Why This High-Yielding MLP Could Outperform in 2013

Energy Transfer Partners (NYSE: ETP  ) is a master limited partnership, or MLP, with a vast portfolio of oil and gas assets throughout the country. It currently yields 7.9%, which is  notably higher than the average MLP.

While the partnership has a lot going for it, its shares have underperformed the benchmark MLP index by a wide margin over the past few years. But thanks to recent acquisitions and expansion projects, the midstream company may offer significant upside in the near term. Let's find out why.

Lackluster stock performance
Over the past three years, Energy Transfer Partners shares have posted a return of next to nothing, as compared to the benchmark Alerian MLP Index, which has returned nearly 40%.  

Meanwhile, other MLP heavyweights such as Kinder Morgan Energy Partners (NYSE: KMP  ) , Plains All American (NYSE: PAA  ) , Enterprise Products Partners (NYSE: EPD  ) , and Magellan Midstream Partners (NYSE: MMP  ) have delivered three-year returns of about 35% for Kinder Morgan, roughly 75% for Plains, around 60 % for Enterprise, and a whopping nearly 110 % for Magellan, all easily besting ETP's stock performance.

Perhaps the biggest reason for Energy Transfer Partners' lackluster stock performance is the partnership's lack of a distribution increase for almost five years; its distribution has stayed constant at an annualized $3.58 per unit since the second quarter of 2008. Going forward, however, this should change.

As the impact of numerous recent acquisitions and growth projects is felt in coming quarters, the likelihood of a distribution increase in 2013 appears much better. Let's take a closer look at some of the acquisitions and growth projects that should drive a distribution increase.

Impact of Sunoco acquisition
On Oct. 5, Energy Transfer Partners finished up its acquisition of Sunoco for approximately $2.6 billion in cash and roughly 55 million common stock units. Following the purchase, it contributed Sunoco to ETP Holdco, an entity in which it maintains a 40% equity interest, while Energy Transfer Equity (NYSE: ETE  ) , which owns Energy Transfer Partners' general partner, contributed Southern Union to ETP Holdco for a 50% equity  interest.

The Sunoco acquisition should provide major diversification benefits, allowing Energy Transfer Partners to progress from a company dealing primarily with natural gas pipelines -- a business suffering from depressed prices -- to one with greater exposure to crude oil and refined product infrastructure. The deal, which boosts the company's share of cash flow from crude and refined product to around 30%, adds some 7,900 miles of crude oil and refined product infrastructure.

Once the Sunoco acquisition starts to become accretive to earnings and cash flow, distributions should start growing again. The company is currently working on integrating Sunoco into its system and once this process is complete, Energy Transfer Partners believes it will realize "meaningful synergies."  

Growth projects
In addition to acquisition-led growth, numerous growth projects in the company's Midstream and NGL segments have either recently been completed or are slated to be completed shortly. As these projects come online, they will serve to not only diversify the company's business mix, but should also provide a significant boost to its distributable cash flow.

In its Midstream segment, two major projects -- Phase 2 of the Rich Eagle Ford Mainline and the Red River Gathering Pipeline -- were up and running in the third  quarter. And most recently, on Dec. 31, the company announced that its Karnes County processing plant went  into service.

The Karnes County facility, which has a capacity of 200 million cubic feet per day, and Phase 1 of the Jackson plant, which is scheduled for completion in the first quarter of this year, are crucial  in servicing projects in the Eagle Ford Shale and should provide a substantial boost to the partnership's cash flow.

Of all its growth projects slated to come online within the next year, the company expects its Midstream segment to benefit most handsomely. Going forward, Energy Transfer Partners projects that the segment will grow substantially and will account for a larger share of its overall business mix. Crucially, the bulk of increased cash flow will be derived from long-term fee-based  contracts.

A rise in the percentage of fee-based contracts is a big plus for energy MLPs because these assets provide a high degree of cash flow stability, which provides strong visibility into future distribution increases.

Final thoughts
Thanks to recent acquisitions and expansion projects, Energy Transfer Partners' general shift has been from a natural gas-focused pipeline operator to a more diversified energy company with interests in natural gas, NGL, crude oil, and refined product infrastructure that provide a larger share of stable, fee-based cash flows.

Over the past few years, the company has made numerous strides to diversify its business and adapt to changing market conditions. It has set up an NGL platform to further expand its downstream NGL capabilities and has sought to reduce its exposure to riskier, weather-sensitive non-core businesses.

It has also greatly improved its geographic reach and increased its share of fee-based contracted income with its purchase of Southern Union's assets. And finally, with its recent acquisition of Sunoco, Energy Transfer Partners now offers a "best in class" logistics and transportation platform for natural gas, NGL, crude oil,  and refined product.

All in all, it has become clearer how the company's numerous acquisitions and growth projects over the past three years will impact distributable cash flow. Energy Transfer Partners' distribution coverage ratio, which dipped to an uncomfortable 0.9 times in the second quarter, should gradually return to healthier levels in 2013, allowing the partnership to more comfortably raise its distribution. If and when it does, Energy Transfer Partners' shares should follow suit.


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