Genesis Undertakes Horizontal Expansion

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Acquisition seems to be becoming the norm in the financial world to achieve quicker growth. It is a costly way to expand. But buying a business that is ongoing reduces risk of failure .

Genesis Energy LP (NYSE: GEL) recently took over the downstream transportation assets of Hornbeck Offshore Services (NYSE: HOS) in order to enlarge the extent of its marine business operations.

Is it still a good investment?

Benefits of the acquisition to Genesis

Acquiring the downstream transportation business of Hornbeck added a total of nine barges and nine tug boats to the company’s existing fleet of 50 barges and 23 tow boats. This fits Genesis’s current business, which includes a marine inland barge business, crude oil and heavy refined products storage, blending terminals and its crude oil pipeline systems.

The Hornbeck barges are among the youngest fleets in the industry, with an average age of eight years. The new barges are also double-hulled and thus fulfill the regulatory compliance requirements of the Oil Pollution Act. The barges provide vapor recovery, and the tug boats were remodeled in 2005, They will be used to meet the transportation demands of refineries and storage terminals on the Gulf Coast, Eastern Seaboard, Great Lakes and Caribbean.

The two companies have planned to sign service contracts to ensure efficient running of operations and undisrupted services provided to customers, once the acquisition gets regulatory approval and becomes effective.

Although there is overlap in the customer base of the two companies, the acquisition is estimated to provide an immediate push to the acquirer’s cash flow.

Genesis is a very stable company with cash flows from operations growing at a Combined Annual Growth Rate (CAGR) of 28% in the last three years. The company also has a $1 billion revolving credit facility to pay for this acquisition while at the same time continuing to safely fund its other organic growth programs.

The current status of other rivals

Enterprise Products Partners L.P. (NYSE: EPD) is also an active rival of Genesis. The company recently partnered with Western Gas Partners, LP to purchase natural gas liquid (NGL) fractionation trains 7 and 8. Enterprise has a 75% stake in the joint venture while the remaining belongs to Western Gas. Both the trains have been designed to handle nearly 170,000 barrels per day (BPD) of NGLs. These trains will be commercially run by the end of 2013.

Enterprise has also partnered in midstream energy infrastructure projects in the past as well. In light of rising demand for natural gas, domestically and for export, this venture is likely to boost the company’s revenues and income in the year 2014.

Moreover, the company is in the process of developing two refined product export facilities to serve the rising demand of refined products export capability on the United States Gulf Coast. In the last five years, the U.S. has gone from importing  roughly 1 million barrels per day (MMBbls/d) of refined products in 2007,  to exporting over 1 MMBbls/d in 2012. This will offer customers substantially improved access to the company’s marine services at its ports. It is expected to commence operations in early 2014. This vertical integration will strengthen the company’s foothold in this industry and increase its market presence. This will result in higher revenues and improved margins in the subsequent year.

Conclusion

Genesis has acquired a lucrative business and is expected to add market share and operational capacity to meet rising demand. The company is also providing a higher return to investors by registering trailing twelve months (ttm) Return on Equity (ROE) of 10.8% compared to the industry’s ROE (ttm) of 9.5%. Genesis Energy also intends to pay a dividend that providesa consistent, reliable and attractive return, even in periods of its business cycle downturn. In my opinion, this stock should be bought.

In the light of its bright future outlook, Enterprise is recommended for investors who demand  dividends in addition to price appreciation. The company increased its dividends this month for the 36th time in a row and is expected to do so in the future as well.


Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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