On Thursday, Wolfe Research adjusted its stance on Western Gas Partners (NYSE:WES)stock, raising its rating from Underperform to Peer Perform. The firm cited the company's enhanced performance and solid prospects for 2024, along with beneficial non-core asset sales following the Meritage (NYSE:MTH) transaction, as reasons for the upgrade.
The company's decision to increase its distribution by 52% in February has led to a reevaluation of the stock, now based on a yield valuation concept. While Western Gas has the highest payout ratio in its group based on operating cash flow, the firm acknowledges that the company's strong balance sheet and moderate growth could sustain this high payout strategy, even though it offers less financial flexibility compared to its peers.
The analyst pointed out that despite the business's healthy status and general outperformance, it's challenging to justify Western Gas trading above a 10% yield. However, the firm also notes that the stock appears relatively expensive when assessed using traditional metrics like EV/EBITDA and free cash flow (FCF) yield, especially when compared to Master Limited Partnership (MLP) peers.
Wolfe Research employs a sum-of-the-parts valuation approach, assigning different target EV/EBITDA multiples to Western Gas's various business segments based on 2025 projections. The Delaware (Permian) business is valued at a premium multiple of 8.75x to 9.25x, reflecting growth potential and Occidental Petroleum's (NYSE:OXY) focus on the basin.
The DJ basin business is valued at 7.75x to 8.25x EBITDA due to strong market share and excess capacity, despite potential long-term volume challenges. The Powder River Basin (PRB) assets and other gathering and processing (G&P) segments are valued at 8.0x to 8.5x and 7.0x to 7.5x multiples, respectively. Equity investments are valued at 8.0x to 9.0x EBITDA.
The valuation framework suggests an overall target EV/EBITDA multiple ranging from 8.2x to 8.8x, leading to a fair value estimate for Western Gas units between $33 and $36. The firm acknowledges potential upside risks, including better-than-expected financial outcomes, volume stabilization or improvement in the DJ basin, and a shift in investor valuation methods towards yield-based approaches.
Conversely, risks to the downside could arise from lower volume growth, increased capital expenditures, and potential public market sales of stock by Occidental Petroleum.
InvestingPro Insights
Western Gas Partners (NYSE:WES) has recently drawn attention with its significant distribution increase and its strategic non-core asset sales. An analysis of real-time data from InvestingPro reveals that the company has a Market Cap of approximately $13.1B and is trading with a P/E Ratio of 13.2, reflecting a stable valuation in the market. Over the last quarter, Western Gas has exhibited a solid Revenue Growth of 10.11%, indicating potential for sustained financial performance.
InvestingPro Tips highlight that Western Gas has been trading near its 52-week high, with the price at 93.59% of this peak, and has demonstrated a strong return over the last three months, with a 26.64% total return. Additionally, the company has maintained dividend payments for 12 consecutive years, which is noteworthy for income-focused investors, especially with a recent Dividend Growth of 15.0%.
For those considering deeper financial analysis, InvestingPro offers additional tips, among them the company's short term obligations exceeding its liquid assets and a high Price / Book multiple of 4.53. For readers interested in these insights, InvestingPro provides further guidance which can be accessed through their platform. Should you wish to explore these additional tips, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. Currently, there are over ten additional InvestingPro Tips available for Western Gas Partners, which can provide a more comprehensive understanding of the company's financial health and stock performance.
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