WES’s price to distributable cash flow
In this series, we’ve analyzed Western Gas Partners’ (WES) operating performance, leverage position, and cash flow measures. In this article, we’ll perform a valuation analysis for WES based on its historical and forward multiples.
Currently, WES trades at a price to distributable cash flow of 10.3x. This is quite low compared to the ten-quarter average of 17.2x. WES’s high historical valuation might be justified by its stable earnings, strong distribution growth, strong growth guidance, low leverage, and impressive distribution coverage.
WES’s valuation has been falling since the rout in energy prices. Although WES’s earnings have minimal commodity price exposure, investors still dumped WES’s shares, doubting the profitability of midstream companies in the current low energy price environment. Energy Transfer Partners (ETP), Williams Partners (WPZ), and EnLink Midstream Partners (ENLK) are among midstream MLPs that are trading below their historical valuations. WES forms 0.62% of the PowerShares S&P International Developed Low Volatility Portfolio (IDLV).
WES’s EV-to-EBITDA multiple
WES currently trades at an EV-to-EBITDA multiple of 12.7x. Similar to its price-to-DCF ratio, WES’s EV-to-EBITDA multiple has come down compared with its average over the last seven years of 15.0x.
WES’s forward EV-EBITDA multiple, which is based on the current fiscal quarter’s EBITDA estimates, is 10.5x. This indicates expectations of higher EBITDA for WES in the fourth quarter of 2015.
However, the EV/EBITDA ratio can be misleading in understanding the unit valuation of limited partner units. This is because the entire EBITDA in the EV/EBITDA ratio calculation may not be available to limited partners. Western Gas Partners has IDRs (incentive distribution rights) in its structure. Currently, it operates in the highest distribution tier with a 50% split. This split means that its general partner, Western Gas Equity Partners (WGP), gets 50% of incremental distributions.