Drop Downs Should Prove Immediately Accretive to Cash Flow for DCP Midstream Partners LP

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Drop Downs Should Prove Immediately Accretive to Cash Flow for DCP Midstream Partners LP

By: Roger Conrad

Rising production from the nation’s emerging shale oil and gas playscontinues to drive demand for expanded takeaway capacity. Thus far, midstream MLPs have pursued smart growth by inking contracts and commitments from major customers prior to building new assets and financing these projects with inexpensive equity and debt capital. This conservative approach ensures solid returns on cash flow and has fueled robust distribution growth in recent years.

Bearish investors worry that the upsurge in domestic energy production, coupled with a recession in Europe and a weak global economy, will constrain commodity prices. In such an environment, producers would likely scale back drilling activity, weighing on demand for midstream assets in certain basins.

However, I’ve yet to see signs that this scenario is playing out. For example, Enterprise Products Partners (NYSE: EPD) on June 20 announced plans to construct one of the world’s largest propane dehydrogenation units on the Texas Gulf Coast. The new facility is supported by long-term, fee-based contracts executed with companies that have investment-grade credit ratings. Management expects the plant to come onstream in the third quarter of 2015.

Units of DCP Midstream Partners LP (NYSE: DPM) have given up about 7.9 percent since May 1, reflecting concerns about the recent decline in NGL prices. Nevertheless, management has pursued a number of growth opportunities that should boost the firm’s distributable cash flow and offset the firm’s exposure to energy prices.

Not only has DCP Midstream Partners expanded its gas processing capacity in east Texas that serves the Eagle Ford Shale, but the firm has also formed a joint venture with Anadarko Petroleum Corp (NYSE: APC) and Enterprise Products Partners to build a 435-mile NGLs pipeline running from Colorado to Texas.

The publicly traded partnership’s general partner also recently dropped down minority interests in two non-operated fractionation facilities in Mont Belvieu, Texas, for $200 million.

Management expects the deal to be immediately accretive to cash flow and reaffirmed the goal of growing the firm’s distribution by 6 percent to 8 percent in 2012. For more MLP picks, check out my Best MLP Investments Report.