Energy Transfer Partners (ETP) is another of the big cap MLPs. Along with KMP and EPD it makes up a good portion of the Alerian MLP index. Like my earlier posts on KMP and EPD this post takes a look at the partnership’s historical performance and how its positioned for the future.
ETP has had a great run the last ten years like many MLPs. Since 2001 it has returned 24.7% CAGR along with a distribution growth of 11.9% CAGR over the same period. That’s slightly less than a 10-bagger over the last decade primarily driven by a high yield, high dividend growth, and the power of re-invested dividends. Just wanted to drive my dividend theme home a bit today!
How about its current valuation? The chart below shows ETP’s historical yield and spread the 10 year note versus the respective historical averages.
As you can see from the chart ETP is trading below its average historical yield but above its average historical spread to the 10 year note. This is also the case for KMP and EPD. That’s why I called those partnerships a bit pricey in those earlier posts. Of the three, ETP is trading closest to its historical yield and at the largest gap to its average spread suggesting it is the most undervalued of the three partnerships. At an absolute level, its current yield of 7% is also the highest of the three. Even looking out a bit further on the cap table of MLPs, to include WPZ, PAA, and MMP, ETP has the highest yield.
Is there a reason for ETP trading at a low relative valuation? Like any business ETP has its issues and challenges. I think ETP has two significant ones. First, it has not raised its distribution in just about 2 years. ETP is in a transition from predominantly a business focused on intrastate operations to one more heavily weighted to interstate operations. It has undertaken two large pipeline projects over the last 2 years that have yet to start contributing to its bottom line. I think this has tested the patience of investors as other MLPs have re-started or continued their distribution increases. Second, ETP has the 50% IDR general partner issue I’ve discussed in my other MLP posts. So, even when distribution growth resumes the general partner benefits more than the limited partners do.
The growth issue seems to be nearing an end. ETP’s two large pipeline projects are nearing completion and are expected to start contributing to cash flow in 2011. These are large projects and incremental cash flow growth could approach 20-30%. The general partner issue is a trickier one which has not been addressed and I’ll be watching that closely. However, as in the case of KMP, who has similar GP issues, growth to the limited partners could still be quite rewarding.
In summary, for the near future, I see ETP positioned better than KMP but not as good as EPD. All three are incredible top notch businesses with the wind at their backs but based on valuation ETP looks to be the most attractive of the three for new money. ETP reports Q3 2010 earnings next week so keep your eyes and ears open.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.