Boardwalk Pipeline Partners LP (BWP, Financial) along with its subsidiaries provides transportation, storage gathering and processing services for natural gas, natural gas liquids and hydrocarbons in the U.S.
Boardwalk has a well-diversified midstream business; due to its global presence, the LP is strategically positioned to meet the growing demand for its products.
Stable revenue model
The LP has a stable revenue-generation profile with around 93% of the revenue coming from fixed-fee and ship-or-pay contracts and the other 7% from interruptible contracts. Around 80% of the LP’s firm contract revenue comes from capacity reservation charges which are received monthly regardless of utilization and 12% from utilization charges. This makes cash inflow relatively certain and provides clear revenue visibility.
Industry outlook
According to the LP’s quarterly presentation, natural gas production in the U.S is expected to grow by more than 23% in the next five years. With supply basins connected to or being near to Boardwalk, the LP has a competitive advantage in securing contacts. This is the reason why Boardwalk has been able to secure firm contracts for the long term. One of the recent contracts is to transport around 1Bcf/d of natural gas produced in Marcellus /Utica supply basin. U.S natural gas demand and exports are also expected to grow by 17% in the next five years and with increasing demand Boardwalk is likely to secure long-term contacts. Therefore, even in the coming years, I expect clear cash flow visibility that is likely to increase as the energy market grows.
In addition to a strong transportation pipeline, the LP also has well-situated storage assets to store natural gas in events of changing end-use market demands. Thus, the LP is well managed to provide its services securely and efficiently even in changing economic conditions.
Clear revenue visibility and its impact on distributable cash flow
Boardwalk has significant project backlog and the partnership expects to generate around $1.3 billion in fiscal 2017 from capacity reservation charges; this would be around 9.5% more than the partnership’s capacity reservation charges in fiscal 2015. The majority of the LP’s growth contributors in fiscal 2017 would be the projects placed into service in 2016.
In addition to these, the partnership has plans to invest in Northern supply access, Coastal bend header, Sasol ethane cracker and Brine supply projects. A capex of around $1.2 billion is expected to be invested in these projects which are estimated to provide cash flow secured by ship-or-pay contracts with a weighted-average contract life of approximately 17 years.
Investment in valuable projects is likely to provide better revenues which in turn would have a positive impact on the company’s distributable cash flow. A year-over-year rise of 7.6% in distributable cash flow from $83.6 million in third-quarter 2015 to $90 million in third-quarter 2016 is primarily attributed to increasing EBITDA. Twelve-month rolling EBITDA has increased from $692 million in third-quarter 2015 to $778 million in third-quarter 2016; with increased contact terms, it is expected to rise further.
Debt should not be a concern
Debt to EBITDA ratio is expected to increase in 2017, primarily because the partnership needs cash to fund its growth projects. I expect leverage to increase until those projects are placed in service and begin generating revenue. This should not be a concern for investors as the company has sufficient liquidity to meet its short-term and long-term obligations.
As of Sept. 30 the LP had total liquidity of $2.7 billion, net of cash distribution to unit holders. It comprises $377 million cash, $1.5 billion of revolving credit facility, $300 million of subordinated loan agreement and $500 million of at-the-market equity program. Hence, the partnership has sufficient liquidity to meet its obligation in fiscal 2017 and also cover its capex requirement of $1.2 billion. At the same time, I expect an increase in distribution yield.
Conclusion
Boardwalk is currently trading at an EV/EBITDA of 10.1 against the industry median of 15.9. Further, a peer such as ONEOK Partners LP’s (OKS, Financial) is trading at an EV/EBITDA of 13.0 while DCP Midstream Partners LP’s (DPM, Financial) is trading at an EV/EBITDA of 12.2. Considering the present undervaluation and the industry outlook, Boardwalk Pipeline has the ability to grow both its revenue and distributable cash flow.
Disclosure: No position in the stock discussed.
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