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Why Genesis Energy Has the Highest Leverage among Its Peers

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Sep. 25 2015, Published 3:58 p.m. ET

Genesis Energy’s operating margin

In this article we’ll touch on Genesis Energy’s (GEL) comparative peer analysis based on various financial metrics and ratios. First, let’s look at operating margins. An operating margin is a ratio used to measure the operational efficiency of a company or segment.

Genesis Energy’s current operating margin of 2.9% is 1.6 percentage points less than the peer median operating margin of 4.6%. This is because Genesis Energy’s Supply and Logistics segment has very thin operating margins, which brings its overall margins down. During 2Q15, Genesis Energy’s Supply and Logistics segment generated a segment margin of $11.6 million, while its revenue stood at $527.2 million.

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Genesis Energy’s forward EV/EBITDA

In a forward looking market, the forward EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a better measure compared to the historical EV/EBITDA multiple. Genesis Energy’s forward EV/EBITDA multiple of 11.2x is above the peer median of 9.7x.

Genesis Energy’s peers, Martin Midstream Partners (MMLP), Sunoco Logistics (SXL), Plains All American Pipeline (PAA), and NGL Energy Partners (NGL) have forward EV/EBITDA multiples of 9.1x, 9.7x, 9.4x, and 11.9x, respectively. Generally, a stock with lower forward EV/EBITDA trades at a lower price-to-earnings multiple on the stock market. This is shown in the chart above.

Genesis Energy’s solid historical EBITDA and distribution growth, strong distribution growth expectations, and diversified business with little commodity prices exposure could be possible reasons for its higher valuations compared to its peers.

Genesis Energy alone constitutes 3.3% of the Global X MLP ETF (MLPA).

Genesis Energy’s net debt to EBITDA

GEL’s net debt to EBITDA multiple of 7.4x is highest among our selected peer group. Net debt to EBITDA ratio reflects how easily a company can repay its debts from its operational earnings and available cash in hand. Genesis Energy’s high leverage might imply that it’s been using debt to fund growth projects that aren’t generating high enough EBITDA.

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