Niska Gas Storage Partners LLC (NYSE: NKA) at one time was a great way for investors to play the natural gas market.
The company is designed to pay back a high percentage of its cash flow, as its stock pays a $1.40 dividend that equates to a whopping 12% yield.
Unfortunately that won't be the case much longer. Niska's cash flow has stalled, and the company doesn't expect to generate enough cash in this fiscal year to maintain its dividend.
The problem simply is that the price for natural gas currently is cheap and it won't be headed higher anytime soon.
You see, to cover its basic costs, Niska needs the price difference, or spread, between current natural gas prices and January future prices to be about $1.00. Those spreads right now are around 47 cents – quite a fall from the January 2010 spreads of $1.50.
"[W]e anticipate weaker financial results of the full fiscal year ending March 3, 2012 due to continued deterioration in market conditions," Interim Chief Executive Officer Simon Dupéré told investors Nov. 3. "[W]e expect low seasonal storage spreads, combined with reduced volatility, to have a more pronounced negative impact on our financial results through the third and fourth quarters."
The stock is down 45% so far this year. It could rise again, when natural gas prices increase and improve the cost of storage – but that doesn't look like it's going to happen in the near-term.
Still, with the share price so low, it's not an ideal time for investors who are long on the stock to sell it.
That's why investors should hold Niska Gas Storage Partners LLC (**) – until U.S. natural gas prices rise again, making storage business models more attractive.
Natural Gas Storage a Tough Business – For Now
The United States has the largest natural gas storage facilities in the world. This allows it to easily capture cheap natural gas produced in the summer and store it for the peak winter months, when increased demand exceeds production and prices climb.
Niska Gas Partners provides over 204 billion cubic feet (bcf) of storage facilities, with an estimated additional 12 bcf of future storage being brought online in the near term.
But natural gas storage investments aren't very profitable – right now.
New natural gas production from unconventional shale sources has kept supply meeting demand. This production increase has dampened prices as well as price volatility.
While U.S. natural gas prices have collapsed, liquefied natural gas (LNG) is still trading internationally at prices closer to crude oil.
The United States has been changing its natural gas market to profit from LNG. It's been building LNG import facilities so global natural gas producers can ship their surplus to the U.S. terminals.
The difference between U.S. natural gas prices and internationally-sourced LNG will start to tighten in 2015 when the United States starts importing LNG, ending the period of extremely cheap U.S. natural gas.
That's when Niska could again be a profitable investment. But for now, the company is struggling.
Niska Gas Storage Partners is a "Hold"
Niska revised downward its estimates of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for its fiscal year 2012 to $120 million to $130 million and net income to $3 million to $13 million. The company in August had estimated adjusted EBITDA of $145 million and net income of $27 million.
Niska does not have the proper capitalization to maintain its current business model more than another year or two before it has to make some hard decisions about its long-term rate of distributions. It cannot maintain its current model going forward without a change in the fundamentals or help from its majority owners.
The company currently estimates it will only generate 70% of its needed cash flow this fiscal year to maintain its dividend rate, and will likely chop its payout rate significantly.
Niska's bad fortune in September got it removed from the Alerian MLP Index, a group of the 50 most prominent energy MLPs, adding to near-term stock weakness.
Its stock closed Friday down 3.87% at $10.93.
Niska's management does not expect to generate the necessary cash flow to maintain its dividend yield. With U.S. natural gas prices likely to stay low, the company does not have a profitable near-term outlook.
If you are long on this investment, I would suggest holding at this point until a seasonal boost – even if it's small – in natural gas could let you sell these shares at a higher price.
The extremely high dividend yield can't continue, but while it does, you can use it to pay down the cost basis on your investment.
(**) Special Note of Disclosure: Jack Barnes has no interest in Niska Gas Storage Partners LLC (NYSE: NKA).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed The Mosaic Co. (NYSE: MOS).
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