CNXM - CNX Midstream Partners LP

[investor1]

CNXM is a gathering and processing MLP largely serving the natural gas producer CNX Resources. Some highlights:

 

• CNXM trades for a 10% yield
  
• The partnership has provided long-term guidance of 15% annual growth in distributions through 2023
  
• If the partnership delivers on its guidance, an investor receives ~70% of their cost basis in distributions in 5 years
  
• Leverage is a modest 2.7x
  
• Distribution coverage is 1.4x
  
• Moving away from "MLP stats", current EV/EBITDA is 8.0x and EBITDA is growing at mid-teens pace
  
• 2019 is a large year for capex, then the partnership expects a step-down in growth capital going forward and increased FCF
  
• CNXM has an acreage dedication from CNX (33% LP owner and GP owner). CNX is well-positioned with low-cost natural gas assets, in the lowest cost natural gas basin, that compare favorably to others in the area
  
• CEO bought shares in open market in Q1
  
• This is an out-of-favor structure (MLP), in an out-of-favor industry (natural gas). Probably explains the low valuation
  

 

The risks are as follows:

 

• CNX slows drilling due to lower natural gas prices, and volumes through CNXM's pipelines do not grow as anticipated
  
• CNX owns Incentive Distribution Rights (IDRs), which entitle them to an increasing share of CNXM's cash flows as the distributions grow. CNX could decide to "monetize" the IDRs in a transaction with CNXM through the issue of debt or LP units at CNXM to CNX. Terms of this deal could be unfavorable to existing CNXM LP unitholders
  
• If CNX stops drilling, their current production base, and thus volumes through CNXM pipe, has a 30% decline rate.
  

 

Thoughts? Has anyone looked at this one?

[lnofeisone]

I've looked into this one a few weeks back and think they are about fairly valued. I think your summary is very much in line with what I gathered as well. I would definitely be a buyer in the 10-12 range.

 

I think few things are holding CNXM down and will likely persist in the short/intermediate term.

 

1) They are extremely concentrated (2 customers but CNX is very likely bulk of their gas).

 

2) CNX looks to be an efficient operator and is looking to grow its gas volumes (from CNX earnings call) which would normally bode well for CNXM. Except for this nugget from their earnings call which I interpret that they need to invest a bit more before they can accommodate additional volumes. The full transcript is on Seeking Alpha.

 

"Chad Griffith

So a lot of the -- well, let me rephrase. So a significant portion of the capital that we're spending in 2019 is associated with debottlenecking projects. So some of the capital that we're spending is associated with additional horsepower and upgrades to facilities that will improve line pressures on some of the legacy areas of our system. A lot of those areas are the legacy production that CNX had from earlier on the Marcellus program. And we would expect a volumetric uplift from that work. And then other pieces of the capital are associated with sort of greenfield construction to support CNX's move into some other new greenfield areas."

 

*As a side note, I do wonder how they will choose where to expand capacity, i.e., long term to get access to other E&Ps or focus on accommodating CNX only.

 

3) Very likely, as a result of 1) they lowered guidance (slide 10 from 2018 http://www.cnxmidstream.com/~/media/Files/C/CNX-MidStream/events/cnxm-analyst-day-presentation-2018.pdf) from projected ~$250M to $200-$220M. Most of it is due to an increase in CapEx (https://seekingalpha.com/article/4258099-cnx-midstream-partners-lp-2019-q1-results-earnings-call-slides). From their call (https://seekingalpha.com/article/4237246-cnx-midstream-partners-lp-cnxm-ceo-nicholas-deiuliis-q4-2018-results-earnings-call-transcript?part=single).

 

4) IDRs are really bringing down the distribution growth from ~22% to 15% which makes being an LP a bit of a downer. But this is mostly a psychological pain of not being able to keep 100% of the distribution  ;D