- Solid growth in distributable cash flows.
- Growth projects will add to the top line as well as cash flows.
- Growing cash distribution will make it attractive to a larger set of investors.
Energy Transfer Partners (NYSE:ETP) is one of the leading companies in the natural gas utility industry with a market cap of about $19 billion. The partnership is a relatively smaller player compared to its competitors. The partnership has been one of the best performers in the sector along with Enterprise Products Partners (NYSE:EPD) - both of these stocks gained more than 18% over the last twelve months, while the third major player, Kinder Morgan Energy Partners (NYSE:KMP), has lost more than 11% over the same period. However, the scope of this article is the analysis of distributable cash flows and future growth prospects of Energy Transfer Partners, and we will not be focusing on the comparative analysis.
Growth in Cash Distributions
Distributable cash flow is the most important figure when it comes to measuring the performance of any partnership. For a partnership to maintain healthy growth in cash distributions; it is vital to have strong growth in distributable cash flows. ETP did not increase its cash distributions for about five years and the last increase in the cash distributions was in the second quarter of 2008. However, in the third quarter of the last year, the partnership again started to grow its cash distributions - in the following quarter, ETP again raised the quarterly cash distributions, and currently it stands at $0.92 per unit.
At the same time, the distributable cash flow of the company has also more than doubled indicating that the growth in the future cash distributions will continue. Massive growth in the distributable cash flows has also taken the distribution ratio of the partnership over 1 (1.09x), from 0.63x a year ago. The growing strength of the distributable cash flows and the ratio will go a long way in ensuring the future growth of cash distributions.
Regardless of the increasing margins of the partnership, Energy Transfer has increased its debt base with a net total of $16.45 billion in the last year. Due to higher revenue generation, the partnership managed to increase its operating cash flows to $2.3 billion, up from about $1.2 billion at the end of 2012. Energy Transfer Partners is one of the highest yielding stocks in the industry - with a cash distribution yield of 6.5%.
In the past few years, the company has spent a huge amount in capital expenditures which is now bearing fruits for the company. Due to the strategic acquisitions and deals, the revenues of the company have grown by almost 200%. The significant demand for crude transportation to the Gulf Coast markets has prompted the partnership to shift its focus from Natural Gas to Crude through the Trunkline Oil pipeline - the project will handle 420,000-600,000 barrels a day and span over more than 700 miles. The Trunkline shipments of crude would begin in 2015, and it will bring substantial revenue and cash flows to the partnership - The project is a joint venture between ETP and Enbridge Energy Partners (NYSE:EEP). This ensures future growth for the company with timely strategic decisions for better distributable cash flow growth in the future.
ETP is also expecting to see processing and throughput volumes increase over the course of the current year as numerous projects start to pay-off. The natural gas exports are also speeding up, with companies getting approval to export NGL. ETP has also partnered with Lake Charles Exports, an entity owned by BG LNG Services, to export LNG in order to meet growing global demand. The export of natural gas liquids over long distances also offers a unique arbitrage opportunity to domestic players in the U.S., enabling the market players to secure larger revenue margins and utilize them to strengthen their asset base. These decisions will increase the profitability and growth in future cash distributions and make the partnership an extremely attractive investment.
I believe ETP is one of the best positioned energy partnerships in the sector - the partnership has started to grow its cash distributions, which should attract more investors. In addition, the foundation for future growth in cash flows and distributions is in place in the shape of a good cushion in distributable cash flows. Furthermore, the future growth projects will add to the revenues and cash flows substantially over the next few years. In my opinion, ETP will see a considerable rise in the stock price over the next twelve months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.