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Enterprise Products Partners L.P. Message Board

  • joelndll joelndll Jan 7, 2010 9:18 AM Flag

    EPD being Diluted?

    EPD is issuing 9,250,000 shares that is diluting the EPD share price. I didn't look at quarterly report to see how many units are
    outstanding. This issuance is the reason share
    price of EPD is falling. They are using the
    money for debt and the general partner. Accordingly, this does not do much for the P&L
    statement.

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    • They use the money to pay off debt and that is a good thing. Over time this will be a $50 stock. They are the largest pipe line in the country.

    • It may be true that I don't understand MLPs as
      well as you but the 9,250,000 shares bringing in 270+ milliondollars for debt reduction and general partner i.e. most likely accruals, is not the same as buying/acquiring an asset that produces an income. They were paying off their debt plus a dividend before this offering. Therefore, the majority of the stock holders of EPD do not see this as you do, elsewise why did the share price drop by 3%? Ignorance I suppose?

      • 4 Replies to joelndll
      • Joe, an additional point on how the MLPs work: As many said, the MLPs buy and build projects using their credit lines (which is relatively cheap SHORT TERM financing priced on LIBOR and a spread). When market conditions are right, the MLPs then issue equity and debt to repay the draws on their credit lines. The credit lines aren't meant to be permanent financing and some even have penalty rates if they remain "outstanding" too long. The banks supply these facilities and require that they be repaid and then they make them available again for the next project. Because the financing is short-term, the banks use LIBOR instead of requiring higher rates for longer term financing.

        As for the offering, almost any company that announces an offering sees a short-term drop in its price based simply on the dynamics of supply and demand and the fact that the underwriter is getting a commission. A somewhat more cynical view is that the large institutional accounts that are approached to purchase the shares in the offering sell shares short first upon the announcement and then replace the short with shares bought at the lower offering price.

        I've now watched this dynamic occur with NRGY, EVEP, ETP and now EPD. The other three all went on to rise after their offerings, even when the equity raise was somewhat large and dilutive. It's all about growing the distributable cash flow through projects and acquisitions that are priced correctly and paid for with the right mix of appropriately priced debt and equity. The good MLPs have strong records of not overpaying for acquisitions or projects and for returning money to unitholders.

      • joel-

        They already spent the money on additional pipelines, processing plants and other expansions that will provide income! If they don't sell more units to bring the debt/equity mix up to 50/50 they will #1 lose their bond rating and pay more for borrowings boh future and existing.

        EPD has almost $1B in expansion commitments in the short term. I was not aware they could pay the required distribution and fund this out of current cash flow.

      • Joe wrote "the 9,250,000 shares bringing in 270+ million dollars for debt reduction and general partner i.e. most likely accruals, is not the same as buying/acquiring an asset that produces an income."

        Joe - please read a few of the prior announcements for equity offerings for EPD or any other MLP. The press releases almost always say the money goes to reduce credit facility debt. The following example is so over-simplified that it could be a bit wrong, but . . . If EPD was a person, then EPD would be charging for what is acquires on its credit card and using money from other sources [like income or a home equity loan] to pay off the card.

        You know that EPD has a load of cap ex projects [249 mile Haynesville pipeline to be in service Sept 2011; the White Kitchen lateral in the Eagleford shale in service during Q2-10; the Sherman/Trinity River lateral in the Barnett Shale to be in full service during Q2-10; etc]. So EPD is building stuff - a heck of a lot of expensive but money producing stuff. The $270 million that EPD is raising today is going towards that stuff. It is going for $x million in project A, $y million in project B, $z million in project C, etc.

        The latest EPD presentation can be found at http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjI1ODF8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
        See page 13 of that report - the "History of Financial Discipline" - where you can see a spreadsheet that may represent this story better than I can write it out in text.

        Joe wrote that "the majority of the stock holders of EPD do not see this as you do, else why did the share price drop by 3%? Ignorance I suppose?"

        No - not ignorance. The fall in unit price is a function of unit volume. Look at volume and compare it to the average volume. When unit volume spikes - this effects unit prices.

        Look at the price for ETP - which did an offering yesterday. The price [currently] is up on a day when the majority of MLPs have decreases. The share price is getting a bounce - an event that happen after most offerings.

        If you believe that the unit price for EPD is down due to unit holder disapproval of the offering - then you are holding an incorrect perception.

        Joe - you are expressing widely held newbie beliefs. And everybody was a newbie once. I believe you will find that through study [read the EPD presentation], time and observation - your perceptions will change.

      • it dropped to right around where the added units were priced....which is natural

    • Not to be critical, but you really need to understand the MLP model. All of the MLPs have to pay out a good portion of their cash flow in the form of distributions in order to escape taxation at the entity level. Therefore, unlike regular C corps, they don't retain as much of this cash (very similar to REITs), and must constantly raise equity and debt to grow and expand. As a unit holder, you want them to grow and expand their reach and increase their distributions which should lead to an increase share price (as long as they don't overpay for acquisitions or new projects - which they have a good record of avoiding -- and the capital markets cooperate by allowing them to raise debt that is not expensive and not have to issue cheap equity). This is the model for all MLPs. If you are not comfortable and overly concerned about dilution, then buy a bond. I think if you do a nonscientific study, you might find that in almost every case that an MLP raises equity, the temporary decrease in the stock price, represents a great buying opportunity. Most of these MLPs don't raise money unless they are sure that the project or acquisition will produce the required returns that they have set as their goals.

 
EPD
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