NGL Energy Partners (NGL, Financial)Â has slumped recently with the stock sliding by 57% in the last six months, but after touching a low of $9.12 on Jan. 7, NGL has bounced back by 40% to its current level of $12.76.
NGL Energy is engaged in crude oil logistics, water solutions, liquids, retail propane and refined products and renewable businesses in the U.S.
The company announced on Jan. 8 that it has entered into an agreement with an affiliate of ArcLight Capital Partners to sell TransMontaigne GP LLC for $350 million in cash. There are several positives that emerge from the transaction, starting with the company’s distribution payout.
NGL Energy announced that it will continue paying $2.56 in distribution per unit after the transaction. Considering the current unit price of $12.76, NGL Energy has a distribution yield of 20% that is sustainable through 2016. This will attract dividend seekers, and the unit price is likely to trend higher in the foreseeable future.
Besides the distribution, the following factors point to improving fundamentals from the transaction:
- The company intends to use proceeds from the transaction to repay the debt under the revolving credit facility. In addition, NGL Energy is not fully funded for capital expenditure for the next 18 months. Therefore, the company is likely to navigate through challenging times for the industry with healthy credit metrics.
- As a part of the transaction, NGL Energy will retain approximately 3.2 million common units it owns in TLP and has granted an option to ArcLight to purchase 800,000 of those common units at a future date. This provides additional scope for liquidity inflow and improvement in credit metrics in the next few quarters.
From a growth perspective, NGL Energy announced on Jan. 11 that the company will be conducting an additional open season for its 20-inch pipeline that originates at Lucerne / Riverside, Colorado, and will deliver at least two grades of crude oil from the DJ Basin into NGL’s facilities at Cushing, Oklahoma.
This pipeline is likely to be functional by the fourth quarter of 2016 and will have significant incremental impact on the company’s EBITDA. To put things into perspective, NGL Energy expects $190 million in annualized EBITDA from Grand Mesa Pipeline and Sawtooth by 2018.
Therefore, in the next 12 to 18 months, there are credit positive factors for NGL Energy even as the broad energy sector continues to face challenging times. Further, by 2018, NGL Energy is targeting EBITDA of $1.0 billion from all segments, and this implies continued growth with nearly 60% fee-based income targeted by 2018.
Considering these positive factors, NGL Energy is not only attractive for the near term but also for the long term. Continued increase in distribution besides projects that will continue to have an incremental EBITDA impact can be expected. In the current industry scenario, the key factor is that the company’s credit health is likely to remain strong.
From a credit rating perspective, Standard & Poor's and Fitch have reaffirmed “Stable” outlook with BB- and BB rating respectively. Moody’s has a negative outlook with Ba3 rating, but that can be expected to change with the recent asset sale development. Rating upgrade from Moody’s is yet another positive trigger.
Investors should consider small exposure to quality names in the energy sector. A big plunge in the sector is still not advisable with a few negative industry triggers still to play out.
Disclosure: No positions in the stock
