Why Investors Should Pass on Boardwalk Pipeline Partners, LP

For investors new to the energy space, one of the better outcomes of the 18-month-long downturn in the oil and gas industry has been the drop in pipeline operator stocks. Frequently structured as master limited partnerships (MLPs), these entities are as close to a legal monopoly as you'll find in the public equity markets. There are only so many options, after all, for pulling crude oil and natural gas from the earth to distribution facilities and, eventually, into your gas tanks and homes. 

But if you're looking to buy in to the sector, Boardwalk Pipeline Partners, LP (BWP) isn't among the names you should consider. Here's why.

A dividend cut long before it was cool

The biggest and baddest of the energy infrastructure operators, Kinder Morgan (KMI 1.73%), cut its dividend late last year as capital markets for anything even remotely related to oil and gas seized up. That move had major ramifications for the space -- if it could happen to Kinder Morgan, it could happen to anyone. Boardwalk Pipeline, on the other hand, cut its dividend long before the current oil downturn even began.

On Feb. 10, 2014, Boardwalk announced a quarterly distribution cut of 75%, from $0.40 per unit down to $0.10. The company noted in its release that the intention was to "free up internally generated cash to help fund growth and reduce leverage in order to strengthen the balance sheet during the difficult market conditions impacting the Partnership."

What were these conditions? Put simply, the pipeline assets the company owns are not ideally suited to current market fundamentals (i.e., where the gas is versus where it needs to be in terms of demand). A map of the company's assets in a recent investor presentation tells the tale:

Image source: Boardwalk Pipeline Partners, L.P. 2016 MLPA Annual Investor Conference presentation.

The company has a presence primarily in southern Texas, Louisiana, Indiana, and Kentucky. The Texas presence in itself is worrisome, as the competition there is pretty stiff. Beginning in 2014, the company saw contracts begin to roll off and, because of said competition, the rates it could charge were far lower than before.

From the same press release: "The Partnership is forecasting distributable cash flow for the year ended December 31, 2014, to be approximately $400.0 million, reflecting a $158.6 million decrease from 2013. The decline in distributable cash flow is primarily due to continued, unfavorable market fundamentals negatively impacting the Partnership's existing natural gas transportation and storage revenues."

There may have been a boom going on, but it wasn't benefiting Boardwalk. However, things have improved, marginally.

Setting things right, slowly

Since cutting its dividend, Boardwalk has made considerable strides toward righting the ship -- but it hasn't been easy. Considering Boardwalk's results have stabilized and begun to tick upward, maybe the cut was the right decision all along:

Data source: S&P Global Market Intelligence.

Management knew it was going to have to spend big bucks to expand its operations into more profitable areas. So it had two choices if it wanted to avoid cutting the dividend: Issue new shares, or issue debt. Its debt-to-assets ratio at the beginning of 2014 stood at 44%, low relative to that of peers such as Kinder Morgan and Buckeye Partners, L.P. (BPL),  but both of those companies possess a much more diversified and profitable asset mix. Debt investors probably knew that -- and with equity issuances the only option besides a dividend cut, management opted for the latter. It was the right decision, no matter how painful, as the market knew its position was weak.

With less money flowing out, the company purchased the following growth plans:

Image source: Boardwalk Pipeline Partners, L.P. 2016 MLPA Annual Investor Conference presentation.

Natural gas will now flow from the Midwest -- which, thanks to fracking, is now economically viable -- to major hubs in the South, and key assets are also being developed in Texas and Louisiana.

In all, Boardwalk is spending a lot of money to catch up to its more profitable peers, and it will no doubt see decent profits in the years ahead, but is it enough?

There are better options

Perhaps in anticipation of the future profits to be had thanks to its growth plans, units of Boardwalk Pipeline have rallied 33.8% this year. The downside of that rally is that Boardwalk currently yields a paltry 2.3%. That's less than Kinder Morgan's hobbled 2.7% yield, and far below the likes of ONEOK, Inc. (OKE 1.22%) at 5.19%, Spectra Energy (SE) with 4.46%, and Buckeye Partners at 6.87%.

After this rally, any one of these names makes for a better option, as they each already own coveted assets. I'll be the first to heap praise on Boardwalk's management for making tough choices, but there are just too many other great names in the pipeline space to make the units attractive right now.