Units of Intermediate partners of the Summit (NYSE: SMLP) have fallen more than 50% over the past year due to concerns about its financial profile. Not only did the Master LP (MLP) pay an excessively high percentage of its cash flow to investors, but it also had future liabilities on its balance sheet that it did not know exactly how it would deal with.
The intermediary company has since taken several steps to solve its problems. However, these measures have not yet lifted the weight that weighs on the valuation of the company. It is for this reason that Summit Midstream is trading at a ridiculously low price, making it an opportunity to look upward.
Do the right things
Summit Midstream finally succumbed to the weight of its weak financial profile last February. The MLP sold a non-core asset for $ 90 million, which gave it some cash to repay a portion of an obligation to its parent company in a previous acquisition. In addition, the company entered into an agreement to eliminate the expensive management fees that it paid to its parent company. Finally, Summit has reduced its distribution to investors by 50%. These changes will allow the Company to retain approximately $ 85 million in cash per year, which it can use to repay debt and finance expansion projects.
As a result, Summit Midstream has significantly improved its financial profile. The MLP can now cover its distribution – which still has a staggering 16.7% performance even after the 50% reduction earlier this year – by a comfortable 1.75 to 1.95 times. At the same time, the Company expects to end the year with a leverage ratio of 4.3 times EBITDA, which is only marginally above the peer group average. of 4.1 times.
A barrel bottom valuation
Despite all the progress made, the market value of Summit Midstream has continued to decline this year as its unit price has fallen by more than a third since the announcement of these changes. For this reason, the MLP trades at a ridiculously low valuation compared to its peers.
Summit Midstream currently expects to generate adjusted EBITDA of $ 295 to $ 315 million this year. Given the current value of the company's $ 1.8 billion, this means that Summit is trading at six times its profits. In comparison, Summit's peers trade at a multiple of 10 times EBITDA.
Summit Midstream should, on the one hand, sell at a lower value because some problems remain to be solved. In particular, the parent company owes its parent company a cash payment of $ 303.5 million next year to dispose of its debt outside a previous acquisition. The company may need to sell more assets or dilute investors by issuing new units to finance this payment, which is a source of concern. In addition, its leverage ratio remains high, which limits its ability to invest in expansion projects.
However, the market seems to have price Summit Midstream as if its profits were declining, which is not the case. Although they have increased only a little over 1% in 2018, they are increasing by 7% this year, despite the negative impact of the sale of the asset. This corresponds well to the average growth rate of the reference group of 8%. In the meantime, Summit has launched two attractive expansion projects that could generate healthy future growth, including a large-scale gas pipeline that it is developing with ExxonMobil. Although the way the company finances this pipeline is unclear, it is working on strategies to minimize its initial cash outflows in order to maintain a strong financial profile.
Convincing enough to look closely
Although Summit Midstream has taken several steps to strengthen its financial statements this year, there are still some hurdles to overcome that continue to weigh on its valuation. However, its unit price has dropped to such a depth that it is trading at a ridiculously low level. Thus, this MLP could have considerable upside potential if it could find a good solution to address its remaining concerns, which is why investors might want to place this high-yielding stock on their watchlist.