Genesis Energy Stock: Overlooked Ultra-High-Yielder Has 50% Upside
Why Investors Are Set to Gain From GEL Stock
Rising or falling oil prices don’t really affect midstream oil and gas companies like Genesis Energy, L.P. (NYSE:GEL). That’s because upstream companies sign fee-based take-or-pay contracts to use their infrastructure.
Case in point, the U.S. oil and gas midstream market wasn’t all that affected by the COVID-19 pandemic. Even though the demand for oil plunged in that period, companies continued to drill. And all those hydrocarbons needed to be shipped and stored somewhere.
Going forward, factors such as an increasing pipeline network, record production, and record consumption will boost the demand for U.S. oil and gas midstream companies, especially over the next five years. From 2023 to 2028, the U.S. oil and gas midstream market is projected to expand at a compound annual growth rate (CAGR) of 4.2%. (Source: “United States Oil and Gas Midstream Market Size & Share Analysis – Growth Trends & Forecasts (2023 – 2028),” Mordor Intelligence, last accessed August 17, 2023.)
Production cuts from the Organization of the Petroleum Exporting Countries Plus (OPEC+) will also create opportunities for the U.S. oil industry.
Despite the OPEC+ cuts, global oil production is expected to increase by 1.4 million barrels per day in 2023 and 1.7 million barrels per day in 2024. Of the 2024 total, 1.2 million barrels per day are predicted to come from non-OPEC countries, with production growth led in part by the U.S. and Canada. (Source: “Short-Term Energy Outlook,” U.S. Energy Information Administration, last accessed August 17, 2023.)
All of these positive growth drivers should help juice Genesis Energy, L.P’s bottom line, high-yield dividends, and unit price over the coming years.
About Genesis Energy, L.P.
Genesis Energy owns and operates midstream assets in four business segments: offshore pipeline transportation, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation. (Source: “Investor Presentation: June 2023,” Genesis Energy, L.P., last accessed August 17, 2023.)
The partnership’s operations are located primarily in the Gulf Coast region of the U.S., Wyoming, and the Gulf of Mexico.
The company has more than 2,400 miles of offshore pipelines and basin-critical infrastructure to transport hydrocarbons that are produced in the Central Gulf of Mexico to onshore facilities in Texas and Louisiana. It also has onshore pipelines and terminals that primarily transport crude oil from its offshore pipelines to refineries and other refinery-centric facilities along the Gulf Coast.
Genesis Energy, L.P. owns and operates a leading fleet of maritime vessels that mostly transport intermediate refined products, crude oil, and clean refined products along the Gulf Coast, East Coast, Great Lakes, and Western river systems.
Aside from dealing with oil, the company is a leading global producer and marketer of natural soda ash and sodium hydrosulfide, both of which have little to no substitutes and have a high demand that’s driven by global industrial production and the green energy transition.
Q2 Net Income Up 58% & Cash Flow Up 51% Year-Over-Year
For the second quarter ended June 20, Genesis Energy announced that its net income attributable to the partnership increased by 40% year-over-year to $49.3 million. Its net income attributable to unitholders went up by 58% year-over-year to $26.4 million, or $0.22 per share. (Source: “Genesis Energy, L.P. Reports Second Quarter 2023 Results,” Genesis Energy, L.P., August 3, 2023.)
The company’s cash flow from operating activities went up by 51% year-over-year to $157.0 million. Its earnings before interest taxes, depreciation, and amortization (EBITDA) grew by 34% year-over-year to $183.0 million, while its adjusted EBITDA slipped to $197.9 million.
Commenting on the results, Grant Sims, Genesis Energy, L.P.’s CEO, said, “Our financial results for the second quarter were generally in-line, if not slightly ahead of our internal expectations and once again demonstrated the resilient earnings power of our diversified market leading businesses.” (Source: Ibid.)
Management Expects Record-High Full-Year Adjusted EBITDA
Despite the solid financial results and industry tailwinds, Genesis Energy, L.P. actually lowered its full-year adjusted EBITDA guidance from its original guidance by five to six percent to the range of $725.0 to $745.0 million. That would still be record-high annual adjusted EBITDA.
Management also expects a record-high margin for its offshore pipeline transportation segment and record-high contributions from the partnership’s soda ash business. Management also says Genesis Energy will deliver sequential growth of approximately eight percent to 10% over its normalized 2022 performance at the midpoint.
Genesis Energy, L.P. expects to report even better financial results for 2024, even with an anticipated softer macroeconomic environment. The partnership forecasts that its offshore volumes will ramp up, with additional volumes from its Granger soda ash expansion.
For 2025, the company expects a significant change in its offshore volumes and segment margin contributions as its Shenandoah and Salamanca deepwater pipelines come online. These two take-or-pay developments will handle a combined production capacity of about 160,000 barrels per day.
Genesis Energy Stock’s Distribution Maintained at $0.15/Unit
In July, Genesis Energy, L.P.’s board declared a quarterly distribution of $0.15 per unit, for a yield of 6.4%. That’s more than double the current inflation rate of about 3.1%. The payout is safe; the company’s available cash provides 5.24x coverage for its quarterly distribution.
Keep in mind that Genesis Energy is an oil and gas company, so its dividend can fluctuate.
In March 2020, just as the pandemic was crushing the global economy, management reduced GEL stock’s common distribution from $0.55 to $0.15 per unit. The dividend reduction saved the company about $200.0 million per year. (Source: “Genesis Energy, L.P. Announces Distribution Reduction to Accelerate De-Leveraging Plan,” Genesis Energy, L.P., March 26, 2020.)
The company has held its quarterly distribution at $0.15 per share ever since.
The partnership’s decision to reduce its dividend wasn’t a result of any material deterioration in the company’s financial performance or underlying business, but rather a proactive step. Genesis Energy, L.P. is using the extra cash to accelerate its deleveraging plans—that is, to reduce its outstanding debt without incurring any new debt and thus, strengthening its balance sheet.
Again, Genesis Energy stock’s payout is safe, and the company could raise its dividend if it wanted to. With a robust outlook for 2024 and 2025, which includes cash flow in the range of $200.0 to $300.0 million, chances are decent that Genesis Energy, L.P. will increase its payout over the coming quarters.
Buy-and-hold investors are, no doubt, happy with the company’s strengthened balance sheet, expanding operations, and robust outlook. Now they’ll want to see management reward them with growing distributions.
Genesis Energy, L.P. Launched New Unit Repurchase Program
Genesis Energy recently announced a new unit repurchase program, authorizing the company to repurchase up to 10% (12,253,922) of its own outstanding common units. The partnership said that any repurchases will be funded by a portion of its cash flow and liquidity.
Sims noted, “We believe our current equity valuation does not reflect the strength of our asset base or the long-term outlook of our market-leading businesses.” (Source: “Genesis Energy, L.P. Authorizes Common Unit Repurchase Program,” Genesis Energy, L.P., August 8, 2023.)
He continued, “Given this backdrop, we believe this is an appropriate time to institute a repurchase program which we intend to manage in a prudent and balanced manner consistent with our priority of maintaining our targeted long-term leverage ratio over time.”
This new program is in addition to Genesis Energy, L.P.’s previous repurchase program, under which the company has, to date, redeemed a total of $50.0 million.
The partnership has also repurchased outstanding bonds on the open market over the last several years, when it believed that they didn’t reflect the long-term outlook for Genesis Energy.
All of these actions show management’s ability and willingness to return capital to its investors.
GEL Units Have 50% Upside Potential
Genesis Energy units’ price hasn’t fully recovered from the COVID-19 pandemic. While GEL units are up by 253% over their March 2020 pandemic low, they still need to climb by 64% to get to where they were at the start of 2020.
Wall Street analysts believe there are enough growth catalysts to propel GEL stock to within striking distance of that level over the coming quarters.
Analysts have provided a 12-month low estimate of $11.00, a median estimate of $13.00, and a high estimate of $14.00. These estimates point to potential gains in the range of 17% to 50%.
Chart courtesy of StockCharts.com
The Lowdown on Genesis Energy Units
A growing midstream energy company, Genesis Energy, L.P. has a sizeable footprint in the U.S., especially across the South and in the Gulf of Mexico. It has a strong balance sheet and is expanding its operations, with two major developments projected to come online in 2024 and 2025.
As mentioned earlier, the partnership reported better-than-expected second-quarter results and, while it lowered its full-year adjusted EBITDA guidance, still expects to report record-high adjusted EBITDA and sequential growth of about eight percent 10% over its normalized 2022 performance at the midpoint.
Thanks to its strong cash generation, Genesis Energy, L.P. is able to pay reliable, high-yield dividends and repurchase its own units.