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Inergy, L.P. Message Board

  • lner2512 lner2512 Aug 7, 2011 3:43 PM Flag

    I think I like NRGY again

    I owned NRGP in 2010, got bought out by NRGY, sold it but thought it might look good this Fall. The current price and 10% yield have me interested now. The company is lumped into the propane group, but that is becoming misleading--they are in a transition that the market is not valuing properly yet.

    NRGP has renewed and extended maturities on their debt at lower rates. Their LOC is LIBOR-based, which may mean it will escape any effects from the U.S. credit downgrade.

    New shares were issued, 9 or 10 million of them at $36, in the last month or so. While not necessarily dilutive when done by an MLP, these issuances can depress the market for the stock for several months. And other factors are adding to that effect right now!

    NRGY is still mostly a propane company, but the storage and midstream pipeline operations are growing very rapidly and are much more profitable. They will continue to make small propane acquisitions, but larger storage and pipeline deals are more likely, IMO, especially in the Northeast.

    For customers, switching out of propane is very difficult (see Morningstar's analysis of SPH); even switching vendors can be costly, as some of my family members will tell you.

    The effects of their storage/midstream acquisitions and growth are just beginning to hit their results. Meanwhile, they incurred large one-time charges in buying us out of NRGY in 2010 but that deal lowered their costs and increased future DCF flows. In 2011 their early debt extinguishment cost over $49M but this was not a cash cost, just a write-off of costs incurred when that debt was issued, that would otherwise have been written off in future years.

    The picture I see is that of a company in transition from all propane to a 50-50 split between propane and other revenues, such as storage, midstream, etc. That is their stated aim, and they seem to be on target.

    All of which brings me to share price; it closed Friday at under $29, with a yield in the 10% range at today's distribution rate. My experience is that MLPs are priced based on their DCF and yield; I expect NRGY's DCF to increase based their 2011 guidance and their performance to date. And a yield of 10% is too high, meaning I expect it to pull the share price higher or at least prop it up about at current levels. After all, the underwriters of the last secondary issue were able to sell those shares at $36, nearly 25% higher than Friday's close.

    So this week, I'll put in an order for some shares and maybe sell some puts on additional shares. NRGY may be a nice addition to MWE, EPB, WPZ, LINE, RRC and VNR.

    BTW, thanks to all who posted recently on NRGY! You helped me do my DD. But I do wonder why there seemed to be an emphasis on net book value of the shares--that works well for entities such as banks with readily marketable assets, but I've never seen it used with MLPs. Could someone enlighten me?

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