The midstream industry is in the midst of an intense ramp-up in organic growth and company consolidation. Mergers and acquisitions are an every other day occurrence as companies like Energy Transfer Partners (NYS: ETP) and Kinder Morgan Energy Partners (NYS: KMP) look to cash in on America's booming domestic energy production.
Growing fast enough to capitalize on oil and gas production is a big challenge for the companies in the midstream industry, but your analysis of their potential shouldn't stop there. I created a premium report on Energy Transfer Partners to help investors look past the wheeling and dealing and toward some other areas that warrant attention.
Below is an excerpt from the report, laying out three areas investors need to be watching in the coming years. We hope you enjoy.
The three areas you MUST watch
All eyes are on ETP's distributions, as the partnership hasn't increased its distribution since 2008, and investors have high expectations for an improvement sometime soon. ETP's distributable cash flow ratio, essentially the number of times cash flow can cover distribution payments, has increased each of the last three years, growing from 0.86 times in 2009 to 1.12 times by the end of last year. As ETP's new projects come online and distributable cash flow increases, this ratio will continue to improve. This improvement is already starting to show on ETP's cash flow statement. In the second quarter of this year, distributable cash flow increased $51.9 million over the same period last year. The lack of a distribution increase is the No. 1 issue affecting ETP's share price right now. Expect a pop in the stock once ETP announces a return to distribution growth.
ETP purchased Sunoco because of its crude oil and petroleum products distribution capabilities. The company also picked up Sunoco's marketing segment however, which means ETP is the now proud owner of 4,900 gas station convenience stores. Analysts are quick to point out that ETP has no business operating a bevy of tight-margin gas retailers, and investors should keep a close eye on how the partnership handles this part of the acquisition going forward. Some estimates for the value of Sunoco's retail operation are as high as $2 billion.
Though it has taken measures to diversify its business mix, 66% of the partnership's revenue comes from natural gas pipelines and midstream operations. If natural gas producers continue to move away from gas production, particularly in Texas, ETP could suffer. The flip side is also true, however, and any increase in the price of dry gas and natural gas liquids that boosts production will serve ETP and its investors quite well.
Looking for more guidance
That was just a sample of our new premium report on ETP. If you're weighing whether the company is a buy or sell, the report is an essential resource for investors seeking more information on the company. Not only that, but the report comes with updated quarterly guidance and dives into upcoming catalysts on the horizon. To get started, simply click here now.
The article 3 Areas ETP Investors Must Watch originally appeared on Fool.com.
Fool contributor Aimee Duffy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.