(Idea) Genesis Energy - One Of The More Undervalued MLPs
(Idea) Genesis Energy - One Of The More Undervalued MLPs
One of our favorite energy investment situations is to find a company undergoing large-scale asset development. In these situations, all available cash flow is directed toward constructing the asset. In most cases, debt issuance and asset sales are also used to fund development.
As the assets are in the development phase, the company’s financial resources are stretched thin. Revenue remains flat, while debt-to-equity ratios blow out, capital spending surges, and free cash flow disappears. To an uninformed outside observer, these deteriorating metrics give the appearance of increasing risk to equity owners, thereby keeping prospective investors at bay and unduly depressing the unit price.
However, for investors who can look out a few years and formulate a general idea about how the assets are likely to perform, such situations can be fertile hunting grounds for high-returning investments. Those who can buy the units when they’re out of favor during the development period stand to reap the benefits from surging free cash flow once the assets are placed into commercial service.
In recent years, we’ve identified numerous investment opportunities that fit this model. Two more recent examples have been Cheniere Energy (LNG), EnLink Midstream (ENLC), and Targa Resources (TRGP). Top on the list at the moment is Genesis Energy (GEL), a midstream MLP that operates in offshore oil and gas transportation in the Gulf of Mexico, soda ash production, maritime shipping, and onshore liquids infrastructure. A snapshot of GEL’s operations is shown below.
Source: Genesis Energy Investor Presentation, Aug. 2024.
We believe the long-term return prospects offered by GEL units are as strong as they were for these other successful investments. While we’ve maintained a conservative price target of $15 per unit, we believe the upside is significantly greater as the company’s nearly completed Gulf of Mexico oil and gas transportation assets enter service over the coming quarters.