Sell Energy Transfer Partners (ETP)
I think you can do better.
Yes, Energy Transfer Partners (ETP) pays a current yield of 8.2%. But with a master limited partnership like this what I want to see is the potential for solid increases in cash distributions over time. And on that front Energy Transfer Partners looks like a laggard.
I’m selling this master limited partnership out of Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ as of today.
Standard & Poor’s, which gives this stock a buy rating, forecasts that cash distributions will climb just 1.7% in 2011. That trails S&P’s forecast of 7.1% growth in cash distributions for Magellan Midstream Partners (MMP), for example. In the realm of growth in real cash, and not in projected cash, Energy Transfer Partners showed no increase in distribution in the second quarter of 2011 versus a 7.2% increase from Magellan Midstream Partners and a 4.5% increase for ONEOK Partners (OKS). (Energy Transfer Partners is a member of my Jubak’s Picks portfolio; Magellan Midstream and ONEOK are members of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ )
This doesn’t look like a short-term problem either. Barclays forecasts that the distribution increase at Energy Transfer Partners will grow at a 3.1% compounded annual rate from 2010-2015 compared to 5.1% for its peers among master limited partnerships.
What’s the problem? Actually it seems to be problems plural. Read more
Update Energy Transfer Partners (ETP)
When I last reported on Energy Transfer Partners back on January 10, 2011 (see my post http://jubakpicks.com/tag/etp/ I said that I’d wait for the partnership’s February 17 earnings report to see if Energy Transfer Partners had some new projects on its to do list. I noted that the way a master limited partnership grows cash flow for distribution is by raising money in the capital markets, building new projects, and collecting the cash flow. The last investor presentation I’d seen was a very impressive litany of completed projects, but I didn’t see any significant new work on deck. That would limit the capital gains an investor could expect from the units. But given the then 6.8% yield on the partnership and Energy Transfer Partners track record, I thought it a good idea to wait for February 17.
So what did investors hear that day? Solid news for the fourth quarter of 2010 with reported adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $411 million, flat with the fourth quarter of 2009, and distributable cash flow of $284 million, up 11% from the fourth quarter of 2009. For the year distributable cash flow came to $1.03 billion.
As far as cash distributions go, 2011 looks like a really good year. Cash flows from several recently completed projects that entered service in the fourth quarter of 2010 will ramp up. Standard & Poor’s estimates that cash distributions will climb by 2.9% in 2011.
But when it came to new projects, the list was pretty short. Management announced plans to invest $300 million in a 160-mile gas pipeline called the Rich Eagle Ford Mainline that will take gas from the Eagle Ford Shale formation to connect with the Chisholm pipeline that the partnership current has under construction. Energy Transfer Partners will also build a new processing plant its LaGrange site.
But that’s pretty much it.
Frankly, I’d hoped for more. And in some markets the lack of new projects would make me sell the stock.
But at the moment, when economic growth seems like it might be slowing and when the middle of 2011 is looking like a major test for stock valuations (see my post http://jubakpicks.com/2011/03/01/even-strong-manufacturing-data-point-to-crunch-time-around-the-middle-of-2011/ , the predictability of Energy Transfer Partners is attractive. And the current 6.5% yield, with all the odds favoring an increase in distributions in 2011, is, well, extremely attractive. Read more
Update Energy Transfer Partners (ETP)
Energy Transfer Partners (ETP) is one of my favorite master limited partnerships. Its natural gas pipeline business coins cash and the yield on these partnership units is a very satisfying 6.8%. The total return (that’s dividend plus price appreciation) has been even more satisfying at 23.2% for 2010 after an absolutely stellar 42.7% in 2009.
But now I think the partnership is near a crossroads.
Just skimming through the company’s presentation at the December 7, 2010 Wells Fargo Energy Symposium will show you what I mean. (http://www.energytransfer.com/PRAttach/Wells%20Fargo%20December%202010%20Presentation%20Final.pdf ) The presentation is a litany of completed pipeline projects. Chisholm will go into operation in the second quarter of 2011. Hermanas went into operation in December 2010. Lumberjack? December 2010. Fayetteville? In service now. Tiger went onto service in December 2010.
So what’s next? Energy Transfer Partners runs a very profitable business but growth for a master limited partnership depends on raising capital, investing in new projects, and then collecting the revenue from those projects.
What I can see at Energy Transfer Partners is a lot of opportunities for smaller infill projects but I don’t yet know what the company sees as its big next steps. Without those big next steps, Energy Transfer Partners will be a very rewarding dividend play. But without that growth, it’s hard for me to see how the partnership delivers the kinds of total returns that it has produced in recent years.
I think Energy Transfer Partners has earned some wait and see time from me and I’m looking forward patiently to the February 17 earnings report and conference call to see what the vision for the future might be. If you own this I’d hold on. If you don’t, I’d wait and see what February 17 brings. In the meantime, as of January 10, I’m raising my target price to $54 a share, from $52, by March 2011.
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 not own shares of Energy Transfer Partners as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. I’ll have the fund’s portfolio as of the end of December posted in a few days.
Update Energy Transfer Partners (ETP)
I’m filing this update from the beach. I’m on vacation the week of March 29 April 2. Unless the sun stops shining here in the Bahamas (or the kids decide to hire themselves out on a fishing boat), I don’t anticipate filing more than once a day for this week. JubakPicks.com will go back to its normal schedule on Monday April 5.
Update Energy Transfer Partners (ETP)
Energy Transfer Partners (ETP) has hit my $47 target price just about on schedule. But I don’t see any reason to sell these master limited partnership units out of Jubak’s Picks quite yet. As I wrote in July 2009, “The longer the Federal Reserve promises to keep interest rates low, the more valuable Energy Transfer Partners (ETP) is and the longer I want to hold it.” The Fed’s target for shorter interest rates is still at 0% to 0.25% and the promise is still to keep rates at that level “for an extended period.” Long-term interest rates have begun to push upward in anticipation of an eventual change in Fed policy, or inflation, or the depreciation of the dollar, or whatever, but the 7.84% yield on these units is still comfortably ahead of that increase. (For more on Federal Reserve policy see my post http://jubakpicks.com/2010/03/16/fed-holds-interest-rates-near-0-but-continues-to-reduce-role-in-the-markets/ )
So what’s ahead for Energy Transfer Partners? Read more
Update Energy Transfer Partners (ETP)
The longer the Federal Reserve promises to keep interest rates low, the more valuable Energy Transfer Partners (ETP) is and the longer I want to hold it. Read more
