Monday, March 11, 2013

More Adjustment to Loews Book Value

So I made a post about the adjusted book value per share of Loews (L) and someone kindly responded that there are publicly listed MLP general partnership (GP) interests that I can use to value L's GP interest and IDR (incentive distribution rights) in Boardwalk Pipeline (BWP).

The thing to do, of course, would be to calculate the implied valuation of the GP/IDR from these listed entities at current prices and I may actually do that at a later date.

But for now, I just wanted to get a sense of the valuation of these things so I did some googling first (to avoid too much work!).  Keep in mind I'm not the best googler in the world, but I did find something interesting. 

There are some presentations and reports out there that value these GP/IDR interests very highly.  One report analyzed the implied values of GP interests (as a ratio of total GP cash flow (including IDR) based on acquisitions between 2007 and 2010.  The low was around 12x and the high was almost 60x with a median of 24x and average of around 28x cash flow.

Even Kinder Morgan (KMI), when it IPO'ed, came out at 25x cash flow (IPO enterprise value / total GP cash flow).  This valuation would include income from their limited partnership interest too.

For some clean numbers, I looked at the merger proxy of the Kinder Morgan - El Paso merger.  Merger proxies are great because of the valuation work included in there (even though we spend time laughing at investment bankers, sometimes that stuff comes in handy).

Anyway,  according to the proxy filed in October 2011, the peer group valuation of the general partnership interest that KMI owns as a ratio enterprise value (EV) of only the GP portion / GP distribution (including IDR) was valued using this peer group:

Alliance Holdings, L.P.
Atlas Energy, L.P.
Crosstex Energy
Energy Transfer Equity
NuStar GP Holdings
Targa Resources Corp

The valuations (EV of GP only / GP distribution including IDR) were:

                 mean             median            high           low
2011e        20.9x             19.4x               29.5x        15.5x
2012e        17.7x             17.2x               21.7x        14.5x

Since we know the 2012 cash flows for BWP, let's just use the 2011 estimated valuation of 19.4x median or 20.9x mean.  We can just use 20x because it's a simple round number.

There was also a historical transaction analysis done by Barclays of GP transactions between 2003 and 2010.  The valuation ranged from:

           low         median            high
           12.7x      18.8x               26.1x

Barclays added to this EV valuation KMI's holdings in the LP's, so the above 18.8x figure is for the GP-IDR cash flows alone.   The deal universe was:

Sellers:
Penn Virginia GP Holdings, LP
Enterprise GP Holdings, LP
Inergy Holdings, LP
Buckeye GP Holdings, LP
Magellan Midsteam Holdings, LP
Markwest Hydrocarbon, Inc.
Kaneb Pipeline Partners, LP & Kaneb Services LLC
Plains Resources, Inc.


Again, this points to a valuation in the 19-20x range, far higher than the 10x multiple I put on the cash flow in my L valuation post.

Loews Adjusted BPS Updated
So, adjusting the prices of DO, CNA and BWP as I did in my last post to current prices, we get an adjusted BPS of $52.21/share for L now.  This figure does not include the 2% GP interest and the IDR.

Here is the cash flow from the 2% partnership interest and IDR paid to L in the past four quarters:

Amount Paid to GP (including IDR, millions)
February 2012:     $9.1
May 2012:            $9.6
August 2012:      $10.2
November 2012: $10.8
Total:                   $39.7

Using the above figure of 20x, that comes to  $794 million for the value of the BWP GP, and with 392 million shares outstanding, that comes to around $2.00/L share.  

Add this to the $52.21 above and we get a total adjusted book value of $54.21/share.   With L now trading at around $44/share, that's a 19% discount to adjusted book value.

This is just a quick look at this piece of L.  I don't think people spend too much time on it as it doesn't take up a large percentage of the value, but if BWP keeps growing, this can get big enough to really make a difference.

I don't follow MLP/GPs at all so there is probably a lot more that can be done here in terms of fine tuning the valuation (or more recent proxy/valuation tables), but for now, I think the above look is a little better than just randomly throwing a 10 multiple on the GP cash flows.  Good enough for me (for now). 





3 comments:

  1. Request for post: AIG

    :)

    ReplyDelete
  2. Awesome post. I have built a Loews SOTP spreadsheet and have explored the value of the GP as well. The reason the lofty multiple is somewhat justified is BWP is in high splits and continues to issue units to fund growth. I am not home and do not have the numbers in me, but when I looked at their most recent unit issuance funded acquisition, the immediate return on the GP capital contribution (assuming stable per unit distribution) was on the order of 25%. I own Loews and think the GP could be easily be worth $750mm or $1b in a few years. It Is a nice little hidden asset that adds the the upside and margin of safety

    ReplyDelete
    Replies
    1. Hi,

      Thanks. Yes, the GP can really be worth a lot as they can grow by issuing new units to fund growth. It's kind of nuts when you think about it, but I won't complain.

      Thanks for commenting.

      Delete