This High-Yield Stock Is About to Hit the Accelerator

Western Gas Partners (NYSE: WES), like many energy companies, hit a speed bump in recent years due to the oil market downturn. However, with oil prices now on the upswing, this pipeline company is about to hit the gas. As a result, earnings are on pace to expand at a brisk pace this year, which will enable the company to increase its 7.9%-yielding distribution to investors at a healthy rate over at least the next two years.

The building boom

Weaker oil prices caused Western Gas Partners’ producing customers to slow their drilling pace in recent years, which limited the company’s expansion opportunities. As a result, the company spent only $792 million on growth projects last year. However, with oil prices improving, drillers need more pipeline and processing capacity, which opened the door for Western Gas to expand more rapidly. Initially, the company thought it would invest between $1 billion and $1.1 billion this year on building out its gas gathering systems, natural gas processing and oil treating capacity, and pipeline network. However, it now expects to spend about $1.4 billion this year after securing the right to participate in two new long-haul oil pipelines out of the fast-growing Permian Basin.

Image source: Getty Images.

These expansions position Western Gas to grow earnings by at least 13% this year, which is a huge improvement from 2017, when earnings only rose about 3%. That growth rate will support the company’s ability to increase its distribution by $0.015 per unit each quarter through 2019, implying about 13% growth from the level at the end of 2017. Meanwhile, with earnings set to grow at a faster rate, the company’s financial metrics will improve even as it grows the payout. Distribution coverage, for example, will widen from a rather tight 1.05 in the first quarter to more than 1.2 in the second half of the year. Meanwhile, debt-to-EBITDA should fall from a solid 3.9 in the first quarter to an even better level of less than 3.5 by year-end.

Plenty more where that came from

Western Gas Partners should be able to continue growing earnings at an accelerated pace in 2019. Driving that view is the fact that several projects currently under construction won’t start service until later this year or in 2019. One of those is the Cactus II Oil pipeline, which won’t come on line until the third quarter of next year. Meanwhile, the company could potentially secure additional expansion opportunities to drive growth in near-term given how fast production is increasing in the Permian, as well as the DJ Basin, the company’s other main operating area.

In addition to the visible growth from these organic expansion projects, Western Gas Partners could accelerate its growth rate by acquiring additional assets from its parent Anadarko Petroleum (NYSE: APC). The two companies have worked together on a series of needle-moving deals over the years and have the potential to continue doing so since Anadarko Petroleum still owns several midstream assets. Currently, these assets generate more than $300 million in EBITDA, so they’re a needle-moving growth opportunity for Western Gas considering that it’s on pace to produce $1.2 billion in EBITDA this year. On top of that, Anadarko is investing $550 million to expand its midstream business, which would mean additional assets that it could eventually drop down to its MLP.

Lots to like about what’s up ahead

Western Gas Partners’ earnings growth rate is on pace to accelerate this year thanks to a slew of expansion projects the company has under construction. That positions the company to increase its distribution to investors at a healthy rate over the next two years while its financial metrics improve. Add in in the upside from acquiring more assets from Anadarko, and this pipeline company looks like it could be an appealing option for income-seeking investors.

10 stocks we like better than Western Gas Partners
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Western Gas Partners wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

You May Also Like

About the Author: Over 50 Finance