Western Gas Partners, LP (WES), Enterprise Products Partners L.P. (EPD): Which of These MLPs Is a Bargain?

Page 1 of 2

The midstream arm of Anadarko Petroleum Corporation (NYSE:APC), Western Gas Partners, LP (NYSE:WES) and midstream energy firm Enterprise Products Partners L.P. (NYSE:EPD) have formed a joint venture for two natural gas liquid, or NGL, fraction trains. Both of these energy infrastructure firms will become bigger and better in the coming years on the back of the U.S. oil and gas boom. Although I am bullish on these two firms, Enterprise Products Partners L.P. (NYSE:EPD) in particular has outperformed Western Gas Partners, LP (NYSE:WES) and is one of the most lucrative midstream investments at the moment.

Western Gas Partners, LP (NYSE:WES)

The Houston based Western Gas Partners, LP (NYSE:WES) has acquired a 25% stake in the joint venture while Enterprise owns the remaining 75%. The partnership will invest $120 million in 2013 as construction cost.

They have also announced another project for second cryogenic processing train at the Lancaster plant in DJ basin called ‘Lancaster II’. Construction will begin this year while commercial operations will begin from early 2015. The project comes with a price tag of $165 million. Expected capacity of Lancaster II is 300 million cubic feet per day (MMcf/d) while output of 200 MMcf/d is guaranteed by Western Gas.

MLPs: Risks vs. Return

Both Western Gas Partners, LP (NYSE:WES) and Enterprise Products Partners L.P. (NYSE:EPD) are Master Limited Partnerships (MLPs); i.e. they have a different structure as compared to a listed company or a real estate investment trust. MLPs have tax benefits of a limited partnership and are generally higher yielding stocks that distribute nearly all of their cash between their unit-holders.

An average MLP generates a yield of around 6%. In fact, the $7 billion market cap Alerian MLP ETF, a fund which represents the 25 leading U.S listed midstream MLPs, gives a yield of 5.8%. Analysts are expecting around 6% to 7% growth in annual distribution of MLPs. This could easily translate into a total return of around 12% to 14% in a year.

However, there are some risks as well, particularly those coming from changes in tax status structure and increasing interest rates. In short, if President Obama makes the proposed changes to the tax structure of MLPs, then they would lose their coveted tax advantage. However, I believe that such a move is akin to a major overhaul and there are very little chances of this happening in the short term.

Secondly, like most high yield investments, MLPs have typically underperformed during the period of rising interest rates. These corporate entities rely heavily on the capital markets to raise their funds – since they are allowed to keep a very small percentage of their cash with themselves. A rise in interest rates makes borrowing — and investments in MLP — relatively more expensive. Moreover, the greater the investors are concerned about an economy, the poorer the MLPs are going to perform at the stock market.

While in the current business environment, I believe that benefits of investing in most of the midstream MLPs outweigh the risks but investors would make better decisions if they are aware of any potential pitfalls.

The leading MLP Fund

The U.S is now producing more oil and gas than ever before and this output will most certainly increase in the coming years. This will translate into more business for the midstream sector. Both Western Gas Partners, LP (NYSE:WES) and Enterprise Products Partners L.P. (NYSE:EPD) are well positioned to capitalize on this gain. Although I am bullish on both of them as well as the Alerian MLP ETF in the long run but Enterprise Products looks more lucrative now.

Enterprise Products Partners L.P. (NYSE:EPD) is the biggest holding in Alerian MLP ETF with a total weight of 9.53% while Western Gas Partners, LP (NYSE:WES) is the fourteenth largest with a weight of 2.85%. In the past six months, both of these companies have easily outperformed Alerian MLP ETF which has risen by 12%.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!