Western Gas Partners LP (NYSE: WES) could be at risk of a re-rating if double-digit distribution growth becomes harder to achieve after 2015.
But the MLP remains a worthwhile long-term holding for several reasons. Anadarko Petroleum Corp (NYSE: APC) has proved itself a supportive sponsor over the years, most recently transferring interest in its Permian Basin joint venture for what amounts to a three-year IOU and extending NGL price protections.
The exploration and production company still has several midstream assets in its inventory that provide some visibility on future distribution growth in a challenging environment.
We also wouldn’t be surprised if Western Gas Partners were to leverage its favorable cost of equity capital—the lowest among established gathering and processing MLPs—to pursue opportunistic third-party acquisitions.
More important for long-term investors, Anadarko Petroleum boasts one of the strongest balance sheets among North American producers and some of the best economics in the Niobrara Shale and Permian Basin.
Western Gas Partners’ close relationship with a sponsor that will survive the industry reset and win market share represents a huge competitive advantage.
However, three risks mean that investors shouldn’t allocate fresh capital to Western Gas Partners in the near term and should consider taking profits off the table:
Western Gas Partners’ distribution isn’t at risk, and we remain bullish on the MLP’s long-term prospects. However, the risk-reward balance has skewed toward the downside in the near term.
Investors sitting on large gains in this stock should consider taking some profits off the table and prepare for more volatility in the near term.
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Elliott and Roger on Nov. 30, 2021
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