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Inergy, L.P. Message Board

  • faerbertom faerbertom Oct 12, 2009 9:28 PM Flag


    I was interested in buying shares in this company, but their negative value after eliminating goodwill etc.; paying dividends far in excess of earnings the last three years by borrowing money to pay those excessive dividends; officers of the company selling over 100,000 shares in excess of purchases; insitutional investors selling almost 1,000,000 shares in excess of purchases; all of this caused me to hold off. What am I missing here?

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    • I think you have to begin with an understanding of how MLPs are different from regular corporations. The tax laws require that MLPs pay out a substantial amount of their earnings in distributions (much like REITs) which is why most MLPs have large yields. The downside of that tax law requirement is that these companies must continue to borrow and issue equity to fund their growth initiatives. There is always risk that they could overpay for an acquisition or acquire some business that does not work out, but this company has a requirement that any acquisition be accretive.

      You also have to be careful not to let the GAAP accounting obscure your analysis. Many MLPs hedged their production or sales and GAAP requires that they mark-to-market the change in the value of these hedges even though generally there is no cash exchanged on these positions. There can also be large depreciation expenses on the physical facilities and pipelines even though the actual replacement value of their facilities may be increasing in value. While it is true that many physical plants need to be maintained and updated, to actually build new facilities would probably cost significantly more.

      Thus, when you evaluate an MLP, you should focus on DCF (distributable cash flow). If it is growing, then that is the best sign of the health of the company. NRGY stated in their presentations that they will try to maintain debt to EBITDA ratios of 3.5 to 4, which to me is not overly leveraged considering that they have to pay out much of their cash as distributions.

      There are always risks -- whether they will have continued access to the debt and equity markets to raise the capital they need to continue to expand, whether there will be enough opportunities at the right price to acquire, and whether they can continue to execute. But all companies have similar issues, but not all companies have the track record that they have of increasing distributions and paying such a good yield.

      • 2 Replies to marklibera
      • Thank you for educating me about something
        I don't know much about.

      • Faerbertom;
        You are missing a whole lot. Marklibera's post is a great place to start to understand what kind of an investment NRGY is. The basic business model of a Master Limited Partnership, and the accounting methods, are fundamentally different than a publicly traded stock corporation. I suggest you read one of the great primers available on "what is an MLP" to get some background, and then come back and look at NRGY with an improved set of analytical tools.
        The industry group (National Association of Publicly Traded Partnerships...NAPTP) has a couple of primers available on their website under "PTP 101" (the Wachovia Ver III is a great place to start):

        The most relevant single performance metric for an MLP is the DCF/distribution ratio, known as the coverage ratio. The coverage ratio is a short hand metric that is viewed as serving the same purpose as a P/E ratio. With the latest distribution announcement, NRGY is at 1.0x (DCF = $2.72, dist = .675/quarter, or $2.70 indicated annually). These are the #s to consider when worrying about whether they are paying out more than they are making (which the distribution/earnings comparison you made would make you wonder about). And never loose sight of the history of increasing distributions, with an expectation of continuation of that. In the past year the NRGY dist. went up by 6,3%, and Wells Fargo forecasts it will go up an average of 6.7%/year over the next 3 years (i.e., a 3-yr CAGR = 6.7%). A coverage ratio > 1.0x, and forecasted dist. increases are the lifeblood of an MLP.

        IMHO the general partner of NRGY, traded as NRGP, is even a more attractive investment, but there is no free lunch. NRGP thrives if NRGY thrives, but will suffer more if NRGY falters. Disclosure: I own a wee piece of NRGP, but not NRGY.

    • I've owned this stock for 7 years and allit does is pay dividend and make money. i would not buy at these levels. wait for a pull back after it pays it dividend it always drops. you can set a clock to it. but every year they increase the div and make you some money in growth.