When I wrote about Western Gas Partners L.P. (WES) I was impressed with the distribution growth rate this 5-year old MLP had produced. I can get pretty interested in a midstream MLP with a 4% yield and 15% to 20% dividend growth. Now the recent IPO of the general partner holding company, Western Gas Equity Partners L.P. (WGP) is looking to double junior's dividend growth rate.
Note: MLP companies such as Western Gas Partners and Western Gas Equity Partners have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.
The New Western Gas Equity Partners
The Western Gas Equity Partners IPO spun out the general partner and limited partner interests of Western Gas Partners owned by Anadarko Petroleum (APC). The assets of Equity Partners consist of the 2% general partnership stake of WES including incentive distribution rights and 46% of the limited partner units. Note that Anadarko Petroleum still holds 91% of WGP.
It is interesting to break down the market value of Western Gas Equity Partners. WES has a current market cap of $5.2 billion. So about half of the LP units held by WGP are worth $2.6 billion. However, WGP has a market cap of $7.4 billion. That means the GP stake and IDR's are valued at $4.8 billion. That is a lot of money compared to the value of the part - Western Gas Partners - actually doing the work.
The WGP/WES combo recently announced the dividends for the 2012 fourth quarter. The WES distribution of 52 cents represents a 4% increase over the third quarter and an 18% increase over the 2011 Q4 payout. The initial WGP dividend was prorated to represent a quarterly rate of 16.5 cents. At the current share price and based on these dividend rates, WES has a yield of 3.9% and WGP yields an even 2%.
The exciting part is where the Western Gas duo expects the distribution rate to go from here. Western Gas Partners projects a minimum 15% increase in its distribution over the next four quarters. Western Gas Equity Partners is looking for a minimum dividend rate boost of 33%.
Investment Potential and Conclusions
The distribution growth rates of both of these MLP stocks put them in a different category compared to other L.P. investment choices. If Western Gas Equity Partners is able to increase the distribution by a third and the yield stays at 2%, the share price will go up by the same 33%. Two years of this kind of distribution growth would be an investment double. I see both WES and WGP as investments focused more on share price gain than actually on the dividend stream - at least at this point in their growth cycle.
The WGP cash flow increases with both the WES distribution increases and the incentive distribution rights of up to 48% of the payout increase to L.P. units. With this pure play GP company, it is interesting to see the power of compounding growing distributions with IDR.
In my model portfolio, I have taken half the WES position and put it into WGP. I will be reporting on how the two values compare. If the Seeking Alpha interest in the form of email subscriber numbers and amount of coverage is an indicator, these two MLP's are still running under the radar of individual investors.
Recommended Reading: Western Gas Partners Riding Anadarko Coattails To Strong Dividend Growth