PTXP - Penntex Midstream

[whistlerbumps]

If you have interest in picking through the MLP wasteland, I would recommend taking a look at Penntex (PTXP).

 

PTXP owns gathering and processing assets in Northern Louisiana, mainly servicing Memorial Resource Development (MRD).  The good things about PTXP is that they IPO'd recently (June 15) and they were only fully operational in Q4 15 so they haven't had enough time to get into trouble/do too many stupid things.  What that means it that PTXP has a strong balance sheet (net debt 2.3x EBITDA), no material capex needs (total 2016 capex <$4mln), and is well below IDR thresholds.

 

Major customer MRD is a very healthy gas producer with a strong hedge book (close to 100% for 2016 and 85% for 2017) and should be cash flow breakeven in 2016.  If gas prices rebound, their production should increase which should lead to increased cash flows for PTXP.

 

Even without a rebound in MRD production, PTXP should generate ~$1.44 of DCF in 2016 (16% yield) and pay out ~$1.10-1.20 of distributions (~12.5% dividend yield).  I think these valuations are attractive given their low-risk nature.

[whistlerbumps]

Forgot to mention that ~85% of PTXP 2016 revs is from minimum volume commitments so it should be very secure

[BG2008]

I'm trying to figure out how Penntex's deferred revenue works.  My understanding is that the processing plant did not process the minimum volume.  But since the fees are fixed, they get paid anyway.  The natural question becomes can Range/MRD use that deferred revenue in the future?  Is there a time in the future when Penntex will have to provide the processing but won't be paid? 

[investor1]

I'm trying to figure out how Penntex's deferred revenue works.  My understanding is that the processing plant did not process the minimum volume.  But since the fees are fixed, they get paid anyway.  The natural question becomes can Range/MRD use that deferred revenue in the future?  Is there a time in the future when Penntex will have to provide the processing but won't be paid?

 

Yes, there will be, but only after RRC has delivered the total MVC agreed to in the 15 contract. The best description is in Note 9 of the 10-Q: "RRC Operating may utilize these deficiency payments as a credit for fees owed to the Partnership only to the extent it has delivered the total minimum volume commitment under the processing agreement within the initial 15 -year term of the agreement." It would be a great scenario to get to a point in the near-term where RRC can use these credits, because that means drilling (and thus processing volumes) have accelerated such that 15 years worth of MVC have been used up.

 

I have a question on the ETP transaction that I can't answer. Why is ETP locked up from making a tender offer for the remaining public units for six months (until May)? What's the logic there? I think ETP will likely tender for the remaining shares rather than leave public float. The remaining PTXP float is too small to use as a currency for capital raises.

 

If that occurs, I think the takeout will be at a nice premium to today's price. One way I think about it is in the context of what ETP paid for its 65% LP and 100% GP interest. If they put zero value on the GP (unlikely, though no IDRs are currently being paid), the LP unit implied value of their purchase is ~$24.60. At today's LP unit price, ~$15.00, the implied value of the GP based on ETP's purchase price is $250M, which implies a lot of growth (and an LP unit price higher than $15.00). The answer is likely in between (say $20?), but still at a nice premium to where the units are currently trading. RRC's commentary on the Terryville, and natural gas prices, have only gotten more bullish/healthier since October, so I suspect ETP will tender in haste come May. It's too bad, long term I think the Terryville will be a large producer as it is extremely economic. An independent PTXP would trade at a very low yield (and say $30+ per unit) if real volume growth materializes.

[BG2008]

I'm trying to figure out how Penntex's deferred revenue works.  My understanding is that the processing plant did not process the minimum volume.  But since the fees are fixed, they get paid anyway.  The natural question becomes can Range/MRD use that deferred revenue in the future?  Is there a time in the future when Penntex will have to provide the processing but won't be paid?

 

Yes, there will be, but only after RRC has delivered the total MVC agreed to in the 15 contract. The best description is in Note 9 of the 10-Q: "RRC Operating may utilize these deficiency payments as a credit for fees owed to the Partnership only to the extent it has delivered the total minimum volume commitment under the processing agreement within the initial 15 -year term of the agreement." It would be a great scenario to get to a point in the near-term where RRC can use these credits, because that means drilling (and thus processing volumes) have accelerated such that 15 years worth of MVC have been used up.

 

I have a question on the ETP transaction that I can't answer. Why is ETP locked up from making a tender offer for the remaining public units for six months (until May)? What's the logic there? I think ETP will likely tender for the remaining shares rather than leave public float. The remaining PTXP float is too small to use as a currency for capital raises.

 

If that occurs, I think the takeout will be at a nice premium to today's price. One way I think about it is in the context of what ETP paid for its 65% LP and 100% GP interest. If they put zero value on the GP (unlikely, though no IDRs are currently being paid), the LP unit implied value of their purchase is ~$24.60. At today's LP unit price, ~$15.00, the implied value of the GP based on ETP's purchase price is $250M, which implies a lot of growth (and an LP unit price higher than $15.00). The answer is likely in between (say $20?), but still at a nice premium to where the units are currently trading. RRC's commentary on the Terryville, and natural gas prices, have only gotten more bullish/healthier since October, so I suspect ETP will tender in haste come May. It's too bad, long term I think the Terryville will be a large producer as it is extremely economic. An independent PTXP would trade at a very low yield (and say $30+ per unit) if real volume growth materializes.

 

I don't think you can ever put $0 on a GP that has 1.4x coverage ratio and trading at 8% dividend yield.  There are some organic growth opportunities here as well.  I current distribution of $0.295 is very close to the threshold where the GP will take 15% of the distribution.  GP can start receiving distribution if they simply lower coverage to 1.1x.  Owning GP is one of the best business in the world, it beats the crap out of being a hedge fund manager.  Hence transactions in this space reflects that.  I think a high teens to $20 price probably makes sense.  In short, PTXP is a bit of an event driven trade that pays you 8% to wait.  That's how I view the situation. 

[investor1]

In short, PTXP is a bit of an event driven trade that pays you 8% to wait.  That's how I view the situation.

 

Agree 100%.

[BG2008]

Anyone understand the non-cash nature of their G&A expense.  I'm trying to bridge the financials to their distributable cash flow. 

 

For the 9 month period ended Sep 2016, they had $13.8mm of cashflow due to change in deferred revenue, and $3.9mm of cashflow due to equity based compensation, and $3.0mm of cashflow due to non-cash contributions to G&A expenses. 

 

I think that the add back for equity comp is BS.  That's a real expense.  The deferred revenue, we just talked about.  But, I'm trying to figure out what's in the non-cash contributions to G&A.  I've called IR and left them a VM and haven't heard back yet. 

[investor1]

Interesting open market buy of 400,000 units from ETP last week (incremental 1.5% ownership). Supports the view that they want the whole thing.

 

RRC management commented that they will bring 25 Louisiana wells online in Q1... that's a ton of gas.

 

[winjitsu]

Anyone understand the non-cash nature of their G&A expense.  I'm trying to bridge the financials to their distributable cash flow. 

 

For the 9 month period ended Sep 2016, they had $13.8mm of cashflow due to change in deferred revenue, and $3.9mm of cashflow due to equity based compensation, and $3.0mm of cashflow due to non-cash contributions to G&A expenses. 

 

I think that the add back for equity comp is BS.  That's a real expense.  The deferred revenue, we just talked about.  But, I'm trying to figure out what's in the non-cash contributions to G&A.  I've called IR and left them a VM and haven't heard back yet.

 

Any update? After the ETP acquisition, the company really has gone dark in terms of communication.

 

Interesting open market buy of 400,000 units from ETP last week (incremental 1.5% ownership). Supports the view that they want the whole thing.

 

RRC management commented that they will bring 25 Louisiana wells online in Q1... that's a ton of gas.

 

 

Make sense. I've thought through a few different scenarios, but shareholders win regardless. This is my largest event-driven position.

 

Assuming ETP is interested in economic return rather than purely strategic, they need to raise distributions to make the IDR's worth something. Two scenarios:

 

1)  ETP uses PTXP as a asset acquisition vehicle since its under-levered relative to the rest of the company. Asset base increases, distributions increase, shareholders win.

 

2) ETP acquires PTXP after the 5/1 lock-up. Most likely scenario since they signaled they want to simplify their org structure and PTXP is tiny relative to the rest of the organization (look at their latest org. charts -- PTXP sticks out like a sore thumb!). ETP is better off buying as much as they can on the open market while it's cheap then make a tender 15-20% over market.

 

I think the biggest risk at this point is that the company low balls an offer after the lock-up expires, but we have some smart HFs in our corner with meaningful positions. Using Alerian MLP index as a comp, this should trade at 1.1x distribution coverage at a 7% yield, which gets me to a price of ~$18.70. Assuming 10%+ take-over premium, I would want at least $20+.

 

Also, in addition to the RRC growth, I think most investors haven't given Wildhorse Resources (the other NGP entity that controls the Terryville acreage) the growth potential that it deserves after their recent IPO in December.

[winjitsu]

Another VIC on PTXP largely echoing the same sentiments as my previous post...

 

https://valueinvestorsclub.com/idea/PENNTEX_MIDSTREAM_PRTNRS_LP/139810#description

[investor1]

Interesting trading action yesterday (5/17). 235k units changed hands (7x normal volume) and price up when entire MLP space which was universally down. Last volume spike this large was when ETP bought 400k units on March 8.

 

Q1 PTXP throughput was not impressive on surface, but RRC was mostly completing wells drilled by MRD and had to shut-in some offset production.

 

Baker Hughes Interactive Rig Map shows 7 Hz rigs working in and around the Terryville. Hopefully they are all working for Range.

 

If ETP isn't going to pull the trigger right away, I'd love a volume ramp story to start playing out.

[Beardog]

I think the biggest risk at this point is that the company low balls an offer after the lock-up expires, but we have some smart HFs in our corner with meaningful positions. Using Alerian MLP index as a comp, this should trade at 1.1x distribution coverage at a 7% yield, which gets me to a price of ~$18.70. Assuming 10%+ take-over premium, I would want at least $20+.

 

Nicely done... here is your $20 tender offer:

 

http://www.reuters.com/article/brief-energy-transfer-partners-lp-announ-idUSFWN1IK0MS

 

[BG2008]

Interesting trading action yesterday (5/17). 235k units changed hands (7x normal volume) and price up when entire MLP space which was universally down. Last volume spike this large was when ETP bought 400k units on March 8.

 

Q1 PTXP throughput was not impressive on surface, but RRC was mostly completing wells drilled by MRD and had to shut-in some offset production.

 

Baker Hughes Interactive Rig Map shows 7 Hz rigs working in and around the Terryville. Hopefully they are all working for Range.

 

If ETP isn't going to pull the trigger right away, I'd love a volume ramp story to start playing out.

 

That's great observation. I used your comment as a real world example of M&A news getting leaked to my summer intern.