Looking Through The Boardwalk Recontracting

Looking Through The Boardwalk Recontracting

Boardwalk Pipeline Partners (BWP) trades at a rock bottom valuation due to uncertainties surrounding contracts that are set to expire in the coming years (ie. recontracting). The goal of this write up is to put forth a conservative estimate of where EBITDA will be following the recontracting and establish a value for the shares.

Boardwalk operates natural gas pipelines and storage facilities. The vast majority of Boardwalk’s revenue is from long term contracts and as a result there is typically high visibility on revenue and EBITDA. When a pipeline is built customers typically sign 10 to 20 year contracts guaranteeing revenue for the pipeline regardless of usage.

History Of The Recontracting

Well over a decade ago Boardwalk started planning a pipeline system that would flow gas from the shale fields in the middle and southern part of the country to Southern Texas and Louisiana. After the pipeline system was built more economic shale gas was discovered in other parts of the country, primarily the Utica and Marcellus Shale. This led to less drilling in the areas which Boardwalk’s pipeline system served. Despite the decreased drilling, Boardwalk’s customers were locked in for 10 years and had to continue paying. These contracts will all be up for renewal over the next 3 years and revenue will decline.

In 2014 Boardwalk management recognized the fact that this recontracting was looming. To plan for the recontracting they slashed the dividend and used the vast majority of the cash flow for growth projects to offset the looming revenue losses. Boardwalk has been successful in increasing EBITDA over that period. The table below from Boardwalk’s latest investor presentation shows the growth in EBITDA that resulted from the growth projects

Boardwalk is fortunate that its pipeline system feeds into Southern Texas and Louisiana, the area of the country that is seeing the largest demand growth for natural gas. A large number of LNG export facilities are being built in this area and exports to Mexico leave from this area. In addition, a large number of electrical and petrochemical facilities are being built in this part of the country.

Boardwalk’s largest pipeline system coming up for recontracting is Gulf Crossing. Currently, 70% of the capacity is being utilized even as the vast majority of the pipeline’s capacity is under contract. Cheniere is building a large amount of LNG export capacity and needs natural gas to flow its facilities. In order to facilitate this they are planning a pipeline called Midship that will go from the SCOOP and STACK to Bennington. At Bennington, Midship can connect into Boardwalk’s Gulf Crossing and a competing pipeline. As a result it is likely that Gulf Crossing will be able to recontract close to 100% of its capacity, albeit at a lower price.

Putting A Number On The Recontracting Loss

Most analysts estimate that Boardwalk will lose around $200 million from recontracting from 2017 to 2021. For the purpose of getting a very conservative estimate of the earnings power of Boardwalk I am going to assume they lose $250 million in EBITDA to recontracting between 2017 and 2021. It assumes a poor outcome for all regions coming up for recontracting but also assumes Midship gets built (which seems very likely). My estimate of recontracting losses is far in excess of any analyst I have seen, including Goldman Sachs which has a sell rating on the stock.

Growth Projects

Boardwalk currently has $1.3 billion of growth projects in the pipeline. This should lead to roughly $160 million in EBITDA based on industry returns and past Boardwalk growth projects. Boardwalk has already paid for the majority of this through free cash flow and should earn enough free cash flow over the next year to pay for the rest. These projects will be put into service by 2020 with the majority of the revenue starting during 2019.


In 2017 Boardwalk earned $845.5 million in EBITDA adding back a recontracting loss of $7 million. Over the coming years I estimate they will gain $160 million from growth projects and lose as much as $250 million to recontracting. That leaves them with EBITDA of at least $755 million.
Steady, natural gas pipeline MLPs trade at roughly 12 times EBITDA. Post recontracting Boardwalk will be a high quality natural gas pipeline company, with the vast majority of revenue coming from predictable, long term contracts. Boardwalk’s recent growth projects have an average contract life of 17 years. After recontracting their problematic pipelines will represent a small amount of revenue and be at market rates. A dirty little secret of pipeline companies is that most of them have some recontracting issues but they are not as transparent as Boardwalk has been.

At 12 times $755 million in EBITDA Boardwalk would trade at $21.50. Since Boardwalk still needs another year of cash flow to pay for the growth projects the price target should also be for a year out. Discounting that back to today for a 10% return (including the dividend) works out to roughly $20 of value today.

So how is it possible that I have lower estimates than every analyst and a higher price target? Quite frankly my only major insight is that once the recontracting is resolved there will be no more uncertainty and the stock should be valued like its peers. Even in an adverse outcome that is worse than any analyst is expecting the stock should be higher. Over the next year we should find out the recontracting results for the majority of Boardwalk’s pipelines and the uncertainty should be lifted.

Distributable Cash Flow

At $755 million in EBITDA Boardwalk would have $475 million in distributable cash flow. If Boardwalk wanted to maintain 1.2 times dividend coverage they could pay a 14.3% dividend at today’s price. I believe they would first want to delever before paying out such a large percent of cash flow. Over time the dividend should go much higher although the timing is uncertain.

Boardwalk Management

Boardwalk management gets a bad rap because of the stock price and the dividend. When they planned the pipelines that are being recontracted over a decade there was no way to know that more productive shale fields would be discovered. As Forrest Gump says “Sh*t happens”. This is not the fault of management.

Boardwalk management was transparent and proactive when they realized the problem. They cut the dividend and planned ahead for the coming recontracting. Most MLP managements in a similar situation would just keep paying out a big dividend and drive off the cliff. With Boardwalk management I am comfortable because they are transparent about the problems. With other MLPs one doesn’t know what recontracting issues lie in the future.

Storage Upside

Boardwalk’s storage business has two types of customers, strategic and financial. A strategic customer might be an electrical plant that wants to have some natural gas in storage. A financial customer takes advantage of the natural gas futures curve. In recent years storage revenue has declined mainly because the natural gas curve has been unfavorable.

Management is bullish on strategic customers because of the location of their pipelines. Boardwalk has storage in areas where large amounts of facilities are being built that use natural gas such as LNG export facilities, petrochemical plants etc. These facilities may want to utilize some of Boardwalk’s storage. On the financial side they don’t think the natural gas futures curve could get any worse. This valuation doesn’t include any potential storage upside.

My clients and I are long shares of Boardwalk Pipeline Partners (BWP) at the time of this writing. Positions may change at any time


My Thoughts said...

Thanks for the idea.

How much of the $1.3bn of growth capex projects has already been spent as of 12/31/17?

It appears they have $400mm of construction-in-progress so I am guessing they have $900mm more to fund. Correct?


Tsachy Mishal said...

They started some of these projects in 2016. Hard to estimate how much of 2016 capex is in there. They spent $570 million on growth capex in 2017. They are forecasting 430 million in growth capex in 2018. They don't tell you exactly so you have to make an educated guess. My guess is one to two quarters of FCF in 2019 should finish paying for it

My Thoughts said...

One more question:

- Why are BWP maintenance capex so high relative to other natgas pipeline companies? And why the spike relative to a few years ago?

- $140mm of maint capex for these types of natgas pipelines is very high. Is some of the maint capex one-time work on existing pipelines to reverse flow or something similar?

I know that there is some debate that many MLPs are under-investing in existing pipelines, but $140mm for these assets strikes me as very high.

And valued on an EBITDA - maint capex, this is not cheap given your assumptions. But something tells me the $140mm maint capex is not the correct number to use going forward.


Also, even with a normal maint capex, 12x EBITDA strikes me as quite high in this environment. Esp given that IDRs still exist. The environment for MLPs is quite bad, and MLPs with IDRs still in place is horrible.

I acknowledge that the burdensome 50/50 split does not kick in until distributions at $2.10 per year, but these out-of-the-money IDRs are still weighing on valuations.

Tsachy Mishal said...

They said they had to do some one time work and that it should come down to $110 million over time.They are also very conservative while other MLP managements are very aggressive in their categorizations

The IDRs dont kick in until the dividend is $1.60 and not fully until $2. It is far away and would be a very good problem. This is how other MLPs are valued. I think MLPs in general are cheap to fairly valued

My Thoughts said...

more on maint capex.

WPZ has about 7x the amount of similar pipelines but only 3x the maint capex.

Some of this difference may be that BWP is capitalizing MRO expenses that WPZ is expensing. There is a fair amount of accounting discretion in this area.

But it still seems to me that something is amiss here. I would think that BWP should have about $70mm of maint capex.

Help me understand.

My Thoughts said...

Thanks for your answers. Very helpful.

I agree that IDRs far enough away should not affect value much.

I also think midstream MLPs are cheap and have been digging into many of them.

I'd recommend CEPQ (super cheap; no IDRs; fully funded growth capex; not the greatest quality assets but under long-term contracts)

and MPLX (12.5x EBITDA - maint capex; no IDRs; great sponsor; great assets)

And I also own some SRLP (giving value to IDRs, trades about 10x EBITDA - maint capex; no long term contracts but awesome assets)

Tsachy Mishal said...

I think you probably do well in those but BWP is so much cheaper that nothing even comes close in value