It’s Q3 reporting season and Insider Monkey is here to cover one of this year’s solid-performing funds’, Wolf Hill Capital Q3 letter. For the three months, Wolfhill has returned 11.73%, which has powered the fund to a year-to-date return of 19.77%. That is easily better than the S&P 500’s total return of 7.77% and the HFR equity hedge index of 6.44% for the same period.
One of Wolf Hill’s current ideas is Archrock Partners LP (NASDAQ:APLP). a Master Limited Partnership and largest player in the natural gas compression sector. With an enterprise value of around $2.3 billion, APLP has scale and geographic/customer diversification in all major U.S. producing basins. The company covers all points in terms of distribution and production, from wellhead to pipelines, storage, and processing plants.
In terms of its admirable qualities, Wolf Hill notes that Archrock Partners LP (NASDAQ:APLP)’s distribution coverage is over 2x distributable cash flow. In addition, the fund notes that the EIA and some industry analysts forecast U.S. natural gas production to grow around 21% through 2021, an estimate that could increase demand for APLP’s compression services if it occurred. Due to the fund’s research and industry contacts, Wolf Hill believes ‘industry conditions have tightened considerably over the past several months’, another optimistic sign. Also the company has discussed potentially increasing the distribution once ‘there is a clear line’ line of sight to 4x leverage.
Due to the fund’s estimation, Wolf Hill estimates that there is total return potential of over 50% with a tax-deferred 8.3% payout while investors wait. The fund thinks Archrock Partners LP (NASDAQ:APLP) might increase the quarterly distribution/unit to a sustainable 1.5x coverage ratio by Q1 2018, implying a $0.40/unit quarterly distribution versus the current $0.28 per unit distribution. Shares of the stock haven’t done well year-to-date, falling 13.78% since January 1. Nevertheless, the stock yields 8.24% at current prices and trades for a forward P/E ratio of 14.7 based on analyst estimates.