Is Inergy LP Back in Growth Mode?

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Several years ago, Inergy LP (NYSE: NRGY) was primarily a propane company. Management decided that it should start to shift gears and invest in the mid-stream natural gas arena. This seemed like a logical choice given the shale-gas boom that was taking place and the ability of management to use its cash cow propane business to fund its venture into the mid-stream business. It intrigued me so much that I purchased units in the partnership.

Shortly after I bought my shares, the company announced a massive restructuring. It was spinning off the bulk of its mid-stream assets into a new LP, Inergy Midstream LP (NYSE: NRGM). Inergy LP would be the general partner (GP) and a material  unit holder in the new entity. I wasn't happy with the change, particularly since the split resulted in a distribution cut for Inergy LP unit holders, but it was in line with management's new focus and had the potential to lead to faster distribution growth in the future since GPs have incentive rights that generally lead to higher distribution growth than the LPs they manage. 

Then, not long afterwards, Inergy LP company sold its propane division to Suburban Propane Partners (NYSE: SPH) in a rather complex deal that left Inergy LP shareholders owning shares in both companies. This was something of a fast forward of management's plan to shift out of propane and into natural gas mid-stream, but I was again displeased. This time because it seemed to invalidate the logic for the split off of Inergy Midstream LP. It also resulted in another distribution cut at Inergy LP, though the total disbursement from Inergy and the distributed Suburban units roughly equaled the former payout.

I still own the stock because management is still moving in the direction it promised, even if not the way I would like to have seen. The recent announcement that Inergy Midstream LP was purchasing Rangeland Energy, LLC, the owner of the COLT crude oil rail terminal, storage, and pipeline facilities, for $425 million, looks like Inergy LP  is finally shifting back toward growing its business again. Though COLT is not a natural gas facility, it is still in the midstream space.

Shares of both Inergy and Inergy Midstream were up materially on the news. Indeed, after taking a significant, and well deserved, amount of heat over the financial engineering that Inergy had been engaging in, to what appeared to be little benefit to shareholders, the COLT deal is a welcome breath of fresh air. If the deal is consummated as envisioned, it could lead to distribution growth for Inergy Midstream LP and Inergy LP.

COLT is a newly built facility in the Bakken Shale area that appears to have solid expansion opportunities. John Sherman, President and CEO of Inergy Midstream, opined that the facility is located “in one of the most compelling shale basins in North America.” Whether or not that is merger-induced hyperbole remains to be seen, but the facility's contracts are “take or pay,” meaning that Inergy Midstream gets paid no matter what happens, so COLT has a solid foundation from which to build. Indeed, Inergy management went on to state that COLT's current contracts “underpin a growing and stable cash flow stream that is expected to be immediately accretive to distributable cash flow per common unit.”

The words “immediately accretive to distributable cash flow” are music to the ears of an investor in limited partnerships. Those words are particularly compelling to anyone who has lived through Inergy's transformation from a propane company to the effective general partner of a mid-stream LP. This may or may not be the end of the transition, but it is a good sign and comes shortly after Inergy sold (or dropped down, in LP language) US Salt, LLC to Inergy Midstream.

Such drop downs are what typically takes place between a General Partner and a Limited Partner. And while the shift of assets was appropriate, it didn't suggest the ability to grow the business. In fact, some looked at it as just one more financial machination that did little to benefit Inergy LP shareholders. The COLT purchase, however, casts a better light on the US Salt drop down and suggests that, perhaps, the transition of Inergy is finally reaching completion and Inergy LP can return to growing its business and, more importantly, growing its distribution to unit holders.

As unit holder who has gone along for the ride on the often rough road this transition has traveled, I hope this is the positive step that it appears to be. The one cloud over the deal that's worth keeping an eye on is that COLT is a rail facility, which means it could be replaced by pipelines at some point in the future. However, at present, there appears to be enough demand for the COLT facility's services that Inergy is looking to expand it. This, coupled with the contracts that are currently in place, suggests that pipelines appear to be a far-off concern.



ReubenGBrewer has positions Inergy LP and Suburban Propane Partners. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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