THE HEDGEYE EDGE
Cash Flows Near Peak, Cyclical and Structural Headwinds Emerging...
We expect Genesis Energy's (GEL) Offshort Pipelines segment cash flows to peak in 2017 and then decline through at least 2020, as Lucius, Heidelberg, and other key GEL fields mature, with few new fields sanctioned to fill the hole. GEL has invested heavily in crude-by-rail and tank barges over the last 4 years; these were poorly-timed bets.
The continued buildout of non-GEL onshore pipelines will likely take market share back away from crude-by-barge, pressuring prices and volumes in GEL's Marine Transportation and Supply & Logistics segments. And GEL's Onshore Pipelines and Refinery Services segments are no-growth businesses, at best.
We continue to like GEL on the short side for its high valuation, super-aggressive non-GAAP accounting, high leverage, and low quality asset base and management team. GEL is a slow-moving train wreck that may be able to hang in through 2018 as GoM crude volumes continue to grind higher, but we think that ultimately the Company will be forced to reduce the distribution and the stock will trade to fair value, which we estimate to be ~$15/unit based on our DCF.
Reviewing the 1Q17 Results…
GEL’s 1Q17 results were in-line. Adjusted EBITDA was $131MM vs. consensus of $129MM, and EPS was $0.23 vs. consensus $0.22. EPS – which we believe is the best measure of GEL’s economic profitability – was down 29% YoY in 1Q17. GEL’s 1Q17 CapEx was $61MM and FCF was $32MM or $0.27/unit. Net debt ticked down slightly to $3.0B due to a $140MM equity raise in March. Net debt to annualized 1Q17 EBITDA stands at 5.7x – the Company is still way overlevered.
Operationally it was a mixed quarter but consistent with recent trends: the Offshore Pipelines segment continues to show strong volume growth while all the other businesses struggle. As evidence, Offshore Pipelines Segment Margin was +11% YoY while Segment Margin for the other three segments combined was (22)% YoY.
PSX Westlake Contract Renegotiation Hits Refinery Services… GEL recently amended its sulfur removal contract with PSX’s Westlake, LA refinery, its largest customer. While the term of the contract was extended from 2018 to 2026, it came at a significant cost. GEL management noted on the call that this and other contract renegotiations is going to put Refinery Services Segment Margin in the range of $16MM - $17MM per quarter compared to the prior run-rate of ~$20MM. We now expect EBITDA from Refinery Services to fall by ~20% in 2017.
ONE-YEAR TRAILING CHART
