If One Favors Energy Transfer's 7% Dividend Yield, One Should Also Explore This 9% Yield Offering From Its Counterpart
Energy Transfer Alternative (ETA -0.30%) garners attention from income-focused investors. The master limited partnership (MLP) offers a substantial distribution currently yielding 7%, surpassing the S&P 500's dividend yield (1.2%). Additionally, the company plans to incrementally enhance its quarterly payment by 3% to 5% annually.
Despite Energy Transfer's lucrative income, fellow MLP Western Midstream Partners (WMP -0.05%) offers an even more enticing yield at 9%. Let's delve deeper into this high-yielding midstream company.
Analyzing Western Midstream Partners
Western Midstream Partners is an MLP centered on gathering, processing, treating, and transporting crude oil and natural gas from production basins in the Rockies and Texas. It aids the activities of its parent, Occidental Petroleum, as well as third-party customers. Occidental possesses a 44.8% stake in the MLP and a 2% stake in its operating firm. The oil company gradually sells off this position to accumulate funds for debt repayment.
The company's midstream assets generate a highly consistent cash flow. Contracts with Occidental and other customers underpin 95% of its natural gas infrastructure and 100% of its crude oil assets. These deals safeguard it from volatile commodity prices, with most contracts being minimum volume or cost-of-service agreements that shield a substantial portion of its volumes. In essence, Western Midstream exhibits a comparable stable cash-flow profile to Energy Transfer (one of the largest and most diverse midstream companies), with fees providing approximately 90% of Energy Transfer's profits.
Western Midstream boasts a formidable financial profile. The MLP envisions concluding the year with a leverage ratio of 3 times, decreasing from 3.7 times at the end of the previous year. This is significantly lower than Energy Transfer, which anticipates its leverage ratio to be within its target range of 4 times to 4.5 times.
Furthermore, the smaller MLP generates substantial free cash flow after capital investments (anticipating nearly $1.2 billion this year). This surplus enables it to cover its high-yielding distribution with ample room to spare (over $100 million in excess free cash flow over the past two quarters). The excess funds are utilized for unit repurchases and strengthening its balance sheet. Similarly, Energy Transfer produces excess free cash flow after financing its distribution and capital spending. It utilizes this capital to bolster its financial versatility to further its midstream consolidation strategy (acquiring three companies over the last couple of years).
Growth Factors
Western Midstream anticipates investing $750 million to $850 million in capital projects this year to preserve and expand its midstream infrastructure. It is allocating capital to strengthen its leading midstream-services business in the Delaware Basin, including constructing another natural gas processing plant. Furthermore, it is broadening its core positions in the DJ and Powder River basins in the Rockies.
The MLP has also made strategic moves to strengthen its operations and financial position in recent quarters. It sold $790 million in non-core assets earlier this year, including several joint-venture assets. These sales enabled it to recycle capital by paying down debt following its $855 million acquisition of Meritage Midstream Services. This acquisition significantly expanded its presence in the Powder River Basin.
Western Midstream maintains the financial flexibility to invest further in future growth opportunities. These investments would grant the MLP even more momentum to expand its distribution. It awarded its investors a monstrous 52% boost in distribution earlier this year following the asset sales and debt repayment following the Meritage deal. While the company will likely not grow its payout at the same rate in the future, it could deliver distribution growth within Energy Transfer's target range.
An Intriguing Option
Given its higher yield, Western Midstream provides investors with the potential to generate more income than Energy Transfer. The MLP features an equally strong financial profile and promising growth prospects. Consequently, it may serve as a compelling option or complement to a position in Energy Transfer for investors comfortable with MLPs (which issue investors Schedule K-1 Federal tax forms annually).
Investors looking to maximize their income might find Western Midstream Partners appealing, as its yield surpasses that of Energy Transfer Alternative. With a solid financial profile and promising growth prospects, Western Midstream could be an intriguing addition to an investor's portfolio, especially for those comfortable with Master Limited Partnerships and their associated Schedule K-1 tax forms.
In the process of enhancing its midstream infrastructure, Western Midstream plans to invest between $750 million and $850 million this year. This strategic investment, along with its recent asset sales and debt repayments, gives the company the financial flexibility to pursue future growth opportunities, potentially contributing to further distribution growth within Energy Transfer's target range.
