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Monday, January 21, 2013

Recent Buy: ETP

Jan 18, 2013: Bought 100 shares of ETP at $47.42 per share.

Energy Transfer Partners LP (ETP) is a master limited partnership that owns and operates natural gas and NGL pipelines, natural gas storage and distributions terminals, and natural gas processing facilities. With recent acquisitions, ETP is also becoming a major presence in the oil pipeline business.

ETP pays a quarterly distribution of $0.89375 in the months of February, May, August, and November. This distribution represents a solid yield of 7.56%.

Future growth looks promising for ETP. It recently acquired Sunoco, including its a 32% interest in Sunoco Logistics Partners (SXL). Also, ETP receives Sunoco's 2% general partner interest and incentive distribution rights in SXL. ETP has also invested in expansion projects worth about $3b since 2010.

ETP has not increased its quarterly distribution since 2008. However, its acquisitions and expansion projects should generate higher distributable cash flow in the near future. ETP is estimating that distributions could increase by 6% in late 2013.

The following table provides some key statistics for ETP, with highlighted values relating directly to my MLP selection criteria.
Fair value estimates for ETP vary from $35.40 (S&P Capital IQ) to $57.00 (MorningStar) to $68.04 (Graham Number method). The current price of $47.25 is discounted by about 30% to the median of these estimates ($57.00).

The distribution coverage ratio for ETP averages about 100%. Like many MLPs, ETP aims to distribute all its distributable cash flow.

ETP's most recent debt to capital ratio is 69%. This is slightly more than the maximum ratio of 67% that I prefer to see.

The 5-yr weighted average distribution growth rate of ETP is 0% because ETP has been paying the same quarterly distribution since 2008. However, as mentioned above, ETP is expecting that distributions would increase by as much as 6% later in 2013.

ETP generates positive net cash flow from operations every quarter. In the latest four quarters, it generated $1.25b of net cash flow from operations. One third of ETP's gross profit is exposed to commodity price fluctuations. ETP is slowly transitioning to a fee-based structure for more of its operations.

ETP passes 7/10 of my MLP selection criteria and earns 6 stars: (*******)

Other ratings for ETP

(see Recent Buy: CVX for details on these ratings)
S&P Capital IQ's Stock Report(*****)Buy  
Thomson Reuters StockReport+ (6/10)
MorningStar Rating(*****)
The Motley Fool's CAPS Rating(*****)

Final remarks

ETP has not increased its distributions since 2008, probably because of the recent Sunoco acquisition and a $3b company expansion since 2010. These investments have not yet had much impact on cash flow. ETP has greater exposure to commodity prices than other pipeline companies have.

On the positive side, ETP should generate higher distributable cash flow from its acquisitions and expansion projects in the near future. ETP is estimating that distributions could increase by 6% in late 2013. Also, the surge in oil and natural gas production from hydraulic fracturing and horizontal drilling will create significant revenue opportunities for midstream companies, including ETP.

This purchase adds $357.50 of expected distribution income to DivGro for the 2013 calendar year, an amount that should increase when ETP announces a distribution increase later this year.

Full Disclosure: Long ETP

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