An MLP Gets an M&A Makeover

In an environment of rising taxes and historically low interest rates, one might reasonably assume that income investors had thoroughly mined every last master limited partnership (MLP). After all, MLPs offer ample payouts along with significant tax advantages, the very remedy for one’s portfolio amid the current malaise. 

However, the MLP space is subject to some of the same tendencies as the broad market–a handful of the largest names garner most of the attention, while smaller-cap entities toil away in relative obscurity. But this information vacuum gives watchful investors an edge over their less attentive peers.

In the case of NGL Energy Partners LP (NYSE: NGL), that means an opportunity to secure a rising income stream from a company that has fundamentally revamped its operations before the rest of the investing public catches on. 

Almost as important, investors who start building a position in this $1.3 billion MLP will be doing so alongside management. Insiders own almost 10 percent of units outstanding and boosted their holdings nearly 9 percent over the past six months. Clearly, NGL’s executives anticipate good things to come.

Meanwhile, NGL’s units fell in sympathy with its fellow MLPs during the fourth quarter and currently trade roughly 13 percent below their 52-week high. Although the units are up almost 13 percent since their late-December low, investors still have time to initiate a position without paying a premium. 

At the time of its May 2011 initial public offering (IPO), NGL Energy Partners derived the vast majority of its operating income from wholesale propane (60 percent) and retail propane sales (27 percent), with just 13 percent from midstream operations.

Unfortunately, propane-oriented MLPs have suffered significant headwinds, as warmer-than-average winters dampened demand for heating. That means most propane pure-plays are treading water as far as their payouts are concerned–growth in their distributions has stagnated. 

But NGL has been on an acquisition spree that has radically altered its revenue mix for the better. Since late 2011, the MLP has completed eight different deals totaling roughly $1.5 billion. Among its purchases are assets or companies ranging from retail propane operations in the Mid-Atlantic and Northeast to midstream storage and transportation assets in prolific shale plays across the US.

However, it was NGL’s June 2012 merger with High Sierra Energy LP that was truly transformative. The $693 million deal added crude oil gathering, transportation and marketing, along with natural gas liquids transportation and marketing as well as wastewater treatment and transportation for energy producers. 

Then in November, the newly diversified midstream operator added crude oil purchasing and logistics operations in the Eagle Ford Shale and Permian Basin with its purchase of Pecos Gathering & Marketing LLC.

At the end of its most recent quarter, NGL reported that income from sales of retail propane, though almost tripling from the year-earlier period, accounted for just 5 percent of total revenue. The company is the sixth-largest propane retailer in the US and continues to pursue small, bolt-on acquisitions to its existing propane operations, but its focus has clearly shifted. 

Crude oil logistics now contribute the lion’s share of income, accounting for almost 63 percent of revenue, with natural gas liquids logistics (31 percent) and water services (1 percent) comprising the balance.

NGL’s units currently yield 7.6 percent, and the MLP has boosted its payout for six consecutive quarters, with its recent $0.40 quarterly distribution almost 170 percent higher than its first payout in the third quarter of 2011. Management is targeting annual distribution growth of 12 percent to 15 percent, with a conservative coverage ratio of around 1.5. 

NGL has financed a majority of its merger and acquisition activity with equity, so its debt obligations remain manageable. In the MLP’s most recent earnings call, CEO H. Michael Krimbrill estimated the company’s current debt outstanding is about $390 million drawn from its credit revolver and about $250 million from a private placement.

Although Krimbrill says the MLP won’t sustain its torrid pace of M&A, he does expect to pursue another $200 million-plus in acquisitions over the next 12 months. NGL’s strategy is to pursue smaller players that can add fee-based income that’s accretive to cash flows.

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