The recent performance of
Energy Transfer Partners LP
(NYSE: [[ETP]]) demonstrates the importance of distribution growth
as a catalyst for unit price appreciation in the MLP space. (I
tackled this subject based on historical return data among
energy-focused MLPs in
Investing in MLPs: Yield vs. Distribution
The midstream operator hasn't increased its payout since July
24, 2008, when management announced that the MLP would hike its
quarterly disbursement to the current rate of $0.89375 per unit.
During this extended fallow period, Energy Transfer Partners issued
additional units on eight occasions, raising $3.4 billion in
That Energy Transfer Partners has issued equity this many times
in the past four years isn't necessarily alarming.
As pass-through entities that disburse the majority of their
cash flow to their investors, publicly traded partnerships rely on
the debt and equity markets to fund growth projects or
acquisitions. For example, blue-chip midstream MLP
Enterprise Products Partners LP
(NYSE: [[EPD]]) has placed seven equity offerings since July 2008,
raising $2.45 billion in capital.
In many instances, these secondary issues give savvy investors
an opportunity to purchase units of their favorite MLPs at a slight
discount; the market's knee-jerk reaction to this
ostensiblydilutive move is to sell the stock.
However, these equity issues often enable an MLP to pursue
expansion projects and asset acquisitions that will enable the firm
to grow its cash flow and quarterlydistribution - a prospect that
outweighs any short-term dilution. To return to our example,
Enterprise Products Partners has grown its quarterly payout by 19.2
percent since July 2008.
Investors' patience with Energy Transfer Partners has thinned in
recent quarters, with the stock appreciating only 1.5 percent and
returning a total of 26.8 percent over the past three years. In
contrast, the Alerian MLP Index has rallied 59.8 percent and
generated a total return of 93.3 percent over the same period.
Within the midstream space, we favor Enterprise Products
Partners LP and
Western Gas Partners LP
(NYSE: [[WES]]) because of their potential for superior
distribution growth. However, the recent rally has pushed these
stock prices beyond our buy targets.
At current valuations, units of Energy Transfer Partners yield
8.2 percent and offer the best value in the midstream segment. Of
course, some stocks deserve a low valuation because they lack an
upside catalyst. With a number of organic growth projects and
recent acquisitions expected to bolster cash flow, units of Energy
Transfer Partners could stage a significant rally if the MLP
finally ends its dry spell and raises its distribution in 2013.
Over the past 24 months, Energy Transfer Partners and its
Energy Transfer Equity LP
(NYSE: [[ETE]]), have closed a number of major deals in an effort
to diversify its business, overcome weakening cash flow in its
intrastate transportation and storage unit, and jump-start
Intrastate transportation and storage, which in 2011 accounted
for 38 percent of the MLP's adjusted earnings before income, taxes,
depreciation and amortization (EBITDA), has borne the brunt of
depressed natural-gas prices and narrowing basis differentials
within Texas. Whereas the decline in gas prices has compressed
profit margins on retained fuel, the declining differential between
various sales hubs inTexas - a product of rising production -has
lowered throughput and pressured renewal rates.
In the second quarter of 2012, these headwinds combined to
reduce intrastate transportation and storage's adjusted earnings
before interest, taxes, depreciation and amortization to
$156.9million - an 8 percent decline from year-ago levels. Over
these three months, volumes on the intrastate pipeline system
averaged 9.9 billion cubic feet per day, compared to 1.4 billion
cubic feet per day in the second quarter of 2011.
Management has moved aggressively over the past two years to
diversify Energy Transfer Partners' business to include exposure to
midstream infrastructure that handles crude oil and natural
)), a group of heavier hydrocarbons such as ethane, propane and
In May 2011, Energy Transfer Partners and
Regency Energy Partners LP
(NYSE: [[RGP]]) announced that their 70-30 joint venture in the
Eagle Ford Shale, Lone Star NGL LLC, had closed its acquisition of
Louis Dreyfus Highbridge Energy LLC for $1.92 billion in cash. The
midstream assets involved in this transaction include NGL
pipelines, fractionation capacity and storage facilities.
Since the deal closed, Energy Transfer Partners and Regency
Energy Partners have focused on expanding this system to serve the
Eagle Ford Shale, a capacity-constrained unconventional field in
Texas where drilling activity continues to accelerate.
In the second quarter of 2012, Energy Transfer Partners' NGL
transportation and services segment grew its adjusted EBITDA to $39
million, up roughly 58 percent from a year ago.
Although this business segment has steadily grown to about 8
percent of the MLP's second-quarter adjusted EBITDA, we expect cash
flow from this segment to increase significantly in early 2013.
Energy Transfer Partners' extensive investments in the Lone Star
NGL system will begin to pay off when the second phase of the Rich
Eagle Ford Mainline pipeline, the West Texas NGL pipeline, and the
first phases of the Jackson County and Karnes County processing
plants come on-streamin late 2012. The MLP's wholly owned Justice
NGLpipeline - a 300-mile system that will deliver output from the
Chisholm and Jackson County processing plants to the joint
venture's Mont Belvieu fractionationfacility - is also slated to
begin operations in the fourth quarter.
Energy Transfer Partners and Regency Energy Partners expect the
first of two Mont Belvieu fractionation plants, each of which will
boast a nameplate capacity of 100,000 barrels per day, to start up
in the first quarter of 2013.
This new strength in NGL-related transportation and processing
likely helped the MLP secure a long-term contract with
Exxon Mobil Corp
(NYSE: [[XOM]]) to build a 117-mile gathering system and processing
plant that will handle volumes from the Woodford Shale. This
pipeline is expected tocome on-stream in the fourth quarter of
2012, while the processing facility will be completed in the third
quarter of 2013.
Investors also shouldn't discount contributions from drop-down
transactions related to Energy Transfer Equity's $7.9 billion
acquisition of Southern Union Company.
In the first of these deals, Energy Transfer Partners purchased
a 50 percent interest in Citrus Corp., which owns Florida Gas
Transmission, a 5,300-mile pipeline system that stretches from
Texas into the Florida Peninsula. This $2 billion drop-down
transaction, coupled with expansions to two of the MLP's other
interstate pipelines, more than doubled the interstate
transportation segment's second-quarter adjusted EBITDA on a
year-over-year basis. Over the long term, this pipeline system
should benefit from rising demand for natural gas among electric
utilities and industrial customers in the Southeast.
More recently, Energy Transfer Partners and Energy Transfer
Equity announced that the general partner will contribute the
assets acquired in its takeover of Southern Union Company to ETP
HoldCo Corp. Energy Transfer Partners will hold a 40 percent stake
in this new entity and assume operational control of these
midstream assets, while Energy Transfer Equity will retain a 60
This move effectively enables Energy Transfer Partners to
benefit in the near term from having operational control of these
assets, without assuming additional debt or issuing equity. That
being said, Energy Transfer Equity's management team affirmed that
the eventual goal remains to sell these assets to the two MLPs in
which it owns an interest.
Here's a list of the former Southern Union businesses that
Energy Transfer Equity has contributed to the ETP HoldCo.
Panhandle Eastern Pipeline Company
owns and operates a 6,500-mile pipeline system that can deliver
up to 2.8 billion cubic feet of natural gas per day to markets in
the Midwest and East Coast from the Midcontinent region.
Trunkline Gas Company
owns andoperates a 3,000-mile pipeline that can transport 1.5
billion cubic feet of natural gas per day to markets in the
Midwest and East Coast from suppliers on the Gulf Coast.
Trunkline LNG Company
owns and operates an import facility for liquefied natural gas
that's located near Lake Charles, La.
SeaRobin Pipeline Company
owns and operates about 960 miles of interstate pipelines that
connect developments in the offshore Gulf of Mexico to
gas-processing infrastructure in south Louisiana.
Southwest Gas Storage Company
owns and operates MidContinent and Midwest gas storage assets
with a total capacity of about 60 million dekatherms.
Southern Union Gas Services
owns and operates five gas-processing plants with a total
capacity of 450 million cubic feet per day, 930 million cubic
feet of treating capacity and a 4,000-mile network of gathering
pipelines in the Permian Basin.
Missouri Gas Energy
is a regulated gas distribution company that serves a half
million customers in western Missouri.
New England Gas Company
serves about 50,000 customers in Massachusetts.
Management has indicated that the two gas distribution companies
would be divested and hinted that the gathering and the processing
assets would likely be sold to either Energy Transfer Partners or
Regency Energy Partners. Energy Transfer Partners is also
reportedly investigating the conversion of one of the long-haul
pipelines-probably the Trunkline-acquired from Southern Union into
an oil-carrying system.
Meanwhile, Energy Transfer Partners has agreed to convey the
non-logistics assets acquired in the takeover of Sunoco to ETP
HoldCo, including about 4,900 retail gasoline outlets that last
year generated $261 million in EBITDA. Although management has
indicated that ETP HoldCo will explore "MLP-friendly" options for
the retailbusiness - one of which would be to lease the gas
stations to a third-party operator -the industry consensus is that
these assets will be divested.
However, Energy TransferPartners will retain its general partner
interest, incentive distribution rights and 32.4 percent equity
Sunoco Logistics Partners LP
(NYSE: [[SXL]]). The latter owns 2,500 miles of refined-product
pipelines, 5,400 miles of oil pipelines and terminals capable of
holding 42 million barrels of liquids. In 2011 Sunoco collected $97
million in pretax distributions from Sunoco Logistics Partners, an
income stream that will now accrue to Energy Transfer Partners.
Not only does this move further diversify Energy Transfer
Partners' business away from its legacy intrastate pipeline
holdings, but Sunoco Logistics Partners' extensive system of oil
and refined-product pipelines also stands to benefit from the
upsurge in onshore oil output.
In the run-up to the acquisition of Sunoco, the two companies
were discussing potential joint ventures in Texas that would
involve Energy Transfer Partners' Texoma pipeline to carry crude
oil and connecting it to Sunoco Logistics Partners' Nederland
terminal. We would expect plans of this nature to go forward.
The firm has also reduced its exposure to commodity prices and
another slow-growing business by divesting its retail propane
operations to AmeriGas Partners LP (NYSE: [[APU]]) for $1.46
billion in cash and $1.32 billion in the acquirer's common
Although the equity issued by Energy Transfer Partners to cover
the acquisition of Citrus Corp. reduced the MLP's distribution
coverage to about 90 percent in the second quarter, the
aforementioned expansion projects and recent acquisitions could
prompt management to hike the distribution in 2013. Such an
announcement would be a welcome catalyst for the stock.
In the meantime, patient investors can collect a quarterly
payout of $0.89375 per unit, which equates to a distribution yield
of 8.3 percent at the current quote.
I am long [[ETP]]. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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