PAA Natural Gas Storage, L.P. (PNG) appears to be overvalued by the market given current weak natural gas economics and limited potential for growth for this MLP, though the company is expected to continue its yield given the deeper pockets of its parent company, Plains All American Pipeline, L.P. (PAA), says Ethan Bellamy, Senior Analyst at Robert W. Baird & Co.
“Would we pay a 6.7% yield for something that appears to have basically bond-like characteristics and limited outlook for growth, at least in the short term? That seems a little rich to us. Down the road, there’s a chance that if private equity operators who own gas storage assets and develop those assets with the intent to ultimately sell them to an MLP like PNG, if they change their outlook and recognize that there’s been a sea-change downward in intrinsic gas storage economics, potentially that would allow PNG to do some accretive acquisitions,” Bellamy said.
Bellamy says, however, that PNG does not seem to have capitulated yet and the MLP is not a name the analyst would short, although he says other names may offer more upside.
“I would say that the market appears, in our view, to have overbid PAA Natural Gas Storage,” Bellamy said. “The natural gas storage market has been extremely disappointing. Intrinsic gas storage economics are very poor and don’t appear to be recovering any time soon. We think that PNG has the benefit of a parent that will always step up and make sure they are able to pay their distribution, so this is definitely not a name that we would short.”
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