The 2 Things Western Gas Investors Need to Focus On in 2016

Source: Western Gas Partners investor presentation.

Another growth option for Western Gas is organic growth projects, of which it has two in the planning stages. The first is the recently announced $115 million expansion of the Ramsey gas processing plant in the Delaware Basin. Then there's the proposed Delaware Basin Express Pipeline. Western Gas is holding a non-binding open season to determine customer interest and potentially lock down firm volume commitments. According to CEO Don Sinclair, "We are very encouraged by the interest shown."

Of course, a midstream MLP can have all the growth prospects in the world, but as Kinder Morgan's recent funding troubles have shown, if you can't raise cheap growth capital, then dividend investors might need to accept a payout cut for management to fund growth using distributable cash flow. Western Gas Partners happens to have a few things working in its favor to help it grow without having to potentially gut its distribution.

Strong balance sheet provides plenty of growth capital

Source: Morningstar.

With a Q3 and year-to-date distribution coverage ratio of 1.05, and 1.13, respectively, Western Gas Partners' payout remains secure for now but isn't generating a substantial amount of excess distributable cash flow with which to internally fund its growth. Thus the MLP will have to turn to debt and equity markets to secure the capital it needs to expand or acquire new assets.

Western Gas Partners' balance sheet is a lot cleaner than most of its peers. The most important metric to focus on is the debt-to-EBITDA ratio, or leverage ratio. The leverage ratio is one of the key things credit rating agencies and lenders use to determine how capable an MLP is of servicing its debt.

Western Gas Partners' current liquidity of $1.073 billion consists of cash and the remaining $1 billion in borrowing power under its revolving credit facility. However, credit revolvers come with debt covenants that need to be complied with. In its case, Western Gas is required to maintain a leverage ratio of 5.0 or less, except for the first nine months following an acquisition, when it's allowed a maximum leverage ratio of 5.5.

Western Gas' low debt levels grant the MLP the ability to take on an additional debt to grow. Thus, Western Gas can utilize all of its credit facility to fund its growth and further secure its distribution.

In addition, unlike Energy Transfer Partners, which currently yields 12.9%, Western Gas Partners' 7.2% yield means it may still be able to tap the equity markets to raise growth capital.

Bottom line: Western Gas is better positioned than many midstream MLPs, but risks still remain

With strong access to liquidity due to its much better than average balance sheet, Western Gas should be able to continue growing its DCF in 2016. However, falling oil and gas production might still hurt its cash flow, so investors need to keep an eye on its distribution coverage ratio in the quarters to come.

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The article The 2 Things Western Gas Investors Need to Focus On in 2016 originally appeared on

Adam Galas has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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

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