Incitec Pivot Ltd T.IPL

RE:Sooooo...What's Going on?

[SargeX]

Hey Fantome

Beauty of a post (got my thumbs up).

My wife & I are long term retiree holders (Mar, 2010) and have always really liked the IPL management. We were a little nervous about them doing Heartland on their own instead of getting a partner but who could have seen this,

Anyway, my gut feel is 50% cut or complete suspension of the divy. It will eventually come back but I think it would be a prudent move.

Coincidentally, I just posted a comment on the ENB board about Keyera's news release from this morning where they said they are in good shape and how it'd be nice if other midstreamers gave an update as well.

Here's the link.

https://www.keyera.com/titanweb/keyera/webcms.nsf/AllDocs/423A20177C349ECD8725838400369B9B?OpenDocument#.Xm_FOahKiWs

Ciao
  Sarge

Fantome wrote: A lot of people are scratching their heads about why the SP has fallen off a cliff and are making all kinds of SP forecasts and discussing entry points...

What are the "Grownups" seeing that most don't see?

The answer lies in the business segment of IPL called natural gas processing.  This segment of the business in 2019 accounted for almost 30% of total revenue.

What is natural gas processing anyway?

Basically it is a process that takes raw natural gas and splits it into its component parts...things like propane and butane..also known as NGLs.  The FRAC spread is the difference in the price of the raw natural gas and the price of NGLs.  Obviously the higher the spread the greater the profit from doing this.

As a general rule (yes..a bit of an oversimplification)...NGL pricing closely follows the oil price.  natural gas prices on the otherhand  are derermined by the market supply and demand for natural gas for such things a home heating for example and so it takes a different path.

Here's where it gets interesting...

When the oil prices recently cratered due to the price war between the Saudis and the Russians...the price of natural gas did not fall by as much since it is a separate market and not reliant on the spat between the Saudis and the Russians.

This in turn means that the FRAC spread was likely significantly lowered,  The implication of this is that the profits from this approximately 30% of IPL revenues will much lower for as long as the price war continues.

The questions then become...

How much is this impact and how long will it last?

Will this impact be large enough to put the dividend in jeopardy if the payout ratio climbs above 100%?

When you superimpose these questions onto the large capital requirements for the rest of Heartland you end up with additional questions..uncertainty.... and risk

Right now it is hard to know the answers to these questions until we see the next Q report and even then it be a partial impact since the problems started mid quarter....so the real answers might go out to the 2Q report which we won't see until July.

IMO... to buy now..without answers to these fundamental questions is bit like shooting in the dark and hoping to hit something

What can the company do to address this issue?

The simplest thing would be to issue a PR which talks about the impact (if any) of the cratering of the oil price on the FRAC speads and if there is a marerial impact then provide revised guidance for 2020.

If they don't then the usual scenario will be for the price to keep getting bid down due to the risk premium.

Comments as always appreiciated.