When was the last time your wallet got up and patted you on the back? Probably not for a while, especially in this economy. But don't worry, let Regency Energy Partners (NYSE:RGP) do the work for you.
An investment that pays you
Some investments only yield results once you sell them and take any profits you have hopefully accumulated, but Regency Energy Partners is nice enough to pay investors a quarterly lump sum of 47 cents per share, which works out to be $1.88 a year or a yield of 7.8%.
But why stop there? You don't want to put your money down on something that isn't going to grow, which is why Regency recently embarked on two new acquisitions.
For roughly $1.3 billion, Regency purchased all of Eagle Rock Energy Partners' midstream assets. On top of that, Regency bought $290 million of midstream assets from Hoover Energy Partners.
Both acquisitions add to Regency's footprint in Texas, which is seeing astounding output growth from the Permian Basin and the Eagle Ford. Being able to capitalize on massive growth is what makes Regency Energy Partners worth looking into as a strong income play.
With these two new assets, Regency's distributable cash flow will bump upwards in 2014 when the deals close. Considering that Regency Energy Partners has a distribution coverage ratio of 1.12x, a raise seems very likely.
A case for a raise
Some in the industry like to see coverage ratios around 1.3x, which Regency won't be far from once the deals close. Regency's payout has already been raised twice in 2013, and could be raised again in early 2014 for several reasons.
The first reason I already stated, which was the additional cash flow coming in from the two purchases. Regency's board of directors will recommend a 6-8% increase in its distribution in 2014, according to the press release.
Even before the deal closes, Regency could still decide to pay out more. For 2013, Regency wants to spend $870 on capital expenditures and so far has spent $690 million. If Regency follows through with its guidance, it will spend only 20.7% of its capex this quarter, leaving more cash available to distribute.
It is almost a certainty that Regency will raise its distribution, management has already stated it wants to do so. But what about after 2014? How will Regency Energy Partners continue to reward investors?
Growth, synergies, scale
Regency Energy Partners has been very busy this year, especially after it announced plans to purchase PVR Partners (NYSE:PVR) for $5.6 billion. It seems that Regency's appetite for growth can't be satisfied.
If Regency gets its way, PVR Partners will provide massive amounts of scale that will reduce Regency's costs. Per year, Regency will be able to save $30 million through synergies. PVR Energy also has seven major projects under construction, which will continue to boost cash flow.
Unitholders in PVR Partners should pay close attention to Regency Energy Partners, as PVR Partners unit holders will own 38% of the MLP if the deal goes through. Those unit holders should hold onto their investment, as Regency's growth story has just begun.
For instance, in 2014 Regency plans on adding 400 MMcf/d of additional gathering capacity and 200 MMcf/d of processing capacity in Northern Louisiana. In Texas, Regency wants to further expand its fractionation capacity (which is used to process NGL) by 100,000 barrels a day while expanding crude gathering capacity by 70,000 barrels a day.
These are just a few of the projects Regency has lined up, but they are noteworthy and justification as to why Regency's payout has nowhere to go but up. It's true that Regency is issuing out plenty of common units to pay for its acquisitions (which dilutes ownership and increases the amount it has to pay out), but through scale and growth, Regency should be able to manage.
On a side note, Regency is picking up some coal related assets from PVR Energy. PVR Energy has a high margin coal royalty business where it leases out coal properties, which could be sold or spun off. While PVR Energy/ Regency won't be mining the coal and will just be raking in cash, there is a chance that Regency Energy Partners will want to focus on just oil and gas related properties.
Regency Energy Partners pays out a yield of 7.8% on its common units, but with cash flow on the rise through organic growth projects and asset purchases, that should continue to grow. For that reason, the wallets of Regency unit holders will give their "owner" a pat on the back for each distribution that lands into their leathery crease.
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Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.