Just Happened: DCP Midstream Analyst Day

I was supposed to write this post two weeks ago, but then the MLP market went haywire and we decided that fielding stakeholder calls and emails was of greater importance at the time. So while the DCP Midstream Partners (DPM) analyst day can no longer be said to have “Just Happened”, we still wanted to highlight some slides from the company’s presentation that day.

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To understand DPM, investors would do well to have a handle on its family tree. DPM’s general partner, DCP Midstream LLC, is both the largest NGL producer and natural gas processor in the US. It also owns tens of thousands of miles of gathering pipelines that feed its plants and fractionators and thousands of miles of NGL pipelines that transport the output to end users.

The LLC is itself a 50/50 joint venture between Spectra Energy (NYSE: SE) and Phillips 66 (NYSE: PSX), both of which own GP and LP interests in their own daughter MLPs – Spectra Energy Partners (NYSE: SEP) and Phillips 66 Partners (NYSE: PSXP), respectively. SE and PSX share something else in common: both were spun off from bellwethers in their respective industries, with the former taking the natural gas assets of utility Duke Energy (NYSE: DUK) in 2007 and the latter taking the midstream and downstream businesses of oil and gas producer ConocoPhillips (NYSE: COP) in 2012. Both of these events happened after the partnership went public (in 2005), which is why its name – DCP, i.e. Duke ConocoPhillips – reflects the identities of its former owners.

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The LLC’s near-term growth is focused in four basins, so that’s where DPM’s opportunities are as well. The two entities expect to spend $4-$6 billion through 2016 on organic projects, with the LLC’s portion financed through dropdowns to DPM. Those dropdowns, along with its share of organic spending, are expected to drive 7% distribution growth annually at DPM through 2016, absent accelerated dropdowns or meaningful third party acquisitions.

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Given the recent slide in WTI, I’ll leave you on the macro front with this Bentek row chart highlighting basin IRRs. Most if not all oily and wet gas plays are likely to experience weaker economics than what’s shown here without a bounce in crude oil prices.

As of October 7, DPM was a member of the Alerian MLP Index (AMZ), Alerian MLP Infrastructure Index (AMZI), Alerian MLP Equal Weight Index (AMZE), and Alerian Natural Gas MLP Index (ANGI), and traded at a yield premium of 27 basis points to the AMZ.

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