This partnership is throwing off cash

Western Gas Partners has seen double-digit gains in a matter of months.

By Jim J. Jubak Mar 7, 2012 4:54PM
Image: Natural gas plant (© Kevin Burke/Corbis)Western Gas Partners (WES) hit my target price of $40 a share on Jan. 23 and kept rising, reaching $46.12 on March 1. 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 Nov. 16, 2011, when I added it to my Jubak’s Picks portfolio. 

I was waiting for the master limited partnership's fourth quarter earnings report on Feb. 27, actually. I wanted to see what the partnership's list of growth projects looked like.

As I've noted about Kinder Morgan Energy Partners (KMP) and Oneok Partners (OKS) in my dividend income portfolio, master limited partnerships grow their cash flow (and hence their distributions to investors) by borrowing money to invest 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 -- 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, Western Gas Partners completed its first acquisition last year 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 Feb. 13, 2012.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. 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 the most recent quarter, see the fund's portfolio here. 
Tags: energyJim JubakKMPOKSWES
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3Comments
Ice Cold Sangria
Mar 8, 2012 1:36AM
avatar

 

Wow.  MSN is pretty cool.

 

They deleted that "hot babes" post I was referring to, but left my posts intact.  These guys are not so bad after all.

 

I gotta go to bed now.  I stopped the video tape where Hickey and Boggs were walking into the Los Angeles football stadium to blow up the bag man.

 

Sean Connery was pretty cool, but Robert Culp in Hickey and Boggs - - well, that is as cool as it gets.  Except for maybe John Wayne in McQ.

 

Tomorrow morning - - be kind to one person.  Anybody.  At the office or on public transit.  Just be kind to one.  We're running out of time.  Or, in the immortal words of George Clooney in "The Descendants" . . . .

 

"It's gonna be a train wreck."

 

 

Ice Cold Sangria
Mar 8, 2012 12:09AM
avatar

 

H ot  b a be s?                        Makes me want to invest in a company that is extracting oil from shale.

 

I'm gonna pass on watching Hickey & Boggs and go to bed.

 

The internet is destroying us all.

 

Where the hell is part two of Atlas Shrugged in the movie theaters?   Will there be a part three?

 

The internet is destroying us all.   We are all sleep deprived.

 

 

 

 

 

Log off.                                Go to sleep.

 

 

Ice Cold Sangria
Mar 7, 2012 11:48PM
avatar

 

Yes, money is cheap.

 

 

 

 

 

 

 

But, I live in Seattle.  When I go outside my office building for a smoke, whackadoo bums, street scum, and drunks wander up to me to adivse me how I can make money by investing in extracting oil from shale.  They also ask for a cigarette.

 

Lord.  Oil out of depleted shale.  Bite me.

 

Run away and invest your money in General Motors who is going to make a pile of cash out of that Chevy Volt.  They'll have to move piles of money just to go to the bathroom!!!!

 

(Yes, yes, I stole that joke from Louie Anderson.)

 

 

How drunk and stupid do you have to be to buy $2,000.00 more shares of Exxon?

 

I'm going to log off and watch my video tape of Hickey & Boggs.  The hell with you knee biters.

 

 

 

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