Update Western Gas Partners (WES)

03/07/2012 1:40 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Western Gas Partners (WES) hit my target price of $40 a share on January 23. The stock kept going up to $46.12 on March 1. And now it looks like it’s pulling back a bit with the rest of the market.

Sell? Hold? What have I been waiting for? My gain on Western Gas Partners was 22.6% as of the close on March 6 from November 16, 2011 when I added it to my Jubak’s Picks portfolio http://jubakpicks.com/

The master limited partnership’s fourth quarter earnings report on February 27, actually. I’ ve been waiting to see what the partnership’s list of growth projects looked like.

As I’ve noted about Kinder Morgan Energy Partners (KMP) and ONEOK (OKS) in my dividend income portfolio http://jubakpicks.com/  master limited partnerships grow their cash flow (and hence their distributions to investors) by borrowing money and then investing it in projects with returns above their cost of capital. So two things really matter to investors in a master limited partnership: First, Is money cheap or expensive, and, second, Does the partnership have a good list of opportunities for investment?

Right now money is cheap. Very cheap. So master limited partnerships with a long list of viable investment opportunities should be able to grow cash flow and distributions at a hefty rate.

For the full year of 2011, Western Gas Partners showed in its fourth quarter report, distributable cash flow climbed 4% to $2.33 a partnership unit. (EBITDA—that’s earnings before interest, taxes, depreciation, and amortization--increased by 19% from the fourth quarter of 2010 due to an increase in natural gas and, especially, natural gas liquids flowing through the partnership’s pipeline system.) That increase in cash flow was good enough to enable the company to raise its quarterly distribution by 4.5% from the payout in the third quarter to an annual $1.76 a unit. (The year-to-year increase comes to 16% from the fourth quarter of 2010.) At the March 6 closing price that’s good for a yield of 3.98% for 2012--if the partnership doesn’t raise distributions in the quarters ahead.

But what I was happiest to see was big increase in cash-earnings assets and plans for assets.

First, there were continued asset drop-downs from Anadarko Petroleum (APC), such as the $483 million Red Desert Complex. (Western Gas Partners was formed in a 2008 spin off of assets from Anadarko. Anadarko contributed about one-quarter of its midstream pipeline, collecting, and processing assets. Since then, Anadarko has dropped down another $1.2 billion in assets to Western Gas Partners.) Credit Suisse projects $500 million in additional drop downs from Anadarko in 2012.

Second, in 2011 Western Gas Partners completed its first acquisition from someone other than Anadarko. That’s an important signal of the company’s growing independence.

And, third, Western Gas Partners announced $400 million in planned capital spending for 2012 on organic growth. The big internally generated projects include the $205 million Brasada Processing Plant, which will be the partnership’s first venture into the liquid-rich Eagle Ford shale region, and the $130 million Lancaster Processing Plant Projections, which is projected to be in service by the first quarter of 2014.

Looking at the February report, I see a still-relatively young partnership that’s throwing off increasing amounts of cash for investors and that has a enviable line up of new projects underway. As of March 7, I’m raising my target price for Western Gas Partners to $49 by June 2012. The partnership paid its fourth quarter dividend on February 132, 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Western Gas Partners as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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