Boardwalk Pipeline Partners—any value in the wreckage?
Sorting through the rubble
The below graph reflects the collapse of Boardwalk Pipeline Partners (BWP) as the stock fell from $34 per share to end March at $14 per share. The company’s market capitalization now sits at $3.43 billion, as it cut its payout rate 80%. While analysts like Jim Cramer would suggest investors stay away from BWP—and he may be right—other analysts think that the wreckage is priced into the stock, and that value investors could consider the current level the right time to buy. This article considers the prospects for BWP in the context of the accelerating small cap value rally and the bad news specific to BWP.
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For a similar analysis of how the Fed announcement has affected large cap stocks, read Will the Fed take a bite out of Apple? And for mid caps, read The Fed tapers–will mid cap value hold up better then mid cap growth in Q2?
Not all MLP’s are created equal
BWP suffered the misfortune of not having its pipelines and storage terminals close enough to serve its customers at profitable rates and ended up losing contracts to better located competitors. Boardwalk had to slash its payout 80%, (from 52 cents per unit to 10) leaving it with an estimated dismal yield of just over 3.0%, which is terrible for an MLP. The S&P MLP Index (SPMLP) notes that the MLP index has risen about 20% per year over the last five years. As a result of this recent terrible yield, the stock has collapsed. Regardless, with a mere $3 billion of market cap and an estimated $400 million for distribution for 2014, the company sits with a valuation of around eight times its distributable cash flow. That’s not a bad price. As such, it could be argued the company has been sold down to a more appropriate value. However, investors need to consider the future prospects of growth.
BWP retools for growth
BWP’s slashed payout should give it the financing wiggle room it needs to get its proposed Bluegrass Natural Gas Liquids (or NGLs) project running by the end of 2015. BWP’s General Partner, Loews Corporation is well capitalized and seems supportive of BWP’s new plans, with specific reference to the Bluegrass project in particular, should the project go forward as planned.
When things are not going right, a lot can go wrong. However, BWP’s payout cut should leave them with a little over $400 million in savings to finance growth, and Loews seems available for $300 million in debt funding as well. Should things move forward without a hitch, it would seem that the financing should be in place, and if the Bluegrass project goes forward without a hitch, solid returns could be forthcoming in the future—barring unforeseen events.
Small cap value
As discussed earlier in this series, the Fed’s dovish commentary on March 31 seems to have reinforced risk seeking appetite, and intensified interest in beaten up value shares—with small caps taking the lead. BWP certainly fits this category. From a short term perspective, risks are plenty, although if more speculative investors are interested in placing some bets on beaten up small caps with reasonable turn around stories, Boardwalk Pipeline Partners could offer significant upside potential at its current price. Investors should do their homework to make sure that the financing from Loews and others is rock solid, and that the Bluegrass Project will be executed without delays or other problems. This type of investment is not particularly suited for passive investors.
Read the next part in this series to see how small cap growth company Oasis Petroleum is performing relative to the Russell 2000 and Morningstar small cap growth indices.
Constructive macro view
Despite problems in Ukraine and China, and despite the modest consumption data in the U.S., the U.S. labor market appears to be recovering—with the exception of the long-term unemployment. From this perspective, it would appear that the U.S. is probably the most attractive major investment market at the moment. While the fixed investment environment of the U.S. is still showing a modest recovery, corporate profits and household net worth have hit record levels. Hopefully, all of this wealth and liquidity can find a way into a new wave of profitable investment opportunities, and significantly augment the improvement in the current economic recovery. For investors who see a virtuous cycle of employment, consumption, and investment in the works, the recent out performance of value stocks over growth stocks could become the prevailing trend, favoring iShares Russell 1000 Growth Index (IWF) and growth oriented companies such as Google (GOOG) or Apple (AAPL).
Cautious macro view
Given the China and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index (IWM), State Street Global Advisors S&P 500 SPDR (SPY) and Dow Jones SPDRs (DIA), and iShares S&P 500 (IVV). Accordingly, long-term investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index (IWD) including companies like Wallmart (WMT).