Western Gas Keeps Aiming Higher

03/07/2012 4:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

An enviable list of strong projects under developmentmeans this MLP continues to have growth potential, writes MoneyShow’s JimJubak, also of Jubak’s Picks.

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

Sell? Hold? What have I been waiting for? My gain on Western GasPartners was 22.6%, as of the close on March 6, since I added it to myJubak’s Picks portfolio on November16, 2011.

Actually, I was waiting for the master limited partnership’sfourth-quarter earnings report on February 27. I’ve been waiting to see whatthe 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, master limited partnerships grow their cash flow(and hence their distributions to investors) by borrowing money and investingit in projects with returns above their cost of capital.

So, two things really matter to investors in a master limitedpartnership:

  • First, is money cheap or expensive?
  • Second, does the partnership have a good list of opportunities for investment?

Right now, money is cheap. Very cheap. So master limited partnershipswith a long list of viable investment opportunities should be able to grow cashflow and distributions at a hefty rate.

For the full year of 2011, as Western Gas Partners showed in itsfourth-quarter report, distributable cash flow climbed 4%, to $2.33 apartnership unit. (EBITDA—that’s earnings before interest, taxes, depreciation,and amortization—increased by 19% from the fourth quarter of 2010, due to anincrease in natural gas and, especially, natural gas liquids flowing throughthe partnership’s pipeline system.)

That increase in cash flow was good enough to enable the company toraise 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 thefourth quarter of 2010.)

At the March 6 closing price, that’s good for a yield of 3.98% for2012—if the partnership doesn’t raise distributions in the quarters ahead.

But I was happiest to see a big increase in cash-earnings assets andplans for assets.

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

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

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

Looking at the February report, I see a still relatively youngpartnership that’s throwing off increasing amounts of cash for investors andthat 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 February13.)

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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