This was a pretty weak week for SA articles, so let’s get this over.
Let’s start with all the ET posts that got published this week. The only one I can sort of recommend is the one by Fishtown Capital. First, the DAPL posts:
Long Player resurfaced on September 17 after a long hiatus on ET. Sell rating; 438 comments, 38 likes. LP has been openly Sell-rated on ET since February 2022. His posts for about a year before that were Hold-rated, but they were really Sells, if you bothered to read what he wrote. He’s been wrong for a long time. He doesn’t like the management or its “bull in a china shop” approach to business, and his problems have focused on DAPL and the risk of its being shut down. The Army COE has just issued a draft report on DAPL, with 5 alternative approaches. One possibility is a complete shutdown of DAPL and that’s what LP focuses on (and wants). Based on that, he says to avoid the common and preferred units. He sort of acknowledges that his prior Sells were premature but points out that years ago he warned of a bankruptcy risk at another company and eventually he was right and he’s going to be right now, too. BTW, he also acknowledges that whatever the end result is, the litigation will go on for years.
Fishtown Capital posted on September 19. Strong Buy rating; 123 comments, 53 likes. Very simply, DAPL is a nonevent, even if the worst happens. It’s only 3% of ET’s EBITDA and 4% of its DCF. ET’s coverage ratio for its distribution would drop from 1.87X to 1.8X. No big deal. Some people have argued that ET would be responsible for 100% of DAPL’s debt if the pipeline is shut down, but that’s not true. ET’s share of the debt is entirely manageable. If you read the report (this post has a link to it), FC thinks the most likely result will be to allow DAPL to continue as it currently exists, with some additional conditions imposed on the operation.
Then, the regular posts about ET:
JR Research posted on September 19. Strong Buy rating; 37 comments, 17 likes. JR went Buy-rated on ET in May; it’s up 15% since then. No mention of DAPL. JR just thinks the price increase means the market has already factored in the benefits of the CEQP deal, so further increases in price are unlikely in the near term. So he drops his rating from Buy to Hold.
Bill Zettler posted on September 20. Hold rating; 35 comments, 21 likes. Mr. Z dropped from Buy-rated to a Hold in late June and he repeats that rating here. Problems facing ET (and the midstream business in general): 1. Regulatory risks – it’s getting harder to build pipelines. Throw in the DAPL risk and ET’s failure to get a renewal of its Lake Charles application, and regulatory issues are a big problem for ET. 2. The Hubbert curve is a problem. I looked it up and the Hubbert curve tries to predict how long any natural resources will last. This is another was of saying that we have reached peak production in places like the Bakken and Appalachia, and this is going to be a big problem for the industry. 3. Minimum volume commitments are a problem. Mr. Z lost me on this one. I guess he’s tying this into his belief that production volumes may have peaked. If production doesn’t stay stable or increase, producers will have problems meeting their MVCs and that will make them riskier customers for ET. Plus, at contract renewal time the producers will demand lower MVCs. 4. ET (and pipeline MLPs) have been in a downtrend since 2014. ET’s price peaked at $ 32 in late 2014, when it paid a distribution of 80 cents. Now it pays $ 1.23 and it trades at $ 13.75. Mr. Z cites several other MLPs with similar price drops. The market simply doesn’t like midstream. (Me - The track record since the 2014 peak has been down in any event, but I’m not sure if Mr. Z’s numbers from 2014 represent ETE or ETP, which were the companies that existed in 2014. Either way, the record since the end of 2014 peak has been poor at best.) Finally, he says to stay away until DAPL and the Lake Charles application are resolved. IMO, that means stay away for years.
Horizon Yield posted on September 21. Hold rating; 43 comments, 3 likes. 1. HY just started posting on SA; this is his 3rd article. 2. HY needs to read what he writes after he uses spell check and before he hits Send. He says ET’s divine increases may end so it can repay its debt. Maybe God will help, but I think he means dividend increases. Too many wrong words in this post. 2. HY ties ET’s results entirely to the price of energy – when prices are high, ET does well; when they drop, so do ET’s results. 3. There’s more but why bother? It’s just not helpful. I read the 1st 2 comments (as of the time I read the post). “I hope you were not actually paid to write the BS.” “The author has 26 followers. Amazing. … embarrassment of being ignorant and foolish …”
And finally (I hope), Leo Nelissen posted on September 21. Strong Buy rating; 27 comments, 15 likes. ET is the best 9%-yielding company available in any industry. That’s the overall theme. Then, an intro to ET, a review of Q2 results and some discussion of plans for the future. No discussion of DAPL or Lake Charles. The usual stuff – the distribution is safe and well-covered by cash flows. The company plans to raise it 3% - 5% per year, thereby offsetting inflation risks. If you had bought ET after 2015, you’d have done really well. (Me – compare this to Mr. Z’s 2014 starting point; the starting date you choose can have huge effects on the results.) Mr. N does not own ET and he explains why. He’s at a stage of his life when he’s looking more for growth rather than income. So he isn’t an owner. But if you are an income investor, he highly recommends it.
ARLP – September 21 post by Michael Wiggins De Oliveira (Investing Group Leader), Buy rating @ $ 21.42 but he doesn’t own any. This is his 4th Buy-rated post about ARLP over the last year; it’s down 14% over that time. For an experienced SA author (Mr. De Oliveira has posted more than 2,000 articles on SA), this post seems a bit rote. His listing of ARLP’s strong points is simple – a 13% yield, and ARLP has pre-sold enough coal for delivery in 2024 that the distribution is safe for next year, at least. The drawbacks: 1. ARLP has too much net debt ($ 100 million is too much?) and Mr. De Oliveira would like them to bring down its debt profile slightly. Me – ARLP’s leverage ratio based on net debt is 0.09X EBITDA. That’s not a typo - $ 95 million of net debt and $ 1.060 billion of TTM EBITDA. 2. He wants ARLP to slow down its unit repurchases and focus on debt repayment. Me – In the 1st half of 2023, ARLP repurchased about 1 million units for $ 19.5 million. It has about 130 million units outstanding, so it’s unit repurchase program isn’t very aggressive. 3. The political winds now favor nuclear power over coal, so that’s a headwind. Me – Nuclear? Really? 4. And finally, we get to the coal issue – it’s out of favor and electric utilities continue to shift from coal to natural gas. Me – no disagreement. BTW, Mr. De Oliveira posted 4 articles on SA today and that may help explain why this one is so superficial.
EPD – September 21 post by Samuel Smith (Investing Group Leader), Buy rating @ $ 27.25 and he owns some; 17 comments, 9 likes. This is Mr. Smith’s 6th Buy-rated post about EPD over the last 6 months. It’s another of his head-to-head comparisons. He did EPD vs ENB and EPD vs WMB a month or 2 ago, and now it’s PAA’s turn. Mr. Smith says PAA is up 41% over the last year, twice as much as MLPA, so he is revisiting it to see if it’s still a good investment. Me – I should mention that Mr. Smith has done several of these head-to-head posts about PAA over the last year and PAA keeps losing, to ENB, KMI, ET and EPD. So I wouldn’t give him much credit for PAA’s rise. He still likes EPD better. Lower leverage, better diversification, similar valuations. He reached the same conclusion a year ago and hasn’t changed his mind.
HEP – September 22 post by Zach Bristow, Buy rating and he own some, which I find amazing since he doesn’t know the most important thing there is to know about HEP – that it has agreed to be acquired by DINO. 5 critical comments, no likes. The article itself is a detailed review of HEP, but since Zach doesn’t know that HEP and DINO agreed to a deal in August, I’m not sure how much faith I would place on what he says.
KMI – September 22 post by Long Player, Strong Buy rating @ $ 16.60 and he owns some; 24 comments, 10 likes. 2 points: 1. Shifting from fossil fuels to green energy is going to take longer than most people realize so KMI’s basic business is safe for a long time. 2. And KMI has a big CO2 capture and reuse business (inject it in wells to force more oil out) and that is going to be very attractive. Lots of comparisons to Denbury Resources CO2 business; Denbury got acquired by XOM. So solid business and a nice growth engine.
TRGP – September 20 post by Aaron Goldberg (nothing to sell), Hold rating; 4 comments, 1 like. TRGP is not an MLP but it rolled up NGLS (I think that was the symbol) so it’s still in my list of midstreams to follow. A year ago, Mr. Goldberg was a Buy on TRGP @ $ 63.63. Now he downgrades to Hold at $ 84. Start with an introduction to how oil & gas is produced, and the various processes that midstream companies can provide. TRGP is on the natural gas/NGL side for the most part, and they have sold some of their oil-based operations to fund expansion into NGLs. Then, a projection of TRGP’s growth projections (not from the company, but from East Daley and others) – 25% or so growth in EBITDA over the next 4 years. Currently, TRGP trades at an EV/EBITDA ratio of 8.8X 2023 EBITDA. Based on 2024 expected EBITDA and TRGP’s range of multiples over the last few years, Mr. Goldberg has a target price range of $ 72 - $ 89. So at $ 85 or so, it’s fully valued and is now a Hold.
6-month report card: Six months ago, someone named Delya Pernas recommended buying NRP on Seeking Alpha. NRP has since returned 56%, making that the best Buy rec of that week. Honorable mentions go to The Value Portfolio, who recommended PAA (up 39%) and 3 guys that recommended ET (up 26%). 1 of those 3 guys was Daniel Thurecht, whose posts I miss. OTOH, Someone named Pacifica Yield took the opportunity to recommend buying IEP (Icahn Enterprises, an MLP) and it’s down 56%, thanks to the short seller report and cutting the distribution in half.