Enterprise Product Partners LP (NYSE:EPD)
Investment Synopsis:
As the largest by market cap MLP, Enterprise Product Partners has an unmatched record of steady distribution growth and financial stability. However, the current combination of a 5.5% yield combined with projected 5% distribution growth can be bettered with investments in other high quality MLPs. EPD is at best a hold for long term unit owners. It would be attractive as a Buy if the yield moves above 7%. New or added investments not recommended at this time.
• IPO Date: July 28, 1998
• Market Cap: $54.7 billion
• Annual adjusted EBITDA: $5.24 billion (H1 2015 annualized)
• GP/Sponsor: None
Distribution Facts
• Current yield: 5.5%
• TTM distribution growth: 5.56%
• Forecast annual distribution growth rate: 5%-6%
Business Operations
As the largest MLP by market cap and one of the oldest public partnerships, Enterprise Product Partners has developed an extensive and integrated network of energy infrastructure assets. Here is a listing of what the partnership owns:
• Pipelines: 51,000 miles of natural gas, NGL, crude oil, refined products and petrochemical pipelines.
• Storage: 225 million barrels of NGL, refined products, petrochemical and crude oil, and 14 Bcf of natural gas storage capacity.
• Processing: 24 natural gas processing plants; 22 fractionators; 10 condensate distillation facilities.
• Export Facilities: refined products export terminal; expanding world scale LPG and processed condensate export facilities, adding ethane exports 2016.
With its asset base, Enterprise is connected to many of the major production basins at the production end and a majority of consumers –refineries and chemical crackers– at the consumption end of the energy midstream pathways. In order of importance, the company generates about one-half of its operating margin from NGL pipelines and services. The other half is evenly split between natural gas pipelines and services, crude oil pipelines and services, and petrochemical and refined product services. The Enterprise system has been developed and continues to grow based on the goal of providing feedstocks to all types of energy users in the U.S. and globally.
A couple of financial details that sets Enterprise Product Partners apart from most of the large cap, midstream MLP pack; A few years ago, Enterprise brought in its publicly traded general partner. As a result, EPD does not make incentive distribution rights –IDR– payments to a general partner. Along the same topic, Enterprise has paid out a smaller percentage of distributable cash flow as distributions to LP units, typically maintaining a 1.5 times DCF coverage ratio. With larger, moderate growth MLPs the ratio tends to be in the 1.0 to 1.2 cash flow coverage range.
Growth Prospects
Enterprise Product Partners generates growth through both acquisition of existing assets and development of new projects. As of mid-2015 the company reported plans to spend about $12 billion in growth capital for the four year period, 2014-2017. At an eight times EBITDA multiple, the projects will produce another $1.5 billion (28% above current amount) of incremental EBITDA by 2018. Enterprise will make large acquisitions when the opportunity arises. For example, in 2014, Enterprise spent over $5 billion to buy up the general partner and limited partner interests of Oiltanking Partners LP, a fast growth publicly traded partners.
Enterprise Product Partners has an enviable record of distribution growth. As of Q2 2015, the company has announced 44 consecutive quarterly increases. EPD is probably unmatched for its record, and future potential, of steady cash flow and distribution growth. In spite of this record, there are several factors that may cause investors to steer clear of EPD. First, the combination of a 5.5% yield and 5% or so distribution growth is significantly lower than the yield vs growth prospects of a number of other high quality MLPs.
The sheer size of EPD makes it difficult for the company to generate annual distribution growth above about 6%. Even an acquisition as large and cash flow accretive as the Oiltanking Partners acquisition was not enough to meaningfully move the DCF needle. Second, as the largest MLP, EPD is usually the largest component by several factors in MLP-focused ETFs and other funds. When the MLP market falls, the EPD unit value falls as least as much as the sector indexes, and possibly more. Since peaking in late August 2014, with a then current yield of 3.5%, the unit value has dropped by 35%.
Finally, as of Q2 2015, quarterly EBITDA and DCF had dropped for three consecutive quarters. Enterprise’s high DCF coverage and future growth projects will allow the company to maintain its record of distribution growth. The main risk is a lower unit value as investors discover the lack of recent cash flow growth.
Recommendation: Avoid EPD at the current 5.5% yield. The MLP will be an attractive buy if the unit values falls to bring the yield above 7%.