Published by Bob Ciura on July 9th, 2017
Enterprise Products (EPD) is a best-in-class Master Limited Partnership.
MLPs have high appeal for income investors, because they have certain tax advantages, and typically offer high dividend yields.
You can see the entire list of 134 MLPs here.
Enterprise Products has a 6%+ dividend yield, which makes it part of a select group of stocks. The High Dividend Stocks list Excel sheet has 416 stocks with 5%+ dividend yields.
Not only that, but Genesis has increased its dividend for 47 quarters in a row.
Enterprise is also a Dividend Achiever. The Dividend Achiever Excel list has 265 stocks that have increased their dividends for 10+ consecutive years.
The recent drop in oil and gas prices has kept a tight lid on Enterprise Products’ share price, but the company has minimal exposure to commodity prices.
This article will discuss why the stock could be an attractive income investment.
Enterprise Products is a midstream MLP, which means it operates pipelines and storage terminals. It has a massive network of assets, stretching across the U.S.
Source: June 2016 JP Morgan Energy Conference, page 6
The company’s assets consist of 49,300 miles of natural gas, NGL, crude oil, refined products, and petrochemical pipelines.
It also has 260 million barrels of NGL, refined products, and crude oil storage capacity, along with 14 billion cubic feet of natural gas storage capacity.
These assets operate similarly to a toll road, in the sense that the company generates fees based on volumes going through its pipelines and storage terminals.
As a result, Enterprise Products is only modestly affected by falling oil and gas prices.
Enterprise Products operates four business segments:
- NGL Pipelines & Services (57% of Operating Profit)
- Crude Oil Pipelines & Services (17% of Operating Profit)
- Natural Gas Pipelines & Services (13% of Operating Profit)
- Petrochemical & Refined Products Services (13% of Operating Profit)
Even in a very difficult pricing environment over the past three years, Enterprise Products has continued to grow distributable cash flow.
Source: June 2016 JP Morgan Energy Conference, page 54
Enterprise Products grew distributable cash flow by 2.5% in 2016, to $4.1 billion. The company’s core NGL business continues to see strong demand, in spite of weak commodity prices.
Last year, the NGL, refined products, and petrochemical pipelines businesses grew volumes by 12%. This more than offset a 7% decline in crude oil volumes.
Its strong performance has continued in 2017, which gives Enterprise Products a long runway of growth up ahead.
In the first quarter, distributable cash flow rose 7.1%, to $1.1 billion. Fully-diluted earnings-per-unit rose 12.5% year over year.
The company saw strong results across many segments.
The key contributor was a 31% increase in operating profit for the Crude Oil Pipelines & Services business. Enterprise Products’ Petrochemical & Refined Products Services posted 18% growth last quarter.
Separately, the NGL Pipelines & Services business grew operating profit by 9%, reaching a record for the quarter.
Enterprise Products has high-quality assets with access to premier oil and gas resources in the U.S. This gives the company steady cash flow and reliable growth.
Since Enterprise Products is not highly exposed to commodity prices, its most important growth catalysts are new projects, including exports.
Exports are a growth catalyst, particularly for liquefied petroleum gas, or LPG. LPG consists of gases like propane, butane, and methane.
Demand for LPG is growing at a high rate across many international markets.
Source: June 2016 JP Morgan Energy Conference, page 26
In 2015, the U.S. government ended its 40-year ban on oil exports. On a few days after the ban was lifted, Enterprise Products won the first export contract.
This gives Enterprise Products an advantage. Last year, it transported a record 877,000 barrels per day of U.S. LPG, and commenced exporting natural gas to Mexico.
Enterprise Products retained $709 million of distributable cash flow in 2016, to reinvest in the growth of the business.
It retained another $238 million of distributable cash flow for the first quarter, which will allow the company to invest in growth projects and pay down debt, without the need to issue dilutive equity.
Enterprise Products has $8.6 billion of capital projects to be developed through 2020.
On July 5th, Enterprise Products raised its quarterly distribution to $0.42 per share, up 5% from the same distribution last year. On an annualized basis, the new dividend rate is $1.68 per share.
The company has increased its dividend 61 times since its IPO in 1998. It is the 52nd quarterly dividend increase in a row.
Enterprise Products appears to have a sustainable distribution, based on its performance across several metrics.
First, the company maintained a distribution coverage ratio of 1.2 over the past four reported quarters.
This means in that period, it generated 20% more distributable cash flow than it needed for distributions.
In addition, the company does not have an over-leveraged balance sheet.
Source: June 2016 JP Morgan Energy Conference, page 56
At the end of 2016, Enterprise Products held a leverage ratio of 4.4, which is not alarmingly high for an MLP.
And, the company has a strong investment-grade credit rating of BBB+ from Standard & Poor’s. It also has no GP Incentive Distribution Rights.
These qualities help lower Enterprise Products’ cost of capital. The company has a manageable 4.6% cost of debt, and an average debt maturity of 16 years.
Approximately 88% of its debt is fixed-rate, which means Enterprise Products should be able to withstand higher interest rates moving forward.
Strong distribution coverage and a modestly capitalized balance sheet explain its tremendous track record, of 52 consecutive quarterly dividend hikes.
Going forward, investors can continue to expect mid-single digit dividend growth on a percentage basis, each year. For example, a 4%-6% annual dividend growth rate seems reasonable.
This dividend growth, combined with a 6.2% current dividend yield, make Enterprise Products an attractive stock for income.
The current oil and gas pricing environment is making things very difficult for exploration and production companies, but high-quality midstream MLPs like Enterprise Products are being unfairly punished.
Enterprise Products had a strong year last year, and has continued to perform well so far in 2017. The company operates quality assets and is likely to benefit from new projects and exports going forward.
For investors looking for a high dividend yield and dividend growth from the energy sector, Enterprise Products is worth considering.