By Carla Fried
Given the sorry state of global commodity prices, investing in the U.S. energy boom is a dicey business. While natural gas production is up about 25% over the past five years, natural gas prices are about 45% lower.
U.S. crude is nearly 40% higher over that stretch, but all of that came between 2009 and early 2011. Since then, U.S. crude oil prices have slumped 6%.
Investing in the major diversifieds Exxon Mobil (XOM) and Chevron (CVX) means gambling that massive capital expenditures the past few years will pay off down the line with production gains that can -- fingers crossed -- benefit from stronger commodity prices.
That's where a company like Spectra Energy Partners (SEP), a master limited partnership, begins to look intriguing. The mid-stream pipeline and storage operator is pretty much immune to commodity prices. It makes its money charging the producers and refiners to move and store their bounty. In fact, more than 90% of Spectra Energy Partner's revenue comes from fixed capacity reservation fees. Whether the buyer uses the pipeline or storage facility is moot; Spectra Energy still gets paid. That creates some nice revenue and cash flow:
In August, Spectra Energy Partners announced it would assume all the remaining pipeline and storage facilities from Spectra Energy (SE), the company it was spun out of in 2007. When the deal closes -- by year end -- Spectra Energy Partners expects to be one of the largest fee-based MLPs in the United States. Before the drop-down deal Spectra Energy Partners was operating more than 5,000 miles of pipelines, had nearly 60 billion cubic feet of natural gas storage and the capacity to store 4.8 million barrels of crude oil.
Estimated 2014 EBITDA that incorporates the big drop-down deal, is $1.48 billion, a far reach from today's growing, but small level:
SEP EBITDA (Annual) data by YCharts
Spectra Energy Partners is on the record that it expects increased cash flows from the deal to drive up distributions to shareholders 9% a year in 2014 and 2015. Add that to a compelling dividend yield currently above 4.5% and you've got yourself some nice motivation to put up with the obligatory K-1 hassles that come with MLPs.
(Spectra Energy Partners is only a 1.4% position in the ALPS Alerian MLP ETF (AMLP) - which charges an obscene 0.85% expense ratio anyway.)
There also seems to be ample growth in pipeline and storage buildout to keep distribution increases coming. Long-term, management has laid out more than $25 billion in projects; the drop-down of the Spectra Energy assets is expected to add $8 billion in organic growth through the end of this decade.
Spectra Energy Partners is also a fairly decent valuation story. Despite thumping the S&P 500 by more than 20 percentage points in 2013, Spectra Energy Partners still trades about 5% below the $46 per share fair value estimate from Morningstar. Using additional investment research tools to examine Spectra is a good idea.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.