Here's What We Like and Dislike About Enterprise Products
Enterprise Products Partners L.P. EPD is among the leading midstream energy players in North America. With its wide base of midstream infrastructure assets, the partnership provides services to producers and consumers of commodities, including natural gas, natural gas liquids (NGL), oil and refined petrochemical products.
Before we point out the strengths and flaws in the company, let’s look at how it fared in the last reported quarter.
Q4 Recap
Enterprise Products reported fourth-quarter 2019 adjusted earnings per limited partner unit of 54 cents, in line with the Zacks Consensus Estimate. It was supported by higher sales volume and margins from the NGL Pipelines & Services business. Increased crude oil transportation volumes also aided the results. However, the bottom line declined from 59 cents per unit in the year-ago quarter, due to lower natural gas transportation volumes and decreased operating margin from the propylene business.
Let’s delve deeper into why we like this stock.
Revenue Stability
Enterprise Products has an extensive network of pipeline that spreads over nearly 50,000 miles. The pipelines carry natural gas, NGL, crude oil and refined products. Most importantly, the partnership’s midstream properties are linked to all prospective shale plays in the United States that are rich in natural gas and oil. These extensive networks of pipelines provide the partnership with stable fee-based revenues.
Contract Extensions
Almost 80% of Enterprise Products’ pipeline contracts with shippers have been extended for 15 to 20 years, which should help the partnership generate steady cash flow for unitholders. Notably, 70% of the partnership’s volume-weighted contract durations are for more than 10 years, which signifies quality capital investments. The integrated midstream energy firm’s businesses are not limited to connecting producers and consumers of hydrocarbons. In fact, Enterprise Products is expanding its midstream operations to capitalize on the growing feedstock demand in the petrochemical plants of domestic and international markets.
Growth Projects
Since its IPO in 1998, Enterprise Products has invested a hefty sum of $26 billion in major acquisitions. The partnership has spent another $42 billion on its organic growth projects that have been contributing to cash flow. The partnership is also well positioned to generate additional cashflow from growth capital projects of $3.1 billion that are expected to come online in 2020.
Notably, the partnership has $4.6-billion projects under construction, which are expected to come online in the 2021-2023 period. Its major Seaway Crude Pipeline capacity expansion project, a joint venture with Enbridge Inc. ENB, will transport more oil from Cushing, OK, to the Texas Gulf Coast.
Its Mentone cryogenic natural gas processing plant came online in the Permian Basin. This is expected to enable producers in the region to reduce flaring. The Permian Basin, being one of the most productive regions in the country, hosts companies like Pioneer Natural Resources Company PXD, Diamondback Energy, Inc. FANG and others and has a significant flaring rate. Hence, Enterprise Products’ Mentone facility will provide the producers with a better option than flaring.
Distribution Hikes
After raising distributions for more than 20 years, the partnership is planning to hike payments by 2.3% through 2020. Notably, the partnership intends to repurchase units in 2020 using a portion of its cash flow from operations. The distribution hike and unit buyback will likely lead to a 5.6% increase in returned capital to limited partners from 2019 levels.
Due to the above-mentioned points, we feel that Enterprise Products is up for the long haul. However, there are some concerning factors. Let’s discuss them as well.
Levered Balance Sheet
Over the past few years, the partnership’s debt-to-capitalization ratio of 50.1% has been consistently higher than the overall energy sector's 31%. This shows that Enterprise Products’ balance sheet is more levered than the sector, which can dent the partnership’s financial flexibility.
Distribution Yield Lower Than Industry
Although Enterprise Products is strongly committed to returning capital to stockholders, the partnership’s distribution yield is much lower than the industry it belongs to. The partnership’s distribution yield of 7.5% is lower than the industry’s 9.1%.
Global Energy Demand Growth Uncertainty
Although the phase-one trade agreement solved a few concerns for the United States, there are many more yet to be addressed. Moreover, the global coronavirus outbreak is expected to affect energy demand growth. This might hurt demand for crude, NGL and refined petroleum products. It will likely lower the partnership’s cash flow generation from its export facilities.
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