Solid operating results coupled with recent market weakness make several MLPs compelling long-term opportunities at these levels.
Three MLPs that I think offer particularly attractive value going into 2013 are Enterprise Transfer Partners LP (NYSE: ETP), Regency Energy Partners (NYSE: RGP) and Genesis Energy (NYSE: GEL).
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Energy Transfer Partners’ big question is still when distribution growth will resume. The most recent increase was way back in early 2008. Management has repeatedly promised a return to growth once it completes a raft of strategic moves that’s already transformed the master limited partnership into a major gas and liquids midstream company.
The lack of distribution growth has arguably been a major drag on the MLP’s unit price the past several years. But Energy Transfer’s yield is still well over 8 percent, more than three percentage points higher than the payout of midstream rival Enterprise Products Partners LP (NYSE: EPD).
My contention is a return to dividend growth would narrow that yield gap considerably, with the result of robust unit price gains for Energy Transfer.
Underlying business results are already strong enough to support such a move. The MLP earned a record USD339.5 million in distributable cash flow for the three months ended Sept. 30. That was a 27.6 percent boost over last year’s tally, and it covered the current payout by a solid 1.26-to-1 margin.
Moreover, the revenue mix is considerably more secure than it was last year. The sale of propane distribution assets to AmeriGas Partners LP (NYSE: APU) in return for equity has converted what was a seasonal enterprise with huge weather-related variations in income into a steady cash provider based on the buyer’s reliable dividend.
And the MLP has acquired numerous fee-generating assets as drop downs from its general partner Energy Transfer Equity LP’s (NYSE: ETE) purchase of the former Southern Union Group as well as from its own acquisition of Sunoco Inc.
Energy Transfer Partners is now generating the vast majority of its cash from fees that fluctuate little, if at all, with energy prices. And it’s now using its vastly increased scale to pursue new opportunities, such as the USD1.5 billion conversion of its Trunkline natural gas system to carry oil by mid-2014.
The Lone Star partnership with Regency Energy Partners continues to progress as well, expanding assets in the liquids rich Eagle Ford Shale.
For its part, Regency reported a slight increase in third-quarter cash flow as well as a small drop in distributable cash flow. It again failed to cover the distribution, which will likely once again discourage an increase when the next payment is announced in January. But management nonetheless stuck with its projection for volume and profit growth in 2013, as a series of new midstream projects come on stream.
Lone Star posted flat results from the year-earlier quarter. That was largely because of Hurricane Isaac-related downtime, however, and should be reversed as new assets start producing income. Regency anticipates spending USD380 million on the venture for all of 2012 and an additional USD120 million next year to complete projects now under development.
The rest of the USD400 million planned capital spending for next year will focus on Regency’s core gathering and processing and contract compression services. Gathering and processing (G&P) revenues are more sensitive to how energy prices affect drilling volumes than, say, income from fee-for-service pipelines. And weaker conditions are one reason for Regency’s shortfall in the third quarter.
The partnership’s nine-month cash available for distribution did cover the payout, however. Moreover, only 9 percent of cash flow is subject to commodity-price risk, Regency enjoyed a 13 percent boost in G&P volumes during the quarter and bookings for contract compression rose.
That’s pretty solid confirmation that the current distribution level is headed higher over time.
Regency’s third-quarter conference call featured one other interesting bit of information: management’s assertion that a merger between the MLP and Energy Transfer Partners is “inevitable.” The two currently share the same general partner, Energy Transfer Equity, so the most important consideration will almost certainly be the price offered Regency unitholders to complete the combination.
Management was unwilling to speculate during the call on what that price might be. But with Energy Transfer selling at a much higher price-to-book value, it’s likely that Regency will fetch at least some premium to its current price. Energy Transfer Equity currently holds 15.4 percent of Regency’s common units, in addition to the general partner interest.
Given the broad hints dropped by management about the need to “simplify” structure in the near future, a deal could take place as soon as next year. That’s enough reason to stick around Regency Energy Partners.
Meanwhile, Genesis Energy, which is the owner and operator of liquids-focused energy midstream assets continues to deliver reliably growing cash flow and distributions.
The boost to 47.25 cents per unit announced in mid-October marked the 29th consecutive quarter Genesis has raised its distribution.
And it was the 24th time over that period that the annualized rate of increase was better than 10 percent, this time a rate of 10.5 percent.
Genesis’ third-quarter “available cash before reserves”–its primary measure of profits–rose 23.8 percent to a new record of USD45.9 million.
The company benefitted from its lack of exposure to commodity prices, the return of development drilling in the offshore Gulf of Mexico and the contribution from several new projects.
Pipeline transportation was the primary driver, with margin surging 45.3 percent. Supply and Logistics operations enjoyed a 25.1 percent margin increase, and even Refinery Services were up 5.5 percent. Pipeline margins were enlarged by this year’s acquisition of Gulf of Mexico pipelines. Margin is defined as revenue plus equity from investments, less all cash expenses.
As a smaller MLP focused on projects in fast-growing regions, Genesis has plenty of options to keep moving the profit meter forward at a rapid clip. And as crude oil production continues to grow throughout North America, so will its opportunities.
The MLP enjoys strong volume growth in the Permian Basin and Eagle Ford Shale areas, both prime areas of low risk output growth. And management expertise now extends to terminals serving both rail and water traffic. Sodium hydrosulfide (NaHS) volumes also continue to grow, as the company extends its reach into the pulp and paper and mining industries.
Geographically, Genesis’ list of opportunities spans Texas, Florida, Mississippi, the Rockies and the deepwater Gulf of Mexico. And Keystone XL pipeline or no, it will begin receiving Western Canadian crude oil over its system beginning in the first quarter of 2013.
That adds up to a hard-to-beat combination of safety and long-term growth prospects. I highlight 6 more MLP investments in my free report.