Hey Subscriber,

This is a picture of the bag smack 2-3 dozen times with a 9 iron every day AFTER the market close. I do it to work off the tension and frustration AFTER I run or bike or do something healthy.

I show this simply because I don't know about you, but I have been picking stocks and making up/down business cycle calls for 20+ years (so far so good) and I will be the first one to tell you
I have NEVER seen a more complicated armada of negative/positive market-moving financial and political and supply chain and geopolitical and inflationary warships all launching macro and microeconomic missiles into the real economy and the stock market ALL AT THE SAME TIME.

To reiterate my missive on Friday, while all is not well in Stock Marketland, this stock market correction (which we still see as at most a 10% ish correction down to SP 4100 ish and then a retest of course) had little to do with the China Evergrande debacle. EvergrandeGate turned out to be exactly what we assumed it would be--an opportunity to take a boatload of the 10 years of stock market profits made in a year and build some cash to reinvest.

Nasdaq futures are up this morning, and the Fed "put" (i.e., the concept that the Fed's desire to maintain the goods and services demand creating "wealth effect" rolling) is alive and kicking . . . so as long as the Fed has our back, where is the worry?

The Key Point About the 2021-2022 US Stock Market You Should NEVER Forget: IF you add ALL the world Central Banks together, the world's money supply to buy stuff and stocks and bonds is still exponentially exploding. All in, the major central banks are STILL buying $300 BILLION in assets PER MONTH.

And so far, the long stocks case we have made and followed is (with the cash we had on hand by going to cash PRE the 41-day pandemic bear market) has been a sorta Ockham's Razor approach--that the simplest, most obvious conclusion as to how to invest in this environment is always buy the dips because $300 billion per MONTH of reserve bank monetary stimulus is the real "marginal buyer" of financial assets and it HAS TO GO somewhere.

Forget the Meme Stocks or Robinhooders buying $75 of Tesla--they are pipsqueaks compared to $300 billion a month of new cash money sloshing into the capital markets as the real marginal buyer of stocks.

In short, with $300 BILLION in financial assets being turned into investable/spendable cash per month, there might be a shit ton of worrisome cross currents and economy-killing risks (see 5% inflation, The White House and Congress), but at the end of the day, instead of a flashing strobe light of blinding new market risks, there is really just one number that sums up the plethora of risks and where the market actually is and where it goes from here.

$300 billion of Central Bank liquidity per MONTH. Based on the end of August data, the EU/Japan/US Central bank assets surged to $25 TRILLION from $16.2 trillion before the pandemic--a 58% yearly growth rate.

And all that is before $2-$3 trillion of new fiscal spending hits the US economy in 2022.

IF you really think about it (and I usually come to these epiphanies smashing a 7-iron into the bag pictured above!) is it any wonder that with negative nominal 10-year rates in the EU and Japan (and negative 5% ish REAL 10year rates counting 3-4% inflation rates) that a large amount of that cash swishing around institutional investors went into positive nominal rate US bonds (taking 10-year rates down to 1.15% and lower for almost a year) and US stocks up over 110% since the April 5th, 2020 bottom?

Conclusion: This once-in-many-generations everything rally was created primarily by the US Fed, and it's the Fed's to take away. And let's be real on the politics; my 24 years in DC and interviewing dozens of Senators and Congressmen and women taught me that despite all the Kabuki theatre by the Dems and GOP on defaulting on US debt, "thar is an election year next year--we shant ffff up our chances to keep or get power, shall we?"

Thus the silver lining for a market that has inferred and interpreted bad news as good news in the context of a real 10% ish correction is: 1) Valuations look stretched only if interest rates are going to normalize in the next couple of years, meaning that investors may be calling the bluff on the Fed’s desire and their ability to meaningfully lift rates from real (after inflation) negative 2-3 percent ish.

That’s a risky bet, given the current inflation picture. You don't need a doctorate in economics to understand when rising demand meets to little supply (ordered any furniture or semiconductors lately?) the result is price inflation. If there really are long term structural changes in the supply chains turn out to be you know--structural changes--we (and consumers) should not expect the consequences--higher prices on the goods we buy at a "store" (in my house Amazon)-- to be "transitory".

The good news is our high yield Ultra Income portfolio does EXTREMELY well in an above 3% inflationary world (transitory or not).

And again, we have the Fed on our side. While consumer price inflation might have cooled a touch in August, the Fed has already tried to steer the inflation narrative away from hard metrics like the consumer price index and toward softer ones like inflation expectations. The New York Fed itself recently said that three-year inflation expectations rose to 4%, a record high that is double the Fed’s target rate. The development suggests that consumers expect inflation to stick around, thus making it more likely it does.

Companies like paint maker Sherman Williams and Nike (which both recently cut third-quarter sales guidance) are meanwhile warning of margin pressure as input prices keep rising, prompting analysts to cut S&P 500 earnings forecasts for the quarter.

As inflation remains elevated, strategists say the Fed will indeed raise rates—if not soon. But IF the market does ultimately correct in anticipation of tighter monetary policy, the Fed will pause or at the very least slow its efforts. Rightfully or wrongly, to the Fed in an economy with 70% of GDP consumer consumption, the wealth effect is a crucially important part of monetary policy.

Key point: it is an indisputable fact that consumers with financial assets and discretionary income spend more as their assets grow.

Thus Central bankers don’t have much tolerance for market downturns and IF the market corrects 10%+ to our 4100 downward target, VOILA Ocham's Rasor prevails--Fed steps in and helps the market all over again.

We are paying attention to the squadron of market risk events coming from Washington and stickier than believed inflation at 4-5% because market downturns create buying opportunities.

But for now (and until it is proven it's not) the Fed put is real, and at least for now, it still reigns supreme in protecting and preserving the bull market for stocks.

HOWEVER-- our allocation of 60% to high-income energy-related MLPs and ETFs is keeping our total 2021 returns 3-to-1 higher than the QQQ/SP 500, and I think we have a dandy new play that is both high yield and up to 3X upside...

Genesis Energy (GEL) The Perfect MLP For 2022 With 2-3X Upside Potential and Doubling (or triplling) It's 6.6% Yield

Action to Take: Buy Under $12 with $36 Target

I love a great business turnaround story--especially in critical energy infrastructure which also gives me unique exposure the rapidly growing EV economy (PS--I test drove a $168,000 Lucid yesterday--their plant is here in Arizona...OMG...it makes a rattle and roll Tesla look like a Model T).

The MLP is Genesis Energy (GEL). I met the GEL founders years ago at a speech I was doing for one of there big offshore customers Murphy Oil--but those dudes are gone (never met a loan they turned down).

Here are the impressive and exciting key parts of why we can truly foreast a $32-$36 target valuation over the next few years of its balance sheet turnaround:

Genesis Energy is currently over-levered small-cap midstream MLP that cut its distribution last year from $2.20/unit to $0.60/unit, and the stock collapsed amid the onset of Covid19.
However, the outlook for Genesis is much brighter due to an easily reached ~1/3 increase in EBITDA in the next 2-3 years with minimal capital investment (they have a LOT of excess capacity to fill).
The increase in EBITDA comes from already contracted incremental volumes on Genesis pipelines as well as expansion of capacity for a key product used in lithium ion battery production.
Genesis Energy trades very cheap at just 7x 2022E EBITDA and 6.5x 2023E EBITDA. Assuming just a 9x 2023E EBITDA valuation, Genesis units could more than double.
The Kicker: Just like buying USAC last April at $5 a share, our expected increase in EBITDA means not only a much stronger balance sheet but also a likely tripling in distributions/unit implying a yield to current stock price of over 20% by YE2023.

I talked with the current CFO and he gave me the sad story of the over-leveraged Genesis Energy and the way the are already on their way to get their stock out of the MLP pentalty box. I also am using some great research from Principal Street Advisors here that we subscribe to.

Basically Genesis Energy, LP is a $billion midstream master limited partnership (MLP) that participates in four businesses:

(1) pipeline transportation in the deepwater of the Gulf of Mexico (which had production halted due to IDA--now 80% back to normal as hurricane season winds down)
(2) producer and marketer of US natural soda ash and sodium hydrosulfide (NaHS) used to convert raw lithium into EV battery grade lithium carbonate
(3) Onshore terminals and pipelines serving US refineries
(4) Marine transportation focused on transporting asphalt and refined products.

The distribution increased from an annual rate of $0.20/unit April 30, 2003 and peaked at $2.89/unit with the July 31, 2017 declaration--a CAGR in excess of ~20%.

To pay for additional debt, the distribution was reduced to an annual rate of $2.00/unit just 3 months later. The distribution increased over the next 5 quarters, reaching $2.20/unit annualized with the declaration on January 31, 2019.

The good news is the $2.20 distribution stayed for 4 quarters before being reduced to the current rate of $0.60/unit annualized beginning with the declaration on May 1, 2020. The reduction in 2017 was over cost of capital concerns and lack of investor reward for such a high distribution as the yield at the time was approximately 12% and the reduction brought the yield down to 8.3%.

Excess balance sheet leverage has been an issue for the partnership over many years as shown in the following chart.

Figure 1: Genesis Net Debt/EBITDA History

Source: Company reports, Principal Street Advsiors

Investment Thesis - EBITDA is likely to grow significantly with minimal capex required from Genesis, providing a catalyst for upside re-rating in GEL units

The history of GEL's excess leverage is getting ready to change. Based on announced contracts and the associated EBITDA that is expected to come with them, we expect the GEL balance sheet to de-lever rapidly as shown below.

Figure 2: Genesis Energy Net Debt/EBITDA Forecast

Source: Company reports, Principal Street estimates

We forecast GEL's Adjusted EBITDA to rise from ~$620mm in 2021, below the low end of its previously disclosed guidance range of $630-$660mm, to over $800mm in 2024, an increase of ~30%. The key growth areas for Genesis are from its Offshore pipelines segment and the soda ash business in its Minerals segment.

Together, these segments contribute approximately 3/4 of total segment margin and are expected to comprise the vast majority of the segment margin growth in the coming years.

Offshore Pipelines Business EBITDA growth without spending capex because there is plenty of spare capacity

The majority of the increase in EBITDA is expected to come from the Genesis Offshore Pipelines segment. Genesis has contracted with Murphy Oil (MUR) to transport 80,000 bpd from its King's Quay floating production system that will be moored in the Green Canyon area in the Gulf of Mexico (GOM) and 140,000 bpd with British Petroleum (BP) from its Argos/Mad Dog 2 development

Source: Murphy Oil Corporation

Murphy entered into a contract with Genesis to transport the entire 80,000 bpd output of crude oil and natural gas (up to 100mmcf/d expected) in December 2019. The floating production system, built in South Korea, departed at the end of 2Q21 with arrival to its shore base in the Gulf of Mexico expected by the end of 3Q21. Installation is set for 4Q21 to 1H2022. Once installed, the crude oil is to be transported on GEL's Cameron Highway Oil Pipeline System (CHOPS) and GEL's Poseidon Oil Pipeline System via the Shenzi lateral.

BP's Argos platform is to be placed at the Mad Dog Phase 2 location about 6 miles SW of the existing Mad Dog platform, which is located in 4,500 feet of water approximately 190 miles south of New Orleans. The platform is a semi-submersible floating production platform that is expected to deliver 140,000 gross barrels of crude oil/day from 14 production wells. The project is on schedule for startup during 2Q 2022

The Argos project is 100% dedicated to CHOPS which has ~300,000 bpd of spare capacity. As mentioned, the King Quay production is set to flow oil on both Poseidon and CHOPS. Combined, the two pipeline systems have 850,000 bpd of capacity. During 2Q21 ~470,000 bpd moved across the Genesis pipelines for a combined capacity utilization of 55% and indicative of ~380,000 bpd of spare capacity.

Figure 5: Genesis Energy Available Capacity on Offshore Pipelines

Source: Genesis Energy investor presentation.

Volumes from Argos and King Quay are expected to fully ramp over 6-9 months and at full production are expected to generate approximately $25mm/Q or $100mm/year in incremental gross margin and EBITDA per GEL management guidance. Full realization of the $25/mm/Q is expected to be achieved by 4Q22 per management commentary on the 2Q21 earnings conference call. Because of the substantial spare capacity, nearly all the revenue from the two projects flows to GEL's EBITDA.

Key Point: The three developments represent up to an additional ~200,000 barrels per day of incremental production that could wind up on Genesis pipelines. Final investment decisions from the producers behind these potential projects are expected later this year. In our model for 2025 and beyond, we assume a little over half this volume ends up on Genesis pipelines by the end of 2027 given the lack of alternatives to the Genesis pipelines in the deepwater of the Gulf of Mexico

Incremental EBITDA contributions from the Soda Ash Business, a key component for lithium carbonite which is used for batteries for electric vehicles

Source: Genesis Alkali

Soda ash is a key component used in the manufacture of glass (~1/2 of global demand) as well as lithium, a key component of lithium-ion batteries.

Figure 7: Soda Ash Global End Markets

Source: Genesis Energy August 2021 Investor Presentation

In 2020, the total market volume of soda ash amounted to nearly 60.3 million metric tons, down from 61.5 million metric tons in 2019 due in large part to the impact of the Covid19 global pandemic and has been growing at about 1-1.5 million metric tons per year.

Genesis is the largest North American producer of natural soda ash with 3.5mm tons/year of natural soda ash production capacity. Genesis reserves are located in the world's largest trona deposit, accounting for over 80% of the world's economically viable soda ash. Moreover, Genesis is the low-cost producer, by far. Because Genesis soda ash cost of production is ~½ of the cost to produce synthetic soda ash (~70% of world production), it has historically sold out its entire production capacity by displacing the other producers.

Global demand has been growing 2% annually but is expected to strengthen because soda ash is a key component for the production of lithium carbonate and lithium hydroxide which, in turn, are substantial constituents for producing lithium-ion batteries for battery storage and electric vehicles. In 2020, lithium constituted ~1% of global soda ash demand.

Key Point: Demand for soda ash demand for lithium production is expected to grow rapidly.

Approximately two tons of soda ash are required to create every one ton of lithium carbonate. In 2020, lithium carbonate equivalent (LCE) production was ~292,000 tons. By 2025, LCE is projected to reach 1,140,000 tons/year or ~300% increase and by 2030, industry players and analysts estimate that LCE production would reach 3,000,000 tons or 900% above current levels.

In effect, demand for soda ash from LCE production alone could lead to 2.3mm tons greater demand for soda ash by 2025- and 6-mm tons of soda ash by 2030 or ~10% of current global demand or ~2%/year from LCE production alone. This demand from LCE production would provide potential upside to the ~1.0-1.5 mm tons historical growth in demand for soda ash for its other applications and supports the thesis that the supply/demand balance in the soda ash market should continue to tighten.

In addition, growing demand for solar panels suggests that there could be additional upside in demand for soda ash coming from glass.

Genesis is constructing an expansion project that would expand its natural soda ash production capacity by 1.3mm tons/year with completion of the expansion on track for the 3Q of 2023.

Key Point: But given the exponentially rising demand for lithium carbonate, by the time the expansion is placed in service, the increase in demand for additional soda ash would be greater than the capacity expansion - or ~2.28 mm tons/year of soda ash by 2025 and 6mm tons of incremental soda ash demand by 2030.

We would expect with a tightening supply/demand dynamic in the soda ash market that there would be upside price pressure for soda ash, none of which we have included in our model. Further, we believe there would be potential for additional expansion beyond the 1.3 mm tons/year that Genesis is adding at present

Rising Cash Flow Improves the Balance Sheet and Should Facilitate Restoration of the Distribution Close to Pre-Pandemic Levels by 2H2023

With the ramping up of volumes on the offshore pipelines and the added capacity to soda ash production, we are modeling cash from operations to rise from an estimated ~$410mm in 2021, to ~$460mm in 2022 to ~$520mm by 2023, $600+mm in 2024, and over $800mm by 2025. Even if we assume contributions made to the Grainger expansion/optimization by Genesis, we are forecasting that Genesis free cash flow after paying distributions to preferred and common unitholders to be strong enough to reduce debt by ~$270mm in 2022, ~$200mm in 2023, ~$135mm in 2024 and over $300mm in 2025.

The ramp in EBITDA combined with the reduction in debt causes Net Debt/EBITDA to plunge from an estimated 5.0x at the end of 2021, to 3.1x by the end of 2024 and below 3x in 2025.
We also forecast a sharp increase in the distribution to common unitholders beginning with the 3Q23 distribution declaration as we project Net Debt/EBITDA to drop below 4.0x by 2Q23.

Because of the significant cash from operations and FCF, starting with the declaration for 3Q23, we forecast a rise in the distribution back up to $0.50/unit/Q, then rising $0.01/unit/Q for 4Q23 and then $0.02/unit/Q through at least 2027 ending at a $3.32/unit/year annualized rate in 4Q27.

Genesis Energy Historical and Forecast Distributions/Unit/Quarter

Source: Company press releases, Principal Street estimates

Valuation
The impact on valuation from the increase in EBITDA is dramatic due to the currently highly leveraged balance sheet. If we assign a 9.0x EBITDA multiple, which is nearly 1 full turn below the average of the last five years as shown in the graph below the table, we obtain a valuation of nearly $23 by the end of 2023 and $30 by the end of 2024.

The $23 valuation, if achieved by 2023, would represent more than a double from its current valuation and the $30 valuation, if achieved by 2024, would represent more than 3x where GEL stock is trading currently.

With debt leverage plunging from 5.8x currently to the mid 3x by the end of 2023 and near 3.0x by the end of 2024, ordinarily, we would expect valuation multiples to rise as financial risk/leverage falls. However, we assume no multiple expansion in our valuation. Nonetheless, assigning a 9.0x multiple of EBITDA despite a very strong mid 3x leverage on the balance sheet by the end of 2023, we obtain an estimated valuation of ~$23/share and $30 by the end of 2024.

Figure 9: Genesis Energy Valuation and Valuation Forecast

Advice: LOAD THE BOAT HERE

Sept. NL Part II: WE Make Great Profits From This Correction with Cash, Patience & Reasonable Expectations