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Gas MLPs Delivering on Bottom Line

In last week’s issue I discussed DCP Midstream Partners (NYSE: DPM), whose general partner, DCP Midstream (DCP), is a 50/50 joint venture of Phillips 66 (NYSE: PSX) and Spectra Energy (NYSE: SE). Spectra Energy also sponsors its own MLP, Spectra Energy Partners (NYSE: SEP), which released strong earnings last week.

Spectra Energy Partners owns the natural gas and crude oil assets in Spectra Energy’s U.S. portfolio. SEP’s 17,000 miles of interstate pipelines ship (primarily) natural gas, as well as crude oil and natural gas liquids (NGLs). The partnership also gathers natural gas and can store up to  166 billion cubic feet (Bcf) of it at its facilities in the U.S. and Canada.

SEP’s assets are strategically located in the regions where demand for natural gas — primarily for use in electricity generation — as well as crude oil is expected to increase steadily:

160209MLPIIsepmap

Source: Spectra Energy Partners SEC filing

For the four quarter, SEP reported EBITDA of $457 million, up 7.8% from $424 million a year earlier. The natural gas transmission business accounted for the lion’s share with EBITDA of $413 million, up from $369 million a year ago.

Distributable cash flow (DCF) of $260 million was up 6.1% from the prior-year quarter. For the year, DCF was $1.21 billion, a $150 million improvement on 2014. SEP increased its fourth-quarter distribution 2% from the prior quarter and 8.7% year-over-year.

Distributions per limited partner unit totaled $2.43 for 2015, compared with $2.245 in 2014. DCF coverage for the year was 1.26x, and units currently yield 5.6%.

Also reporting strong results was EQT Midstream Partners (NYSE:EQM), which is sponsored by the Marcellus natural gas producer EQT (NYSE: EQT). EQM’s assets include a transmission and storage system with 700 miles of interstate pipes. The system is supported by 14 associated natural gas storage reservoirs with approximately 400 million cubic feet (MMcf) per day of peak withdrawal capacity and 32 billion cubic feet (Bcf) of working gas capacity. The partnership also operates the Allegheny Valley Connector (AVC), a 200-mile FERC-regulated interstate pipeline that reaches deep into the Marcellus basin.

Bolstered by its long-term, mostly fixed-volume contracts, EQM reported fourth-quarter net income of $112.7 million, up from $84.8 million a year earlier. Distributable cash flow reached $111.9 million, providing distribution coverage of 1.54x for the quarter, and 1.67x for all of 2015.

In the earnings release, EQM reaffirmed its forecast for full-year 2016 adjusted EBITDA of $530-$550 million and distributable cash flow of $460-$480 million. EQM expects to distribute $3.19 per unit this year, which would be up 21% from 2015.

Conclusions

Earnings results are starting to pour in, and despite the ongoing collapse in oil and gas prices, some MLP sectors are showing surprising strength. While it was clearly not a good quarter for those that make a living selling oil and gas, Q4 results from Spectra Energy Partners and EQT Midstream Partners indicate that the business of transporting and storing natural gas has been good for them.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


Portfolio Update

Energy Transfer’s Lousy Timing   

What did we learn yesterday about Energy Transfer Equity (NYSE: ETE)? Not much more than what it would trade like in the depths of the MLP crash, immediately after the mysterious departure of its chief financial officer, in the home stretch of a massive merger, on the day the market was vividly reminded that the merger partner’s largest customer is very likely headed for bankruptcy reorganization. A daily loss of 42% was the unpalatable answer.

Even at today’s modestly higher price, ETE is now trading at a market cap of less than three times the past year’s distributions from affiliates, and at a standalone enterprise value-to-EBITDA multiple of 7, which figures to decline below 6 over the next year even under the most bearish scenario.

That’s the current price for a well-diversified collection of mostly natural gas focused assets that are levered to America’s steady energy demand rather than its gradually declining crude production. It’s far below the multiples accorded to midstream general partners in the past, and even more of a shocking comedown for ETE, which retains multiple growth avenues tied to value-added gas processing, shipping and liquids exports.

As for that Chesapeake bankruptcy threat, let’s do some simple math. Chesapeake currently accounts for roughly 20% of Williams (NYSE: WMB) revenue, which would get diluted to approximately 10% of the Energy Transfer family’s if ETE is able to complete its pending acquisition of Williams.

And this 10% for the most part would not go away if Chesapeake were to file for bankruptcy. The company’s economic wells will keep pumping no matter how their ownership gets parsed. And because Williams owns the gathering infrastructure built for Chesapeake by its own midstream affiliate, whoever comes to control the big producer would likely have no ready alternative for moving its gas.

I have no idea why Energy Transfer’s CEO left abruptly, His departure was disclosed in a terse SEC filing late Friday, followed by another Monday clarifying that the exit “was not based on any disagreement with respect to any accounting or financial matter.”

My working theory is that the CFO was canned because ETE founder and CEO Kelcy Warren is angry about what’s happened to the unit price and his personal wealth. But no one knows. What I do strongly suspect is that the reasons for the CFO’s departure won’t matter two years from now, when crude and natural gas prices are highly likely to be materially higher that they are today, along with ETE’s unit price,

Painful as its recent performance has been, ugly as the market and sector sentiment now look, this is what a big opportunity looks like. Buy #2 Best Buy ETE below $15.         

— Igor Greenwald

 


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