TWM - Tidewater Midstream & Infrastructure

[investor1]

Tidewater Midstream (TSX:TWM) seems pretty cheap on an initial read. Has anyone taken a deeper look at the asset and contract quality?

 

Company Description:

• TWM acquires and develops NGL and natural gas processing, transportation, and storage assets in Edmonton, Deep Basin, and Montney areas. The Company IPO’ed in 2015, and through acquisition and organic development has deployed ~$500M to create $80M of EBITDA. TWM has several debt financed organic projects underway, and a stated corporate goal of >20% EBITDA per share growth over the next 24 months.
  

Valuation:

• At $1.50 per share, TWM has $507M FD market cap, $657M EV
  
• 8.2x $80M 2017 (Exit Runrate) EBITDA
  
• 5.5x $120M 2019 (Exit Runrate) Guided EBITDA
  
• Note: TWM will need to borrow to a $300M net debt balance (from $150M current) to achieve $120M EBITDA so pro forma YE 2019 multiple is $807M / $120M = 6.7x
  

Return Potential:

• If TWM re-rates by YE 2019 to 12x run-rate EBITDA of $120M, that implies a stock price of $3.33, a 51% annual return
  
• If TWM experiences no multiple re-rating and trades at 8.2x, the implied stock price is $2.01, an 18% annual return
  

Positives:

• Discounted valuation. Comps (Gibson Energy, Inter Pipeline, Pembina Pipeline, Keyera) all trade at 13x-14x EBITDA (admittedly they are bigger with likely higher asset quality)
  
• CEO (Joel A. Macleod) buying shares. He owns 1.6% of company and has made consistent open market purchases through December 2017 at current prices
  
• Rapid EBITDA growth through acquisition and organic projects has yet to appear in financials
  
• Flying under the radar due to small market cap and low dividend payout
  
• History of creating assets at <6x EBITDA that would likely trade at a much higher multiple
  

Risks:

• Since its 2015 IPO, TWM has returned to the equity markets several times for both acquisitions and debt reduction
  
• Execution. TWM has had several projects “fall away” over the past couple years
  
• Rapid EBITDA growth through acquisition and organic projects has yet to appear in financials
  
• AECO gas price weakness could lead to lower margins on contract rollovers
  

December IR deck here:

http://www.tidewatermidstream.com/uploads/links/Tidewater_December_2017_Presentation_Final.pdf

[Spekulatius]

I like it. It looks like they own a mix of gathering (which are lower quality) and backbone (higher quality) assets. Typically, something like this would trade at 10x EBITDA. I need to take a closer look,  it I am inclined to buy some here.

[doc75]

I have a healthy position here, built up when it rose above 3% yield. Management is young and energetic, and I think they're shrewd.    The AECO prices are stubbornly low and the expectation is that they'll remain that way for some time. 

 

Which projects that "fell away" are you concerned about?  I've generally been quite impressed at their execution. 

 

 

[Sunrider]

Interesting - question though. On the chart showing their investments and debt, they put forward the $120m incremental capital investment figure and put debt up by $150m. I appreciate these are summary numbers, but where does the rest + any organically generated cash go? Surely they either need less debt or would be accumulating cash?

 

C.

[investor1]

Interesting - question though. On the chart showing their investments and debt, they put forward the $120m incremental capital investment figure and put debt up by $150m. I appreciate these are summary numbers, but where does the rest + any organically generated cash go? Surely they either need less debt or would be accumulating cash?

 

C.

 

My read of that slide is that the $120M is PF EBITDA. The capital required is $200M - $360M (shown below). This will be funded by debt (the incremental $150M you pointed out) and internally generated cash flow.

 

Also, it looks like the CFO nibbled a few shares (2,950 @ C$1.53) on 1/10/18.

[investor1]

I have a healthy position here, built up when it rose above 3% yield. Management is young and energetic, and I think they're shrewd.    The AECO prices are stubbornly low and the expectation is that they'll remain that way for some time. 

 

Which projects that "fell away" are you concerned about?  I've generally been quite impressed at their execution. 

 

 

 

I agree that execution has been good. My comment was based on the fact that around the time of the IPO, TWM touted an eventual marine export terminal for propane (see pg. 14 of the attached). This was abandoned when the propane arb reduced. I think it's normal course for midstream companies to achieve less than 100% of their stated projects - the trick is buying with a margin of safety if they don't execute. I think the modest current multiple gives you that margin of safety.

TidewaterMidstreamAndInfrastructureLtd.-NewKidOnTheBlock20150722.pdf

[investor1]

TWM PR out today mentioning progress on the 120km pipeline project from its BR Complex to TransAlta's Sundance and Keephills generating units. Still early in this project, hopefully there will be more color on the March 29 earnings call.

 

At $1.35, TWM is trading at 7.6x runrate EBITDA and a 3.0% yield.

TWM_PR_3.22.18.pdf

[sculpin]

GMP...

 

Tidewater Midstream and Infrastructure BUY

TWM-TSX

Last: C$1.34

Target: C$2.25

 

FLASH: Supplying crypto operations

 

Impact: Neutral. No change to guidance.

 

Within the next month, Tidewater expects to begin generating $1 mm of annualized EBITDA by contracting tolls for power supply related to crypto mining with no capital investment. The company highlighted an opportunity to increase EBITDA per annum to $5-10 mm from this initiative over the next 12-18 months. Additionally, Tidewater intends to consider taking equity stakes in certain instances.

 

We view Tidewater trying to provide creative solutions to natural gas producers by connecting them with crypto mining operations positively. However, investors may be hesitant on TWM taking equity stakes in crypto mining operations given it is outside of its core operations, and that most investors will be focused on TWM due to it being a growth oriented pipeline and processing company. TWM has reaffirmed its 2018e EBITDA guidance of $80 mm (GMPFE: $80 mm), indicating the crypto opportunity could be 7% of 2019e EBITDA ($109 mm) at the midpoint.

 

Recommendation: Maintain BUY rating and $2.25 target

 

Tidewater has entered into a definitive agreement with TransAlta for certain items related to its 120 km pipeline from the BRC to TA’s Sundance and Keephills plants. This agreement pertains to the early work and certain key terms for later contracts. TWM and TA still need to execute further agreements to see the project to completion, including an agreement for the 15-year take-or-pay and TA’s option to invest up to 50% in the project. Recall, this project is expected to cost $150 mm, contribute $21 mm of EBITDA per annum and have a capacity of 130 mmcf/d. The expected in-service date is early 2020e.

 

The company has confirmed that Kelt Exploration has committed 25 mmcf/d to its previously announced Pipestone Montney sour deep-cut facility. The duration of the contract is five years, and also provides Kelt an option to purchase up to 15% of the project. Recall, Blackbird Energy (BBI-T, not covered) is the other E&P that has a take-or-pay with TWM for its Pipestone plant (20 mmcf/d). These customers have the option to expand commitments up to 55 mmcf/d. Additionally, Tidewater has signed a reserve dedication agreement with a new customer, but no details were provided.

 

For reference, the Pipestone plant will be a 100 mmcf/d plant with NGL processing capability of 20,000 bbl/d, and acid injection capabilities. It is expected to provide EBITDA of $30 mm per annum once it comes into service in mid-2019. The plant is still awaiting certain regulatory approvals.

 

At Ram River, Tidewater has entered into a volume commitment with an investment grade counterparty to process 17.2 bcf of gas over a five-year term. The initial volumes are expected to be 15 mmcf/d and decline over the course of the contract. It is unclear as to when this contract will commence, and no terms were provided.

[antoninscalia]

Interesting development:

 

Birch Hill Equity Partners to Acquire Shares of Tidewater Midstream and Infrastructure Ltd.

 

https://www.newswire.ca/news-releases/birch-hill-equity-partners-to-acquire-shares-of-tidewater-midstream-and-infrastructure-ltd-692844481.html

[investor1]

Chief Executive Officer’s Intent to Acquire Additional Tidewater Shares

Mr. MacLeod has entered into a term sheet with an arm’s length loan provider to facilitate, inter alia, the acquisition of additional Tidewater Common Shares. Mr. MacLeod feels that Tidewater Common Shares continue to be undervalued. The term sheet includes a pledge of approximately 5.5 million shares of Tidewater (the “Collateral”) as security in connection with a loan. The loan has a term of three years and upon repayment Mr. MacLeod is entitled to 100% of the appreciation or increase in the value of the Collateral.

 

Joel (very publicly) betting on himself... I would have preferred subtle signalling through standard disclosures of open market purchases, but here we are.

[antoninscalia]