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The Art of Bottom Fishing

By Peter Staas on Jun. 17, 2014

In our Exclusive Video Report on the National Associate of Publicly Traded Partnerships’ (NAPTP) recent MLP investor conference, we upgraded Niska Gas Storage Partners to a buy in our MLP Ratings table as a speculative trade.

Although we don’t expect natural-gas spreads to improve for the firm’s storage capacity near the AECO hub in western Canada, sponsor Riverstone Holdings has made all the right moves to shore up Niska Gas Storage’s balance sheet and preserve the distribution for common unitholders.

The sponsor suspended its subordinated distribution in the second quarter of 2012. A long-term solution followed in April 2013, when Niska Gas Storage Partners completed an equity restructuring that eliminated the subordinated units. New incentive distribution rights, which compensate the general partner for managing the MLP, provided additional breathing room.

And in fall 2013, the sponsor, which owns about 48 percent of Niska Gas Storage Partners’ common units, opted into a newly created distribution reinvestment program, bolstering the MLP’s coverage ratio and freeing up capital for potential growth projects.

Having stabilized its financial situation, the MLP hired former executives that had spearheaded PVR Partners LP’s diversification into gathering and processing in the Marcellus Shale and the Granite Wash.

Although volumes on PVR Partners’ systems in northeast Pennsylvania never lived up to management’s expectations, Regency Energy Partners LP’s (NYSE: RGP) acquisition of the MLP is a testament to the long-term value of these assets.

At the NAPTP’s MLP investor conference, new CEO William Shea indicated that Niska Gas Storage Partners LLC would evaluate acquisition and green-field opportunities in gas gathering and processing and other midstream business lines.

More color on this strategic shift or the announcement of the MLP’s first transaction could serve as an upside catalyst for the stock.

After all, the market rewarded Ferrelgas Partners LP (NYSE: FGP), a chronically overvalued propane distributor that has never raised its distribution, for its recent acquisition of water management solutions in the Eagle Ford Shale.

That being said, reports of intense competition and lofty valuations for midstream assets on the sales block raise the risk associated with any deal.

Niska Gas Storage Partners’ new management team also didn’t rule out partnering with a larger entity.

To this end, the MLP’s Starks Storage development project, which would provide much-needed NGL storage on the Gulf Coast, could fit well as part of a joint venture with an MLP that already owns fractionation assets.

Alternatively, a strategic partnership with a Canadian midstream operator looking to monetize assets to fund additional growth projects would also make sense.

With the new management team at the helm for only a month, the aforementioned scenarios are purely speculative. Execution risks also remain elevated. For these reasons, we won’t add Niska Gas Storage Partners to our MLP Portfolios.

 

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