Energy MLP Western Gas Equity Feeds Off Another MLP

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Western Gas Equity Partners doesn't actually do much but pay expenses typically incurred by a public company, such as registration and auditor fees. It also dispenses cash to investors.

Those fast-growing payouts -- in the fourth quarter, distribution jumped 40% vs. the year earlier -- are helping to draw more interest from investors.

Western Gas Equity ( WGP ) is a master limited partnership, a type of investment vehicle in the energy industry that's been growing in popularity. One reason is "the rare combination of decent yield and growth behind that yield," said Benjamin Fink, Western Gas Equity's chief financial officer.


Western Gas Equity, which went public in December 2012, was formed byAnadarko Petroleum ( APC ) to own a limited partnership interest in and the general partner ofWestern Gas Partners ( WES ), an MLP it created earlier to focus on midstream energy assets such as processing plants, storage facilities and small feeder pipelines.

The general partner, in turn, owns all the incentive distribution rights, which entitle Western Gas Equity unit holders to a growing percentage of the overall cash distributed by Western Gas Partners.

Of the two MLPs, Western Gas Partners is the worker bee -- it owns, operates and grows midstream energy assets in many U.S. energy basins.

Pursuing High-Value Projects

Most of Western Gas Partners' midstream assets were "dropped down," or sold, by Anadarko, an oil and gas exploration and production company based in the Houston area. But Western Gas Partners has also been investing in its own projects lately.

Two of its top assets are in the drilling-active DJ Basin in Colorado, also known as the Denver-Julesburg Basin, and the Eagle Ford formation in South Texas. It's especially focused on the extraction of high-value natural gas liquids.

"Western Gas Equity is a leveraged play on Western Gas Partners," said Fink, who's also the CFO of Western Gas Partners. "There's an umbilical cord between them."

The two MLPs share the same management team. But on the Western Gas Equity side, "expenses are very low," Fink said. "All the money left over is paid to unit holders. The assets we manage are really all at (Western Gas Partners)."

Due to a complicated mathematical formula with built-in multipliers, Western Gas Equity's cash payouts have been growing at a faster pace than those at Western Gas Partners. While its fourth-quarter cash distribution jumped 40% from the year-ago period to 23 cents, Western Gas Partners' climbed 15% to 60 cents. Payouts are to be made in February.

"Western Gas Partners and Western Gas Equity are two investment options for exposure to the Western Gas story," said Wells Fargo analyst Sharon Lui. "Our preference is for Western Gas Equity."

One reason is its ownership of the so-called incentive distribution rights, "which provide enhanced leverage to the potential growth at Western Gas (Partners)," she said.

Western Gas Partners has been expanding midstream operations in Eagle Ford and DJ Basin, among other areas, to take advantage of drilling activity and demand.

Contributions from those investments and continued dropdowns from Anadarko "are the key drivers" behind distribution growth at both MLPs, Lui says.

Wells Fargo estimates Western Gas Equity's three-year compounded annual growth rate for distributions (2014-16) at 27% vs. Western Gas Partners' 13%. Still, as the latter goes, so goes the former. "Their ability to grow is directly linked to Western Gas Partners' ability to grow its distribution," Lui said.

Inside The MLPs

Since Western Gas Partners' IPO in 2008, Anadarko has regularly sold its midstream assets to its midstream subsidiary. And it plans to keep on that path, Fink says.

What's more, Western Gas Partners doesn't take on much commodity risk since Anadarko, its biggest customer, has kept it mostly on fixed-fee contracts.

"MLP investors are conservative. Risk-adjusted growth is quite compelling," Fink said.

Lui says that other midstream gathering and processing MLPs do have exposure to commodity swings, citingAccess Midstream Partners ( ACMP ) as one example. If that's a problem, investors have shrugged it off.

Other general-partner MLPs in energy areAlliance Holdings ( AHGP ),Atlas Energy (ATLS) andEnergy Transfer Equity (ETE), Lui says.

But their underlying assets are different. Alliance, for example, is tied to coal, Atlas to oil and gas reserves and Energy Transfer to a pipeline.

"General partners have outperformed the S&P 500 and the MLP energy group as a whole because they're leveraged to potential deals and transactions at the underlying MLP through the incentive distribution rights," Lui said.

What's also appealing about Western Gas Equity is the operating MLP's "diverse portfolio," Fink says. Three of its biggest cash-flow and earnings generators are spread among the DJ Basin, Eagle Ford, and the Marcellus Shale in Pennsylvania, he says. A gas asset in Wyoming also is showing good growth.

Nearly half of Western Gas Partners' 2013 forecasted capital budget was earmarked for the DJ Basin, with the rest split between projects in the Eagle Ford, Marcellus and a fractionation venture in Mont Belvieu near Houston, among others.

Western Gas Partners has predicted it would take in $440 million to $450 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in 2013. Third-quarter adjusted EBITDA was $125.2 million. Of that, $105.9 million was distributed to unit holders.

Fourth-quarter results for both MLPs will be released Feb. 27.

Anadarko released its fourth-quarter results Monday afternoon, reporting adjusted net income of 74 cents a share, 16 cents below the consensus estimate of analysts polled by Thomson Reuters. The company reported revenue of $3.338 billion, also below analyst expectations.

Western Gas Equity's shares have climbed 47% since its IPO. They're up 4% in 2014.

But the public float is small, only 9% of outstanding shares. Anadarko owns the rest. "A number of investors have complained that the float is very low," Fink said, adding that Anadarko plans to sell some of its units this year. In a Jan. 2 filing, Anadarko indicated it would sell up to 40 million units in the next three years, or about 20% of its stake. Fink thinks 2014's sale will amount to much less than that.

Credit Suisse analysts have predicted Anadarko might cut its stake by 3% to 6% this quarter. "A potential sale should be seen as a positive by investors, given the low float," they wrote in a research note.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ACMP , AHGP , APC , WES , WGP

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