When I last reported on Energy Transfer Partners (NYSE: ETP) back on January 10 (see that post here), I said that I’d wait for the partnership’s February 17 earnings report to see if ETP 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 featured 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 ETP’s track record—I thought it might be 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 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, which will take gas from the Eagle Ford Shale formation to the Chisholm pipeline that the partnership is building now. ETP will also build a new processing plant at its LaGrange site.
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 on this), 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.
On the basis of that yield, and the increase in distributions, I think these units could appreciate to $60 by January 2012. That’s roughly a 10% gain from here. Add in a 6.5% dividend, and that’s a very good package considering the stock-market environment for the second half of 2011.
As of March 2, I’m keeping Energy Transfer Partners in my Jubak’s Picks portfolio with a price target of $60—up from the current target of $54—by January 2012.
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 (JUBAX), 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 January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio here.
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