With a juicy distribution yield of 5.9%, a business model focused on operational efficiencies and attractive acquisitions/growth projects, Genesis Energy L.P. (GEL - Snapshot Report) provides investors with a steady, predictable income stream. In addition, this Zacks #1 Rank (Strong Buy) diversified midstream energy operator has raised its quarterly payout 28 times in a row.
On top of this, earnings growth is expected to be strong in 2012 and 2013 based on the solid fixed margin businesses and limited commodity price exposure.
Acquisitions, Growth Initiatives Drive Record DCF
Genesis Energy reported first quarter earnings per unit of 27 cents on April 26, beating the year-ago earnings by 17%. The result was driven by a 23% gain in total segment gross margin, due largely to the partnerships growth initiatives and contribution from the acquisition of interests in Gulf of Mexico oil pipelines from Marathon Oil Corp. (MRO) in January.
Distributable cash flow (DCF) an indicator of cash paid for distribution to unitholders escalated approximately 24% year over year to a record $39.6 million, providing a healthy 1.11x distribution coverage.
Consistent History of Increasing Distributions
Genesis Energy has established a track record of consistent distribution growth. On July 9, the partnership raised its second quarter 2012 cash distribution to 46 cents per unit ($1.84 per unit annualized), representing an increase of approximately 2.2% sequentially and 10.8% year over year. Importantly, the latest payout marks the 28th consecutive quarterly distribution hike by the pipeline operator, of which 23 increases have been 10% or more year over year.
Genesis Energys announced distribution boost is in sync with its goal of delivering disciplined growth to unitholders. The partnership boasts of a consistent and improving financial policy with high distribution coverage.
Double-Digit Earnings Growth Prospect
Based on continued solid expected performance from all the partnerships segments, analysts are predicting strong earnings growth for Genesis over the next couple of years. The 2012 Zacks Consensus Estimate is $1.05, representing 10% earnings per unit growth over 2011. Next years average forecast is $1.18, corresponding with 12% growth.
Valuation looks reasonable for Genesis Energy. The stock is going for about 29.5 times forward estimates, a 19% discount to the peer group average of 36.3x. Its price to sales ratio of 0.7 is essentially in-line with what similar firms offer.
Market Performance & Technicals
Since late-December, Genesis Energy stock has maintained momentum above its 200 day moving average, which currently stands at $28.13 against the current unit price of $31.00. Following the latest distribution increase announcement in early July, units started trading above its 50 day moving average as well. On the performance front, Genesis Energys unit price has outperformed the S&P 500 year-to-date and has delivered a return of 10.6% during the period, versus just 8.4% for the benchmark. The upside momentum is likely to persist on the back of expected higher payouts.
Houston, Texas-based Genesis Energy is a master limited partnership that operates crude oil pipelines and is an independent gatherer and marketer of crude oil in North America, with operations concentrated in Texas, Louisiana, Alabama, Florida, Mississippi and New Mexico. Genesis engages in three business segments: Pipeline Transportation, Refinery Services, and Supply and Logistics.