Benefits of a symbiotic relationship
Published April 30, 2013
Like International Lease and Finance Corp., midstream oil and gas pipeline company Regency Energy Partners is affiliated with a larger entity, another midstream firm known as Energy Transfer Partners. This relationship, as well as Regency Energy’s transition to more stable revenue generation, is what initially attracted analyst Damien McCann to the company. Regency Energy owns assets that are broadly similar to Energy Transfer, an investment-grade company he was already covering in his research. But because Dallas-based Regency Energy was smaller, it was not considered investment grade, even though the credit risk was similar. After conducting further due diligence on Regency Energy and collaborating with other analysts, Damien says he became comfortable enough with the investment to move forward.
"It was an investment made with the expectation that Regency Energy will benefit from increased scale through additional organic growth, acquisitions, or possibly even a consolidation with Energy Transfer. Regency Energy has high-yield peers in the industry that lack the association with a larger entity, making the potential for an upgrade somewhat unique."
“It was an investment made with the expectation that Regency Energy will benefit from increased scale through additional organic growth, acquisitions, or possibly even a consolidation with Energy Transfer,” explains Damien. “Regency Energy has high-yield peers in the industry that lack the association with a larger entity, making the potential for an upgrade somewhat unique.”
Since the initial investment in 2011, Regency Energy has continued to grow through acquisition and organic expansion, but the pace has not been quite as fast as Damien would have liked. “Regency Energy has been a solid, steady investment, providing decent returns for the fund,” he says. “I had hoped for more rapid growth, but my long-term investment thesis remains intact.”
Research makes for an educated investment
For American High-Income Trust® President David Barclay, the Regency Energy investment highlights yet another approach to finding the best opportunities for the fund, which he noted has also invested in Energy Transfer. “Sometimes there are investment-grade holdings that provide an attractive risk-return profile for the fund but also help give us a broader perspective of the markets and potential investments,” he notes. “In the case of Energy Transfer, our knowledge of the investment-grade market and the ability to look across the ratings spectrum gave us even more insight into the high-yield market, and using our research capabilities we were able to make an investment in a lesser-known issuer like Regency Energy.”