Through its subsidiaries, Boardwalk Pipeline Partners LP (BWP)
provides transportation, storage and processing services to natural gas
liquids and other liquids in the United States. The partnership owns
and operates approximately 22,675km of interconnected pipelines to be
served across 13 different states throughout the northeastern and
southeastern side of the USA. Loews Corporation is the parent company of BHPC, the company who owns a controlling stake of BWP.
Google Finance: NYSE:KMISubstantial shareholders as at 19 Feb 2016:
- Loews @ BHPC (50.17%)
- All directors & executives (0.093%)
- Andrew H. Tisch (0.03%) – a business partner
| Valuation | UNDERVALUED |
|---|---|
| Current price | US$ 16.70 |
| Shares outstanding (approx.) | 250,296,782 |
| Market cap | US$ 4.180 billion |
| Fair value | US$ 17.17 |
| Margin of safety | 2.7% |
HIGHLIGHTS
- Good business model to grow with the oil and gas industry
- Excellent cash flow management and efficiency
- Berkshire’s stock pick?
ANALYSIS
Financial Ratios @ Reuters: BWP.N
Please note that I have computed all
ratios reported below from original sources unless stated otherwise. For
other various ratios, please refer to Reuters.
Exposure to oil & gas sector with minimal commodity risk
BWP’s business model avoids the direct
risk of commodity price fluctuations, albeit still subjected to its
customers credit risk. BWP managed to announced profitability in FY2015
despite the oil price crash by more than 50%.
Referring to An Attempt to Value Oil,
the United States is on its way towards being a net exporter of crude
oil. As the US gradually produces for its local consumption, pipeline
services can improve transportation efficiency between the producers and
consumers, hence being the main growth drivers for BWP in the near
future. Customers are also likely to remain loyal to their respective
pipeline providers due to high initiation costs; which allows more
freedom for BWP to raise profit margins.
Commendable cash flow management and efficiency
BWP has posted 7 years of positive FCF in
the past 10 years, with positive FCF in the most recent 6 consecutive
years. From this, the company manage to reward its shareholders with
consistent dividend yields throughout the past 10 years. At current
price of US$ 16.70, a payout of 40 cents in FY2015 translates to a
decent yield of 2.4%. The company managed to achieve good cash flow
management due to negative cash conversion cycles over the past 10
years. TTM, the company reports a cash conversion cycle of -24.2 days,
which implies that customer’s have been paying BWP in advance before the
services commence.
BWP has achieved a 10-Y revenue and net
profit CAGR of 8.3% and 1.3% respectively. The company has been
consistently profitable of the past 10 years.
A smaller scale Kinder Morgan, stock picked by Berkshire Hathaway
Berkshire Hathaway has invested more than
US$ 300 million in Kinder Morgan, the largest pipeline company in North
America. While it wasn’t the stock picked by Warren Buffett himself, it
was picked by his portfolio managers which are considered to be
potential future Warren Buffetts. This in itself is a good advertisement
for the pipelines sector.
In fact, BWP is actually a better company than Kinder Morgan
(KMI) in terms of capital structure, as KMI is mounted with huge
amounts of debts. According to Reuters, KMI has a debt to equity of
1.25. Berkshire might have also favoured KMI over BWP due to KMI’s
larger market cap, which is easier to invest given their large funds.
Huge debts to fund expansionary capital expenditures
As at the FY2016Q1, BWP’s debt to equity ratio stood at 0.79. Boardwalk prices US$ 550 million offering of senior notes at
5.95% cost of capital, due 2026 for; (i) growth capex (ii) refinancing
long term debts (iii) addition to working capital. Post external
fundings, the adjusted debt to equity ratio is 0.91. This is definitely
a risky capital structure, but the prospects for BWP is bright and I am
fully supportive of leveraging on this opportunity.
Technically, too late for entry?
The stock has rebounded 87.2% from a
52-week low of US$ 8.92 in early February 2016. YTD, BWP has appreciated
30.7%. A price consolidation after its strong rally could allow a
cheaper entry into BWP.
VALUATION
Fair value of US$ 17.17 based on a P/E of
17.85x from a TTM EPS of 96 cents. At fair value, yield is 2.3% based
on 40 cents payout in FY2015.
Best regards,
Shaun Loong
https://megamicrocaps.wordpress.com/2016/05/20/bwp-piping-hot-prospects-from-og-sector/
