The Focus List’s exposure to midstream master limited partnerships (MLP) hasn’t done us any favors in recent weeks, with the group remaining under pressure despite the recent rallies in the price of crude oil and natural gas liquids–developments that bode well for production volumes in the US onshore market.
Among the names on our Focus List, Western Gas Partners LP (NYSE: WES) has lagged the most, reflecting concerns about its tightening distribution coverage and how the partnership will fund its 2018 capital-spending plans.
However, we regard these concerns as overblown and the stock as oversold.
The partnership covered its third-quarter payout by 1.09 times and warned that this relative weakness could persist until the back half of next year, when new gathering and processing capacity will come onstream and Anadarko Petroleum Corp (NYSE: APC) will ramp up production in the Delaware Basin.
With its net debt at 3.5 times operating cash flow, Western Gas Partners has the capacity to take on additional leverage to finance its planned capital expenditures for next year. The MLP could meet some of these capital needs when it refinances $350 million worth of bonds that mature in August 2018.
Anadarko Petroleum’s focus on living within cash flow may result in slower-than-expected production growth—previous guidance had called for the upstream operators’ oil output to grow by 15 percent annually.
Nevertheless, we remain sanguine on Western Gas Partners longer-term growth story and Anadarko Petroleum’s history of going above and beyond to support the MLP.
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Elliott and Roger on Sep. 27, 2018
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