Midcoast Energy Partners L.P., (MEP.N), is a limited partnership formed by Enbridge Energy Partners, L.P (“Enbridge Partners”) to serve as Enbridge Partners’ primary vehicle for owning and growing its natural gas and natural gas liquids (NGLs) midstream business in the United States. The company’s business primarily consists of gathering unprocessed and untreated natural gas from wellhead locations, processing the natural gas to remove NGLs and impurities and transporting the processed natural gas and NGLs to intrastate and interstate pipelines for selling to various customers and market outlets.
In Alpha Deal Group’s initial due diligence call with Midcoast Energy, President Mark Maki stated the company operates in several segments: gathering, processing and transportation and logistics and marketing. Its logistics and marketing business purchases and receives natural gas, NGLs and other products and sells them to wholesale customers that include refiners, utilities and chemical facilities.
The company’s assets consist of a 39% controlling interest in Midcoast Operating, L.P., a Texas limited partnership that owns a network of natural gas and NGL gathering and transportation systems, natural gas processing and treating facilities and NGL fractionation facilities primarily in Texas and Oklahoma.
With revenue of $1.54 billion for the quarter, compared to a consensus estimate of $1.35 billion and quarterly revenue up 7.2% on a year-over-year basis, Midcoast Energy has been attracting analysts’ attention. Its IPO took place in November 2013 and now four analysts rate the stock a “hold” and six a “buy.” Midcoast Energy currently has an average rating of “buy” and an average target price of $21.67.
Chart 1: Midcoast Stock Price
Source: Eikon/StarMine
Competitive strengths
Maki said that Midcoast Energy possesses a variety of competitive strengths. Investors can benefit from predictable distribution growth through drop-downs of additional interests in Midcoast Operating from Enbridge Energy Partners (“EEP”), combined with visible growth through an attractive organic project backlog.
Moreover, one of Midcoast Energy’s primary strengths is its affiliation with EEP and Enbridge Inc. and the fact that the company is managed by a highly experienced management team who demonstrate a proven track record of operating natural gas and NGL assets, as well as identifying and executing on both organic growth projects and third-party acquisitions.
Midcoast Energy’s assets are strategically positioned within core areas of established, proven and prolific natural gas-producing basins with multiple producing formations, including unconventional resource plays, and significant access to major market hubs for natural gas and NGLs.
Midcoast Energy’s large-scale diversified business also provides customers with services at multiple stages in the natural gas and NGL midstream value chain, including gathering, compression, treating, dehydration, processing, stabilization, transportation, fractionation, logistics and marketing services. Finally, the company maintains a balanced capital structure, affording it access to the capital markets at a competitively notable lower cost of capital.
Promising financial and cash position
Midcoast Energy reported adjusted net income of $5.7 million for the fourth quarter and $65.1 million for the twelve months ended Dec. 31, 2013. Forecasted adjusted EBITDA for 2014 is between $105 and $125 million.
The growth outlook benefits from a strong balance sheet and a low debt level. Most recent quarter debt to equity ratio is set at 21.34% compared to 41.51% of the Industry and 37.04% of the sector. The same level (21.34%) is set for its total debt to equity, compared to 67.20% of the Industry.
Table 1: Midcoast Financial Strength
Source: Eikon/StarMine
Good dividend, share value
A strong cash position also gives Midcoast Energy the capacity to distribute a strong dividend with a declared $0.16644 per unit initial quarterly prorated cash distribution on January 29 and a 6% yield. The company stock price is currently undervalued with a price to book ratio of only 0.61 compared to an average 2.32 for its industry.
Table 2: Midcoast Dividends
Source: Eikon/StarMine
Table 3: Midcoast Valuation Ratios
Source: Eikon/StarMine
Future plans
After completing the IPO in the fourth quarter, the company expects to enhance active capital investment and deliver visible and disciplined growth to its unit holders. The company’s access to capital, visible drop-down opportunities, and agility to respond to market opportunities underpin its growth outlook and attractive value proposition and allows it to pursue opportunities outside the existing asset footprint. Midcoast Energy is also continuing to grow the logistics and marketing segment with investments throughout the NGL value chain. Logistics and marketing is actively seeking new business to enhance takeaway and other active production areas where there’s undeveloped infrastructure and inadequate takeaway. This makes Midcoast Energy Partners a notable company to watch.
This research note is provided by Alpha Deal Group LLC. Alpha Deal works for buy-side clients on special situation deal intelligence in select regional capital markets on mispriced equity idea generation, deal sourcing and deal networking introductions.
