Plenty in the Pipeline
06/29/2010 4:43 pm EST
Elliott Gue, editor of Personal Finance, says the BP spill and subsequent drilling moratorium won’t drain the profits of this rock-solid natural gas distributor.
Enterprise Products Partners (NYSE: EPD) owns about 2,500 miles of offshore oil and natural gas pipelines and gathering systems, as well as six offshore hub platforms that process oil and gas volumes produced in the Gulf of Mexico.
This is a fee-based business. Enterprise is paid a minimum fee whether or not the pipelines and hubs are used. The partnership also receives a fee based on the volume of oil and gas passing through its facilities. These fees are all defined under long-term contracts and aren’t based on prevailing commodity prices.
Some of these pipelines and hubs are designed to handle volume produced from deepwater regions of the Gulf of Mexico. But we don’t expect Enterprise’s operations to take a hit. Although Enterprise’s offshore operations are sizeable in absolute terms, the division is only a minor contributor to the master limited partnership’s (MLP’s) cash flows. Enterprise breaks down its business into five segments: NGL (natural gas liquid) pipelines and services, onshore gas pipelines, onshore crude oil pipelines, offshore pipelines, and refined products. Of those five segments, offshore pipelines and services is by far the smallest, accounting for just 1.33% of revenues in 2009.
Enterprise has always made a point of diversifying its business to avoid inordinate exposure to a single segment or to commodity prices. That costs the MLP some upside in strong environments, but insulates its core business from shocks such as the current disaster.
Second, the moratorium [on deepwater drilling] does not mean that these revenues will disappear. The ban doesn’t impact wells that are already producing oil or natural gas; the moratorium won’t have an immediate effect on deepwater volumes that Enterprise already receives through its offshore hubs. And shallow-water production from the Gulf will continue to feed Enterprise’s pipelines and processing hubs.
Over the long term, the impact on Enterprise’s deepwater business will depend on the length of the moratorium. Production from the deepwater fields hooked up to Enterprise’s hubs and pipelines will diminish over time, following normal decline rates. But such a drop is a ways off; many of the fields Enterprise serves are still relatively young deepwater projects.
Bottom line: Enterprise’s offshore business won’t sustain a crippling hit from [the BP spill], but the drilling moratorium will negatively impact growth. The effects will increase in severity the longer the ban is in place. However, even in a worst-case scenario, Enterprise will be able to absorb the hit from its tiny offshore segment and this headwind shouldn’t affect its ability to pay distributions. Enterprise Products Partners remains one of the lowest-risk and most diversified MLPs in our coverage universe and rates a buy under $36.