2023-12-02 03:38:51 ET
Summary
- Genesis Energy is set to benefit from two major projects, including the expansion of its soda ash facility and the SYNC Pipeline and CHOPs expansion project in the GoM.
- The company will be a huge beneficiary when the soda ash market eventually rebounds.
- While the stock carries risk due to its balance sheet and exposure to soda ash prices, it looks like a solid speculative "Buy."
Genesis Energy ( GEL ) carries some risks given its exposure to soda ash prices and its balance sheet, but 2025 could be a big year for the firm.
Company Profile
GEL is a master limited partnership ((MLP)) that operates in four segments. Its largest segment is its Offshore Pipeline Transportation segment, which transports crude oil and natural gas from the deepwater Gulf of Mexico to onshore markets. It has interests in approximately 1,396 miles of crude oil pipelines with an aggregate capacity of approximately 1,944 MBbls/day and 764 miles of natural gas pipelines with an aggregate capacity of approximately 2,308 MMcf/day. The segment represent about 45% of its segment margins.
The company’s Soda & Sulfur Services segment accounts for about 40% of its margins. GEL mines trona ore and processes it into soda ash at two facilities near its trona ore reserves in the Green River, Wyoming. As part of the segment, the company also operates sulfur removal services where it processes refineries high sulfur gas streams to remove the sulfur at eleven refining and petrochemical processing facilities.
The company’s Marine Transportation segment, meanwhile, represents about 11% of its margin. The company owns a fleet of barges that carry heavy fuel oil and asphalt, primarily for refiner customers. It also owns an ocean tanker called the M/T American Phoenix that transports crude oil.
Finally, GEL’s Onshore Facilities and Transportation segment represents about 3% of its margin. The segment consists of an integrated system of crude oil and refined products pipelines, terminals and related infrastructure primarily serving the refining industry.
Opportunities & Risks
GEL has spent 2023 working on two major projects to help spur future growth. The first is its Granger expansion. Granger is a soda ash facility build in 1976 that the company recently brought back online in January. The facility produces about 500k tons of soda ash using low-cost solution as a feedstock. GEL is spending up to $375 million to expand the facility’s production by an addition 750k tons per year, increasing the plant’s total production capacity to 1.3 million tons per year. Overall, it will bring GEL’s total soda ash production capacity to 4.8 million tons of soda ash per year.
On its Q3 earnings call, GEO Grant Sims said:
“Increasing our exposure to low-cost solution was a central investment thesis in our Granger expansion project. And once fully ramped, roughly half of our total production capacity will be from solution mining. Our combination of both dry ore mining and solution mining provides us with a U.S. industry-leading cost structure that will continue to allow us to run at full utilization and sell every ton we can safely produce to optimize our fixed cost for this year and in many years ahead regardless of the broader economic and pricing environment. As stated in our earnings release, we have recently started the commissioning activities with our Granger expansion project and expect this work to continue over the remainder of 2023. Starting in early 2024, we expect the expansion to be fully online and ultimately adding approximately 750,000 tons a year with a very attractive marginal operating cost per ton to our supply capabilities in 2024. That will both increase our sales volumes and lower our operating cost per ton at Granger and throughout our entire soda ash operations.”
GEL’s other big project is the SYNC Pipeline and CHOPs expansion project in the Gulf of Mexico. The SYNC pipeline will connect the Walker Ridge area of the Gulf of Mexico directly to its majority owned CHOPS system. Once complete, all of the oil from the SYNC Pipeline will flow into CHOPS system to then be transported onshore. GEL owns 64% of CHOPS.
BOE Exploration will be the anchor shipper on the SYNC Pipeline, which also will serve as a host platform for any future nearby developments. First production from its Shenandoah FPS will begin in late 2024 or 2025.
SYNC will also connect to the Salamanca development, being developed by LLOG, with production expected in early to mid 2025. The Salamanca development will be directly connected into GEL’s 100% owned SEKCO pipeline.
GEL expects to spend $500 million on the project, with an anticipated 5x build rate based just on take or pay contracts. However, it said it would be a 4x build rate if producer hit 75% of their projected production targets. That indicates a floor of $100 million in EBITDA on the project, with upwards of $125 million possible if not likely. GEL sold a 36% interest in its CHOPS system for $418 million and its 80% interest in its Independence Hub platform for $32 million in proceeds to help pre-fund this project.
Outside of these expansion projects, a rebound in the soda ash market would go a long way to helping GEL. The soda ash market is currently oversupplied, hurt by slowing global industrial production, a slower-than-expected re-opening of China, some weakening European demand, and new supply coming online in China.
About half of soda ash production is used in glass manufacturing, but it is also used in a wide range of applications including detergent, soap, chemicals, rechargeable batteries, and cosmetics. As such, its demand is pretty tied to basic economic uses. Over 70% of soda ash now is made from synthetic production, which is about 2x more costly as it uses more energy and often produces a waste product. GEL produces natural soda ash from its trona mines, which is less costly and greener.
Management thinks it could take 12–18 months for the soda ash market to tighten up. The company has said it has an increasing good view into generating free cash flow of between $200-300 million, even if soda ash prices don’t recover. A recovery, though, could take that up meaningfully. The company has said that after the Granger expansion, the soda ash business could generate $240 million per year in margin in a normalized cycle, compared to around $200 million in an off-year and as high as $280-$300 million.
When it comes to risk, any further declines in the soda ash market would be one. The market is already pressured, but a weak economy could impact demand, while GEL is adding to market supply with its Granger expansion. The company has exposure to both prices and volumes in this market.
The company also has some exposure to charter rate fluctuations in its Marine Transportation segment. However, this is a pretty small overall piece of the company.
Oil prices could always impact drilling activity and volumes on GEL’s pipelines. However, offshore projects tend to be expensive, and decline rates are low, so once these projects are up and running, they tend to be pretty steady volume contributors. Onshore wells have much higher decline rates initially, and thus more drilling is needed to keep volumes flattish.
At 4.3x leverage (note, I do not make the adjustments the company makes with its reported 3.9x leverage), GEL’s balance sheet isn’t as strong as some other midstream companies. It also has nearly $840 million in convertible preferred units that carry an 11.24% interest rate, after holders elected a 1x reset last year. Treating that as half debt, which is a common practice, the leverage would be about 4.5x.
As such, its debt load does add some additional risk, although the company has been much higher levered in the past and has done a good job of reducing debt and leverage the past few years.
Getting its growth projects up and running on time and on budget is also a potential risk. Delays and cost overruns would hurt returns.
Valuation
GEL trades at 8.1x the 2023 EBITDA consensus of $741.3 million. Based on the 2024 EBITDA consensus of $760.8 million, it is valued at 7.9x. Meanwhile, it trades at 7.1x the 2025 consensus of $840 million.
If it can get to $250 million in FCF in 2025, it would have a FCF yield of 17%. It currently pays out a dividend yield of ~5.1%.
GEL is one of the cheaper valuations in the space, likely due to its soda ash business.
While one of the perhaps riskier names in the midstream space, I think GEL has some of the best upside given that 2025 could see both growth projects come on and a soda ash recovery. I think the stock could be valued at $21 in a couple of years, which would be an 8.5x multiple on 2025 EBITDA, putting it more in line with peers after its growth projects come online.
Conclusion
GEL is a higher risk, higher reward MLP. If the soda ash market recovers in the next couple of years, the company should greatly benefit as a low-cost provider that is bringing more production online with its Granger Expansion project. At the same time, its SYNC pipeline project should drive some solid growth starting in 2025 and beyond.
The company has a lot of growth potential, although that is counterbalanced some by its somewhat weaker balance sheet and exposure to soda ash pricing.
All in all, I like the stock as a high risk-reward play, and thus will start it off as a speculative “Buy.”
For further details see:
Genesis Energy: 2025 Could Be A Big Year