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Q2 in Review: Conservative MLP Portfolio

By Roger S. Conrad on Aug. 29, 2014

Western Gas Partners LP continues to deliver the goods, raising its distribution by 4 percent sequentially and 16 percent year over year. Equally impressive, the MLP generated enough distributable cash flow to cover 130 percent of this higher payout.

Management’s guidance calls for the MLP to grow its distribution by at least 15 percent this year.

We also remain bullish on the MLP’s long-term growth prospects, thanks to its close relationship with its sponsor, Anadarko Petroleum Corp (NYSE: APC), which uses the MLP and its general partner, Western Gas Equity Partners LP (NYSE: WGP), as a means to fund its ambitious drilling programs in US shale plays.

Since its initial public offering in 2008, Western Gas Partners has completed about $2.5 billion worth of drop-down transactions from Anadarko Petroleum, giving the MLP an impressive foothold in the Niobrara Shale and the Marcellus Shale.

Anadarko Petroleum’s current portfolio of midstream assets generates about $300 million in annualized EBITDA and includes oil-related infrastructure in the Permian Basin, Eagle Ford Shale and the Niobrara Shale. Management expects the oil and gas producer to drop down all of these assets to Western Gas Partners.

Over the past three years, this asset base and its sponsor’s aggressive drilling program has provided Western Gas Partners with ample opportunity to pursue organic growth projects.

In 2012, this push began in earnest, with the MLP more than quadrupling its capital expenditures to $424 million. Management’s forecast calls for the partnership to invest between $550 million and $700 million into growth projects this year, with 57 percent of these capital expenditures allocated to the Niobrara Shale and 22 percent to the Marcellus Shale.

Although Western Gas Partners has warned that throughput growth in the Marcellus Shale would likely slow until projects come onstream to increase the takeaway capacity from this prolific basin, the opportunity in the Niobrara Shale remains huge.

Accelerating drilling activity in Wyoming’s Powder River Basin is another upside driver for the MLP. In the second quarter, Western Gas Partners signed an agreement with a third-party producer to expand its Hilight gathering and processing system.

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