This type of structure leaves a lot of cash leftover to plow back into the business, pay off debt, or pay out to unit holders. And that means PVR has a lower cost of capital than the competition, which will prove to be invaluable when interest rates rise down the line.
Beginning last year, PVR has launched several projects that point to sustained profitability. Most notably was its acquisition of Chief Gathering in the Marcellus Shale, which gave PVR six natural gas gathering systems spread out over 300,000 acres.
The partnership’s other assets are in the Texas and Oklahoma panhandle regions, and this segment is particularly exposed to commodity risk. PVR has announced its ongoing effort to mitigate that risk by switching from margin-based revenue generation to fee-based revenue in its natural gas midstream operations. It’s already made dramatic improvement in this effort, growing from 30% fee-based revenue to an estimated 80% fee-based revenue in just three years.
One other important thing to note is that PVR’s distributable cash flow did not cover distributions in 2012 as it had done for the previous four years. Management claims that this was because of the Chief acquisition and was expected. Its target distribution coverage ratio is now 1.05-1.10 times payouts, which it expects to achieve by the second half of this year. First-quarter adjusted EBITDA was up year over year, so it is certainly on the right track.
Let’s face it, the big companies get the headlines and that leaves companies like PVR floating under the radar. We praise the Kinder Morgan Energy Partners LP (NYSE:KMP) and the Enterprise Products Partners L.P. (NYSE:EPD) for their entrepreneurial daring and low cost of capital, and ignore the small guys that employ the same strategies. PVR Partners reports earnings on July 22, investors looking for a new opportunity should pay close attention.
The article Looking for a Turnaround Story? Consider This Company originally appeared on Fool.com.
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