Friday, December 26, 2014

Regency Energy Partners Needs More Than an Attractive Backlog to Ignite Investors

This article was first published by TheStreet on November 29, 2014.
By Sarfaraz A. Khan. Research Asst. Omar E. 
NEW YORK ( TheStreet) - Regency Energy Partners (RGP) is in a strong position to survive a challenging commodity pricing environment in 2015, thanks to its hedges and fee-based business. But this master limited partnership, or MLP, is not the best -- nor even average -- when it comes to rewarding investors through distribution growth.
The Regency partnership is part of a larger empire known as Energy Transfer Equity (ETE) , which serves as the general partner for Regency and also has significant stakes in Energy Transfer Partners (ETP) and Sunoco Logistics (SXL) .

Over the last few years, Regency has significantly grown its asset base by spending a total of $9 billion on acquisitions. Additionally, Regency has also undertaken around $1.5 billion in organic growth projects from its legacy assets.Consequently, since the end of 2010, Regency has grown the size of its fixed assets, such as its properties, pipelines and plants, nearly twice as much as Energy Transfer Partners and Sunoco Logistics.
Furthermore, the partnership has little exposure to volatile commodity prices. Earlier this month, Regency's CEO Michael Bradley said during the third quarter conference call that the partnership has already hedged two-thirds of its commodity exposure for next year, while nearly 75% of its cash-flow will come from its fee based business. That bodes well for Regency, given WTI oil futures have fallen nearly 28% to below $70 a barrel during the last three months.  
Regency has also built an "attractive" backlog of projects wrote Goldman Sachs' analyst Jerren Holder, in a Nov. 17 report. The backlog currently stands at $2.6 billion, the company said in a presentation last week, and underpins Regency's earnings growth.
However, this backlog does not make Regency an attractive investment. The partnership will likely offer below-average distribution growth, which offsets the positives from having a large backlog, wrote Holder.
Like most MLPs, Regency gives its cash flow to unit holders as distributions, as opposed to dividends issued by a conventional company. As a result, an MLP's ability to increase its cash distributions each quarter is one of the biggest factors that make it an attractive investment.
This year, Regency increased its quarterly cash distributions by 7% in the third quarter, as compared to the first quarter. That is hardly impressive considering some of Regency's competitors, such as Access Midstream Partners (ACMP) , EQT Midstream Partners (EQM) ,EnLink Midstream Partners (ENLK) and Targa Resources Partners (NGLS) , have grown their distributions by 8.8% to 27.9%.
Over the next one year, Holder has projected that Regency will grow its distributions by just 5.5%, which is lower than the industry average of 9.8%. In the same period, EQT Midstream, Access Midstream, Cone Midstream (CNNX) and Western Gas (WES) , all gathering and processing MLPs, will grow their distributions by more than 15% each, according to Goldman Sachs' estimates.
Furthermore, for the five years ending 2018, Regency is expected to grow its distributions by just 4.3% per year, about half the size of the average growth of 14 other gathering and processing MLPs covered by Goldman Sachs. Each of its aforementioned competitors are expected to grow by at least 8% in this period, with EQT Midstream in the lead with an average annual growth rate of 19.9% between 2013 to 2018.
A Regency Energy spokesperson was not available for comment due to the Thanksgiving holiday
Regency's units have climbed 9% this year and closed Friday at $28.49. Holder has a "neutral" rating on the stock.