NEW YORK (TheStreet) -- DCP Midstream (DPM_) has been up nearly 13% this year, easily outperforming most of its peers, but its growth story has just begun.
DCP Midstream is a master limited partnership formed by DCP Midstream LLC. The latter, is owned by Spectra Energy (SE_) and Phillips 66 (PSX_). DCP Midstream LLC is the biggest producer of natural gas liquids and the largest natural gas processor in the United States. The company alone is responsible for gathering and processing 12% of the total U.S. natural gas supply.
Moreover, last year, DCP Midstream's parent became the third biggest operator of natural gas liquids, or NGLs, pipelines.
On Friday, DCP Midstream announced that it will offer $500 million of units in the near future. The news caused a 1.76% drop in its units, which closed at $56.23 on Friday.
However, overall, DCP Midstream's units have risen by 12.9% this year, easily outperforming its peers as represented in the Alerian MLP ETF (AMLP), which is up 4.6% for the year to date.
From 2010, DCP Midstream has grown its asset base and NGLs production by more than three times. Consequently, DCP Midstream has been able to grow its distribution for 14 consecutive quarters. For the current year, it has targeted 7% growth.
The company will likely continue increasing its cash distributions as it eyes organic growth on the back of three projects that have come online and two projects that will begin commercial operations before mid-2015.
Furthermore, DCP Midstream can significantly grow its asset base by up to $5 billion by 2016, thanks to asset dropdowns from its parent. This will likely translate into earnings and distribution growth in the coming years.
DCP Midstream, like its parent, is also a diversified partnership with operations in three main areas: natural gas services, NGLs logistics and wholesale propane. DCP Midstream has significant operations in the Midcontinent, Eagle Ford, DJ Basin and the Permian Basin.
Since 2010, DCP Midstream's adjusted earnings in the natural gas services and NGL Logistics divisions have grown at average of 30% per year and 65% per year, respectively. On the other hand, its wholesale propane business has not witnessed any meaningful growth. But investors should not be alarmed as wholesale propane contributed just 6% to DCP Midstream's adjusted earnings in 2013. The rest, 74% and 20%, came from natural gas services and NGL logistics, respectively.
To ramp up its natural gas services segment, in the first quarter, DCP Midstream put a new 200 million cubic feet per day plant in service and has expanded the capacity of another plant by three times to 160 million cubic feet per day. Meanwhile, the company's Lucern-2 plant, with a capacity of 200 million cubic feet per day, will become operational by mid-2015.
DCP Midstream is also developing a 215-mile subsea gas pipeline to tap into the production from deepwater Gulf of Mexico. According to its forecast, this project, which is 40% owned by DCP Midstream and 60% by Williams Partners (WPZ_), will become operational by the fourth quarter of 2014.
DCP Midstream's management has predicted that these projects should provide $500 million of organic growth in 2014.
DCP Midstream is a much smaller entity than DCP Midstream LLC. The latter has a $13 billion asset base, which includes 42 plants and more than 52,000 miles of pipelines. On the other hand, DCP Midstream has $5.4 billion of assets with 22 plants and around 15,500 miles of pipelines. In the previous quarter, DCP Midstream's NGLs production was 139,000 barrels per day; its parent produced more than three times as much in the same period.
However, DCP Midstream is growing rapidly. From 2010, its asset base has grown by 220% while its NGLs production is up 310%. This growth was fueled by the support from its bigger parent as DCP Midstream LLC sold some of its assets to its MLP.
Earlier in March, DCP Midstream completed a massive $1.15 billion dropdown transaction in which it acquired four assets from DCP Midstream LLC: one-third interest in Sand Hills and Southern Hills pipelines, all the remaining interest in the Eagle Ford system and the DJ Basin-based Luerne-1 facility with production of 35 million cubic feet per day.
These four assets will enhance DCP Midstream's transportation, processing and production capacity.
Moreover, the dropdowns have just begun. The company is expecting around $350 million of additional dropdowns in the current year. By 2016, DCP Midstream has targeted dropdowns of between $3 billion and $5 billion, a big deal for DCP Midstream considering its small asset base.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.