On Feb 25, 2013, we downgraded Texas-based natural gas
transportation and storage partnership
Energy Transfer Partners L.P.
) to Underperform from Neutral, based upon a number of near-term
Why the Downgrade?
With natural gas prices likely to remain soft in the near- to
medium-term, Energy Transfer Partners' margins are expected to
suffer in the next few quarters. The lack of fee-based contracts
- which guarantee stable cash flows - has also been a negative.
Furthermore, we expect units of Energy Transfer Partners to
remain depressed until it raises its distribution, which has been
static since 2008.
Causes for Concern
We believe that the overall picture for natural gas remain
particularly weak, with storage levels remaining significantly
above their five-year average. As such, we expect natural gas
prices to stay low in the near future, thereby curtailing
drilling activity around gathering systems and pipelines.
Gathering and processing partnerships such as Energy Transfer
Partners are more sensitive to commodity prices compared to other
partnership subgroups. As a result, collapsing energy prices have
adversely affected their cash flow stability.
Though Energy Transfer Partners dishes out a healthy distribution
yield of 7.6%, the partnership has not grown its payout since
2008. The lack of distribution increase has been a major
impediment to a breakout in Energy Transfer Partners' unit price.
Stocks that Warrant a Look
While we expect Energy Transfer Partners to perform below its
peers and industry levels in the coming months and see little
reason for investors to own the stock, one can look at
McDermott International Inc.
Helmerich & Payne Inc.
Patterson-UTI Energy Inc.
) as good buying opportunities. These energy equipment suppliers
- sporting a Zacks Rank #2 (Buy) - have solid secular growth
stories with potential to rise from current levels.
ENERGY TRAN PTR (ETP): Free Stock Analysis
HELMERICH&PAYNE (HP): Free Stock Analysis
MCDERMOTT INTL (MDR): Free Stock Analysis
PATTERSON-UTI (PTEN): Free Stock Analysis
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