Tell me if you're heard this story before: a Master Limited Partnership that has been paying out far more in distributions than prudent gets itself into trouble when a Black Swan event (COVID) happens and has to drastically cut distributions and sell a portion of its assets. As a result, the unit price is decimated, leaving current unitholders hopelessly underwater and swearing they'll never touch this or any other MLP again. Sound familiar?

Genesis Energy (NYSE:GEL ) certainly fits this description, and its unit price is significantly below where it was pre-COVID despite EBITDA fully recovering and the company issuing bullish guidance for 2023. This is providing a compelling opportunity as the company owns extremely valuable assets and is in the middle of a turnaround that the market is not yet giving it credit for. Solar Energy Street Light

As is normal with my writing, I'm not going to spend pages repeating what is in the investor deck. There are many articles that dive deeper into the company's background and history, and I encourage you to read both them and the investor deck, which is very detailed, before considering an investment.

Genesis Segment EBITDA (Genesis Investor Presentation)

I'm going to focus on Genesis' two main business that will drive the valuation

Both of these businesses are performing well and growing, and have a significant number of catalysts over the next 18-24 months which I believe will result in Genesis rerating.

Genesis Energy has an Enterprise Valuation of roughly $5 billion, of which $4 billion is made up of debt and preferred equity.

Genesis Capital Structure (Genesis Investor Presentation)

The level of debt is what adds risk to this investment, but is also part of the reason the unit price is so low. The company is deleveraging quickly by growing EBITDA and has called out deleveraging as a corporate priority. Insiders, which own a significant amount of units, likely also realize this is a big factor in the current low valuation, along with the much smaller distribution compared to historic levels.

EBITDA has grown rapidly this year, and as a result leverage ratios have improved and are down from over 5x to 4.2x in the last quarter.

Genesis Debt Schedule (Genesis Investor Presentation)

Showing a focus on debt levels, Genesis has even been quietly repurchasing some of its 2027 Senior Notes in the open market when these issues have traded at a discount.

Genesis Energy Debt Schedule (GEL Q3-22 10-Q)

In addition to the debt, there is a significant amount of convertible preferreds outstanding.

Genesis Preferred Equity (Genesis Energy Investor Presentation)

The amount of interest Genesis pays is certainly the most concerning part of this investment, but it is rapidly coming under control by two businesses that I believe have extremely bright futures.

2022 was a year where Genesis paid a small distribution while retaining most FCF to pursue two major growth projects

I expect 2023 will be a year similar to 2022 in which FCF will be used to finish funding these projects.

In 2024 and beyond, Genesis will have ample FCF (I will cover in detail below) which I believe they will use to rapidly deleverage and increase the distribution, which could lead to a rerating of the units.

I'm bullish on the future of oil in general, and Gulf of Mexico offshore oil in particular, as the economics become increasingly compelling as compared to shale. While shale oil offers far faster time to production, breakeven prices continue to drift higher due to a combination of less well productivity and an increase in material and labor costs.

Share Breakevens (JP Morgan estimates)

While Gulf of Mexico offshore production has lots of its own challenges, the breakeven oil prices offering compelling economics for new developments, especially projects that reuse existing infrastructure. In this article in the Journal of Petroleum Engineering, Shell estimated breakeven costs under $35/bbl for medium sized floaters, like the Independence Hub to be used in the Salamanca development project.

Volumes in Genesis's two major GoM pipelines, CHOPS and Poseidon, have grown decently when you consider there were two major oil crashes in this timeline.

Genesis Offshore Pipeline Volumes (Genesis Investor Presentation)

Both pipelines have significant spare capacity, which if/when is contracted, results in FCF for Genesis without having to spend much additional money.

Genesis Offshore Pipeline Volumes (Genesis Investor Presentation)

The positive news is that a significant amount of this capacity is due to be filled over the next two years.

Genesis Offshore Pipeline Key Events (Genesis Investor Presentation)

Beyond these already sanctioned projects, Genesis remains "in active discussions" with the operators of multiple infilled subsea and/or secondary recovery development opportunities, representing upwards of 200,000 barrels of oil per day in the aggregate that can turn to production over the next 2 to 4 years."

I believe in the next 3-4 years, these pipelines all become fully filled.

Soda Ash, generally viewed as a boring yet profitable business, is set to accelerate in the coming years partly as a result of green transition, as Lithium Carbonate requires significant amounts of Soda Ash. SA Author Michael Boyd wrote a compelling case for this 18 months which seems to be playing out judging by the strength in the price of Soda Ash.

There are some other markers to the value of this business. During the Q4-2021 Conference Call, CEO Grant Sims said

During the fourth quarter, we saw Sisecam, a multinational glass and chemicals manufacturer out of Europe, acquired a controlling stake in one of our neighbors in Green River, Wyoming. The consideration paid implied a transaction value of roughly $530 per ton of existing production capacity. This recent data point if applied to our fully expanded 4.8 million tons of production capacity would imply a valuation of over $2.5 billion for our soda ash business by itself.

Since then, Soda Ash prices have increased significantly. If this sale happened today, I would expect it to be closer to a $3-3.5 billion deal. At a $3 billion valuation for this business, Genesis could sell it and be nearly debt free.

2022 Soda Ash Pricing (Genesis Q3-22 10-Q)

Looking at this another way, this segment did $219 million in segment margin for the first 9 months of this year when manufacturing (namely auto, a major user of glass) was still constrained from the supply chain crisis. Annualizing this puts the business near $300 million, and the company has guided to 2023 pricing being above 2022.

The Westvaco facility produces 3.5 million tons of soda ash; Granger will add another 1.3 million tons. The Alkali business constitutes 75-80% of this segment's revenues. With Granger, this segment could do $350-400 million in futures years if pricing holds near current levels.

Taking the lower end of that number and assigning a conservative 10x EBITDA multiple, this segment alone could be valued at $3.5 billion.

Genesis has guided to a "mid $700 million" EBITDA guide for 2023 already. This likely includes half of normal run rate for BP's Argos, which is slated to come on "mid year", and half a year of Granger expansion. EBITDA in this range will yield free cash flow of ~$300 million, most of which will be used to internally fund the construction of SYNC pipeline and expand the CHOPS pipeline.

If we look ahead to 2024, adjusted EBITDA will likely be in the $825 million range with a full year's worth of Argos and Granger, with free cash flow nearer to $400 million. At this point, I expect growth capital needs to be around $100 million to finish SYNC and the CHOPS expansion, leaving $300 million over to reduce debt or increase the distribution. We'll likely see a combination of both.

In 2025, Genesis will add $100-125+ million from Shenandoah and Salamanca. Using the lower end to be conservative, we should see EBITDA of at least $925 million.

From the $925 million in EBITDA, we subtract

That leaves $500 million for common unit holders. With a current common unit market value of $1.1 billion, that's nearly a 50% DCF yield at today's price. Genesis could restore the distribution to $2/unit, and still have over $250 million left over to reduce debt, repurchase units or invest in high ROI projects.

In this scenario, I believe units will at least double to $20, and could go near $30 or higher if additional offshore projects are added at low cost.

I've discussed seasonality with MLPs before. Many investors are hesitant to open a K-1 position late in the year, and prefer to open them early in the next tax year. Considering Genesis was well above $20/unit even in 2019, other investors likely have tax losses they can harvest, even considering the depreciation add-backs.

I think this year-end has been especially nasty for MLPs because of an IRS change that beginning in 2023 that will require brokers to withhold 10% of gross proceeds from sales of PTP securities and certain distributions by PTPs for any foreign holders. I even read one foreign investor complain that his brokerage/custodian is forcing him to transfer or sell the PTP he holds!

This could explain why MLP's like Genesis, Energy Transfer (ET) and Enterprise Products Partners (EPD) have underperformed pipeline C-Corps like Williams (WMB) and Kinder Morgan (KMI) over the past 2 months (especially in the case of KMI, which I think gave pretty weak guidance for 2023.)

Genesis has had a 2022 that has frustrate even the biggest bulls.

Back in 2018, Genesis unit price was more than double the current price despite having a full turn higher debt and lower EBITDA. Why? The higher distribution, of course!

Genesis EBITDA (Genesis Investor Presentation, Authors Calculations)

This year has been mostly all good news, but the unit price has not reacted.

So after 2 very significant EBITDA raises, a healthy guide for FY23, a significant value added takeaway project announced (albeit with a significant capital spend requirement), one of the two major GoM fields (Kings Quay) coming online with Agros/Mad Dog 2 coming soon, Granger about to reopen into a strong soda ash market, and the unit price is down 20% from the start of the year?

I think this is a mispricing which will correct itself early in 2023. I expect Genesis to report a strong Q4 and units re-rate back above $12 early next year and go higher from there. I believe a total return triple inside of 2 years of a very real possibility.

Best of luck to all in 2023 and thank you all for reading.

This article was written by

thin film photovoltaic modules Disclosure: I/we have a beneficial long position in the shares of GEL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.