The size and scale of America's energy renaissance offers income investors a truly epic opportunity to earn high and growing yields on top of strong capital gains. Consider these facts:
- Estimates predict a requirement of $641 billion in energy investments by 2030.
- $313 billion of this will be in natural gas midstream infrastructure (storage, processing, and transport pipelines).
- Natural gas liquids, or NGL, midstream infrastructure will require $56 billion in investments.
- To profit from cheap ethane and propane, the petrochemical industry is planning on building or upgrading 148 facilities at a cost of $125 billion.
Such gargantuan sums of money create opportunities for MLP investors to profit handsomely. However, not every MLP with potential can flourish and not every investment can be a winner. In the past I've written favorably about the strong prospects
of Williams Partners
and El Paso Pipeline Partners
, a strong play on America's coming LNG export boom
. A key investing principle is to only sell an investment when the growth thesis changes. This article will analyze the recent troubles of these MLPs, as well as Williams' general partner Williams Companies
, to see if they remain good investments at this time.
What's the matter with Williams?
In its latest earnings announcement Williams Partners announced its seventh consecutive quarter of declining revenues at -6%. This is on top of a terrible 2013 with a 9% decline, and a 7% decline in the last 12 months. Similarly, 12-month trailing EBITDA/unit was down 26%, after falling 9% through the first quarter of 2013.
The major problem for Williams has been the weakness in NGL prices, which are down 40% in 2013. As a result, ethane rejection has increased (this refers to leaving ethane within the natural gas instead of separating it out) and hurt volumes on its NGL pipelines. In addition, the MLP faced an explosion at its Geismar facility in Baton Rouge, Louisiana, which resulted in $500 million in business disruption. Originally scheduled to be back online in April, management is now saying it will be back online in June.
A bright spot in the first quarter was that the company raised the distribution 7% from the first quarter of 2013 and guided for distribution growth of 6% in 2014 and 2015 and 4.5% in 2016. (Williams Companies guided for 20% annual growth for its dividend through 2016). The coverage ratio, when adjusted for $119 million in insurance claims from the Geismar incident, was .88. This is the eighth consecutive quarter in which Williams Partners has failed to cover its distribution. Why would management raise the distribution and guide for such strong growth in the face of such difficulties? The answer lies in one of the most aggressive investment plans of any MLP.
Williams Partners plans to invest $13 billion through 2016, with $6.8 billion allocated for infrastructure in the Marcellus/Utica shale. This shale formation is the largest in the U.S. and production has nearly increased 14-fold since 2007.
Past 2016, management is looking at an additional $12 billion in potential investments and guiding for a 74% increase in distributable cash flow, or DCF, through 2016 (41% in DCF/unit).
Assuming management can execute on its growth plans, the current distribution/dividend guidance for strong growth is sustainable and the investment thesis remains intact.
What's the matter with El Paso Pipeline Partners?
This MLP, part of the Kinder Morgan empire, recently ran into a growth wall; twelve-month trailing revenues were flat (-1%), and this is similar to what happened in the same time period in 2013 (-1%). Adjusted EBITDA/unit was down 4% after 2013's 8% rise. Most concerningly, DCF/unit was down 10% after rising 21% in 2013. Distribution coverage dropped from 1.23 to 1, which is why management has stopped raising the distribution.
El Paso's problems stem from several negative factors. FERC, or the Federal Energy Regulatory Commission, has recently forced it to cut tariffs on some of its pipelines. In addition, several non-renewals of pipeline contracts, specifically in its Wyoming pipelines, along with lower projected renewal rates, have offset the recent Kinder Morgan $2 billion drop down of two of its pipelines (at 9x EBITDA, both transactions were accretive to unit holders).
The question for current and prospective unit holders is where will future growth come from? Currently, the MLP has $1.3 billion in expansion plans focused on two main areas.
The first area is LNG exports, which are projected to reach 9.8 Bcf/d (billion cubic feet/day) by 2020, up from nothing today. The second is growth in domestic gas demand: Kinder Morgan is projecting a 37% increase, mainly in power generation.
For now, El Paso, with its safe 7.8% yield backed by the financial and managerial might of the Kinder Morgan empire, remains a buy.
Energy investing in the real world can be a tricky business. Every MLP will experience hiccups and troubles, and some will be so difficult that they falsify the investment theses behind investments. However, I do not feel this is the case with either Williams Partners, Williams Companies, or El Paso Pipeline Partners.
The two MLPs have sufficient financial resources (backed by general partners with access to large capital markets) and large and multiple opportunities to take part in America's energy infrastructure bonanza. I am confident that investors in all three will find the next decade highly prosperous, with high, growing yields and market-beating capital gains.
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