We’re keeping a close eye on a number of high-yielding equities, and several have reported strong earnings during the calendar second quarter.
By Kris Rosemann
AmeriGas Partners Raises Adjusted EBITDA Guidance
AmeriGas Partners (APU), the country’s largest retail propane marketer, turned in its best fiscal third quarter adjusted EBITDA performance since fiscal 2013 in the quarter ended June 30, 2018, results released August 1. Adjusted EBITDA advanced 15% from the year-ago period, and management subsequently raised its full-year fiscal 2018 EBITDA guidance to $625-$645 million from $610-$620 million.
Retail volumes sold grew 4% in the quarter thanks to colder weather in April, which was partially offset by warmer months in May and June compared to the same period of fiscal 2017. National Accounts, which consists of supply and delivery services for enterprises across the country, turned in another solid quarter as it grew volumes 11% on a year-over-year basis. AmeriGas reaffirmed its adjusted earnings per share guidance in a range of $2.70-$2.80, which represents ~20% growth over its record adjusted earnings per share realized in fiscal 2017 and an 11% 5-year CAGR from fiscal 2013.
AmeriGas points to natural gas infrastructure as a key growth driver. The company continues to develop new investments in areas adjacent to the Marcellus Shale Formation as demand for natural gas grows. It is also pouring capex into its UGI Utilities business to serve the growing demand for natural gas as a power source across its residential, commercial, and industrial segments. Liquefied petroleum gas (LPG) and international operations also present growth opportunities with a focus on European LPG distribution.
Units of AmeriGas currently yield ~9.7%, and we value units at $48 each.
Enterprise Product Partners Turns in Record-Setting Quarter; Hikes Distribution
Enterprise Product Partners (EPD) CEO Jim Teague pointed to fourteen financial and operational performance records set in the second quarter of 2018, results released August 1, as evidence on his company’s strong performance, which has been boosted by $5.3 billion of assets being “placed in service” since the second quarter of 2017. Volume growth across its integrated asset base and higher NGL prices in its natural gas processing business were key growth drivers as well. The master limited partnership also raised its quarterly per unit distribution by 2.4% to $0.43 in the quarter as well, which marked its 56th consecutive quarter of distribution growth.
Distributable cash flow of $1.4 billion in the second quarter provided ample coverage (estimated to be 1.5x by management) of the payout when considering only the industry specific measurement of cash flow, but we must note that the distribution is dependent on access to the capital markets as free cash flow for in first half of the year came in at ~$777 million compared to cash distributions paid to limited partners of more than $1.8 billion. The MLP’s adjusted Dividend Cushion ratio, which gives it credit for the aforementioned access to capital markets, currently sits at 1.9, and units yield ~6.1% as of this writing. Our fair value estimate for units is $28 each, and it holds solid investment grade credit ratings of Baa1/BBB+ thanks in part to its simplified structure that has no general partner incentive distribution rights, a recent trend we’ve seen take hold across the MLP of which it was well ahead of the curve.
Enterprise Product Partners continues to invest heavily in growth and current has $5.1 billion in major capital projects expected to come online by the end of 2019 with more to come, and it is targeting a 3.75x-4.0x debt-to-adjusted EBITDA ratio (currently 3.9x). Growing demand for US hydro carbons from international markets backs a portion of its growth plans, and export demand is expected to remain on an upward trajectory, thanks in large part to Asia. Roughly half of Asia’s LPG is imported with ~40% of those imports coming from the US, and this demand is considered inelastic to a large degree as it is consumer-oriented and the continent boasts a burgeoning middle class.
Magellan Midstream Raises Distributable Cash Flow Guidance
Net income at Magellan Midstream Partners (MMP) rose only ~2% in the second quarter of 2018 from the year-ago period, but the industry-specific measure distributable cash flow grew ~6.5% on a year-over-year basis to nearly $267 million in the quarter thanks in part to higher than expected refined products pipeline shipments and earlier than assumed recognition of commodity profits.
Magellan’s operating margin in its ‘Refined Products’ segment fell by ~$23 million to ~$191 million as a result of lower commodity profits related to the impact of mark-to-market adjustments for futures contracts used in hedging. Within the segment, transportation and terminals revenue grew nicely thanks to strong demand for refined products and higher storage and service fees. Its ‘Crude Oil’ segment set a quarterly record for operating margin thanks to a condensate splitter that began operations in June of last year and higher spot shipments at favorable pricing. Lower utilization impacted its smaller ‘Marine Storage’ segment as a result of maintenance work on ongoing issues related to Hurricane Harvey.
The MLP remains committed to raising its annual distribution by ~8% in 2018, and it expects its $1.1 billion distributable cash flow guidance ($20 million higher than previous guidance) to result in 1.2x distribution coverage. Magellan expects annual distributable cash flow growth in the 5%-8% range in both 2019 and 2020, and it plans to maintain its coverage ratio at ~1.2x as it plans to grow the distribution in line with this guidance in coming years. It holds solid investment grade credit ratings of BBB+/Baa1, which is an important consideration given the capital market dependence of its distribution. Free cash flow through the first half of 2018 came in at ~$302 million compared to cash distributions paid of ~$394 million. Units yield ~5.6% as of this writing, and its adjusted Dividend Cushion ratio sits at 1.2. Our fair value estimate for units is $69 each.
Omega Healthcare Raises 2018 Guidance; Progresses on Asset Repositioning
Omega Healthcare (OHI) CEO Taylor Pickett referred to the second quarter of 2018, results released August 3, as “eventful yet productive” as the REIT sold the majority of the facilities associated with its strategic asset repositioning effort, restructured its struggling Signature portfolio, and transitioned its legacy Orianna facilities in Mississippi and Indiana to two of its existing operators. With the majority of dispositions behind it, management can now focus on redeploying the proceeds into growth opportunities.
Funds from operations (FFO) for the second quarter came in at $0.75 per share compared to $0.73 in the year-ago period, but adjusted funds from operations (AFFO) fell by $0.11 to $0.76 per share as a result of one-time refinancing costs included in FFO in the second quarter of 2017. Omega raised the bottom end of its 2018 AFFO per share guidance by $0.07 after the second quarter, putting its new guidance range at $3.03-$3.06, which still represents a meaningful step down from ~$3.30 in 2017. Management notes that the narrowed guidance range reflects the increased clarity related to resolving issues related to its Orianna-operated facilities and the timing of asset sales and proceed redeployment, the latter of which will have say in where in the guidance range it ultimately lands.
Shares of Omega have fared well since its largely positive second quarter report, and while we like the progress it is making, another material challenge exists in identifying the proper capital allocations with the proceeds of recent asset sales. We’re keeping a close eye on this risky idea. Shares are trading roughly in line with our $33 per share fair value estimate, and the REIT’s adjusted Dividend Cushion ratio sits at 0.8, highlighting the riskiness of the payout’s dependence on the capital markets. Shares yield ~8% as of this writing.
Public Storage Continues Battling Oversupply Concerns
Self-storage giant Public Storage ( Categories Member Articles