Pipeline Partnership Take Under

Transcription

1 Pipeline Partnership Take Under Summary and Recommendation Valuation risk appears to be mounting in "high greed" pipeline partnerships. The price paid by private equity buyers for the general partner (GP) and limited partner interests in Williams Energy Partners (WEG) implies a cash flow multiple, 8.5 times, that is in line with our valuation of similar entities by the McDep Ratio. It is far less than the unlevered multiple investors place on sell recommendations, Kinder Morgan (KMI, KMP, KMR), El Paso Energy Partners (EPN), and Enbridge (EEP, EEQ). In fact the price paid appears to be an astonishing 26% under the public stock price. Meanwhile, favorable natural gas and oil trends support our independent producer recommendations. Integrated oil recommendations remain attractive as well. Our valuation tables that list our recommendations have a new look with natural gas and oil producers - mega, large and mid cap in a set of two tables (see Tables 1-1,1-2). Pipeline and power companies are in another set (see Tables 2-1, 2-2). Small and micro cap producers make up the final set (see Tables 3-1, 3-2) Williams Energy Partners Deal Looks Like a Take Under Williams Companies (WMB) announces the sale of its general partner and limited partner interests in Williams Energy Partners (WEG). To judge the price paid we add WEG to our Small Cap Pipeline Group of Energy Pipeline and Power Companies (see Tables 2-1, 2-2). Presuming that the buyers, private equity firms Madison Dearborn Partners, LLC and Carlyle/Riverstone Global Energy and Power Fund II, L.P., paid a McDep Ratio of 1.0, we conclude that the purchase price implies a cash flow multiple, PV/Ebitda, of 8.5 times. That compares to a median of 9.0 for our estimates of Present Value for small cap pipelines. The buyers apparently will pay about $510 million for a partial equity interest. The purchase price covers 14.6 million, or 52.6% of 27.7 million limited partners units, as we interpret it. In addition the buyer acquires the general partner interest that we estimate at 9%, our estimate of the GP share of partnership income for the next twelve months. One could say that the GP share "dilutes" ownership by 2.7 million units bringing the total units acquired to 17.3 million. Thus, the price paid per unit appears to be about $29, well under the stock market price of $40. We take that private market price to be an indication of present value that we use in measuring McDep Ratios. The 9% share we attribute to the GP is a minimal number. For the greediest of GP's, Kinder Morgan, El Paso and Duke Energy, the GP share of current cash flow exceeds Neither he nor his spouse act contrary to a buy or sell rating. 1

2 40%, 29% and 26% respectively. The higher the assumed share for the GP, the less the implied price paid per unit of WEG. Yet the price paid per unit looks like a take under price, as it is less than the public price. Suppose the GP interest had no value. The price of units in the take under would then be $35, still some 12% under market. A take under price is not too surprising in the context of McDep analysis. Few thoughtful investors can justify the stock market values for high greed partnerships, in our opinion. Will Respectable Buyers Renounce Ponzi Scheme? There appears to be a temptation for an unscrupulous buyer to appropriate increasingly more value for the GP at the expense of limited partners. Already the GP extols its record of increasing distributions for eight straight quarters. Now at $0.75 per unit the quarterly distribution is only $0.04 from the pyramid level of $0.79 after which the GP gets 50% of incremental distributions. Nor is it particularly difficult to declare higher distributions when the starting level was less than cash flow. All it takes is the stroke of a pen. Similarly, WEG seems to have more debt capacity than the more advanced high greed partnerships. Thus all the GP has to do is borrow to finance the acquisition of another asset. Then like a Ponzi scheme, the distribution would be paid from future financing. Like a Ponzi perp, the GP would be overcompensated for little fundamental contribution and would have almost no liability for debt repayment. The buyers include the Carlyle Group whose partners apparently include some of our most respected former political leaders. Surely such responsible citizens would have nothing to do with a Ponzi scheme! Let us not be so cynical. An argument against WEG becoming a Ponzi scheme is that the buyers may be paying a low enough price for WEG to make money legitimately. Perhaps the new GP will renounce excessive compensation and compete for new funds in the capital markets on a fairer basis. Kurt H. Wulff, CFA Neither he nor his spouse act contrary to a buy or sell rating. 2

3 Table 1-1 Energy Producers Rank by McDep Ratio: Market Cap and Debt to Present Value Net ($/sh) Market Present Debt/ Symbol/ 23-Apr Shares Cap Value Present McDep Rating 2003 (mm) ($mm) ($/sh) Value Ratio Mega Cap Exxon Mobil Corporation XOM , , BP plc BP , , TotalFinaElf S.A. TOT ,317 89, Royal Dutch/Shell RD B , , ChevronTexaco Corporation CVX B ,063 68, Total or Median 692, Producer/Refiners - Large Cap and Mid Cap Murphy Oil Corporation MUR , Petro-Canada PCZ , Valero Energy Corporation VLO , Imperial Oil Limited (30%) IMO , ConocoPhillips COP B , ENI S.p.A. E , Suncor Energy SU , Norsk Hydro ASA (49%) NHY , OAO Lukoil LUKOY , Marathon Oil Corporation MRO B , PetroChina Company Ltd (10%) PTR B , Petroleo Brasileiro S. A. PBR N ,086 19, Total or Median 162, Independent Natural Gas and Oil Pogo Producing Company PPP , Occidental Petroleum Corp. OXY , Encana Corporation ECA B , Devon Energy DVN , XTO Energy Inc. XTO B , Burlington Resources BR B , Anadarko Petroleum Corp. APC , Pioneer Natural Resources Company PXD , Unocal Corporation UCL , CNOOC Limited (19%) CEO B , Canadian Natural Resources Limited CNQ , Total or Median 77, Service Baker Hughes Inc. BHI , Halliburton Company HAL , Schlumberger Ltd. SLB , Buy/Sell rating after symbol: B - Buy, N - Neutral, S - Sell McDep Ratio = Market cap and Debt to present value of oil and gas and other businesses Neither he nor his spouse act contrary to a buy or sell rating. 3

4 Table 1-2 Energy Producers Rank by EV/Ebitda: Enterprise Value to Earnings Before Interest, Tax, Deprec. Dividend or ($/sh) EV/ EV/ Distribution PV/ Symbol/ 23-Apr Sales Ebitda P/E NTM Ebitda Rating 2003 NTM NTM NTM (%) NTM Mega Cap Exxon Mobil Corporation XOM BP plc BP Royal Dutch/Shell RD B TotalFinaElf S.A. TOT ChevronTexaco Corporation CVX B Median Producer/Refiners - Large Cap and Mid Cap Suncor Energy SU ConocoPhillips COP B Murphy Oil Corporation MUR Imperial Oil Limited (30%) IMO Valero Energy Corporation VLO Marathon Oil Corporation MRO B Petro-Canada PCZ ENI S.p.A. E Petroleo Brasileiro S. A. PBR N OAO Lukoil LUKOY Norsk Hydro ASA (49%) NHY PetroChina Company Ltd (10%) PTR B Median Independent Natural Gas and Oil Pioneer Natural Resources Company PXD XTO Energy Inc. XTO B Occidental Petroleum Corp. OXY Pogo Producing Company PPP Unocal Corporation UCL Anadarko Petroleum Corp. APC Burlington Resources BR B Encana Corporation ECA B Devon Energy DVN CNOOC Limited (19%) CEO B Canadian Natural Resources Limited CNQ Median Service Baker Hughes Inc. BHI Halliburton Company HAL Schlumberger Ltd. SLB EV = Enterprise Value = Market Cap and Debt; Ebitda = Earnings before interest, tax, depreciation and amortization; NTM = Next Twelve Months Ended March 31, 2004; P/E = Stock to Earnings; PV = Present Value of oil and gas and other businesses Neither he nor his spouse act contrary to a buy or sell rating. 4

5 Table 2-1 Energy Pipeline and Power Companies Rank by McDep Ratio: Market Cap and Debt to Present Value Net ($/sh) Market Present Debt/ Symbol/ 23-Apr Shares Cap Value Present McDep Rating 2003 (mm) ($mm) ($/sh) Value Ratio Large Cap Power Southern Company SO , Duke Energy Corporation DUK , Exelon Corporation EXC N , American Electric Power Co. Inc. AEP N , Enel S.p.a. (32%) EN , Dominion Resources D , Mid Cap Pipeline and Power Kinder Morgan Energy Partners, L.P. KMP S , Kinder Morgan Management, LLC KMR S , Kinder Morgan, Inc. KMI S , Williams Companies WMB , Calpine Corporation CPN N , AES Corporation AES , Dynegy Inc. DYN , Constellation Energy Group CEG , Mirant Corporation MIR CMS Energy Corporation CMS Sempra Energy SRE , El Paso Corporation EP N , Small Cap Pipeline El Paso Energy Partners EPN S , Enterprise Products Part (16%) EPD Enbridge Energy Partners, L.P. EEP S , Plains All Amer. Pipeline PAA , Enbridge Energy Management, L.L.C EEQ S , Northern Border Partners NBP , TEPPCO Partners, L.P. TPP , Williams Energy Partners WEG , AmeriGas Partners, L.P. APU , Western Gas Resources WGR , Coal Penn Virginia Res. Part, L.P. PVR Consol Energy Inc. CNX , Peabody Energy BTU , Alliance Res. Part, L.P. ARLP Arch Coal ACI Massey Energy MEE Total or Median 5, Buy/Sell rating after symbol: B - Buy, N - Neutral, S - Sell McDep Ratio = Market cap and Debt to present value of oil and gas and other businesses Neither he nor his spouse act contrary to a buy or sell rating. 5

6 Table 2-2 Energy Pipeline and Power Companies Rank by EV/Ebitda: Enterprise Value to Earnings Before Interest, Tax, Deprec. Dividend or ($/sh) EV/ EV/ Distribution PV/ Symbol/ 23-Apr Sales Ebitda P/E NTM Ebitda Rating 2003 NTM NTM NTM (%) NTM Large Cap Power Southern Company SO Duke Energy Corporation DUK Exelon Corporation EXC N Dominion Resources D Enel S.p.a. (32%) EN American Electric Power Co. Inc. AEP N Mid Cap Pipeline and Power Kinder Morgan Energy Partners, L.P. KMP S Kinder Morgan Management, LLC KMR S Calpine Corporation CPN N Kinder Morgan, Inc. KMI S Dynegy Inc. DYN AES Corporation AES Williams Companies WMB Mirant Corporation MIR CMS Energy Corporation CMS Constellation Energy Group CEG Sempra Energy SRE El Paso Corporation EP N Median Small Cap Pipeline El Paso Energy Partners EPN S Enterprise Products Part (16%) EPD Enbridge Energy Partners, L.P. EEP S Plains All Amer. Pipeline PAA Enbridge Energy Management, L.L.C EEQ S Northern Border Partners NBP TEPPCO Partners, L.P. TPP AmeriGas Partners, L.P. APU Williams Energy Partners WEG Western Gas Resources WGR Median Coal Consol Energy Inc. CNX Penn Virginia Res. Part, L.P. PVR Peabody Energy BTU Arch Coal ACI Alliance Res. Part, L.P. ARLP Massey Energy MEE Median EV = Enterprise Value = Market Cap and Debt; Ebitda = Earnings before interest, tax, depreciation and amortization; NTM = Next Twelve Months Ended March 31, 2004; P/E = Stock to Earnings; PV = Present Value of oil and gas and other businesses Neither he nor his spouse act contrary to a buy or sell rating. 6

7 Table 3-1 Small Cap Energy Companies Rank by McDep Ratio: Market Cap and Debt to Present Value Net ($/sh) Market Present Debt/ Symbol/ 23-Apr Shares Cap Value Present McDep Rating 2003 (mm) ($mm) ($/sh) Value Ratio Short Life Dorchester Minerals, L.P. DMLP Newfield Exploration Company NFX , Southwestern Energy Company SWN Stone Energy Company SGY Cimarex Energy Company XEC Spinnaker Exploration Company SKE Denbury Resources Inc. DNR Wesport Resources Corporation WRC , St. Mary Land and Exploration CompanSM Forest Oil Corporation FST N , Chesapeake Energy Corporation CHK , The Houston Exploraton Company THX Total or Median 11, Long Life Ultra Petroleum Corp. UPL Unit Corporation UNT Quicksilver Resources Inc. KWK Penn Virginia Corporation PVA Evergreen Resources, Inc. EVG , Encore Acquisition Corp. (25%) EAC Magnum Hunter Resources, Inc. MHR Swift Energy Company SFY Vintage Petroleum, Inc. VPI Total or Median 4, Canadian Royalty Trusts Provident Energy Trust PVX Enerplus Resources Fund ERF , Pengrowth Energy Trust PGH , Canadian Oil Sands Trust (US$) COS_u.TO B , Total or Median 4, Natural Gas Royalty Trusts Cross Timbers Royalty Trust CRT Hugoton RoyaltyTrust (46%) HGT San Juan Basin Royalty Trust SJT B Micro Cap Abraxas Petroleum Corporation ABP Energy Partners Ltd.(30%) EPL B Purcell Energy, Ltd. (US$) PEL.TO N Buy/Sell rating after symbol: B - Buy, N - Neutral, S - Sell McDep Ratio = Market cap and Debt to present value of oil and gas and other businesses Neither he nor his spouse act contrary to a buy or sell rating. 7

8 Table 3-2 Small Cap Energy Companies Rank by EV/Ebitda: Enterprise Value to Earnings Before Interest, Tax, Deprec. Dividend or ($/sh) EV/ EV/ Distribution PV/ Symbol/ 23-Apr Sales Ebitda P/E NTM Ebitda Rating 2003 NTM NTM NTM (%) NTM Short Life Dorchester Minerals, L.P. DMLP Forest Oil Corporation FST Southwestern Energy Company SWN Chesapeake Energy Corporation CHK Wesport Resources Corporation WRC Cimarex Energy Company XEC St. Mary Land and Exploration CompanySM Denbury Resources Inc. DNR Stone Energy Company SGY Newfield Exploration Company NFX Spinnaker Exploration Company SKE The Houston Exploraton Company THX Median Long Life Ultra Petroleum Corp. UPL Evergreen Resources, Inc. EVG Unit Corporation UNT Quicksilver Resources Inc. KWK Encore Acquisition Corp. (25%) EAC Swift Energy Company SFY Penn Virginia Corporation PVA Magnum Hunter Resources, Inc. MHR Vintage Petroleum, Inc. VPI Canadian Royalty Trusts Enerplus Resources Fund ERF Canadian Oil Sands Trust (US$) COS_u.TO B Pengrowth Energy Trust PGH Provident Energy Trust PVX Natural Gas Royalty Trusts Cross Timbers Royalty Trust CRT San Juan Basin Royalty Trust SJT B Hugoton RoyaltyTrust (46%) HGT Micro Cap Abraxas Petroleum Corporation ABP Energy Partners Ltd.(30%) EPL B Purcell Energy, Ltd. (US$) PEL.TO N EV = Enterprise Value = Market Cap and Debt; Ebitda = Earnings before interest, tax, depreciation and amortization; NTM = Next Twelve Months Ended December 31, 2003; P/E = Stock to Earnings; PV = Present Value of oil and gas and other businesses Neither he nor his spouse act contrary to a buy or sell rating. 8