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Inergy, L.P. Message Board

  • abter1 abter1 Nov 29, 2007 10:34 AM Flag

    Wachovia updates NRGY research

    Wachovia transferred lead research for NRGY to Ron Londe (formerly of AGEdwards, which was bought by Wachovia 10/1/07), and put out a new report today. Here are the bullets from the summary


    "--We are transferring coverage of NRGY and continuing with an Outperform rating. Our positive rating is based on solid distribution growth outlook and coverage, strong financial position and current valuation. We expect NRGY to increase its distribution by 10% during FY2008 with distribution coverage of 1.1 times.

    --Expansion of midstream business should add to distribution growth visibility and diversifies NRGY's operations. NRGY has been building its midstream natural gas segment since its acquisition and development of the Stagecoach natural gas storage facility and the recent acquisition of Arlington Storage Corporation. We expect NRGY to continue to focus on growing this segment through acquisitions and growth projects. In 2008, we estimate the midstream segment will generate roughly 15% of total gross margin.

    --Valuation range remains $35-38. We see solid upside potential for NRGY. Based on the mid-point of our valuation range and recent price, total return potential for the partnership is 23%. NRGY currently trades at a yield of 7.5% and 11.3x estimated FY2008 DCF compared to the recent MLP peer group medians of 6.6% and 12.6x.

    --NRGY reported F4Q07 results that were below our estimates. Adjusted EBITDA for the seasonally weak quarter (excluding extraordinary items) was $13.8 million versus our estimate of $15.0 million and $10.1 million during F4Q06. DCF for FQ407 was ($0.19) per unit, compared to our estimate of ($0.14) and ($0.21) during the year-ago quarter. F4Q07 loss per unit was ($0.59) versus our estimate for a loss of ($0.40) and consensus estimate for a loss of ($0.56). Results were below our estimates due to lower than expected retail gallons sold and a larger than expected general partner take of net income.

    Valuation Range: $35 to $38
    Our valuation range is based on a blend of (1) our two-stage distribution discount model, which assumes a required ROR of 9.0% and a long-term growth rate of 2.5%, and (2) a price-to-distributable cash flow multiple of about 12.5x our FY'08 estimate. Risks to NRGY trading in the valuation range include (1) failure to identify and/or integrate attractive acquisitions; (2) unseasonably warm weather; (3) profit margin erosion in response to higher energy prices; (4) a slow down in new home construction; and (5) rising interest rates.

    Investment Thesis:
    We believe NRGY is well positioned to achieve a 5-year CAGR of about 5.3%. Growth should come from our expectation for NRGY to continue to be an active consolidator in the propane industry. Also, NRGY's acquisitions of the Stagecoach, Bath and ARC assets significantly expanded its midstream operations and provides a leg for additional growth."

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