Continued weak oil and natural gas prices are starting to blunt some midstream operator's dividend growth expectations. However, that doesn't seem to be a problem for Western Gas Partners (WES 3.55%) or its general partner, Western Gas Equity Partners (NYSE: WGP). In fact Western Gas continues to reward income investors with impressive payout growth fueled by strong growth in sales, EBITDA, and distributable cash flow.
That being said as the oil crash drags on there are troubling signs that its growth prospects might be dimming. Let's take a look at the MLP's most recent earnings results and see what long-term income investors can expect in the quarters ahead.
Resilient growth despite challenging industry conditions
| Metric | Q3 2015 | Q3 2014 | Year Over Year Change |
| Revenue | $385.1 million | $326.5 million | +17.9% |
| Adjusted EBITDA | $182.9 million | $167.3 million | +9.3% |
| Distributable Cash Flow (DCF) | $152.8 million | $136.7 million | +11.8% |
| Distribution Coverage Ratio (DCR) | 1.05 | 1.23 | -15% |
Source: Western Gas Partners earnings releases
As you can see from this table Western Gas Partners had a pretty nice quarter. That's especially true considering that it suffered from both scheduled and unscheduled downtime at two of its facilities. This decreased volumes on its natural gas systems.
What investors need to really focus on
Of course the most important thing to midstream MLP investors is generous distributions. On that front management didn't disappoint, with Western Gas Partners and Western Gas Equity announcing a 15% and 31% year over year increase in their respective payouts.
That's in line with previous 2015 distribution growth guidance of 15% and 30%, respectively.Thanks to these newly raised distributions, Western Gas Partners' and Western Gas Equity's respective yields now rise to a generous 6.3%, and 3.7%.
More importantly, with respective DCRs of 1.05 and 1.01, their distributions are covered by DCF.
Investors shouldn't be alarmed by how close Western Gas Equity Partners' coverage ratio is to one. That's because that MLP owns the general partner interest, incentive distribution or IDR rights, and 49.3 million units of Western Gas Partners. Thus its entire revenue stream is derived from fees and distributions it gets from Western Gas Partners and it distributes nearly all of this cash to investors.
| Year | Q3 Distributions Received from WES | Q3 Distributions paid to WGP Investors | Q3 WGP Coverage Ratio |
| 2013 | $47.4 million | $46.8 million | 1.01 |
| 2014 | $64.8 million | $63.5 million | 1.02 |
| 2015 | $84.7 million | $83.5 million | 1.01 |
| Average | 1.01 |
Sources: Western Gas Partners earnings releases
On the other hand Western Gas Partners' coverage ratio has declined dramatically. For example, its respective 2013, 2014, and 2015 Q3 coverage ratios were 1.26, 1.23, and now 1.05. This is a potential indicator that distribution growth will have to slow going forward.
The reason for the decreased coverage ratio is because Western Gas Partners issued 9.5 million units over the past year in order to raise capital to pay down debt, fund growth projects, and acquire Nuevo Midstream LLC.
In addition there's that healthy 15% distribution hike which when combined with the 8% higher unit count caused the 15% reduction in coverage ratio. While a DCR of 1.05 is certainly not a sign of impending troubles, investors should be aware that 2016's payout growth might not be nearly as generous.
Low crude could crimp future growth
Not surprisingly the oil crash is the primary reason for the likely slowdown in next year's distribution growth.
For one thing Western Gas Partners' unit price is down 35% year to date. Since MLPs need to raise growth capital by selling equity, when their unit prices decline it becomes harder to fund projects and still make sure the deals increase DCF/unit.
The second reason payout growth could be negatively affected is because Western Gas was founded by Anadarko Petroleum (APC +0.00%) to own and operate midstream assets in order to serve it and other oil and gas producers.
Source: Western Gas Partners investor presentation.
Anadarko just reported its own third quarter earnings which included a $2.6 billion write down on the value of its oil and exploration assets.
Al Walker, Anadarko's President and CEO, told analysts on the conference call that "growth will not be rewarded in this environment" and that it isn't interested in extending beyond its existing oil fields until crude prices improve.
The company isn't expecting oil prices to increase much in 2016 which could potentially limit the growth areas Western Gas Partners can target with its projects over the next few years.
Bottom line: Enjoy your generous and secure payout but prepare for a long, cold commodity winter
As low oil prices cause oil companies to slash exploration and production budgets Western Gas investors should prepare for smaller distribution growth next year. Until oil prices recover focus on the fact that Western Gas is paying you handsomely to wait for better days in the energy industry.
