DCP Midstream Partners LP (NYSE:DPM) in the first quarter benefited from robust production of natural gas liquids (NGL) in its service areas and the ongoing expansion of its fee-generating midstream infrastructure. In April, the master limited partnership (MLP) purchased a 10 percent interest in the Texas Express NGL Pipeline from Enterprise Products Partners LP (NYSE:EPD), joining Enbridge Energy Partners LP (NYSE:EEP) and Anadarko Petroleum Corp (NYSE:APC) in the joint venture.
DCP Midstream Partners increased its distribution for the sixth consecutive quarter, hiking its payout by a penny to $0.66 per unit. Even better, the firm generated $0.98 in distributable cash flow (DCF) per unit, up 18.5 percent from year-ago levels and enough to cover the distribution by 1.29 times. Moody’s rewarded the MLP for its strong performance, granting the firm an investment-grade credit rating.
At the recent NAPTP conference, management disclosed that organic growth projects servicing the Eagle Ford Shale and the expansion of the Discovery gathering system are “on plan,” which bodes well for future distribution growth.
The stock price has tumbled in recent weeks, reflecting weakness in the broader market and rising concerns about the decline in NGL prices, a product of elevated propane inventories and feedstock substitution. Most management teams at the NAPTP conference expect NGL prices to recover in the back half of the year, as petrochemical capacity that’s closed for routine maintenance comes back onstream. A colder winter would also help to alleviate the propane glut.
The unit price of DCP Midstream Partners could pull back even further, especially if commodity prices remain weak and concerns about the EU sovereign-debt crisis intensify.
Nevertheless, I remain bullish on the MLP’s long-term growth prospects and exposure to robust drilling activity in the Eagle Ford Shale. DCP Midstream Partners has also hedged about 60 percent of its exposure to NGL prices, a move that should cushion the blow if conditions deteriorate further in the near term. Investors should consider easing into this position, as more downside could be in store.
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