A Rare Opportunity For Yield And Growth

When the whole energy sector was being hit hard at the end of last year, as oil prices collapsed, it became clear that at some point consolidation was inevitable. Heavily indebted companies needed cash as the potential cash flow from investments sunk which created an opportunity for those with the room and the guts to take big risks. Given that environment, the number of actual buyout deals announced in the oil and gas industry so far has been quite low.

What there has been, though, is a significant amount of transfers of individual assets, as companies look to raise cash and renew focus at the same time. Deals such as that are usually beneficial to the seller of the asset, but the value to the buyer often cannot be seen for several years. Occasionally though, along comes a deal that offers almost immediate, measurable benefits to the buyer, and the acquisition of the Grand Isle Gathering System (GIGS)by CorEnergy Infrastructure Trust (CORR) that was announced this week is one of them. The GIGS is a network of 153 miles of undersea pipes that service the shallower portions of the Gulf of Mexico oilfield.

The transaction makes sense for the seller Energy XXI (EXXI), an oil and gas exploration and production company that has been struggling with a large debt load. Diversifying into a midstream, fee-based oil service project made perfect sense for the company when prices were high, but now that the crunch is being felt, and capital expenditure needs are piling up, returning to a more focused business model provides at least some breathing room for EXXI. For CORR though, who as their name suggests are all about infrastructure, the acquisition is cash flow positive almost immediately and, as CORR is a trust, that translates to a bigger payout for shareholders. The company estimates that the effect will be a roughly 10 percent increase in the quarterly Distribution per Unit (DPU) starting in the third quarter of this year, from $0.135 to $0.15.

Of course, nothing good comes without a cost to shareholders of some kind. In this case it is a dilution of current holdings. The $245 million cash deal is being financed by a mix of an existing credit facility, a convertible issue and an offering of 12.9 million new shares. That offering, at a below market price of $6.00, was announced before the use for the funds was fully explained, which explains the unusual looking price action in CORR over the last few days.

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As you can see though, once the terms of the purchase and subsequent 11 years of rent payments became clear the market rebounded to above that $6 level.

What makes this deal attractive for retail investors in particular is that it is immediately accretive and boosts an already good yield. At current prices CORR returns about 9 percent, with the added bonus of a chance of capital appreciation. The four Wall Street firms that cover CORR have a mean target price of $8.63, but even a climb to the lowest of those estimates, Stifel’s $7.50, would represent a 17 percent appreciation from current levels; an unbelievable prospect for something yielding 9 percent!

Usually, when consolidation in an industry is expected, everyone starts casting around looking for likely takeover targets and oversold stock. As the story here indicates though, in some cases, waiting to see the nature and details of a deal can cost very little in terms of opportunity cost, but result in an actual opportunity that involves less risk than guessing who will be bought. If you have capital to deploy in the energy sector and are thinking of taking a chance on a struggling company that could possibly be a takeover target or of buying a few depressed stocks looking for a general bounce back, allow me to make a suggestion: Take at least part of that capital and get yourself an 8 percent yield and some growth potential with CORR.