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
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 (
) 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
Western Gas Equity, which went public in December 2012, was
formed byAnadarko Petroleum (
) to own a limited partnership interest in and the general
partner ofWestern Gas Partners (
), an MLP it created earlier to focus on midstream energy assets
such as processing plants, storage facilities and small feeder
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.
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
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
) as one example. If that's a problem, investors have shrugged it
Other general-partner MLPs in energy areAlliance Holdings (
),Atlas Energy (ATLS) andEnergy Transfer Equity (ETE), Lui
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.
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
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