Morningstar says Amerigas paid 11X EBITDA for ETP's propane business, which is about the same size as NRGY's business, although sans storage assets. What does that tell us about the value of NRGY?
The question is now that Amerigas has put a value on a large propane asset sale, using that same metric (10.5 times EBITDA) how are NRGY's midstream assets valued versus its competitors. A storage public company, PNG, is valued at 23 times EBITDA. Not sure if NRGY's midstream assets are comparable to PNG.
NRGY has already planned to spinoff the midstream assets, no doubt because they figured out that the market was not valuing these assets at the same rate as the market valued other purer storage plays like PNG. A potential sale of the propane assets to another company for cash probably has tax disadvantages, so instead of contributing the propane assets to some other company's mlp in exchange for units, NRGY decided to keep control but separate them out so that the midstream assets could be better priced by the market.
rrb and mark,
Thank you for your intelligent responses. I am bottom fishing here because I see the consolidation of the propane business accelerating with the APU/ETP deal and I think the propane business itself is or has bottomed.
Despite all the fear-mongering, people who use propane can't switch to gas unless the local utility builds a line to their home or they change to electric, both of which are very expensive propositions. I have several family members who burn propane--none of them are even considering switching. I think cut-backs because of the recession have about run their course and increased nat gas production should bring propane prices down, benefitting re-sellers like NRGY.
I can see real benefits to NRGY from the upcoming IPO, especially if their longer term objective is similar to that of ETP. A stock deal to sell their propane business to SPH after the IPO would put them in the same position today, with the bonus of the IDRs eventually coming in from the storage MLP along with distributions from SPH. And I doubt there would be tax consequences to a properly structured stock deal.
All of which gets me back to wondering what NRGY's propane business would be worth to SPH or another buyer in an all stock deal after the storage IPO is done. What do you think?
(I owned NRGP, got bought out then sold the NRGY I received in January. Now own NRGY calls, thinking of adding here.)
The Amerigas-Energy Transfer deal is huge for Inergy in that it puts a value on an integrated platform.
I believe that Inergy may end up contributing its propane assets to Suburban (SPH), which would allow SPH to bulk up and rival the bulked up Amerigas. SPH has a pristine balance sheet, no IDRs, so it would be perfect for SPH and would allow NRGY to focus on midstream.
One thing is certain, NRGY has now become cheap. The fear mongering by beefstu is just that, fear mongering. NRGY certainly deserves much of the punishment they have received (i.e. price decline) as they made a series of poor decisions (hefty GP buyout followed by a transformational transaction in Tres Palacios), but the rumors of their demise are misleading.
All of that being said, NRGY will likely be able to maintain the distribution at its current level, and at worst, a cut of 20%.
A cut of 20% brings it down to $2.24/unit and with a 8% yield, you have a price of $28.20.
If you are holding NRGY you are in good shape for the future. First is the dividend (payout) to wait. Second, although Propane is a failing profit for this company, their recently purchased Storage facilities lend themselves to growth when KMP needs storage for EXPORT of natural gas. Likewise, although less profitable to wait is CHKM.
I am holding although I am no expert.
rrb, you have to figure that NRGY already sought that option out before announcing the plan to spinoff the midstream business. The $2.2 billion might be a "fair" price tag for the propane business, but a deal takes a willing buyer and a willing seller. Maybe SPH and Ferrell (or APU) were not that interested at that kind of price before APU bid for the ETP propane business. There are many factors that go into whether a competitor would pay up for NRGY's propane, like whether the competitors could acquire similar assets more cheaply from some of the other independent propane businesses (according to the APU presentation, 59% of the industry is independent) and whether they have more overlapping areas or new areas from an acquisition.
And it's not just the pre-tax deal price that matters, but the after-tax price. It's true that the APU-ETP deal had a stock component to their deal to minimize tax considerations, but I didn't see a summary of what the taxes would be on the cash component of their deal, but note that ETP is much larger than NRGY (in both assets and capitalization) and correspondingly their propane division was a much smaller part of the whole company. The tax hit may only amount to a few dollars per share, which ETP must have judged was an acceptable cost given their need for money to invest in their other higher growing businesses. I own some ETP and not only did they need money to purchase some of the pipeline assets that their parent bought from Southern, but they have an ambitious list of organic projects to fund.
So the bottomline is that although an outright sale of NRGY's propane business may have been easier from a clarity standpoint, the midstream IPO could produce an opportunity for investors. If the midstream MLP units price too low, then you can buy them at the offering and benefit from a better return potential. If they price above the market, then you stand to benefit from your holdings in the parent (which will receive the proceeds and keep the gp and IDRs).
I have reviewed APU both pre and post transaction with Energy Transfer, Suburban and FerrellGas and believe based on the price paid by Amerigas as well as the enterprise values of SPH and FGP, that Inergy's propane biz, if sold, would fetch around $2.2 billion. This is based on EV/Ebitda, market share comparison etc.
That would leave the midstream division worth around $2.8 billion.
I remain convinced that NRGY would be far better off if they divested the propane biz to a player like Suburban and instead focused on the midsteam.
"That would make quite an MLP with coal royalties, propane, storage, pipelines etc."
even water... ;-)
You can always find registration statement on the SEC's website at www.sec.gov. Look under company filings by typing Inergy in the box. Here is the latest amendment which is still missing the many numbers (which they will probably fill in once they report third quarter earnings)
Pure speculation, but I think they'll become a lot larger or a lot smaller in the propane biz in the next year as a result of the ETP deal, and I think the Tres Palacios/Seneca Lake purchases tell us the direction they'll take, although they're also buying more propane businesses. They definitely seem to be in transition, but to what?
I recall Morningstar saying at least a year ago that ETP wanted to sell their propane business, so that means NRGY passed on buying it--although the price probably dropped after ETE bought SUG.
I agree with rrb that NRGY might be better off without the propane business, but now is probably not a good time to sell. They do seem to be putting more money into midstream/storage than the propane business, so they seem to be going in the right direction.
I'll be interested to see what they do with the added liquidity from the midstream spinoff.
ITM, there's no distribution announcement, but the share price tells me they won't be cutting. I tried to buy more calls Friday but no one would sell at my price. Maybe the Europeans will continue their dithering and help me out!
I went to NRGY's website looking for the midstream registration statement today but could not find it after sifting through their SEC filings. Where can I find it? And thanks in advance for any help!