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Western Gas Partners: What Its Valuations Indicate ahead of 3Q17

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Western Gas Partners’ price-to-distributable cash flow

So far in this series, we’ve looked at Western Gas Partners’ (WES) 3Q17 EBITDA (earnings before interest, tax, depreciation, and amortization) estimates, throughput volumes, 3Q17 distribution, and market performance. In this part of this series, we’ll analyze its current valuation based on historical and forward multiples. Let’s start with price-to-DCF (distributable cash flow).

Western Gas Partners was trading at a price-to-DCF multiple of 9.5x at the end of the second quarter of 2017. It’s trading at a price-to-DCF multiple of 8.5x as of October 17, 2017. That’s lower than the last ten-quarter average of 9.7x.

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Western Gas Partners’ EV-to-EBITDA multiple

Western Gas Partners was trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 9.9x as of October 17, 2017. That’s below the historical five-year, two-year, and one-year averages of 12.8x, 10.3x, and 10.6x, respectively. It’s also below the peer median multiple of 11.0x.

The EV-to-EBITDA ratio, however, can be misleading in understanding the unit valuation of Western Gas Partners due to the presence of IDRs (incentive distribution rights) in its capital structure. That gives its GP (general partner), Western Gas Equity Partners (WGP), a higher share of incremental cash flows.

Western Gas Partners’ distribution yield

Western Gas Partners is trading at a distribution yield of 7.1%. The ratio is above the historical five-year average of 5.0%. WES’s peers EnLink Midstream Partners (ENLK) and DCP Midstream (DCP) are trading at yields of 9.6% and 9.0%, respectively. WES’s distribution yield is lower than the Alerian MLP ETF (AMLP), which is at 8.1%.

All three of these metrics indicate that Western Gas Partners is trading at a discount to its historical valuation. That could indicate a buying opportunity, considering its impressive distribution coverage, despite strong distribution growth, a strong presence in the prolific Delaware and D-J (Denver-Julesburg) Basins, significant expansion and dropdown opportunities, and low leverage. These could also be the reason behind WES’s premium valuation compared to its peers.

WES’s current valuation could also reflect its declining throughput volumes in some regions and high commodity price exposure through natural gas processing and its NGL (natural gas liquids) businesses.

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