Investors like MLPs because of their high yields and ever-increasing distribution payments, which is ultimately why many end up passing on Energy Transfer Partners (NYSE:ETP) -- the partnership hasn't increased its unit payout since the spring of 2008. But the Energy Transfer of 2008 is not the Energy Transfer of today, and with more than $2 billion of projects coming online between now and 2013, and nearly $1 billion more in service by 2014, is now the time to buy Energy Transfer Partners?
1. Commodity diversification
Last Friday, Energy Transfer officially closed on the Sunoco acquisition, adding 5,400 miles of oil and petroleum product pipelines to its network. This was a brilliant move, because prior to the pickup, ETP's network consisted of 24,000 miles of pipeline dedicated solely to natural gas.
Energy Transfer Partners is also making changes to its existing natural gas infrastructure so that it may serve crude markets instead. The partnership is in the process of gaining approval from the Federal Energy Regulatory Commission to convert its 770-mile Trunkline pipeline from natural gas to oil. It then wants to flip the direction of the line so that it carries crude south to Texas, instead of north to Illinois. If successful, this conversion would help grow ETP's oil footprint, further diversifying its asset base.
2. Geographic diversification
In 2009, 52% of ETP's business was dedicated to intrastate natural gas pipelines. Today, that number is down to 26%, and the overall makeup of the business is far more diversified than it was even two years ago.
Two very important acquisitions are contributing to Energy Transfer's diversification. First, the 50% stake in the 5,000 mile Citrus pipeline that ETP acquired in a dropdown from Energy Transfer Equity (NYSE:ETE) in the second quarter of this year. Florida is a quiet, yet incredibly significant player in the world of natural gas. Second only to Texas, the state generates 62% of its electricity from natural gas. ETP's pickup is a smart foray into one of the most crucial gas markets in the U.S. Kinder Morgan (NYSE:KMI) owns the other 50% stake.
Second, the Sunoco acquisition again increases Energy Transfer's diversification, this time geographically. Sunoco and Sunoco Logisitics' (NYSE:SXL) assets are highly concentrated in the northeast United States, a region where Energy Transfer had virtually no presence prior to the pickup. The Sunoco acquisition is expected to contribute 33% to ETP's future cash flow, which doesn't hurt either.
3. Market demand
You can be the most efficient, well-run company in the universe, but if no one wants your product or service, well, then what good are you? Luckily for Energy Transfer Partners, demand for midstream services is through the roof.
Energy Transfer's biggest presence is in Texas, where production numbers are hitting highs not seen since the early 1990s. The Sunoco acquisition gives Energy Transfer a stake in the northeast market, where hundreds of wells are waiting for pipeline capacity before they can be brought online.
The U.S. Geological Survey estimates that there is 84 trillion cubic feet of undiscovered, technically recoverable natural gas in both the Marcellus Shale and the Green River Basin, and 38 Tcf sitting in the Utica Shale.
Energy Transfer Partners has the majority of $3 billion in organic growth projects slated to come online by the end of this year. Timing is everything, and ETP is positioned to take advantage of this huge increase in natural gas production very, very soon.
Ultimately, many investors may want to wait until Energy Transfer Partners officially reinstates its distribution payment. There is a lot to like here right now though. The stock is down over 6% on the year, and that may provide the perfect buying opportunity for investors who think ETP is executing on its long-term game plan.
Fool contributor Aimee Duffy holds no position in any company mentioned. Click here to see her holdings and a short bio. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.
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