On the 10th of February, Boardwalk Pipeline Partners, LP (NYSE:BWP) collapsed 42% after the partnership slashed its quarterly distribution from $0.53 to $0.10. For investors, this move came as a surprise and removed one of the main attractions of Boardwalk’s MLP structure; the previously promised 8.8% dividend yield.
Boardwalk Pipeline struggling in natural gas markets
Still, in the long-term, this decision by Boardwalk’s management and general partner, Loews Corporation (NYSE:L) makes sense. Boardwalk has been grappling with sliding revenue and volatile natural gas markets for some time now. As a result, cash flows have shrunk and become unpredictable, which has ultimately put pressure on the partnerships unit distribution as well as capital spending plans. So, Boardwalk was left with two paths to take, slash the distribution and use cash from operations to finance capex internally, or continue to finance capex with debt and new partnership units. The latter of these two choices does not seems like a sustainable path for any company to take. Indeed, maintaining the distribution would have been short-term positive for investors but long-term catastrophic as the payout would almost certainly be cut further down the road.
Still, with a lower yield of 2.9%, which is now according to the company, covered four times by distributable cash flow, Boardwalk Pipeline Partners, LP (NYSE:BWP) looks attractive as a value/recovery play.
The transport and storage of natural gas is a relatively defensive industry, even though Boardwalk has had a tough time recently, it is still an essential service. Now the partnerships payout has been cut, Boardwalk will be able to work on paying down its debt as well as undertaking expansion plans.
Boardwalk Pipeline’s priority to reduce net debt
Reducing net debt is a top priority for Boardwalk Pipeline Partners, LP (NYSE:BWP). In particular, management have stated that their debt-to-EBITDA target is 4:1. Based on 2013 EBITDA, which came in at $650 million and third quarter net debt of around $3.3 billion, Boardwalk is somewhat over its targeted leverage ratio. What’s more, this pile of debt is strangling cash flow with the company paying $163 million, or 25% of EBITDA out in interest during 2013. Further, the partnerships’ management needs to consider, and take action against an increase in interest rates, which could be around the corner. Rising interest rates are perhaps Boardwalks most pressing issue, especially with such a towering debt pile.
Still, at present Boardwalk’s units are currently trading at a P/B of 0.72, shareholder equity is worth’s $18.6 per unit. However, I am hesitant to value the MLP on this basis as new units are often issued eroding per share metrics. Although Boardwalks management has stated that they do not believe any new units will need to be issued by the partnership this year.
Current levels are attractive compared to peers
Nevertheless, Citigroup analysts, John Tysseland and Michael Sheen also believe that there is value to be had in Boardwalk. The analysts feel that at current levels, Boardwalk now looks attractive compared to peers, which also face similar challenges in the North American natural gas market, according to Barrons:
Boardwalk Pipeline Partners, LP (NYSE:BWP) trades at a 10.3x 2015 EBITDA multiple and 9.4x 2016 EBITDA multiple. This compares to other midstream MLPs with similar challenges [such as TC Pipelines, LP (NYSE:TCP) and Niska Gas Storage Partners LLC (NYSE:NKA)] that trade at multiples of 13x to 15x…We consider this multiple low enough to pique the interest of strategic partners that could better utilize the current MLP structure to finance dropdowns and/or [Boardwalk Pipeline’s] asset base along the Gulf Coast.
So Citigroup’s analysts feel Boardwalk Pipeline Partners, LP (NYSE:BWP) is not only undervalued but the company also has a collection of assets that could be attractive to peers.
Investors who are looking for value over yield could find opportunity at Boardwalk based on the partnerships asset value and low valuation in relation to peers.