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Inergy, L.P. Message Board

  • richardleeds richardleeds Jul 31, 2011 6:02 PM Flag

    why NRGY is at low for year and

    Why NRGY is at the low for the year and could go significantly lower.

    Large segment of the business is in propane and this commodity is out of favor.

    Growth in the future in America is going to be more uses of natural gas, natural gas liquids and LNG as more plants are built.

    We should expect more natural gas pipelines to be built everywhere over the next decade and more people using natural gas for everything from transportation to industry to residential and commercial real estate.

    I hold about 30 stock positions in many sectors. My largest holdings are LINE, CHK, ELN and DTV. I have some very significant positions in the energy field including 22 wells where I hold 1% interest and Noble Energy is the largest interest.

    I like to listen to both CNBC and Bloombergy and I spend about 2 hours looking at CNBC and 1 hour looking at Bloomberg each 24 hours for general commentary.

    I rarely am influenced by Jim Cramer but he is a good editorialist and often does pick up on good trends or story stocks. You certainly could not go wrong on his CHK, Apple or Linn Energy suggestions, even though I came into Chesapeake and Linn about a year before Cramer started talking about them.

    I started looking at NRGY because I heard the CEO of NRGY on Cramer's show and Cramer is always pushing the shares. Never could get myself to buy as there was too much in the financial statements and the sector I did not like and fortunately I have been proved right.

    Book value is only one small metric for a company and it is not as important as cash flow, earnings, margins, etc.

    I just could not see the growth in propane in terms of generating significant returns like I did with the other shares I mentioned. Most of those shares have delivered 50-100% returns for me over the last 24 months.

    I came back to NRGY for second look last week after seeing it the low for the year. Still have not changed my mind since the book value/price of shares multiple for NRGY is still higher than my other holdings. This is not justified as my other holdings have been increasing earnings and cash flow at higher rates and more importantly showing more share price acceleration.

    When NRGY drops another 20% and assets are closer to share price multiple of other equities I own, it will be an interesting story. Is that a year away? Just do not know at this time. Shareholders might want to dump NRGY and move into the holdings I mentioned as all of them look like they will continue the run up while NRGY looks like it is going to continue in the other direction. Better to return to NRGY in a year at lower prices.

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    • Nice job of blowing your own horn,
      do you lean on the wheel that heavy when out in traffic?

      Got to admit your opinions not as if off the road and in some ditch...

    • richard thanks for opening a healthy discussion. I too have a considerable amount invested in mlps. On mlps I look at the distribution coverage and cagr and not at the financial metrics.

      Recent history:
      Second quarter results were poor attributable to "retail" propane down $14.1 mm. Retail propane sales were 129.7 million gallons compared to 147.2 million gallons sold in the same quarter of the prior year. Retail propane gross profit, was $164.3 million for the quarter compared to $178.4 million in 2010

      Wholesale propane sales and midstream were up $16.4 mm in the second quarter which offset the retail propane slide. with wholesale propane at $32.8 million in the quarter compared to $32.2 million in 2010. Gross profit from midstream operations was $45.8 million comapred to $30.0 million for 2010


      Also their G&A costs are way down as their are completing digesting the gp merger. For second quarter perating and administrative expenses decreased to $81.7 million compared to $87.2 million in 2010.


      The major financial issue for the quarter came from $49.4 million in costs related to early extinguishment of debt in connection with Inergy’s refinancing as previously announced which should not be repeated in the near future.

      Current:
      Now putting history aside for a momement; year to date US propane stocks are at the low end of the 5 year average, production is nearly flat to slightly up from 2010, however propane demand is down around 180k barrels per day. When the end of heating season propane prices were last reported they were still running fairly strong with wholesale at arounc 1.40 and residential at 2.86. Also the latest us factories report shows a currtailment in activity. Taking all of these factors in aggregate tells me third quarter propane results may be robust as some are thinking but also should not be terrible either.


      Future:
      Their NE storage is at the heart of the ny city gate and a outlet for the increasing marcellus gas play with fixed fees and should provide significant upside potential. Their Texas storage likewise provides significant upside to the eagle ford growth coming out of the copano/km expansion projects. Also it is not as easy for users of propane to convert as is assumed without incurring significant upfront costs so there may not be as much conversion to natural gas as anticipated, but there will still be conservation as what happend in late 2010 and early 2011


      So taking the second quarter results into consideration with the improvements in midstream and wholesale propane and lower G&A and no writeoff for debt, flat retail to slightly better retail propane sales/prices and the outlook for storage growth in their ne and texas assets I would be surprised to see further "material" deteroration in the unit price (caveat not withstanding a crater in the US markets of International markets for other issues) and even the chance for some improvement in unit price back to the mid 30's over the next 6 months of so.

      Again just my view

    • Richard, what you are missing is that NRGY began to transform itself into a midstream storage MLP with several acquisitions over the last couple of years for the very reasons you mention. Another poster posted the splits between revenues and profits generated by the propane and the midstream business. The reason the stock price is down is not so much that they are stuck in a low-growth sector (propane) but more to do with their execution.

      They also acquired their general partner last year to eliminate expensive IDRs.

      The MLP sector has outperformed since last year, but within the sector, there are laggards. The market seems to be rewarding those MLPs with above average distribution growth and those that have exposure to the shale gas regions and NGLs

      • 1 Reply to marklibera
      • convinced that NRGY should be in my portfolio. The question is timing. When.

        I like to buy when a company is in transition and shares are in decline. NRGY in my opinion is one of the pricier MLPs. Perhaps that has a little to do with the Cramer effect.

        Our country is in sad economic shape. Add that to idiots in Washington and that is a toxic mix. The House just went on vacation without funding the FAA. No budget so 70,000 construction jobs are lost for the month. Those people will apply to their states for unemployment. That and the fact Congress did not extend the FAA airline ticket excise tax. So the government does not receive $200 million a week. The airlines are collecting the money and keeping it for themselves because the tax expired.

        The idiocy in Washington makes me think the markets are going to have a tough time until the politicians demonstrate that they care about jobs. Obviously the do not. We should have an energy policy that provides federal tax credits for switching from diesel and gas to natural gas on all trucks. The natural gas industry could put millions to work if we kept the billion dollars per day we send to foreign countries for their oil to run our trucking industry. The government provides $6B per year in credits to the ethanol industry to increase the use of corn in fuel, which drives up corn prices and therefore, feed stock that grows all of our protein. But what kind of job creation is that. That is government money for big farmers.

        Our defense spending in this country is as much as the next 20 countries combined. How crazy is that. Just looked at the numbers on Wikipedia.

        Sorry for the tangent. But the country is so screwed up right now.

        This market could fall off a cliff if these Congressman keep doing what is best for special interests and their Congressional district. The government just approved building a $700 million bridge in a Congressman's district. There were two plans for the bridge, one at $350 million and one at $700 million. They gave the Congressman what he wanted, more pork in his district.

        We are at the precipice and the markets are not very stable. What will the markets do if we keep seeing job losses?

        If NRGY is not going to report any significant news in the next several quarters don't I see a much lower price for entry?

    • Main thing you are missing is the current high yield (due to low price). How much higher could it go before drawing in significant buying?
      I'm not a fan of the propane MLPs, however I wouldn't expect the yield to go much higher unless some event causes the entire MLP sector to be repriced to higher yields.
      Therefore I am thinking the price is close to the bottom (with the caveat mentioned above).

      • 2 Replies to lizahuang54321
      • I did not miss the high yield. That yield, the impressive CEO and Jim Cramer, who is a sharp guy if you get past the theatrics all brought me here.

        Yes, the yield is high and creates some floor, but the price you pay for the yield, that is my point.

        Linn has a 7% yield with incredible growth since I purchased a few years back. Very similar to the growth of my holdings in CHK and DTV.

        Right now the best buy to me is not NRGY in the MLP area. Take a look at BBEP. Price of shares to book value is 1 times with a 9% dividend.

        I am not convinced that the execution problems of the last year or two justify paying a premium for NRGY over Linn Energy or BBEP. I own way too much Linn as it is my biggest publicly traded equity holding.

        I come back to my original thought that NRGY is not worth double the price of LINE or BBEP in terms of what you pay per share to buy the balance sheet. The yields are all pretty close, but I see execution issues impacting NRGY. Does that continue for another year, holding down share price or even reducing share price? Again, why pay double for the assets of NRGY to what you can buy the assets of LINE or BBEP with comparable dividends, but better growth potential over the next year.

        Still interested but propane is bucking a trend here, where is the growth going to come from in that area? Storage is an interesting potential but not fully realized.

        I think markets are going lower due to the idiots in Washington, D.C. and their failure to reduce expenditures. It amazes me that our defense spending is greater than the next 20 largest countries in the world, combined? With the idiots we have running our country we need to invest in the very best companies as very good prices, not overpriced, that are enticing only for the higher dividend. Didn't mean to bring in politics to investing, but they are unfortunately intertwined.

        thanks all, R.

      • My thinking exactly, Liza. Thanks for your comment. I have looked at NRGY several times recently with the idea of selling--I don't like selling so near what I see as a bottom. KMI is a new holding of mine, down because it is overshadowed by KMP, so I thought of swapping NRGY shares into KMI. Great prospects for growth--but a dividend of about 4.2% Look at what NRGY is giving you! And the storage aspect is very important today. I'm hoping NRGY management is paying attention to what pays and continues to focus growth in storage, for example, and not propane.

    • Pretty solid points for flat price at best for some time. Any holes in this analysis??
      TIA

 

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