Please ensure Javascript is enabled for purposes of website accessibility

Regency Energy Partners is a Hidden Gem MLP

By Bob Ciura – Feb 20, 2014 at 11:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Regency Energy is pursuing growth both organically and through aggressive acquisitions. The strategy worked like a charm last year, and will likely do so again in 2014.

In the United States, there's an energy boom ramping up right beneath our feet. The massive amounts of natural gas, that were previously unrecoverable, are now suddenly accessible thanks to new drilling techniques. Advancements in natural gas drilling, such as hydraulic fracturing, have made available the ocean of domestic natural gas in regions like the Marcellus Shale.

As supplies are tapped into and demand for natural gas rises, it goes without saying that infrastructure is key. After all, all that natural gas needs storing, processing, and transporting across the United States. That's why Regency Energy Partners (NYSE: RGP) presents such a strong investment case.

Regency Energy: An aggressive growth strategy
Regency Energy operates solely in the natural gas industry, which is in the midst of a strong growth period. That's due to the natural gas boom taking place in the United States.

In response, Regency Energy is aggressively acquiring various pools of midstream assets. It's clear that management doesn't want to fall behind in the race to profit from the domestic natural gas boom. Late last year, Regency purchased $1.3 billion worth of midstream assets, including pipelines and storage terminals, from Eagle Rock Energy Partners (NASDAQ: EROC).

The acquisition fulfilled several of Regency's strategic growth initiatives. First and foremost, it provides growth on an absolute basis by increasing Regency's footprint in several key targeted areas. Regency will now have an even greater presence in Texas basins. And, the assets will increase Regency's exposure to liquids-rich areas, which management targeted to increase the company's basin diversity. In addition, the acquisition will bring about significant synergies. The deal is expected to close in the latter half of 2014. Upon closing, management expects the acquisition to be immediately accretive to cash flow.

To finance the acquisition, Regency will undergo a round of equity issuances, including $400 million worth of units issued to Energy Transfer Equity (ET -0.56%), the owner of the general partner of Regency Energy.

Very recently, Regency closed on its $300 million purchase of midstream assets from Hoover Energy Partners. These assets are located in Texas, and should fit very well with Regency's current operations. That's because the Hoover assets are already connected to Regency's existing gas gathering systems. At the time the deal was struck, it was expected to integrate fairly quickly. Judging by Regency's full-year earnings report, management was right.

How Regency's strategy is paying off
Regency posted an 18% increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2013 versus the prior year. Management credited strong volume growth as the primary driver of cash flow growth. Regency's distributable cash flow, which measures how much cash the company can afford to pay out to investors, rose by 32% to $411 million.

This allowed management to increase Regency's distribution to $1.90 per unit annualized. At its recent price, Regency yields 7%. Fortunately, this high of a payout is sustainable. Regency generated 1.01 times its distribution in distributable cash flow, meaning it earned enough last year to finance its hefty payout.

Acquisitions and organic growth fuel Regency's future
Clearly, Regency's strategy paid off hugely last year. The company reaped the benefits of its aggressive acquisitions, and increased drilling activity boosted its organic growth projects. Even better, management is forecasting 2014 to be an equally strong year. President and Chief Executive Officer Mike Bradley stated "For 2014, we expect For 2014, we expect strong earnings and volume growth across our base business driven by our substantial organic growth program in 2012 and 2013."

Regency Energy was already successful in its existing natural gas gathering, treating, and processing operations. Adding midstream assets through an aggressive acquisition strategy will ensure future growth as well. That's why management is so confident heading into 2014, after producing such strong results last year.

MLPs have become synonymous with high yields, like these 9 companies

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Energy Transfer LP Stock Quote
Energy Transfer LP
ET
$12.36 (-0.56%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.