Enterprise Products: A Blue Chip among MLPs

12/05/2019 5:00 am EST

Focus: ENERGY

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

The Alerian MLP Infrastructure Index has dropped more than 20 percent since late July. It’s now just a few percentage points above the early 2016 low, and 60 percent under the mid-2014 high, observes Roger Conrad in Energy and Income Advisor.

The chief catalyst for the most recent decline is growing concern that falling North American rig deployment will stall oil and gas production in 2020.

We don’t deny the danger. But third quarter earnings results and updated guidance clearly show vulnerability is not evenly spread across the sector. In fact, a growing number of master limited partnerships appear increasingly able to resist whatever weakness the coming year brings.

After billing themselves as quasi-utilities earlier in the decade, it’s fair to say MLPs have a credibility problem. So it’s no wonder many investors are now considering cashing out in this selloff, even from industry blue chips like Enterprise Products Partners (EPD).

Our strong advice is to not give into the temptation. In fact, there’s unlikely to be a better opportunity to establish positions in well-run, historically solid US midstream energy companies. And that definitely includes MLPs.

The list of long-term winners starts with Enterprise, arguably one of the only major US MLPs that was financially prepared for a downturn when oil prices first broke below $100 a barrel in August 2014.

It has since further increased resistance to cyclical pressures by reducing debt leverage, while focusing on its most profitable assets.

Enterprise halved its rate of distribution growth in mid-2017 and as a result has built distributable cash flow coverage to 1.7 times. That’s a significant cushion for dividends against a possible drop in revenue next year.

The next several quarters will pose a significant stress test for all North American midstream companies. But companies that do stay on course will prove their resilience to investors. We’ll bet our bottom dollar Enterprise Products Partners will be among them.

The partnership has increased its distribution 22 consecutive years, a period that includes multiple energy price cycles. Units traded in the low $30s as recently as July.

That’s a solid target for first half 2020. But as Enterprise expands energy export-focused operations going forward, we expect a move past the low $40s.

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