When last we checked in on Boardwalk Pipeline Partners (NYSE: BWP), the luckless midstream operator had just lost more than half its value in the course of a single trading session after lowering its distribution by more than 80 percent. It’s not the sort of news any MLP investor wants to hear, as evidenced by the ensuing drubbing.

But research since that Feb. 10 massacre gives us greater confidence that the very worst of the downturn in Boardwalk’s business is out of the way. Meanwhile, units trade below the book value of the partnership’s pipes, net of debt. Persistent bulk buying of the June and September call options on BWP suggests that one or more institutional-scale speculators expects good news in a not-too-distant future.

Recall the cause of Boardwalk’s malaise: its Texas-to-Midwest Texas Gas pipeline system is living off legacy contracts signed in a different time, before the Marcellus supplanted Texas in producing much of  the gas the Midwest needs. As these contracts expire, renewals are happening at lower rates if they happen at all.


Source: Boardwalk Pipeline Partners

In addition to that drag, Boardwalk has seen its gas storage and parking revenue dry up amid low stockpiles, shrinking regional differentials, backwardation in the futures and financial regulation discouraging commodity speculation.

At the time of its distribution cut two months ago management projected distributable cash flow of $400 million for fiscal 2014, down from $560 million the prior year. Which made Boardwalk’s predicament sound worse than it actually was.

Of the $160 million decline, $90 million relates to one-time asset sales (mainly stored natural gas) and the reversal of last year’s drop in maintenance spending. That leaves an annual decline of approximately $70 million in potentially recurring items, of which $25 million or so was caused by storage fundamentals that have hit rock-bottom and are unlikely to remain a drag.

The $45 million hit tied to the renewal of transmission contracts, on the other hand, is quite likely to be repeated in 2015. But it should be at least partly offset by the debut late this year of Boardwalk’s Southeast Market Expansion, a $300 million project that will bring 550 million cubic feet per day (MMcf/d) of gas to utility and industrial customers in the South under 10-year firm contracts.

This project’s cost will effectively consume all of the distributable cash flow beyond the $100 million needed to cover the reduced distribution this year. And that in turn will frustrate Boardwalk’s stated goal of lowering its debt leverage from current heights near 5 times EBITDA closer to 4, at least until the Southeast Expansion cash flows kick in next year.

So that’s the bad news already reflected in the unit price, which has been basing in the low teens for nearly two months. The good news starts with the fact that natural gas market conditions that have laid Boardwalk low are probably not sustainable over the longer term.

With national gas storage volumes at historic lows, volatility and a return of the futures to contango should be right around the corner, bolstering Boardwalk’s storage income. And if it turns out that current prices are simply not up to the task of meeting growing domestic demand, the resulting rally could restore some of Boardwalk’s waning pricing power as a gas shipper.

The partnership is already seeking regulatory approval to reverse the flow on the Texas Gas trunk line to ship 600 MMcf/d of gas from the Marcellus and the Utica down to Louisiana staring ion 2016. And the demand for southbound transmission capacity should only grow given the aggressive drilling plans of the numerous gas producers in the region and the LNG export terminal construction boom on the Gulf coast.

Parts of the Texas Gas line are still likely to be repurposed  to carry natural gas liquids from the Marcellus to the Gulf under the banner of the Bluegrass Pipeline, which Boardwalk is jointly developing with Williams (NYSE: WMB). The project remains on the drawing board pending sufficient long-term shipper commitments, and the expected completion date has slipped a year to late 2016.

But Williams management continues to sound enthusiastic and cautiously optimistic about the project, which would give Boardwalk an equal interest not just in the transmission line but in the fractionation and LPG export facilities at its southern end. As this month’s Sector Spotlight elaborates, this business has grown increasingly lucrative by connecting the domestically abundant NGLs with the much tighter overseas markets.

At the current unit price, Boardwalk could provide a distribution yield of 11.4 percent if it were to pay out all of this year’s reduced distributable cash flow. At this price, below tangible book value, the Bluegrass and the north-south gas shipments are effectively free options on the potentially much stronger natural gas market in the future.

Boardwalk is majority-owned by Loews (NYSE: L), a general partner that has already stepped up to offer growth capital financing this year and to fund Boardwalk’s share of the Bluegrass costs longer term. Loews’ deep pockets ensure that survival is not at stake and liquidity not a near-term risk.

It’s true that Boardwalk will need to roll over a lot of debt in a couple of years, and faces another contract expiration cliff in 2018-19 for lucrative agreements inked at peak natural gas prices 10 years earlier.

But these long-term risks will seem quite manageable if the Bluegrass is humming with traffic in three years. And they’d pale into insignificance if Boardwalk’s barebones valuation drew a bid, whether from Loews or another bargain shopper. Williams is one obvious possibility, and Energy Transfer Equity (NYSE: ETE) also has a track record of swooping in on distressed properties.

But even without a white knight, LNG exports are coming, the Utica is looking even more prolific than the Marcellus, and while Boardwalk’s assets are devalued in the current environment they could look good again quite quickly at higher gas prices.

This is not an investment for the faint of heart, and there are considerable downside risks. But at the current price the potential long-term rewards are worth it, for speculators who know not to bet the farm.

We’re adding BWP to the Aggressive Portfolio. Buy below $15.

NGL a Savvy Shopper

NGL Energy Partners (NYSE: NGL) is everything Boardwalk is not. It’s young, fast-growing, well-diversified and relatively unleveraged. Best of all, it’s not in the business of shipping natural gas to places where it’s no longer wanted. Rather, NGL is an attractive and well-managed energy logistics play with a solid yield, great growth trajectory and an inexpensive valuation.

Crude logistics – the business of moving oil from the wellhead to the refinery by truck, train or barge – accounts for just under half the gross margin following the $832 million acquisition of logistics operator Gavilon Energy, which closed in December. NGL now gathers some 225,000 barrels of crude a day from as many as 10,000 active lease locations in the Bakken, the Denver-Julesburg, the mid-Continent, the Permian and the Eagle Ford basins. This crude is then moved via some of the 2,150 railcars, hundreds of trucks or 19 barges either to a refinery or to storage assets that include 8 million barrels of capacity at the Cushing, Oklahoma hub, as well as five Gulf Coast terminals.


Source: NGL Energy Partners presentation

Almost a quarter of the profits is derived from water treatment and processing services for drillers that include wastewater disposal wells. NGL provides these services in the Permian, the Eagle Ford and the Rockies and is looking to expand into nearby regions where it already has gathering operations, such as the Bakken and the mid-Continent. This is a steady and steadily expanding business with predictable, long-term take-or-pay contracts.

The remainder of the profit margin is drawn almost equally from natural gas liquids logistics and processing and a complementary retail propane operation. The retail arm is a reliable customer for the logistics business and allows NGL to capture more of the value chain.

NGL is headed by an industry veteran who previously led Heritage Propane Partners and served as the chief financial officer of Energy Transfer Partners (NYSE: ETP). Since its June 2011 IPO, NGL has spent $3 billion on acquisitions and growth projects. The result has been a 58 percent rise in distribution per unit and a 90 percent total return (vs. 35 percent for the Alerian MLP Index).

Best of all, this growth and these returns have not been achieved at the expense of financial prudence. NGL targets debt leverage of approximately 3 times EBITDA, and a distribution coverage ratio of at least 1.5.

In the fiscal 2015 that has just started it aims to achieve that leverage and yet still increase the distribution per unit by 15 percent. In future years, management is targeting distribution growth of 10 percent. And yet, unusually for a financially conservative, fast-growing, well-managed MLP trading near all-time highs, NGL still has an enterprise value (market cap plus debt) of just 8.5 times forecast 2015 EBITDA. The current yield is 5.5 percent.

Crude gathering margins suffered in the prior quarter as differentials shrank, but NGL can renegotiate these margin-based contracts with a 60 day delay, and at this point has put the squeeze behind it.

We’re adding NGL to the Growth Portfolio. Buy below $44.