5-5 NRGP research report; downgrading on valuation
WF report 5-5, after 3-for-1 split. Summary:
NRGP: Downgrading Rating to Market Perform on Valuation Announces 3-for-1 Split
• Summary. We are downgrading our rating on the units of NRGP to Market Perform from Outperform based on valuation. NRGP units are trading at our current valuation range of $73-77 (which is unchanged) and NRGP's unit price is up 26% year-to-date and 96% over the past 12 months compared to 11% and 42% for the Wells Fargo Securities, LLC index and 5% and 29% for the S&P 500 index. We remain positive on the long-term outlook for NRGP given NRGY's growing natural gas storage (midstream) business, financial flexibility, recent acquisitions and potential for future acquisitions and an estimated 17% average annual distribution growth for NRGP over the next five years. We are adjusting our FY2010 and FY2011 DCF estimates for NRGP to $4.07 and $4.80 from $4.12and $4.99, respectively.
• Unit Split. NRGP announced a three-for-one split of its outstanding limited partnership units for unitholders of record on May 24, 2010. The certificates for the additional units will be issued on or about June 1, 2010. We see this as a positive event for NRGP unitholders as it should add to the trading liquidity for the units.
• F2Q10 Results. NRGP received $20.8 million of gross cash flow as a result of the F2Q10 distribution paid by NRGY. This was below our estimate of $21.1 million but higher than $20.0 million in F1Q10 and $15.8 million in F2Q09. DCF for F2Q10 was $0.99 per unit compared to our estimate of $1.02, $0.97 in F1Q10 and $0.75 in F2Q09. Distribution coverage for the quarter was 1.02 times.
• Distribution Increases Continue. In late April, NRGP announced a 3.7% distribution increase to $0.75 per unit (annualized rate of $3.90 per unit). This increase was below our estimate of $1.01 but up 30.0% over the year-ago payment. The percentage growth of NRGP’s distribution this quarter was 2.6 times faster than NRGY’s increase, which is in-line with our theoretical estimated leverage ratio range of 2.5 to 3.0 times.
Valuation Range: $73.00 to $77.00
Investment Thesis: NRGP is poised to increase its distributions at a five-year CAGR of 17%, contingent upon our estimate of a 7% annual growth rate for NRGY (2010-14). Distribution growth at NRGP can be significantly higher than the growth rate at the underlying partnership, due to NRGP's ownership of incentive distribution rights (IDRs). However, given the current valuation, we rate the units of NRGP as Market Perform. Approximately 50% of the distribution is estimated to be tax deferred for new unitholders.
<<We are downgrading our rating on the units of NRGP to Market Perform from Outperform based on valuation>>
That isn't all bad, just being downgraded to market perform. With the run up it had over the last year that is not a bearish call, IMO. That also gives room, if Inergy outperforms expectations, for some upgrades in the next 6 months to a year.
I would personally rate them a hold here as well, even though I have my distributions reinvested, I can't see adding new units right now (unless you caught the low this AM).