You Shouldn't Overlook this Company Paying a 7% Yield

Regency Energy Partners is a great high-yielding option to profit from the natural gas boom in the United States.

Bob Ciura
Bob Ciura
Apr 2, 2014 at 11:45AM
Energy, Materials, and Utilities

The natural gas boom in the United States is minting money for a number of energy companies. The natural gas revolution in the United States has been well-documented, and for good reason: there's an abundance of domestic supply that is finally being brought to market thanks to advancements in drilling technology.

In order to meet the demand, companies that engage in building and maintaining natural gas infrastructure have significant momentum. One such company is Regency Energy Partners (UNKNOWN:RGP.DL), a midstream operator of natural gas pipelines, gathering systems, and processing facilities. Regency's midstream services are spread out across the country, and are focused on some of the highest-producing natural gas regions of the country, including the Marcellus and Haynesville shales.

Regency's aggressive acquisition strategy and fundamental underlying tailwinds provide it with more than enough cash flow to pay its hefty 7% distribution, making it a great pick for income investors.

Regency is a big spender
Regency recently closed on a $5.6 billion purchase of PVR Partners LP (UNKNOWN:PVR.DL), a strategic initiative designed to expand its footprint in major natural gas producing regions, including the Marcellus and Utica shales in the Appalachia Basin. This will allow Regency to further diversify regionally as well as boost its fee-based asset portfolio, which provide consistent and reliable cash flows.

The stability of its cash flow is what gives Regency the ability to pay its hefty distribution, which stands at 7% based on its recent unit price. Regency generated $411 million in cash available to pay distributions last year, up 32% from 2012. It produced such strong growth from its ambitious expansion initiatives, which along with increased drilling activity, resulted in strong volume growth in the critical gathering and processing segment. That unit posted 17% throughput volume growth in 2013.

In 2014, Regency expects growth to continue, since its recently closed acquisition of PVR Partners' assets will come on-line and contribute to earnings and volume growth. Management sees continued development of its Marcellus and Utica fields, where business conditions remain favorable.

To realize further growth this year, Regency will invest approximately $540 million in growth capital expenditures, a full $230 million of which will be allocated to its primary gathering and processing segment. Regency will also build out its natural gas liquids segment, and will spend $110 million this year to that end.

Financing options provide flexibility
To fund the PVR deal, Regency will pursue a combination of capital financing activities including issuing debt and selling additional units. First, Regency will sell approximately $400 million in units to Energy Transfer Equity (NYSE:ET), the owner of the general partner of Regency.

Energy Transfer Equity derives its own distributions from its investments in Regency as well as Energy Transfer Partners (NYSE:ETP), which is a very similar company as Regency. Energy Transfer Equity also owns the general partner of Energy Transfer Partners, as well as 100% of the incentive distribution rights, of Energy Transfer Partners. In addition to selling units, Regency will issue $900 million in senior notes due 2022, that carry a 5.875% yield.

Regency's growth fuels its distribution
For income investors, making sure a company can afford its distribution is critical. Fortunately, Regency covered its distribution with underlying cash flow. Instead of using traditional GAAP metrics like earnings per share, Master Limited Partnerships often utilize distributable cash flow. This measure provides a clearer picture of how much a company like Regency can pay to its investors, since it adds back non-cash charges like depreciation and amortization.

Regency's $411 million in distributable cash flow covered its distribution by 1.01 times last year. That's a fairly thin margin, but it still represents coverage nonetheless. Investors should also be confident since Regency expects further cash flow growth this year, as previously mentioned. That will help boost its distribution coverage in 2014, and if growth proves to be strong enough, investors may even get another distribution increase. As a result, income investors should find a lot to like from Regency Partners, which is a great pick to capitalize on the natural gas boom in the United States.