Yield higher than the selected peer group
Midcoast Energy Partners’s (MEP) forward distribution yield at 11.7% is higher compared to its peer average of 6.4%. Peers included in the average calculation are ONEOK (OKE), Tallgrass Energy Partners (TEP), and Western Gas Partners (WES).
The graph below compares the forward yields of MEP and its peers relative to their expected distribution growths.
No growth in distributions
For the next two years, Midcoast Energy Partners (MEP) is expected to see distribution growth of -0.1%, which means no growth in its distribution. In comparison, its peers OKE, TEP, and WES are expected to have distribution growth of 1.8%, 24.8%, and 9%, respectively. Thus, MEP’s higher yield seems to be justified by the lack of growth in its forward distribution.
Distribution yields of MLPs that are more sensitive to commodity prices, such as MEP, tend to be higher than MLPs that are less sensitive to commodity price volatility. This is because investors expect higher risks to be compensated by higher yields. This explains its higher yields compared to other MLPs.
MEP is trading at a trailing 12-month EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 38.4x. In comparison, ONEOK (OKE), Williams Companies (WMB), Tallgrass Energy Partners (TEP), and Western Gas Partners (WES) are trading at EV-to-EBITDA multiples of 14.3x, 16.9x, 14.2x, and 12.8x, respectively. So, MEP’s EV-to-EBITDA multiple is considerably higher than the average of 14.5x for the selected peers.
As for forward multiples, MEP trades at a forward EV-to-EBITDA of 54.4x. ONEOK (OKE), Williams Companies (WMB), Tallgrass Energy Partners (TEP), and Western Gas Partners (WES) are trading at forward EV-to-EBITDA multiples of 12.1x, 13.3x, 9.4x, and 10.3x, respectively. MEP’s higher forward ratio indicates expectations of negative EBITDA growth for the company in 2016.
MEP’s EV-to-EBITDA multiple is significantly higher than its historical average of 31.4x. This indicates that MEP is trading at a premium compared to its average historical valuation.