Niska Gas Could Burn Brightly, Despite Weak Debut

It's been a tough few days for initial public offerings. Chinese energy producer MIE Holdings Corp postponed its deal Wednesday. And numerous companies worldwide have canceled or delayed IPOs because of recent market volatility.

Niska Gas Storage Partners LLC (NKA), the first U.S. IPO since the market plunge last week, had a rocky debut. With a price range of $20 to $22, the company got its deal done at $20.50 (selling 17.5 million limited liability membership units). And on its first day of trading Wednesday, the shares fell 6.8%.

Drilling Down on Niska

However, given the strength of Niska, the current valuation looks attractive, especially in light of its strong cash-flow generation.

Niska owns and operates natural gas storage assets. The company is the largest independent operator in its industry and has capacity of roughly 185.5 billion cubic feet. Its facilities in Alberta, Canada; northern California; and the Salt Plains of Oklahoma are strategically located for optimal storage and connections to key pipelines. As a result, customers can easily deal with supply and demand imbalances.

Furthermore, Niska has developed sophisticated engineering techniques for its proven reservoirs. The upshot is that the company is able to get more and more storage capacity at cost-effective levels.

Finally, Niska has high barriers to entry. It's extremely difficult to find unexploited reservoirs near pipelines and natural gas supply sources. And the costs of developing and marketing facilities is also substantial.

Stable Operator

Because of its hedging activities and unrealized losses, revenues can be volatile for Niska. For example, during the nine months ended Dec. 31 2009, there was a 29% drop to $150 million. Yet, the key factor is EBITDA, which came to $145.7 million during this period of time.

This means Niska has the ability to pay out a juicy dividend, which comes to roughly 7.3% (the minimum cash distribution is $1.40 per year). In today's low-yield environment, this is certainly appealing.

Interestingly enough, Niska is similar to PAA Natural Gas Storage L.P. (PNG), which went public last month. PNG is up 9.4% from its IPO and has a dividend yield of 5.8% (based on its minimum dividend of $1.35 per year). Thus, in the case of Niska, there may be some headroom for the stock, while still providing investors strong current income.