Description

Summary

FIP spun out of FTAI in August ‘22 with 4 infrastructure assets: 3 energy terminals and a railroad business.  It is now a pure play infrastructure c-corp company without Schedule K-1 tax forms for shareholders.  FIP has for years overpromised and under-delivered at Jefferson Terminal, but I believe Jefferson is now on the cusp of generating strong earnings and finally gaining momentum after years of investment.  Construction of pipelines that connect Jefferson to ExxonMobil and Motiva are complete and new contracts should increase utilization of the facility.  FIP’s other assets are progressing nicely as well as construction of the 485MW power plant at Long Ridge is complete and FIP has been consistently increasing earnings at Transtar through new business initiatives.  All in all, I believe EBITDA will grow from $140 million today to $250 million in the next 12-18 months.  This earnings power should drive company valuation to $7-$12/sh.  If FIP falls short of this target, I believe it is still worth $3/sh, where it is trading today.  Therefore, at the current price of $2.90/sh, provides a 130%-300% upside potential with limited downside while collecting a 4% dividend.

Business Overview

Transtar is a short-line railroad company that was purchased in 2021 from US Steel for $640 million.  It has a 15-year minimum pay service agreement with US Steel to provide rail haulage, switching, and transportation services at US Steel’s facilities in Indiana, Pennsylvania, Alabama, Michigan, Ohio, and Texas.  This is a long-term contract that is set based on inflation-based index, insulated with pass-through fuel costs.  Transtar connects with all seven Class I railroads in the US, so there are lots of interchanging relationships.  

When FTAI purchased Transtar, it was generating approximately $60 million of EBITDA.  Over the past 12 months, FIP increased EBITDA to $75 million by adding other services, such as in-house maintenance facility, 3rd party freight shippers, uses of right of way, and promoting leasing and development on land adjacent to rail systems.  FIP doubled 3rd party customers to 30 customers and is expected to grow to 50 customers.  Several 3rd party service initiatives will also kick in in January 2023 and other adjacent services are under development (i.e., transloading, maintenance, storage, etc.).  Therefore, FIP has multiple opportunities to grow the Transtar business while benefiting from stable long-term contracts.  

FIP is targeting $100 million of EBITDA at Transtar in 2023, which I believe is reasonable with $30 million of incremental EBITDA from 3rd party business.  

Jefferson Terminal is an energy terminal that handles crude oil and refined products in the Beaumont region.  Jefferson is located right off the Neches river that flows to Port Arthur.  Jefferson has 4 million barrels of storage capacity with additional land to increase to 30 million barrels if needed.  This investment has been a disappointment over the years with delays in pipeline construction and volume throughput not meeting expectations.  However, I think this is a valuable asset that is about to turn around for the following reasons: 

1. Jefferson is located near the two largest refineries in North America, ExxonMobil and Motiva.  Exxon is right across the river from Jefferson and directly connected through 6 pipelines that run underneath the river.  Exxon Beaumont refinery is currently the 8th largest refinery in North America but will become the largest with the expansion plan that will increase production to 620k barrels a day by 2023.  Jefferson is a partner of choice for expansion due to its close proximity and multiple modality of transportation.   Jefferson recently renewed its 5-year refined product contract with Exxon at a higher rate and will commence a new 10-year marine export contract in January 2023.  The new contract will generate approximately $20 million in incremental EBITDA annually and is in talks to further expand storage capacity and pipeline usage with Exxon.  Jefferson is also close to Motiva, currently the largest refinery in North America with 607k barrels per day.  Motiva is 20 miles south of Jefferson and has a pipeline connected to Jefferson.  Overall, Jefferson should benefit greatly from the favorable energy environment and increasing activities by the two largest refineries in NA.  

2. Jefferson is a multi-modal terminal that can transport crude oil and refined products through rail, truck, ship, and pipeline.  It is the only multi-modal terminal in Beaumont, TX, one of North America’s largest energy hubs.  The terminal has six rail loop tracks and direct rail service from three Class I railroads (UP, BNSF, KC), which allows Jefferson to bring in crude from Canada and from Utah to export refined products to Mexico.  

3. Jefferson is the only terminal in the Beaumont region that has heated crude oil storage, which is a high margin business.  This allows Jefferson to blend and transload heavy wax crude coming from Canada and Utah.  This additional flexibility is an advantage for refinery customers.  

Generally, newly built tanks should turn over 1.5x-2x a month with 2.75x-3.25x being excellent.  However, Jefferson has been doing 0.7x turns (= 3 million of volume per month / 4.3 million storage) a month in 2021.  FIP stopped reporting volumes per month, but I suspect it has been trending higher according to the upward trajectory of EBITDA.  Jefferson has been showing some momentum with EBITDA increasing from $2 million/qtr in 2021 to $5 million/qtr in 2022.  I believe the new contracts and increasing activity will further improve volume throughput and generate higher earnings.  

Management estimates Jefferson can increase utilization by 50%.  It projects $80 million in EBITDA, assuming $0.85/barrel and 70% margin.  This equates to 3x turns on volume.  I project monthly volume to reach 2x turns and generate $65 million of EBITDA at the minimum, and believe Jefferson’s advantages should drive it to higher volume throughput over the years. 

Long Ridge is an energy terminal located on the east end of Ohio with a 485 MW power plant.  Long Ridge sits on one of the largest natural gas fields, Utica Shale, and owns a 40% interest in a natural gas reserve that can supply the power plant for 10 years.  This is a huge competitive advantage, because it can produce the  cheapest energy in the region using low cost natural gas.  This will attract industrial businesses to locate next to the power plant through long-term take-or-pay behind-the-meter energy contracts and long-term leases.  Long Ridge has 300 acres of developable industrial land, which is rare in this mountainous area.  Long Ridge also recently purchased 12k acres of land in West Virginia for development of gas reserves, which it can sell excess gas in the market at high ROIC.  The power plant business is expected to generate $120 million of EBITDA annually, of which 50% is owned by FIP.   

In addition to the power plant, Long Ridge has two barge docks on the Ohio River and a unit-train loop track with direct highway access.  It is the only terminal with access to both train and barge in the state of Ohio, Pennsylvania, and West Virginia.  At the terminal, Long Ridge runs a liquid and sand business where it transloads propane and butane (byproducts of natural gas) to be transported to the East Coast on rail.  The sand business transloads sand used for hydraulic fracking in the region.  These supplemental businesses generate approximately $10 million of EBITDA.

FIP owns 50% of Long Ridge after selling half of its interest in 2019.  

Repauno is an energy terminal located on the Delaware River in New Jersey.  This was a dormant infrastructure purchased from DuPont and was formerly a manufacturing site that was shut down.  It has an underground granite storage cavern on the property and 300 acres of developable land.  The site is currently under development with Phase 1 (rail loading system) completed and in Phase 2 (expand storage capacity).  

Currently, 80%-90% of propane and butane from the Marcellus region go to the Gulf of Mexico and get loaded onto a ship for Europe.  However, this is a longer trip to Europe than leaving from the East Coast.  Repauno plans to take advantage of this and export propane and butane from the East Coast.   

Now that the rail-to-ship Phase 1 is complete, Repauno will build 3 million barrels of underground storage cavern, which is expected to be operational in 2023.  This will triple the throughput capacity and allow Repauno to deal with larger ships such as VLGCs (very large gas carriers), which is the most efficient way to ship large quantities and quadruple margins.  

Valuation

After years of investment, FIP assets are in place to generate strong cash flow.  New contracts and initiatives will drive earnings growth for the next several quarters.  Therefore, I believe FIP will reach at least $250 million of EBITDA in the next 12 months with Jefferson being the biggest driver of growth.  

Catalyst

• Selling and capitalizing minority interests in Jefferson, Transtar, Long Ridge, or Repauno

• Takeout potential by larger private/public infrastructure funds or private equity

• Jefferson increasing throughput and accelerating earnings