This article uses terms and concepts explained in A Ranking Protocol for the MLP Space. If you are an energy industry expert please forgive my gross oversimplifications intended to give a big picture view without getting completely down in the weeds.
No Attention Span Summary: The Gathering & Processing ("G&P") Master Limited Partnerships ("MLPs") ranked in order from highest/best score to lowest score on the key 3 Year Forward Yield After Tax / Valuation Coverage Ratio ("3YR FYAT / VCR") metric are as follows: EXLP, GSJK, NGLS, XTEX, ACMP, RGP, CMLP, APL, AMID, MWE, CPNO, EQM, PVR, WES, DPM.
Gathering & Processing
The members of this MLP segment are grouped as peers based on their business operations within the Energy Value Chain. Essentially the group is the part of the value chain that takes produced hydrocarbons from the Upstream segment once the hydrocarbons are up at the surface and now need to be transported horizontally and processed (generally more applicable to the wet or liquids rich natural gas hydrocarbon stream). For the Upstream segment think of oil and natural gas producing companies that primarily have vertical "pipes," i.e. they have the wells that are drilled down into the ground (they are all going horizontal nowadays with their wells but they all have to drill down vertically first).
G&P MLPs that process more liquids rich natural gas also tend to have higher exposure to commodity prices resulting from the processing contracts that they have in place with the Upstream producers. Keep-Whole and Percent of Proceeds/Liquids contracts have varying degrees of risk with Keep-Whole contracts being much riskier, while Fixed-Fee Processing contracts have no direct commodity risk (definitions can be found here). The G&P MLPs with direct commodity price risk can and do enter into commodity hedging contracts to help manage their risk/exposure.
Abbreviated business descriptions taken from Company SEC Filings and/or Company websites that explain why they are all considered part of the G&P MLP segment peer group (sorted alphabetically by ticker symbol):
- Access Midstream Partners, L.P. (ACMP) - Provides gathering, treating and compression services to producers under long-term, Fixed-Fee contracts.
- American Midstream Partners, L.P. (AMID) - Provides natural gas gathering, compression, treating, processing, transportation, and sales of natural gas, natural gas liquids ("NGLs") and condensate, and transportation services in the Gulf Coast and Southeast regions of the United States.
- Atlas Pipeline Partners, L.P. (APL) - Engaged in the gathering and processing of natural gas in the mid-continent and southwestern regions of the United States; natural gas gathering services in the Appalachian Basin in the northeastern region of the United States; and the transportation of NGLs in the southwestern region of the United States.
- Crestwood Midstream Partners, L.P. (CMLP) - Engaged in the gathering, processing, treating, compression, transportation and sales of natural gas and the delivery of NGLs produced in the geological formations of the Barnett Shale in north Texas, the Fayetteville Shale in northwestern Arkansas, the Granite Wash in the Texas Panhandle, the Marcellus Shale in northern West Virginia, the emerging Avalon Shale trend in southeastern New Mexico, and the Haynesville/Bossier Shale in western Louisiana.
- Copano Energy LLC (CPNO) - Provides natural gas gathering, compression, dehydration, treating, marketing, transportation, processing and fractionation services in Texas, Oklahoma, Wyoming and Louisiana.
- DCP Midstream Partners, L.P. (DPM) - Engaged in gathering, compressing, treating, processing, transporting, storing and selling natural gas; and producing, fractionating, transporting, storing and selling NGLs and condensate and the wholesale propane logistics business in Northern Louisiana, Southern Oklahoma, Wyoming, Colorado, East Texas, Michigan and Southeast Texas.
- EQT Midstream Partners, L.P. (EQM) - Provides transmission, storage and gathering services to EQT Corporation (EQT) and third parties in the Appalachian Basin across 22 counties in Pennsylvania and West Virginia.
- Exterran Partners, L.P. (EXLP) - Provides natural gas contract operations services to customers throughout the United States.
- Compressco Partners, L.P. (GSJK) - Provides compression-based production enhancement services, including both conventional wellhead compression services and unconventional wellhead compression services, and in certain markets, well monitoring and sand separation services.
- MarkWest Energy Partners, L.P. (MWE) - Engaged in the gathering, transportation and processing of natural gas; the transportation, fractionation, marketing and storage of NGLs; and the gathering and transportation of crude oil in the southwest, Gulf Coast and northeast regions of the United States, including the Marcellus Shale, and is the largest natural gas processor and fractionator in the Appalachian region.
- Targa Resources Partners, L.P. (NGLS) - Engaged in the business of gathering, compressing, treating, processing and selling natural gas and storing, fractionating, treating, transporting and selling NGLs and NGL products; and storing and terminaling refined petroleum products and crude oil.
- Penn Virginia Resource Partners, L.P. (PVR) - Engaged in the gathering and processing of natural gas and the management of coal and natural resource properties in the United States.
- Regency Energy Partners, L.P. (RGP) - Engaged in the business of gathering and processing, contract compression, treating and transportation of natural gas and the transportation, fractionation and storage of NGLs.
- Western Gas Partners, L.P. (WES) - Engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, NGLs and crude oil for Anadarko Petroleum Corporation (APC), as well as for third-party producers and customers in East, West and South Texas, the Rocky Mountains (Colorado, Utah and Wyoming), and the Mid-Continent (Kansas and Oklahoma).
- Crosstex Energy, L.P. (XTEX) - Engaged in the gathering, transmission, processing and marketing of natural gas, natural gas liquids, or NGLs, and providing terminal services for crude oil.
Assumptions and Fundamentals
Note: ADJ EBITDA = Trailing Twelve Month ("TTM") EBITDA - TTM General Partner Distributions (i.e. EBITDA available to the LP unit holders). Also some companies have made acquisitions and a pro forma TTM EBITDA number may not have been available so TTM EBITDA is understated (which makes EV / EBITDA multiples look higher).
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Note: 3YR FYAT is calculated based on projected distribution growth taking into account the estimated portion of the distributions that will be tax deferred and assuming a tax rate of 35% on the taxable portion of the distributions. The pending expiration of the Bush tax cuts would increase that assumed tax rate to 43.4%.
Note: For Valuation Coverage Ratio ("VCR") a lower number is better, VCR = (EV / ADJ EBITDA) / TTM Distribution Coverage Ratio ("DCR"). Additionally, the VCR calculation has been made slightly more onerous since the original article referenced above. It now uses the lesser of the TTM DCR or if the Most Recent Quarter "MRQ" DCR is less than 1.0x then it uses the MRQ DCR number. This adjustment makes the VCR penalize underperformance immediately when the quarterly DCR is less than 1.00x while still conservatively trailing during a rising DCR trend (i.e. if the MRQ DCR is 1.2x and the TTM DCR is 1.1x it will use the lower TTM DCR).
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Note: For the 3YR FYAT / VCR ratio a higher number within a segment is better, representing more projected yield at comparatively better/lower Enterprise Valuations and better/higher Distribution Coverage Ratios. Due to the compound nature of the 3YR FYAT / VCR score it is not scalable, meaning a score of 3.00 is not "twice as good" as a score of 1.50. The results are most sensitive to the Distribution Coverage Ratio.
- 8 of 14 companies have a Distribution Coverage Ratio less than 1.00x for the second quarter of 2012 primarily due to impacts from low NGL prices (there's that commodity price risk), so their scores are lower as a result.
- The market is more forgiving of larger MLPs as evidenced by DPM, which had the lowest 2Q12 DCR of 0.50x but is still trading roughly 27% above its 52 week low.
- ACMP is definitely benefiting from having 100% Fixed-Fee processing contracts, which means it does not have direct commodity price exposure. Thus ACMP had the highest DCR for 2Q12, although bear in mind that ~75% of that Fixed-Fee Contract Revenue still comes from Chesapeake Energy Corporation (CHK). The CHK concentration will reduce over time as ACMP adds additional different customers.
- Larger MLPs will tend to have a lower 3YR FYAT / VCR score because the market tends to value those companies at a higher EV / EBITDA multiple based on the concept that larger companies have more diversified revenue streams, greater access to capital and are thus less risky.
- Smaller MLPs that trade at lower Enterprise Valuations can score higher in these metrics assuming they have a decent Distribution Coverage Ratio but keep in mind that smaller does equate to riskier.
- While XTEX is ranked fourth in the 3YR FYAT / VCR score its DCR will probably slide lower in the third quarter so I expect it to slip in the rankings. Also keep in mind that it has had to cut and suspend its distribution in the past.
- Given its very strong market reception since its IPO, EQM may be getting viewed as more towards the Natural Gas & NGL Pipeline segment of the business. The market has bid up EQM's unit price ~35% from its June 26, 2012 IPO so the market may also expect a higher rate of distribution growth than my current assumption. I must admit that I misjudged how well EQM would be received.
Additionally all the Companies mentioned in this article are MLPs so additional tax considerations are required for investors, please consult with your tax advisor before making any investments into any asset class that you do not currently own. Some background on MLP tax considerations can be found here:
- Basic Tax Principles for MLP Investors
- MLPs and Taxes: What Investors Should Know
- MLP Tax Issues Every Investor Must Know
Additional disclosure: I may add, change or adjust any positions at any time and my ownership should not in any way be construed as a recommendation for anyone else to own the particular security discussed.