Description

     Genesis Energy, L.P. (GEL) is a high quality MLP in attractive businesses. Its stock price has declined along with the stocks of other MLP's. In the case of GEL the stock price decline has been exacerbated by a dividend cut from an annual rate of $2.89 to $2.00. The dividend cut was a responsible decision by the company to retain funds to pay for the very attractive acquisition of the Alkali Corporation from Tronox for $1.325 bil made in September of 2017.

     The Alkali Corporation is the largest and lowest cost producer of natural soda ash in the world. Soda ash is used to manufacture glass, in chemical processing, in the manufacture of sodium salts, and in soaps and detergents. The company's reserves are located in the US and are estimated to have a productive life of over 100 years. The production and pricing of the material has been relatively steady from 2010. The cost of natural soda ash is estimated to be 50-60% of the cost of synthetic soda ash. The company's competitors here in the US are Solvay, TATA and Ciner. At the time of the acquisition, the company had trailing 12 month EBITDA of $166 mil, making the price 8 times EBITDA. The purchase was financed by cash on hand, $550 mil of 6.5% senior unsecured notes and $750 mil of 8.75% convertible preferred. The preferred was purchased by KKR and GSO. It is convertible into common shares at $33.19.Through March 2019, GEL can PIK the preferred dividend. While the Alkali Corporation is outside of GEL's traditional business activities, I think that it represents a terrific acquisition of a solid, cash flow business at a reasonable price. To date management has reported that the results of the business have exceeded expectations.

     Historically, GEL has been in four areas of the oil and gas business - offshore pipelines, onshore pipelines and facilities, marine transportation, and sulfur services.

     Offshore Pipelines - business was acquired by GEL in 2015 from Enterprise Partners Products, L.P. for $1.5 bil. The business includes interests in Gulf of Mexico offshore oil and gas pipelines and six offshore hub platforms, including a 64% interest in the Poseidon Oil Pipeline, a 50% interest in the Southeast Keithley Canyon Oil Pipeline, a 29% interest in the Odyssey Pipeline System, a 100% interest in Cameron Highway Offshore Oil Pipeline, a 29% interest in GOPL System, and ownership of various pipeline laterals. Gulf of Mexico fields are very expensive but very long-lived and productive. Despite the volatility of oil and gas prices producers such as Anandarko, BHP Billiton, BP, and Shell are continuing to develop offshore fields. GEL's system has spare capacity and will benefit as development continues. EBITDA for 2018 is expected to be around $317 mil.

     Onshore Systems primarily services refiners. It is expected to do about $111 mil of EBITDA. GEL owns five small pipeline systems, five rail facilities for crude loading/unloading, 3 mmbbl crude storage facilities, 1.6 mmbbl refined product storage facilities, trucks, trailers and rail cars, and two small CO2 pipelines. GEL is working on integrating its various with offerings to provide better service to its customers. They are building 650,000 barrels of additional storage capacity at their Baton Rouge Terminal, upgrading the pumping capacity at their Scenic Station rail facility to support XOM's refinery. In the Powder River Basin GEL is building a pipeline and gathering system for Devon Energy. It is expected to cost $50 mil. Devon has dedicated 300,000 acres to the pipeline and 150,000 acres to the gathering system.

     Marine Services provides transportation for primarily refined products with a fleet of barges and tugs. While the business is somewhat protected by the Jones Act, rates have been soft and only one of the company's fleet of 89 barges and 42 tugs is under long-term contract. EBITDA for 2018 is projected to be about $50 mil. The best that can be said for the business is that it is another service interface with the company's large refiner customers.

     Sulfur Services uses a proprietary process to remove the sulfur bi-product from the sour gas of the refinery process using caustic soda (NaOH, an Alkali product) to produce sodium hydro sulfide (NaHS). GEL performs this service for Phillips 66, CITGO, HollyFrontier, Calumet and Ergon. GEL provides the NaOH and the process and in return gets the NaHS as its remuneration. NaHS is widely used in manufacturing, and GEL believes that it is the largest producer and marketer of NaHs in the Americas. The business is expected to do about $70 mil of EBITDA.

     When the company announced its dividend reduction in October, they set forth a financial plan for the next 5 years.

1) Cash coverage of 1.4x to 1.6x of its dividend

2) Target leverage of:

          <5x and approaching 4.75x by the end of 2018

          <4.5x and approaching 4.25x by the end of 2019

          <4x and approaching 3.75x by the end of 2020

     With debt of $3.67bil and EBITDA of $714, GEL is now leveraged 5.14 times. If EBITDA increases by 3% a year, it will average about $735 mil over the next 3 years and be at $757 mil at year end 2020. To be at less than 4x, the company will need to reduce its debt by $670mil or $223 a year. With maintenance costs of about $45 mil, interest expense of $190 mil, the preferred stock PIK'ed, and shareholder dividends of $250 mil, the company should be able to pay down $200 of debt in 2018. The preferred stock PIK option expires after 18 months, so the issue will be cash pay in 2019. This will make $200 mil of debt reductions a tougher target but not an impossible one. At the very least, the balance sheet will be showing improvement.

     In addition to the above two items in the comany's 5 year plan, the company committed to 20 consecutive quarterly $0.01 dividend increases. If this comes to pass, the current $2.01 dividend rate (2018 1st qtr dividend was $0.51) will go to $2.80 at year-end 2022. I think that this is gimmicky, but if it builds investor confidence, it will have served its purpose.

     The company appears to be well managed. Grant E. Sims has been CEO since 2006 and is experienced in the pipeline and MLP businesses. In 2007 James E. Davison of Ruston, LA sold a number of energy-related properties to GEL in return for 13.5 mil shares and $280 mil of cash. He later participated in the purchase of GEL's general partner which was eliminated in 2010. As a result, there is no IDR. He continues to sit on the BOD as does his son, and the Davison family continues to own 10.1% of the GEL shares. In addition, the Davison family owns 76.9% of the company's "B" shares which elect the BOD. There are 39,997 "B shares outstanding.

     GEL appears to be a collection of solid businesses which produce solid cash flows. I get a 10% yield that will be increasing while I wait.

     The risks are that the businesses are hit by a general downturn in the oil and gas markets.

Catalyst

1) The market for MLP shares improves, as it could hardly be worse.

2) The quarterly $0.01 increase in the dividend rate catches people's attention - brokers like a positive story.

3) The company continues to execute, and the quality of its assets become more appreciated.