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Actionable news in CORR: CORENERGY INFRASTRUCTURE TRUST Inc,

70% Of Tenants Are Bankrupt: Outlook For CorEnergy

Summary

With an increasing number of its tenants declaring chapter 11 bankruptcy, there is increased worry about CORR's outlook.

We dig into the plausible spectrum of outcomes for CORR's leases.

We remain bullish with much of the risk priced in.

With the recent filing of Ultra Petroleum (NYSE:UPL), 70% of CorEnergy's (NYSE:CORR) tenants are now bankrupt, specifically the following:

Grand Isle Gathering System run by Energy XXI (NASDAQ:EXXI), 37% of assets of Pinedale Liquid Gather System leased by UPL and 30% of assets of Black Bison Water treatment facility.

From a reactionary standpoint, it is easy to say CORR is screwed and sell the stock. CORR sold off when EXXI announced bankruptcy and now it is selling off again with UPL's declaration. In lieu of emotional response, let us examine the fundamental outlook for CORR.

Weak tenants are part of the business model

CORR knew its tenants were weak going into these deals as weak tenants are inherent to its business model. Through either direct loans (Black Bison) or sale leasebacks (UPL and EXXI), CORR provides financing to energy operators.

This financing is very expensive, with CORR usually getting a double-digit return on its capital. Basic financial reasoning tells us that tenants would not choose CORR as their source of capital if other options were readily available. Exxon Mobil (NYSE:XOM), for example, has access to reasonably cheap debt through either banks or the capital markets so it would not pay CORR 10% when it can pay a bank 3.5%.

Likely the reason UPL and EXXI chose to work with CORR is that bank financing was no longer available. Each of these companies was highly levered and CORR gave them the opportunity to fix their balance sheets by liquidating an asset without having to sacrifice operations of the asset. CORR is unique in this capability because as a REIT it does not, and to some extent cannot, operate energy assets. Consequently, the sale-leasebacks allowed UPL and EXXI to retain the upside of operations while freeing up a significant amount of capital.

At the time these deals were underwritten, few if any were predicting the severe crash in both oil and natural gas prices that has...


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