Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Enterprise Products Partners: High-Quality MLP With Safe 10% Yield

By Sure Dividend (Bob Ciura)CommoditiesSep 17, 2020 10:52AM ET
www.investing.com/analysis/enterprise-products-partners-highquality-mlp-with-safe-10-yield-200537955
Enterprise Products Partners: High-Quality MLP With Safe 10% Yield
By Sure Dividend (Bob Ciura)   |  Sep 17, 2020 10:52AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The energy sector has been one of the market’s worst-performing areas in the past several years. The combination of a global supply glut in conjunction with weak demand due to the coronavirus pandemic, has sent oil and gas prices tumbling. In turn, this has been an enormous headwind for the energy sector, which has led to collapsing share prices and dividend cuts across the industry, even for well-established giants like Royal Dutch Shell (NYSE:RDSb) and BP (NYSE:BP).

Investors looking for value and safe income need to be selective when it comes to energy stocks. One pocket of value and relative safety within the broader energy industry is midstream oil and gas stocks. These are companies that operate storage and transportation assets. While no energy stocks are completely immune from falling commodity prices, high-quality midstream Master Limited Partnerships like Enterprise Products Partners (NYSE:EPD) continue to maintain their hefty distributions, even in a highly challenging environment.

With a current yield over 10% and, more importantly, a safe and fully covered distribution, Enterprise Products is one of our top-ranked MLPs right now.

Toll Road Business Model Fuels Steady Cash Flow

Enterprise Products Partners is an oil and gas storage and transportation company. It is a mid-stream company, meaning it owns and operates pipelines, terminals and other related assets. In all, Enterprise Products has very high-quality assets, including 50,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines.

It also has storage capacity of 260 million barrels of NGL, petrochemical, refined products and crude oil, plus 14 billion cubic feet of natural gas storage capacity. Furthermore, Enterprise Products owns 22 natural gas processing facilities, 24 fractionators, 11 condensate distribution facilities and 19 deep-water docks.

The operating advantage for high-quality mid-stream companies like Enterprise Products is that they generate a steady stream of cash flow, without a high level of exposure to underlying commodity prices. Enterprise Products makes money based on the volumes of materials stored and transported through its system. In this way, the company operates similarly to a toll road.

Instead of relying heavily on high commodity prices, as is the case with the upstream exploration and production companies, the more important factor for Enterprise Products is demand. And thanks to the company’s high-quality network of assets, demand has remained intact over the course of 2020, even with the coronavirus pandemic taking down the broader economy.

Cost Cuts, New Projects To Pump Out Growth

In the second quarter, Enterprise Products reported a relatively mild 6% decline in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and an 8% decline in distributable cash flow. Over the first half of 2020, adjusted EBITDA declined 3%, while distributable cash flow fell 7% compared with the first six months of 2019. This resilience in a very difficult environment has allowed the company to maintain its hefty distributions, even while oil and gas prices have declined precipitously.

The company expects to return to growth sooner rather than later, thanks to a mix of capital expenditure reductions and new growth projects coming on-line. In 2021 and 2022, Enterprise Products sees growth capital expenditures of $1.6 billion and $900 million, respectively, compared with $2.8 billion expected to be spent in 2020. This capital discipline will help the company preserve its strong balance sheet and allow it to maintain its high distributions in 2020 and beyond.

Over the long-term, continued growth is likely due to the company’s slate of new projects. For example, Enterprise Products recently placed the 10th fractionator into service at Mont Belvieu, with an 11th expected to be placed into service in the third quarter. Exports are also a key growth catalyst. Demand for liquefied petroleum gas and liquefied natural gas, or LPG and LNG, respectively, is growing at a high rate globally, and especially in the emerging markets.

High-Quality Business Model Pays Dividends

Not only does Enterprise Products Partners possess best-in-class assets, it also has an extremely high-quality balance sheet in relation to most MLPs. In terms of safety, Enterprise Products Partners is one of the strongest midstream MLPs. It has credit ratings of BBB+ from Standard & Poor’s and Baa1 from Moody’s, which are higher ratings than most MLPs. It also had a high distribution coverage ratio of 1.6x in the 2020 first half, meaning the company generated approximately 60% more distributable cash flow than it needed for distributions over the first half of the year.

The company also ended the most recent quarter with a leverage ratio (defined as net-debt-to-trailing 12-month adjusted EBITDA) of 3.4x, which is lower than most MLPs and is below the company’s own target leverage ratio of 3.5x.

Another attractive aspect of Enterprise Products is that it is a recession-resistant company. Enterprise Products’ high-quality assets generate strong cash flow, even in recessions. As a result, Enterprise Products has been able to raise its distribution to unit holders for 21 consecutive years. Therefore, it has an established track record of delivering steady distributions and reliable increases on a regular basis, even in recessions.

Final Thoughts

Investors need to tread carefully when it comes to energy stocks. Investing in oil and gas stocks has been a treacherous endeavor the past several years, as the entire industry struggles against low commodity prices and weak global demand. But not all energy stocks should be avoided; investors simply must be more selective and make sure to choose the best operators with the strongest balance sheets.

Enterprise Products is just such a company. It has an excellent network of high-quality assets which generate strong cash flow, regardless of the broader economic climate. The company has a long track record of delivering consistent distributions, a manageable level of debt, and a positive future growth outlook. With a current yield above 10%, we view Enterprise Products as a buy for income investors.

Enterprise Products Partners: High-Quality MLP With Safe 10% Yield
 

Related Articles

Enterprise Products Partners: High-Quality MLP With Safe 10% Yield

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email