report for contracted capacity rolls). The key point here is that BWP’s issues are very long in the tail – it’s not just 2014 weakness. In our view, DCF (~$1.60/unit in 2014) is overstated relative to run-rate FCF because “expansion” projects are merely making up for cash flow declines on the base businesses; longer-term, we expect CFFO to be flat-to-down while debt and units out increase.
- BWP will NOT be de-levering in 2014 (or 2015? or 2016?)……Management's comments suggest that it will not increase the distribution until its debt/EBITDA ratio falls to 4.0x from the current 4.9x (current debt/TTM adj. EBITDA as BWP presents it). That is not going to happen anytime soon! BWP guided 2014 DCF to $400MM; distributions will be $100MM and "Expansion" CapEx $330MM. There is NO free cash available for de-leveraging absent equity issuance (which management insisted they would not do in 2014).
Assuming net debt stays about flat around $3.4B over the next year, BWP will be 5.2x levered at YE14, in breach of its 5.0x covenant ratio. If we give BWP an additional $50MM of full-year EBITDA from the SE Expansion that is expected to be put into service in late 4Q14, BWP will be 4.9x levered on a pro forma basis at YE14. If BWP pays down the $175MM revolver by issuing subordinated debt to Loews, the leverage ratio from the standpoint of the equity holder will not change, though it will help with the debt covenant. Still, BWP would be at 4.6x covenant debt/PF EBITDA at YE14. BWP has no long-term debt due in 2014, but has $525MM due in 1H15 and $250MM in 2016. How does that get paid down? Equity issuance? Management is telling us not to expect more equity, but we're having a difficult time seeing how that's possible.
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