|Shares Out. (in M):||132||P/E||n/m||n/m|
|Market Cap (in $M):||2,130||P/FCF||8.5x||10.1x|
|Net Debt (in $M):||1,612||EBIT||155||140|
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Overview: NRGY is an MLP that earns its cash flow in an equal split between: 1) propane distribution to retail customers on the East coast and 2) midstream / pipeline operations (primarily Marcellus transport and storage assets). NRGY has historically been known as a Propane MLP (a sector currently suffering from an abnormally warm winter). However, NRGY is currently undergoing an underappreciated transformation through a “drop down” strategy of its high-growth midstream cash flow to its newly-IPO’d daughter MLP, NGRM. NRGY’s drop downs to NRGM generate cash proceeds, allowing NRGY to sell assets at 10x EBITDA, pay off debt, and retain nearly 50% of the EBITDA (through NRGY’s ownership of NRGM units and the general partner of NRGM, which is currently at the 50% split level on its incentive distribution rights (IDRs).
If you have followed the sagas of GP DivCo’s over the last year (KMI/EP, ETE/SUG, WMB/WPZ, TRGP/NGLS), you know the value of a GP of a MLP at the 50% splits with further “drop down” opportunities. This highly favorable structural transformation ongoing at NRGY (starting with NRGM’s Dec IPO and initial drop downs) has been overlooked because of extremely weak recent performance at NRGY’s traditional propane assets. Further drop downs to NRGM will help NRGY de-lever and rapidly grow its GP, which will have increasing relevance to NRGY’s valuation in the out years.
Target Price: We target a 35% total return for NRGY over the next 12 months (a $20.60 unit price target + $1.44 in dividends). Our target yield is 7% yield for NRGY, on a new FY9/13 distribution level of $1.44 (1.3x distribution coverage). This estimates a 100 bp tighter cap rate relative to pure-play propane peers given NRGY’s substantial midstream cash flow, GP ownership of NRGM, and excess coverage relative to peers at 1x. Our unit price target represents 11x DCF / unit and 11.5x EV / EBITDA (post near-term drop downs of $400M).
Why NRGY is Cheap & Opportunity Summary
Asset Base Overview
|NRGY Comps||Price||Div Yield||FY13 Div||Distrib Cov||P/DCF||EV/EBITDA||Norm Grwth|
|Heritage (APU bot from ETP)||EV $2.9B||11.0x|
|Note: Based on most recent updates to street estimates & pro-forma for APU's 10/17/11 acquisition of Heritage.|
|APU's GP is owned by UGI. FGP does not have a GP. SPH has an external GP but is at the low splits in its IDRs.|
|NRGY is shown PF for $400M in drop downs.|
|Units Out||131.5||5.8M in class B mgmt units (PIK divs), vesting near term.|
|Adj Debt||1,631||4.66x as-reported NRGY leverage ratio at 1Q.|
|Gross Cash||19||5.25x EBITDA covenant. No near term maturies.|
|FY 9/09||FY 9/10||FY 9/11||FY 9/12||FY 9/13||FY 9/14||FY 9/15||FY 9/16|
|Inergy Total Asset Adj EBITDA||297||326||372||340||385||381||385||398|
|A) NRGY's Propane EBITDA||214||215||212||163||173||166||160||153|
|Note: Retail Margin / gal||$1.17||$1.13||$1.19||$1.01||$1.02||$1.02||$1.02||$1.02|
|Note: Retail Vol y/y||-7%||10%||-4%||-18%||6%||-4%||-4%||-4%|
|B) NRGY's "Undropped" Midstr EBITDA||111||111||160||75||55||33||32||32|
|Note: EBITDA at NRGM||102||157||182||193||213|
|Note: Total Midstream Asset EBITDA||111||160||177||212||215||225||245|
|NRGY's Cash Flow from NRGM Ownership:|
|Cash Flow from 56M NRGM Units Owned||84||94||100||106||112|
|2% GP Mgmt Fee Stake||2||2||3||3||3|
|IDR Cash Flow||1.5||15.5||24.5||34.6||46.0|
|C) NRGY's Cash Flow from NRGM Ownership||87||111||127||143||161|
|NRGY Total EBITDA (A+B+C)||326||372||325||340||327||335||346|
|% of Cash Flow from Midstr & NRGM||34%||43%||50%||49%||49%||52%||56%|
|% of Cash Flow from GP||1%||5%||8%||11%||14%|
|DCF / Shr||$1.68||$1.85||$1.60||$1.87||$1.84||$1.90||$1.99|
|NRGY Div Est:|
|NRGY EOP Net Debt||1,411||1,211||1,211||1,211||1,211|
|Note: Drop Downs During Year||200||200||0||0||0|
|Note: Other Cash Burn||-20||0|
|ND / EBITDA at EOP||4.3x||3.6x||3.7x||3.6x||3.5x|
|P / DCF||10.1x||8.6x||8.8x||8.5x||8.2x|
|EV / EBITDA on Current Bal Sheet||11.5x||11.0x||11.5x||11.2x||10.8x|
|EV / EBITDA on EOP Bal Sheet||10.9x||9.8x||10.2x||10.0x||9.7x|
|Note: NRGM Dividends & IDRs:||Current||FY 9/12||FY 9/13||FY 9/14||FY 9/15||FY 9/16|
|NRGM Initial Distr Rate (=50% IDR Split Level)||$0.37|
|Total NRGM Units Out||74||74||78||82||85||88|
|NRGM Units Held at NRGY||56|
|NRGM Div / Unit||$1.50||$1.68||$1.78||$1.89||$2.00|
|Div / Unit over the 50% Split||$0.02||$0.20||$0.30||$0.41||$0.52|
|NRGY's IDR Cash Flows||1.5||15.5||24.5||34.6||46.0|
|Note: NRGY Remaining Drop Downs||EBITDA||Mult||Proceeds||Comments|
|West Coast NGL||20||10x||200|
|Tres Palacios||35||8x||280||EBITDA declining ~7% y/y, recontracting.|
|FY12-13 Drops||400||NGL & LPG. NRGM has revolver capacity.|
|Total Potential Drops||680|
|Expansion Projects||Total||Remaining||Multiple||In Service||Total EBITDA|
|Finger Lakes LPG Expansion||65||22||7.0x||6/1/2012||9|
|MARC I Line||240||183||7.2x||7/1/2012||33|
|UGI JV, Baltimore Pipeline||333||333||8.5x||1/1/2015||39|
|West Coast Expansion||21||11||5.5x||4/1/2012||4|
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