Tank Farms Fuel TransMontaigne

In this week’s Energy Letter, I discussed a stock screen used last week to identify companies that might have otherwise been filtered out by my more typical search parameters. I use a proprietary screening tool that extracts data from the S&P Global Market Intelligence database. These screens are one level of due diligence, which is then followed by a deeper evaluation of the most highly ranked screen prospects.

For more details on this most recent screen, please refer to this week’s Energy Letter. As I indicated there, most of the stocks identified by this screen would likely fail my further due diligence, but the one at the top is worth a deeper dive. That’s what I want to do here today.

If the name TransMontaigne Partners (NYSE: TLP) sounds familiar, it may be because this Denver-based master limited partnership was highlighted here in February in A Fast Start With More Promise as the top-performing MLP to that point in 2016. At that time TLP was up 22.7% year-to-date (YTD), and it has continued to rise. It is now up 43.7% YTD, and 19.7% over the trailing 12 months (TTM). In fact, TLP is one of only nine MLPs with a positive TTM return.

So let’s take a closer look at TLP’s business.

TransMontaigne Partners provides integrated terminaling, storage, transportation, and related services to customers engaged in the trading, distribution, and marketing of light and heavy refined petroleum products, crude oil, chemicals, fertilizers, and other liquid products. It does not purchase or market any of the products it transports.

TLP’s facilities include:

  • A 7.1 million barrel terminal on the Houston Ship Channel
  • Eight refined product terminals in Florida with 6.9 million barrels of storage capacity
  • A 67-mile interstate refined products pipeline between Missouri and Arkansas
  • Two refined product terminals in Missouri and Arkansas with a storage capacity of 421,000 barrels
  • A crude oil terminal in Cushing with a storage capacity of 1 million barrels
  • A refined product terminal located in Oklahoma City with storage capacity of 0.2 million barrels
  • A refined product terminal located in Brownsville with storage capacity of 0.9 million barrels
  • A 16-mile LPG pipeline from its Brownsville facility to the Mexico border
  • A light petroleum products terminal located in Brownsville with storage capacity of 1.5 million barrels
  • 12 refined product terminals located along the Mississippi and Ohio rivers with 2.7 million barrels of aggregate storage capacity
  • 22 refined product terminals located along the Colonial and Plantation pipelines with aggregate storage capacity of 10 million barrels

Because its primary business is moving and storing refined products, TLP hasn’t suffered like most of the midstream MLPs that handle crude oil or natural gas. TLP has managed to maintain positive free cash flow (FCF) throughout the meltdown in oil and gas prices and in fact reported year-over-year growth in 2015 across most important financial metrics. For 2015, TLP reported:

  • Annual net earnings of $41.7 million compared with $32.5 million in 2014
  • Distributable cash flow (DCF) of $70.7 million compared with $65.7 million in 2014
  • A distribution of $2.665 per unit (flat year over year), with annual distribution coverage ratio of 1.39x
  • Consolidated EBITDA of $89.6 million versus $74.8 million in 2014
  • Operating income of $49.9 million versus $38.9 million in 2014.

Increased revenue at the Brownsville and river terminals drove last year’s gains, more than offsetting declines elsewhere. Direct operating costs and expenses were $2.2 million lower than in 2014.

TransMontaigne Partners has an enterprise value of $914 million, and $273 million in liabilities. The partnership ended the year with a debt/EBITDA ratio of 3.6, better than the 4.7 average for its midstream MLP peer group.

TLP is controlled by its general partner, TransMontaigne GP, which was sold on Feb. 1 by an affiliate of NGL Energy Partners (NYSE: NGL) to a private equity fund.

TLP hasn’t issued guidance for 2016, but analysts estimate EBITDA will rise 3% on average, while DCF is expected to be little changed from 2015.  

Based on the most recent quarterly distribution, TLP yields 7.1% on an annualized basis. The median price target for this year for the three analysts covering the company is $40/unit, which is only about 6% above the current price after the sharp rally year-to-date.   

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


Portfolio Update

These Liberals Dig Pipelines

Pipeline stocks have rallied sharply off the winter lows, with the Alerian MLP Index up 32% in two months. Kinder Morgan (NYSE: KMI) has rebounded 48% since Jan. 20 to top its share price immediately prior to  December’s dividend cut.

The end to the free fall in energy prices appears to have stemmed the urge to sell pipelines at almost any price, while leaving plenty of financing options for the strongest players still pursuing growth opportunities.

Two of the largest of such projects are pending in Canada, and these looked better after yesterday’s National Post report suggesting that the Liberal government of Justin Trudeau plans to support them over local opposition.

One is Kinder Morgan’s proposed near-trebling of crude volumes on an expanded Trans Mountain pipeline shipping Alberta crude to the coast of British Columbia. The other is TransCanada’s (NYSE: TRP) proposed Energy East pipeline, which would bring Alberta crude east to the refineries in Atlantic Canada.

According to the National Post report, Trudeau’s backing for these pipelines is based on conviction that the projects are essential to the ambitious economic growth targets his government has set.

Energy accounts for a relatively large share of the Canadian economy, so this policy amounts to the pursuit of enlightened self-interest. The pragmatism of Trudeau’s leftist Liberals on this issue is in contrast with the increasingly hostile reception accorded to pipeline proposals in the U.S.

Following the rejection of TransCanada’s Keystone XL expansion by President Obama, other pipeline projects have faced long delays. For example, Kinder Morgan has been forced to halt construction of its Palmetto fuel pipeline after the Georgia legislature passed a one-year moratorium on eminent domain seizures. In the Northeast the long-pending Constitution gas pipeline has now been delayed for another year, until late 2017, as a result of determined local opposition.

Such delays are certainly not good news for the sponsors of the projects in question. But they do serve to underscore the value of the pipelines already in operation, which often cannot be easily replicated at a reasonable cost. The Palmetto, for example, is intended to move refined products from Louisiana into the Southeast, along a route roughly paralleling that of the heavily overbooked Colonial Pipeline.

The Canada news isn’t enough for us to upgrade Growth Portfolio recommendations KMI and TRP to Buy from Hold, especially in light of their recent gains. For the moment, there is more upside elsewhere.

But it’s encouraging all the same that at least some progressive politicians still view pipelines as vehicles of economic progress.

— Igor Greenwald


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