Bhim
Situation overview
After several months of comprehensive portfolio review, The tide swims (TSX:TWM:CA) Decided to sell its Pipestone-related assets to AltaGas for $650 million. Proceeds will be used to strengthen its balance sheet.Sounds like future divestitures are still in the works TWM’s portfolio review is summarized in the table and the next catalyst will be the commercialization of renewable diesel production.
To play devil’s advocate first, this deal gives me an “everything is on the table but no one wants anything else” feeling and this is certainly one of the crown jewels. That being said, I applaud management for getting this deal done, as it should more or less permanently resolve the (perceived) balance sheet issues. Tidewater Midstream (excluding term loans to renewable energy entities) has a credit facility of approximately $550 million and $75 million in convertible bonds outstanding. $650 million in proceeds (half cash, half AltaGas stock) leaves TWM with zero earnings Net debt position.
AltaGas’ current operating assets are valued at $525 million and the Pipestone Phase 2 expansion is valued at $125 million (total consideration is $650 million). TWM said the assets disposed of account for $55-$60 million of its normalized adjusted EBITDA in 2023. As a result, TWM is able to achieve an EV/EBITDA trading multiple of approximately 9.0x and an option value of $125 million. That’s a great result, especially considering that construction costs for the second phase of the expansion are estimated to be around $360 million, and TWM wasn’t even able to finance it with a partner.
Valuation
As the fully contracted Pipestone plant is sold, EBITDA generated from the remaining midstream assets will be more volatile and more closely linked to commodity prices. TWM still has a significant presence in the Deep Basin (e.g., Brazeau River Complex, Ram River) and central Alberta (e.g., Acheson), with a combined processing capacity of approximately 980 mmcf/d. The downstream business remains unchanged, but of course, based on the merger, Taiwan’s major manufacturers will pay more attention to the downstream business in the future.
Pre-transaction, TWM guided for EBITDA of approximately $180 million, meaning the remaining assets will generate approximately $120 million of EBITDA. Due to the less contractual nature of the remaining assets, I think the valuation multiple should be lower. Here is my estimate of TWM’s fair value:
I applied a multiple of 4.0-6.0x to Tidewater Renewable’s segmented EBITDA, resulting in an enterprise value of $676 million, which, after net debt of about $300 million, leaves an equity valuation of $376 million. TWM’s 69% stake is worth approximately US$260 million. I then apply 4.0x to TWM’s spin-off EBITDA (i.e. excluding Tidewater Renewable). I previously applied a multiple of 5.0x, but the Pipestone divestiture reduced cash flow quality.
author
After excluding the asset sale proceeds against current net debt, I get a projected net debt of only about $12 million. After adjusting for some outstanding warrants, I set a price target on TWM of $1.57 per share, representing an upside of approximately 55%.
author
Where should we go from here?
Granted, TWM has been a value trap for years. There are several forces working against the company. The old debt-financed midstream acquisition growth strategy is no longer viable and the market has shifted to focus on free cash flow generation, but the strategies of Taiwan’s major players are still stuck in the past. The Prince George refinery acquisition proved to be a big success, but also limited TWM’s valuation multiples in my opinion, as the downstream assets are considered more volatile.
What investors can look forward to is the commercialization of the renewable diesel and renewable hydrogen facility (HDRD), which should generate approximately $100 million in EBITDA and significant free cash flow on a run-rate basis. Commercialization should occur sometime in October 2023. I believe that as HDRD reaches commercialization and Pipestone sales close in late 2023, TWM’s 2024 guidance will be easier to analyze, lowering the barrier for marginal investors.
One potential risk is the upcoming maturity of $75 million in convertible bonds in September 2024. I sincerely hope management doesn’t try to do modifications and extensions by offering bondholders lower strike prices and (inevitably) higher coupons. What they should do is use the proceeds from the sale of Pipestone to refresh their RCF capacity and redraw the (most likely) smaller RCF to redeem the convertible bonds at par. I know a 5.5% coupon is attractive in today’s interest rate environment, but even with a spread of 4.5% (i.e. 10% on the RCF and 5.5% on the convertible), at $75 million Of the remaining balance, additional interest expense was only approximately $3.4 million. I think that’s a fair price to pay to permanently do away with dilutive instruments and avoid messy negotiations with bondholders. Fellow shareholders, please contact the company and pass on this information.
I think one potential strategic move TWM could take is to break up the TWM/LCFS structure by buying back LCFS’s minority shareholders. LCFS is clearly a failed IPO (so far), and the drop-down structure is becoming increasingly unpopular in the market. While negotiations with minority shareholders may complicate things in the short term, I believe it will add value in the long term.
in conclusion
Overall, I like Pipestone trading.This is done at a value-added multiple and sales revenue will increase significantly Deleveraging Balance sheet. Taiwan’s major manufacturers are still severely undervalued, but it is undeniable that this has been a value trap for many years. A big upcoming catalyst is the commercialization of the HDRD facility in October. The upcoming risk is that the convertibles are due to mature, but with the balance sheet in much better shape, I believe TWM has the option to take out the convertibles in cash by leveraging a new, smaller RCF. The longer-term strategic move is to dismantle the TWM/LCFS structure. I remain a patient investor in TWM and LCFS.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
