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Inergy, L.P. Message Board

  • abter1 abter1 Aug 13, 2010 9:55 AM Flag

    NRGY downgraded to hold 8/10 on merger news

    WF put out a pair of reports 8/10; one on NRGY, one on NRGP. They like the deal from NRGP's side. Not so much for NRGY...hence the downgrade.

    downgrading to market perform based on limited near term upside of the merger for NRGY
    lowering 2010 DCF/u to $2.52 (from $2.60), and 2011 DCF/u to $2.99 (from $3.02)
    Dist. growth forecasts: 2011 = 5.7%, 3 year = 5.9%, 5 year = 5.2%
    interestingly, these dist growth forecasts are actually lower than their previous ones. Example: new 2011 dist. estimate = $2.96, down from $3.02. 2012 est. = $3.14, down from $3.23. Slower dist. growth in 2012 and outyears due to expected slower growth over next 12 months, based on part on the humble Q2 results they just reported.

    WF not yet factoring in increased acquisitions or increased organic growth. Possible faster dist. increases tied to better opportunities for acquisitions due to lower cost of capital & IDRs. NRGY cost of equity should decline: WF estimates 250 basis points.

    WF ran a hypothetical $500M acquisition scenario. Pre-merger their $500M acquisition example would have increased dist. by 4%, after merger by 6.9%.

    new value range for NRGY is $43-45 (from $40-42) based on elimination of IDRs.

    "NRGY's risk profile has increased, in our opinion, as the partnership must successfully complete future growth projects and material acquisitions above and beyond what was previously assumed to get the full benefit from this transaction."

    interesting comment: "Also, removing the general partner and incentive distribution rights could theoretically make it easier for NRGY to participate in possible industry consolidation or complete major restructuring transactions such as a possible spin-off the partnership’s midstream business."

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    • abter,
      Just found your WF message. Do you have any idea how WF concludes that NRGY's risk profile has increased as a result of this deal? No one says this about EPD after the EPE deal; both are essentially in-house transactions that change only the form of the business, not the substance.