Enterprise Products Partners: "In High Esteem"

05/13/2016 8:00 am EST


Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

Despite being down about 33.6% from its all-time high in 2014, this MLP is one of the few entities in the midstream space that is still held in high esteem by investors, explains Ari Charney, editor of Utility Forecaster.

A big part of the strong reputation at Enterprise Products Partners (EPD) is its relative conservatism.

Unlike its more profligate peers, who pursued distribution growth at all costs, EPD typically retains a portion of distributable cash flow to reinvest in its business. In 2015, for example, that amount totaled around $2.6 billion.

One of the keys to EPD’s financial strength is that it doesn’t have to shoulder the burden of incentive distribution rights (IDRs), which give a general partner first claim to a significant portion of an MLP’s cash flow.

That’s courtesy of management’s foresight to engineer a deal in 2010, whereby the MLP subsidiary acquired its general partner and eliminated the IDRs.

While many MLPs are struggling to sustain their payouts amid the energy crash, EPD managed to cover its distribution by 1.3x for full-year 2015.

EPD has continued to enjoy access to capital from both the debt and equity markets throughout the energy crash.

As the energy sector works through its downturn, a big question for MLPs is the credit quality of their counterparties. After all, a long-term contract may not mean all that much if it’s with a company that’s potentially facing bankruptcy.

Fortunately, EPD is reasonably well insulated from the energy sector’s financial crisis. Nearly 74% of its revenue is derived from customers that have an investment-grade credit rating.

EPD recently boosted its quarterly distribution by 1.3% sequentially and 5.3% year over year, to $0.395 per unit, or $1.58 annualized. That marks the 47th consecutive quarter in which the MLP has increased its payout.

Management expects to grow the distribution by 5.2% for full-year 2016, with a target level of $1.61 per unit annualized.

Income investors who already own units of EPD can further compound the MLP’s distribution growth by participating in its distribution reinvestment plan, which allows participants to reinvest cash distributions at a 5% discount.

Though energy prices have jumped sharply higher in recent months, we believe there could be more downside volatility ahead. One way to mitigate this risk is to slowly build a full position in EPD in increments of one-third.

With a yield of 5.8%, Enterprise Products Partners LP is a buy below $32 in the Income Portfolio.

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By Ari Charney, Editor of Utility Forecaster

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