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  1. Home
  2. / Investing

CorEnergy Takes Important Step in Deleveraging

However, the preferreds are no longer 'money good.' So a completely new 'distressed company' calculus has taken over.
By JIM COLLINS
May 25, 2023 | 01:15 PM EDT
Stocks quotes in this article: NVDA, CORR-A, CORR, SR, NS, NS-A, NS-C, NSS

Well, they did it. They executed on their plan, took advantage of a strong end market and at one point, their common stock had risen 27% this morning. No, I am not talking about Nvidia (NVDA) . I had no position in NVDA going into its earnings report, but kudos to Jensen Huang and his team for exciting Wall Street.

My firm and my clients do have a position however, in (CORR-A) , the preferred shares issued by CorEnergy Infrastructure Trust (CORR) . This morning, CORR announced an agreement to sell its Missouri natural gas assets for approximately $175 million ($165 million net of taxes and fees) to Missouri natgas utility giant Spire (SR) .

Both management teams indicated a 3Q23 closing for the deal in press releases this morning. When the deal closes, the wolf will, it would seem, exit his place of honor at CorEnergy's door.

CORR management noted that ~$100 million of the deal proceeds will be used to fully pay off CORR's bank debt, which is held via a revolver and term loan guaranteed by its operating entity, Crimson MIdstream amd which was set to mature in 1H24. Both those facilities cost CORR more than 9% in the current interest rate environment.

That still leaves ~$65 million left over, a portion of which I believe will be used to pay down some of CORR's $110 million tranche of 5.875% convertible notes, which mature in 2025.

There is still one more debt to be paid, though, quite literally for CORR. As I have noted previously in my Real Money column, on February 6th, which made for an unhappy birthday for me, CORR suspended dividend payments on its common and preferred shares.

Thus the CORR-A preferreds are no longer "money good." So a completely new "distressed company" calculus has taken over. I have not sold a single share of CORR-A, but it has required extreme patience on my part.

The burning question: when will CORR be able to resume preferred dividend payments on CORR-A? Those payments are cumulative, so CORR has to accrue for them at a rate of $2.4 million per quarter.

CORR-A's next dividend payment is due next week, on May 31st, and obviously that is not going to happen. Management's mantra throughout this whole ordeal has been "we will sell the natgas assets to fix looming maturity issues, but the cash flow to pay the dividends will have to come from its California crude oil pipeline assets." Those assets obviously were not included in today's announced divestiture.

That's where the story gets complicated. CORR's Crimson Midstream entity operates regulated pipelines in California. Through a combination of lower volumes and the cost inflation seemingly hitting every company these days, returns on those pipelines have dwindled. Thus, CORR has filed extremely aggressive rate increase requests -- CORR is asking for a 107% toll increase on its KLM pipeline, for instance -- with the California Public Utilities Commission to recoup those costs and get returns back to acceptable levels

California has abundant crude oil resources in the San Joaquin Valley, centered in and around Kern County. The Bakersfield area drove California's property for many decades including for the Getty family, who were notable patrons of a young Gavin Newsom, now California's hair gel-loving governor

But, with ESG and climate hysteria rife in the Golden State in 2023, things are different for the California E&P industry. But that may be the silver bullet here.

CORR has had trouble finding sufficient crude oil volumes to fill its Crimson Modsteam system, but don't forget that oil pipelines can carry other liquids. So, CORR is sitting on miles and miles of pipelines that could be used as parts of carbon capture and sequestration systems, a potential CORR management alluded to in its press release this morning.

Also, like ExCap's other, and larger, pipeline preferred holding, NuStar Energy (NS) (ExCap owns the preferreds (NS-A) , (NS-C) and (NSS) ,) CorEnergy could use some of its California pipes to carry more environmentally friendly fluids, such as biodiesel, ethanol or even "sustainable aviation fuels," all of which are highlighted by NuStar as fuels it currently carries on its own California pipeline network.

Bottom line: CORR management did what they said they would. They exceeded estimates (my estimate was a range of $125-$150 million) for divestiture proceeds from the Missouri natgas assets. If this deal closes, CORR will once again have a workable balance sheet. Period.

That said, CorEnergy will not leave the ranks of "distressed companies' ' until it resumes its preferred dividend payments. That move would necessarily include "catching up" on the two quarterly payments that have been skipped in 2023.

CORR-A has "jumped" back to 33 cents on the dollar in today's trading, but the NuStar preferreds trade at or above their $25/share par values. There is still work to be done by CorEnergy management. I hope they continue to deliver. 

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Jim Collins' firm owned CORR, CORR-A. NS-A, NS-C and NSS.

TAGS: Investing | Preferred Stocks | Stocks | Trading | Energy | Natural Gas

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