Even with turmoil in the oil and gas industry, World Point Terminals LP (WPT, Financial) is giving 7% cash distribution yield to its investors and is undervalued compared to its peers.
The MLP has outperformed its peers based on the per unit decline in price and is worth investigating further for key growth drivers and reasons why investors can be long on this not-so-famous name.
Company and business overview
World Point Terminals is a fee-based, master limited company that owns, operates, develops and acquires terminal assets to store light refined products, heavy refined products and crude oil. These terminals are strategically located in the East Coast, Gulf Coast and Midwest regions of the U.S. As of September, World Point Terminals had a combined available storage capacity of 15.6 million barrels.
In general, refiners prefer to subcontract terminals and storage services as they do not have adequate storage capacity and/or dock infrastructure. The combination of geographic locations' efficient and well-maintained storage assets and access to multiple modes of transportation helps the MLP to meet the flexible demand of its customers.
For the nine months ended Sept. 30 and 2016 through September, the MLP generated 84% and 83% of revenue from storage services fees – out of which 83% and 82% consisted of base storage service fees that are fixed monthly fees. The refiners are supposed to pay this fixed amount regardless of the utilization of the whole allocated capacity. In addition to this customers pay excess storage fees for volumes handled in excess of the amount attributable to the base storage fees.
Growth prospects
World Point Terminals has been strategically acquiring assets it believes will transform to future revenues. At the same time, the MLP is wisely investing in building tankers to increase its storage capacity. The growth will be further fueled by the following:
- On Sept. 14, 2015, the company acquired a terminal in Salisbury, Maryland, with a storage capacity of 177,000 barrels for the storage of gasoline, distillate, bio-diesel and jet fuel. It was purchased for $1.0 million and approximately 83% of the capacity is under contract with Apex Oil Co. through September 2018.
- In the third quarter, the company increased its storage capacity by 178,000 barrels and all of the operational tank capacity is under contract with Apex through Aug. 14, 2017.
- Further, the company has completed the construction of two rail spurs at the Chickasaw terminals, which will improve logistic efficiencies.
Financials
Based on the industry scenario, World Point Terminals has impressive financial numbers. Revenue increased for the third quarter and year to date. The below chart shows that there has been an increase in both the operating margin and net income margin of both the time frames, which indicates the company has been wise in managing its operating and other expenses. Further, EBITDA margin has been relatively stable.
| Amount in thousands | Three months ended Sept. 30 | Nine months ended Sept. 30 | ||
| Â | 2016 | 2015 | 2016 | 2015 |
| Revenue | 25203 | 22485 | 74878 | 72065 |
| Operating Income | 8947 | 7103 | 28202 | 25508 |
| Operating margin | 35.50% | 31.59% | 37.66% | 35.40% |
| EBITDA | 14946 | 13601 | 46094 | 44464 |
| EBITDA Margin | 59.30% | 60.49% | 61.56% | 61.70% |
| Net Income | 8798 | 6987 | 27782 | 25060 |
| Net income margin | 34.91% | 31.07% | 37.10% | 34.77% |
| Operating cash flow | - | - | 47437 | 47011 |
| Capital expenditure | - | - | 15831 | 18681 |
| Free cash flow | - | - | 31606 | 28330 |
Current ratio of 3.3 suggests that the firm is capable of paying back its liabilities. Moreover, World Point Terminals has no debt to repay; thus it is one of those few companies with no debt load and a strong balance sheet position.
Operating and free cash flows have increased for the nine months ended Sept. 30. Even with regular investments in acquisitions and constructions there have been ample free cash flows. This is one of the reasons why World Point Terminals has been persistent in its cash distribution payout.
Shareholder wealth creation
World Point Terminals has a trailing 12-month return on assets (ROA) and return on equity (ROE) of 10.7% and 18.4%. A distribution yield of 7% is also impressive considering and comparing other companies in the same sector. The above numbers indicate that the MLP is focused on creating shareholder wealth; in the long run investors are likely to get good returns.
Valuation
World Point Terminals' stock is trading at an appealing forward price-earnings (P/E) of 14.83 and a five-year expected PEG of 0.69. Also, at an enterprise value of $570 million World Point Terminals has an EV/EBITDA of 9.5 much less than peers Transmontaigne Partners LP’s (TLP, Financial) 12.8 and Sunoco Logistics Partners LP’s (SXL, Financial) 12.5. All three measures suggest gross undervaluation for the firm mainly because of its unique business model in the downstream MLP sector.
Risk
The price and general economic factors play key roles in the production and demand for refined products and crude oil. This in turn has a significant impact on the storage and transportation of these products. Considering the volatility in oil prices, downstream companies also have the fear of losing contracts. However things seem to be improving and with OPEC agreeing to cut down on its production, oil prices have been trending higher.
Conclusion
The company has an average 91% of its terminals contracted in the past five years with customers who are reliable and have contract histories of more than 10 years. Thus, based on the points discussed above and the company’s current valuation, World Point Terminals is a good long-term investment opportunity in the downstream industry.
Disclosure: No positions in the MLP discussed.
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