A Mild Surprise From Enterprise

Perhaps it was the helpful contrast. Genesis Energy (GEL), which I recommended selling in April when it was just shy of $32 a share, has slid to $24 today after announcing a 31% distribution cut on Thursday.

Against that backdrop, the news that Enterprise Products Partners (EPD) will slow its distribution growth from 4.8% to an annualized 2.4% through at least the end of next year, didn’t sound so bad. The market is certainly taking it in stride: EPD’s unit price is down less than 1% today.

The energy pipeline giant said the change will help it finance a full slate of costly new projects while minimizing equity sales. It expects third-quarter distribution coverage of 1.2x, in line with the last quarter’s number. While the distribution growth rate is slowing, the increase announced yesterday pushed the annualized yield to 6.4% based on the recent unit price. That’s plenty for the largest and safest midstream MLP.

The much smaller CONE Midstream Partners (CNNX) has had a rougher year, setting up the current opportunity for this standing portfolio recommendation. CNNX was a Marcellus gas gathering joint venture between CONSOL Energy (CNX) and Noble Energy (NBL), but Noble has exited the region, selling its leasehold interests as well as CNNX equity and stake in the CNNX general partner to a private equity group.

The transition has likely contributed to the steep decline in the price of CNNX since May. MLP investors generally have good reason to be nervous about general partner changes, and would undoubtedly have preferred CONSOL as the sole sponsor following Noble’s exit. But the new owners at Quantum Energy have every incentive to build the value of CNNX and are likely to be more aggressive in developing their newly acquired acreage, which is likely to further boost the partnership’s gathered volumes.

CNNX is already set to benefit from CONSOL’s plan to increase its gas output 30% next year after divesting its coal interests in the fourth quarter. CNNX units currently yield an annualized 7.1%, with strong 1.5x distribution coverage and minimal debt leverage. Management has said it could increase payouts at the planned 15% annual rate through the end of next year without slowing its capital spending or dropping coverage below 1x, and its math checks out.

Midstream MLPs still look relatively cheap and poised to benefit from the higher energy prices I expect next year. CNNX (and for that matter EPD) should outperform the sector from here.

In other portfolio news, the overseas components continue to lead the way. German chemicals giant BASF (BASFY) is up 14% since I recommended it three months ago. The latest news is that it will pay some $7 billion for the seeds and herbicide business that rival Bayer will divest as part of its planned merger with Monsanto (MON). The price was fair at approximately 15x annual EBITDA. It’s not the big M&A splash BASF has determinedly avoided to this point, which is just fine. To get a reasonable price for entrée into a new business line at this point in the cycle without mortgaging the farm looks like a win from here.

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