Can A Change In Priorities Drive Better Distributions From ETP?

By Stephen D. Simpson, CFA | March 21, 2012 AAA

A well-run energy MLP can be a beautiful thing for an investor whose inclinations run towards income. With the largest gas pipeline network in Texas and a growing focus on natural gas liquids (NGL), quality of assets is not an issue with Energy Transfer Partners (NYSE:ETP). The issue for shareholders, though, is whether this is the best play on these assets and whether the aggressive asset growth plans will translate into better distribution growth in the near future.

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Q4 Results Not All That Great
Although Energy Transfer Partners did report 17% year-on-year growth in EBITDA for the fourth quarter that was nevertheless about 4% below consensus expectations. That's admittedly not a big miss, but small percentages matter more with energy MLPs and investors' moods were not improved by the below-expectation distributions that the company announced. (For related reading, see EBITDA: Challenging The Calculation.)

If there was a brighter side to the results, it was that "core" results were better. Results were held back by relatively poor performance in propane (due in large part to warmer than usual weather), but Energy Transfer Partners has since sold that business to AmeriGas Partners (NYSE:APU) in exchange for $2.8 billion, roughly half in cash and half in APU units (which also pay distributions).

A Lot of Growth on the Way
Energy Transfer Partners is certainly not sitting still with its asset pool. In addition to the propane sale, ETP has purchased NGL pipeline and storage assets from LDH, and the acquisition of Southern Union (NYSE:SUG) by Energy Transfer Equity (NYSE:ETE) (ETP's general partner) will result in the sale of SUG's 50% stake in the Florida Citrus pipeline to ETP.

But wait, there's more. ETP will be investing about $2 billion in new projects centered on liquids infrastructure assets like processing, transport and fractionation. On the fractionation side, the company will be looking to add capacity at Mont Belvieu and become a larger player alongside the likes of Targa Resources (Nasdaq:TGRP) and Enterprise Products (NYSE:EPD). And then there's its core Texas pipeline holdings, where the company is bringing more capacity to address the Eagle Ford region.

But at What Cost/Benefit?
Obviously, these ventures are all going to cost money and the propane sale only covers a part of it. Unfortunately, ETP doesn't have the best cost of capital in the MLP space. This is due at least in part to the fact that Energy Transfer Equity (which owns a 1.8% GP interest and 28% of units) takes a larger large bite in the form of GP distributions.

The risk, then, is that ETP is shuffling its assets in the right direction, but the benefits may not show up in terms of distribution growth.

The Bottom Line
One concern I have about ETP is whether the nature of its game has changed permanently. In past years, ETP derived at least some of its excess profits from its ability to move gas anywhere throughout Texas and take advantage of differentials at various hubs. With more infrastructure in place, though, and more gas coming from regions like the Rockies and Marcellus, it's worth wondering if future differentials will be anything like they were in the past. This isn't an existential worry at all, rather just a concern about whether some of the "spice" of this story is gone for good.

These units do look undervalued, as analysts and investors have really soured on the distribution growth outlook. All in all, it doesn't look like a bad holding. That said, it may not be the best play on these assets, and investors may well want to consider the general partner Energy Transfer Equity.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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