|Shares Out. (in M):||40||P/E||0||0|
|Market Cap (in $M):||660||P/FCF||0||0|
|Net Debt (in $M):||80||EBIT||0||0|
“Unless we totally mess this up we are in a good position to produce growth and substantial distribution growth.”
Tom Karam, CEO, closing comments on Q2 2015 Earnings Call
PennTex is the best investment I have seen in the energy space in a while. I think the stock will double in the next one to two years, with minimal downside. If you’re looking for a great way to capitalize on the energy/MLP dislocation then this is it. Zero commodity exposure, 100% fee-based revenue, superb asset positioning, fantastic growth potential and a sponsor that has basically stacked the deck in PennTex’s favor. We’re talking double rainbow. https://www.youtube.com/watch?v=OQSNhk5ICTI
Memorial Resource Development (Ticker: MRD), PennTex’s primary customer, reported earnings last week. They were great. Well results are strong and 2016 production is likely to exceed guidance materially. The stock is up +20%. Meanwhile, PennTex’s stock is down 3%. I attribute the difference to the ongoing rout in the MLP space and PennTex’s limited trading liquidity. I think the underperformance will correct relatively soon. PennTex trades at a near 50% discount to peers. I think there is near 100% upside over the next 12-18 months.
PennTex is a natural gas gathering and processing midstream MLP with assets located in the Terryville play in northern Louisiana. I like PennTex because:
It is cheap – trading at a 6.7% yield
It is low risk – the assets are supported by 15 year take or pay contracts that ensure 100% utilization which almost guarantee +30% distribution growth
It will grow quickly – PennTex’s major producer, Memorial Resource Development (Ticker: MRD), will likely grow production +25% per year for the next five years. This should drive +20% long-term distribution growth for a long time
Incentives are remarkably well-aligned – PennTex and its primary customer are controlled by the same private equity shop. The PE sponsor owns more PTXP. Beneficial treatment of PTXP is quite obvious
The assets are competitively advantaged – PennTex’s assets are situated on top of one of the most economic natural gas basins in the world
PennTex is controlled by Natural Gas Partners (NGP), a +$16B private equity shop based in Irving, Texas. The org chart for PennTex is below.
NGP owns the GP of PTXP, as well as 63% of the LP. PennTex has an acreage dedication from Memorial Resource Development (Ticker: MRD) that covers most of northwest Louisiana. NGP also controls MRD, by way of a 38% equity ownership stake and additional 17% voting rights for stock owned by management of WildHorse Resources, an NGP-related entity focused on acquiring and de-risking E&P assets.
MRD is a very fast growing E&P with a large position in the Terryville gas play in northwest Louisiana. As shown in the org chart below, the company is also controlled by NGP.