DPM’s price to distributable cash flow
In this article, we’ll perform a valuation analysis for DCP Midstream Partners (DPM) based on its historical and forward multiples.
Currently, DPM trades at a price to distributable cash flow of 4.7x. This is quite low compared to its ten-quarter average of 10.8x. DPM’s valuation started falling with the rout in energy prices most likely due to its stagnant distributions, declining throughput volumes, high NGLs (natural gas liquids) exposure, and high leverage.
Energy Transfer Partners (ETP), Williams Partners (WPZ), and EnLink Midstream Partners (ENLK) are among the midstream MLPs that are trading below their historical valuations. DPM forms 2.8% of the Global X MLP ETF (MLPA).
DPM’s EV/EBITDA multiple
DPM currently trades at an EV/EBITDA multiple of 19.8x while its average for the last 12 quarters is 18.9x. DCP Midstream’s forward EV/EBITDA multiple, which is based on the current fiscal quarter’s EBITDA estimates, is 9.0x. This indicates expectations of higher EBITDA for DPM in the first quarter of 2016. DPM’s first quarter EBITDA is expected to be driven by recent projects placed into service.
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. DCP Midstream 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, DCP Midstream, gets 50% of incremental cash flows.