Friday January 11, 2013
by Elliott Gue, editor Energy & Income Adviser
Our top conservative pick for 2013 is Western Gas Partners LP (WES), which owns 15 gas-gathering systems, eight treating facilities, nine processing plants and one pipeline.
Gathering systems consist of small-diameter pipelines that connect individual wells to processing facilities and treating facilities. Customers pay Western Gas Partners a volume-based fee for access to the MLP’s gathering system.
Gas treating and dehydration plants remove carbon dioxide, hydrogen sulfide and water vapor that can occur in raw gas stream. Natural gas transported over interstate pipelines to end-users cannot contain these impurities.
Gas-processing plants separate NGLs, a heaver group of hydrocarbons that includes propane, butane and ethane, from the gas stream. The price of a mixed barrel of NGLs has historically tracked the price of crude oil.
Regardless of the commodity transported, pipelines usually entail little exposure to commodity prices and only modest exposure to economic conditions; the contracts governing these assets often involve a capacity-reservation fee that the pipeline owner receives regardless of whether the customer uses its allotment.
Despite its exposure to gathering and processing, Western Gas Partners is one of the lowest-risk MLPs in our coverage universe -- thanks to its conservative, fee-based contracts and strong support from its parent and general partner, Anadarko Petroleum, one of the largest independent oil and gas producers in the US.
Western Gas Partners continues to benefit from Anadarko's accelerating development of Colorado’s liquids-rich Denver-Denver-Julesburg Basin, where the parent plans to sink 170 horizontal wells in 2012 and boasts an inventory of 2,700 drilling locations.
Western Gas Partners owns a 2,880-mile gathering system in the region, significant processing and treating capacity, and an interest in an oil pipeline.
Drop-down transactions from Anadarko Petroleum will continue to drive Western Gas Partners’ distribution growth. In these deals, the parent company sells midstream assets to the MLP at a price that’s immediately accretive to the child’s cash flow, enabling the publicly traded partnership to boost its quarterly distribution.
Anadarko Petroleum owns 100 percent of the general partner interest in Western Gas Partners, entitling the independent oil and gas producer to incentive distribution fees from the MLP.
The parent also owns about 42 percent of the partnership’s outstanding units. These financial ties incentivize Anadarko Petroleum to follow a strategy that will enable the MLP to grow its distributable cash flow.
Management has indicated that the publicly traded partnership plans to raise its quarterly payout by at least 15 percent in 2013. With a current yield of 4.4%, buy Western Gas Partners LP up to $52 per unit.
Learn more about this financial newsletter at Elliot Gue's Energy & Income Adviser.