This current oil crash is turning out to be worse than many analysts expected. Even mighty Kinder Morgan recently warning that its 2016 dividend growth may not reach its previous 10% growth target. Yet despite worsening conditions across the energy industry, some midstream MLPs continue to grow their businesses and payouts at impressive rates.
One such MLP is Spectra Energy Partners (SEP), which has been able to reward long-term income investors with an impressive 32 consecutive quarters of distribution growth, including a just-announced 8.8% increase for the third quarter. To help investors determine how likely Spectra Energy Partners is to continue its winning ways in the face of low oil prices that could potentially last for years, let's look at four key facts that might make or break Spectra's impressive payout growth streak in the quarters ahead.
Despite low energy prices, strong growth continues
Spectra Energy Partners continues to perform ahead of expectations for the year, with DCF up 34% over the prior year's quarter. Our business model, with virtually no volume or commodity exposure, continues to differentiate us among energy MLPs and gives us strength and resilience in varied market conditions. -- Greg Ebel, CEO
The most important feature of midstream MLPs is their distribution profile which is made up of three factors: yield, payout security, and future distribution growth potential. As Ebel's quote shows, Spectra's second-quarter results were nothing less than spectacular. Distributable cash flow, or DCF, from which the 5.7% yield is paid, jumped 34%, while earnings before interest, taxes, depreciation, and amortization, or EBITDA, rose 29%.
Major projects continue to secure payout and drive long-term growt
Results for the 2015 quarter were driven primarily by increased earnings from expansion projects placed into service specifically TEAM (Texas-Eastern Appalachia to Market) 2014, TEAM South, and the Kingsport projects ... as well as higher volumes and tariffs on the express crude pipeline, as well as higher equity earnings from increased volumes on the Sand Hills Natural Gas Liquids pipeline. -- Pat Reddy, CFO
Thanks to these blowout numbers, Spectra Energy Partners' distribution coverage ratio, the most important metric of payout security, came in last quarter at 1.77.
That's among the highest in the MLP industry and giving the partnership plenty of excess cash with which to continue growing its distribution as well as funding organic growth projects. That's a good thing, too, because Spectra Energy Partners has some ambitious growth plans.
Enormous project backlog to drive impressive payout growth
As a result of the continued demand for pipeline infrastructure, we have $6 billion in our project execution backlog – real projects secured by long-term customer agreements. Our significant backlog of projects in execution, combined with the ongoing development of additional opportunities, provides us a clear path for EBITDA and distribution growth through 2020. -- Ebel
Source: Spectra Energy investor presentation.
As the quote and chart reveal Spectra Energy Corp. (SE), which serves as Spectra Energy Partner's sponsor, general partner, and manager, has an enormous project backlog. In fact it's far larger than the $6 billion in organic projects Spectra Energy Partners is currently working on. This means Spectra Energy Partners can expect additional drop downs from Spectra Energy Corp. in the coming years. It's also why I expect management's current payout growth guidance of 8%-9% through at least 2017 to potentially last through 2020 which is the timeline for completion of these projects.
Spectra Energy Partners is losing some assets but gaining payout security
Spectra Energy Corp. also happens to be the co-general partner -- along with Phillips 66 -- of DCP Midstream Partners (NYSE: DCP), a NGL focused midstream MLP. DCP has been struggling recently because of crashing natural gas liquid prices.
This is important for Spectra Energy Partners investors because Spectra Energy Corp. recently announced it was buying back its MLP's one-third interest in the Sand Hills and Southern Hills NGL pipelines and giving it to DCP Midstream. This is part of a major effort between Spectra Energy Corp. and Phillips 66 to strengthen DCP's distributable cash flow base and secure its payout.
In exchange for losing these assets, Spectra Energy Corp. is giving Spectra Energy Partners back 21.6 million limited units, .44 million GP units, and a $64 million reduction in incentive distribution rights fees over three years starting in Q1 2016. The best part of the deal is that the units Spectra Energy Partners is getting will be retired. That means that its overall unit count, and thus distribution cost, will decrease further strengthening its existing payout.
Takeaway: Despite the oil crash Spectra Energy Partners' distribution prospects continue to impress
With its generous and highly secure yield, impressive growth prospects, and nearly all of its cash flows well insulated from oil prices, long-term income investors would do well to consider this MLP for a spot in their diversified dividend portfolios.
