February 21, 2017 - 11:27am EST by
2017 2018
Price: 15.75 EPS 0 0
Shares Out. (in M): 41 P/E 0 0
Market Cap (in $M): 641 P/FCF 0 0
Net Debt (in $M): 156 EBIT 0 0
TEV ($): 797 TEV/EBIT 0 0

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  • MLP




Investment Summary:

Penntex Midstream Partners (PTXP) presents a highly asymmetric investment with 30%+ upside and an expected catalyst over the next 12 months. Energy Transfer Partners (ETP) now owns 65% of the company and should tender to acquire the remaining shares in order to have unfettered access to PTXP’s cash flows and to reduce complexity within the Energy Transfer complex. In the event ETP does not tender for shares in the near term, you are paid a 7.5% dividend to wait.


Company Description:

Please refer to Yellowhouse’s August 2015 write-up for a more in-depth overview of PTXP’s assets and corporate history. This background is helpful to understand the company, but not central to the current thesis.


Penntex is a Louisiana based MLP, focused on the gathering and processing of natural gas and NGLs in the Terryville Complex. The company was founded by the private equity firm Natural Gas Partners (NGP) and management in January 2014. In the summer of 2015 the company was taken public at $20/share and a 5.5% distribution yield. PTXP’s assets were supported by a newly signed 15 year, fixed fee minimum volume commitment (MVC) by its largest customer, Memorial Resource Development (now Range Resources (RRC)). However, the growth plans at the time of the IPO, including the expected drop-down of Permian assets held by the General Partner (GP), were delayed or did not materialize, resulting in a busted IPO. The limited liquidity of shares due to a sub $200mm free float and a concentrated minority shareholder base further exacerbated the trading performance of shares. This may have also made PTXP shares less appealing to future shareholders which is critical to accessing equity capital in the MLP space.


Timeline/Key Dates:

Less than 3 years after the formation of the company and less than 1.5 years since PTXP went public, Natural Gas Partners decided to cap their upside and take the chance to completely exit their now illiquid investment. On November 2, 2016, NGP sold their 65% stake in PTXP (MLP) and their GP stake (with IDRs) to Energy Transfer Partners (ETP). The consideration for the PTXP shares and GP stake was a combined $640mm and consisted of a mix of cash and ETP shares. The simultaneous sale of the GP and PTXP shares makes it difficult to determine what price ETP paid for the underlying MLP but based on typical value’s for GP’s, it appears PTXP shares continue to trade at meaningful discount to their recent transaction value.


After closing the transaction, ETP immediately fired virtually all of the existing management team at PTXP and installed a majority of its representatives to the PTXP board (ETP now controls 4 of 7 board seats). ETP management also completely control the GP (which has effective control of the MLP). The only remaining PTXP management team members are the General Counsel and the Controller/Chief Accounting Officer (who was subsequently demoted to just VP on 1/23/2017). Based on this, it is clear ETP is already running the entire company as its own.


At the time of the transaction with NGP, ETP also entered into an evaluation agreement with PTXP laying out the terms of any additional tender offers for the remaining 35% of PTXP shares. The remaining independent board members must approve the tender offer price (for either a partial or total tender) before ETP can launch a tender offer. This evaluation agreement expires May 2nd, 2017, after which ETP is no longer required to consult with the independent board members on the attractiveness of their offer for minority shareholders.

I expect ETP to tender at or around the expiration of the evaluation agreement.


Why ETP wants to buy PTXP:

The fixed fee, minimum volume commitment between PTXP and Memorial Resource Development (now Range Resources) was a sweetheart deal between two of NGP’s portfolio companies. This contract also included an area of mutual interest in the Terryville shale play lasting through 2031. Range Resources currently has 220,000 net acres within this area. Other than the prospects that the Terryville might turn into the next Marcellus due to its attractive IRRs and favorable geographic location, the acreage dedication by RRC was probably the main reasons why ETP was interested in buying PTXP. ETP had legacy gathering and processing assets already built in this area of mutual interest that were processing volumes for MRD/RRC. Unfortunately for ETP, these contracts were set to expire at the end of 2017 and MRD/RRC would have to shift all of its volumes to PTXP. This would result in the ETP assets losing their largest customer and beginning to run at a large loss. As a result, acquiring PTXP was one of the only moves for ETP. Now, ETP has the option to sell their existing plants to PTXP or fold them into PTXP if it acquires 100% of the MLP. In a control scenario, PTXP can grow volumes without having to build any new plants (which is much more efficient than if PTXP continues to operate on a stand-alone basis).


Other Reasons why ETP is interested:

  • ETP is incentivized to completely buy out PTXP or raise the quarterly distribution. If they don’t raise the distribution then the GP will have little value because it currently receives zero IDR payments. Alternatively if ETP doesn’t raise the distribution and doesn’t buy the entire MLP, then a meaningful amount of cash flow becomes trapped at the MLP.

  • PTXP is immaterial in size to ETP. This means ETP management shouldn’t care too much about a large premium and is probably more focused on removing the additional complexity of another publically traded MLP. If they control all of PTXP there may also be some additional synergies they can extract.

  • Gives ETP the chance to be the first mover in what could become the most attractive natural gas field since the Marcellus was discovered.

  • ETP has a history of tucking in previous MLPs (such as Regency in 2015).

  • The CFO of ETP expressed interest in simplifying their structure on their Q3 call and was highly complimentary of PTXP’s assets:




PTXP currently trades at an 11% distributable cash flow yield and is building cash on the balance sheet due to its conservative ~1.5x distribution coverage.



To derive a value for PTXP shares requires backing out the implied value ETP paid for the Penntex GP stake. If the distribution payout was increased to a sustainable $0.43 per quarter (a 1.1x distribution coverage ratio) the GP would receive ~$2.7mm from its incentive distribution rights. This would put the IDRs at the 25% take-rate split. Applying a 35x multiple to this IDR payment implies a $95mm value for the GP and a residual $545mm for NGP’s 64.6% stake in PTXP. This equates to a $20.73 price for PTXP shares. If ETP were to tender for the remaining shares at this same price and adding the dividends shareholders will receive by the end of May, shareholders would make a 33.5% return in less than 3 months. Even if a tender takes over a year from now you still stand to make a 39% return while you collect distributions.