Volatility has been the hallmark in the oil and gas industry this year. Except for Big Oil stocks, savvy investors have been cagey about this industry at large. That's why investing in stocks that offer stable cash flows is important. After all, at the end of the day, what investors mustn't forget is that the overall demand for oil and natural gas has been on an uptrend and will be so in the coming years.
Hence, to get the better of volatility, it helps to invest in some of the dividend-paying stocks in this industry. If you are more interested in steady cash flows in the form of dividends from a stable business model rather than growth, then a master limited partnership is for you. If identified correctly, an MLP is one of the best ways to hedge against market volatility.
Fellow Fool and energy editor Dan Dzombak has given an apt description of the MLP structure. For a deeper understanding, click here. Today we'll find out if Energy Transfer Partners (NYS: ETP) is capable of being the MLP worth investing in 2012 and beyond.
Long term in sight
The booming natural gas market has made sure that transportation and storage companies don't lose out. Which is why ETP has been going from strength to strength. The company has bagged some long-term projects which should ensure solid cash flows in future. A fee-based agreement with XTO Energy, a subsidiary of ExxonMobil (NYS: XOM) , takes the cake. ETP will provide natural gas gathering, processing, and transportation services to XTO from the Woodford and Barnett shale plays. The company's 117-mile natural-gas gathering pipeline from the Woodford Shale is expected to be operational beginning in the fourth quarter of this year. The initial capacity of 450 million cubic feet per day looks impressive.
Supplementing this pipeline is a cryogenic processing plant in Johnson County, Texas. This facility is supplementing an existing facility in Godley, and the total capacity is expected to go up to 700 Mmcf/d from 500 Mmcf/d by the second half of 2013. The long-term nature of this project is what impresses me. Roughly estimating, the pipeline alone has the capability of increasing current transportation volumes by 4%.
Energy Transfer Partners' operations are becoming more specialized. The company has initiated the disposition of its propane operations to AmeriGas Partners (NYS: APU) for $2.9 billion. Expected to close early next year, the deal is going to boost Partners' cash reserves by $1.5 billion immediately.
Another promising deal
Energy Transfer Partners' eyes were on the Florida Gas Transmission, a pipeline system that has a capacity of 3 billion cubic feet per day and supplies almost two-thirds of the natural gas consumed in the state of Florida. Currently owned by Citrus Corp., a joint venture between Southern Union (NYS: SUG) and El Paso (NYS: EP) , this deal would give ETP a 50% interest in Citrus. Inked in July for approximately $2 billion, this deal is capable of giving substantial returns.
The company had expanded its Tiger pipeline by 400 Mmcf/d, bringing the total capacity to 2.4 Bcf/d. The coming year should see a major impact on total operations due to this expansion.
Still, everything isn't looking hunky-dory. In August, ETP entered a strategic alliance with Enterprise Products Partners (NYS: EPD) to built a 584-mile crude oil pipeline from Cushing to Houston. However, Enterprise has since left for Enbridge and the dispute is currently in the courts. This might be a blow to the company, but I don't think it will have a long-term effect.
Foolish bottom line
Right now, I'm not too concerned about the 140% debt-to-equity. With an interest coverage ratio at 3.6 times, and a new five-year revolving credit facility inked with Wells Fargo, there isn't much to be alarmed about. ETP looks well placed to perform well in 2012. This year was more of a preparation for the long run. With a dividend yield of 7.8%, this could be the stock that has the capability of being a haven from volatility. The fundamentals look solid.
To stay up to speed on the top news and analysis on Energy Transfer Partners, you can start here by adding the company to your watchlist.
At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. 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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