As Mr. French in The Departed, Ray Winstone finds himself in the position of having to decide whether Leo DiCaprio's character has the right to hit another bar patron. "I'm gonna make a ruling on this right here!"
So, as CorEnergy Infrastructure Trust brought the week off to a roaring start for ExCap by announcing that it would be suspending payments on both its common (CORR) and preferred stock (CORR-A) , which we own, I have to make a ruling on this REIT right here.
I am not selling CORR-A today, in the midst of the preferred's minor price decline of 45% today. To go from Mr. French to actual French... c'est la guerre.
Now is when tactics replace strategy. First, we know that we won't get our preferred dividend payment on 2/28, as CorEnergy is not going to make them. Those dividends will accrue, however, until such time as CorEnergy management figures out how to better manage their finances. So... without getting paid... we will wait. Selling at the bottom can be a catastrophic error. We are not doing that today.
But what are CorEnergy's problems, and can they be fixed? Well management's statement addresses the issues:
"After careful consideration, the Board agreed with management's recommendation to suspend dividends due to a combination of declining volumes and increased costs in our California systems. As a result, we filed for a 36% rate increase on our SPB line in California based on the regulated cost-of-service tariff structure."
CorEnergy is like every other company that has ever stopped paying preferred dividends. They have too much debt for their cash flows. That's basic... but, again, can it be fixed?
With the preferreds trading at about 36 cents on the dollar today, I believe the risk/reward is now tilted, slightly, toward the "yes."
Management also noted:
"Near-term debt maturities provide a transitory challenge, which will be addressed with a focus on monetizing assets and reducing total leverage."
The company's revolving credit facility -- which carries an $80 million capacity and had $68 drawn on it as of 9/3/2022 --matures on February 5, 2024. The company's 5.875% convertible notes, which represent a larger tranche than the revolver-- CORR has $116 million of converts outstanding -- don't mature until 2025.
I think this company can survive, and the thought that CORR management could be attempting to better manipulate the CPUC rate-setting process by first crying poverty and eliminating their dividends has crossed my mind. Also, the credit facility and notes contain minimum financial leverage covenants -- as virtually all debt instruments do -- and it is safe to assume that CORR fell below those metrics in 4Q, although the company's 10-Q for 3Q22 noted that it was then in compliance with all debt covenants. Balance sheets need to be managed daily! Business changes!
CORR's Crimson Pipeline system needs to be better compensated for its routes taking California's oil from where it's found, generally in Kern County near Bakersfield, to refineries that are located in the Bay Area.. Also, CORR owns a natural gas pipeline which transits Missouri and Illinois (MoGas) and that should be monetized immediately. If management is reading this, they should call me because I have plenty of friends who would buy a mid-America natgas pipeline if they could find one for sale.
But, if management is indeed reading this, they should also know that they have down a poor job of managing financial risk here. The $80 million revolving credit facility should have been swapped into fixed rate debt, before interest rates started rising.
Those are solvable problems... but it may take someone else to solve them. That does not concern me. I just want our stream of dividends on CORR-A to be resumed.
That will either take a very favorable ruling from the CPUC on the SPB subsystem of the CORR's Crimson assets (again, CORR is asking for a 36% tariff increase) or another, perhaps another, more financially-competent management team installed at CorEnergy to handle these current challenges.
I am averaging down today, and I look forward to a wild, yet obviously non-income-producing in the near-term, wild ride with CORR-A.
Sometimes, you gotta make a ruling on the spot.
