Enterprise Products: Pipeline Profits

04/25/2017 2:50 am EST


Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

Enterprise Products Partners LP (EPD) is still down about 34% from its all-time high in 2014. It also trades roughly 15% below our estimate of medium-term fair value, explains Ari Charney, editor Investing Daily's Utility Forecaster.

If you’re a value-conscious income investor, then there’s a lot to like about EPD’s reasonable valuation and enticing forward yield of 6.1%, especially when so many other dividend stocks still trade at a premium.

EPD is one of the few MLPs that actually saw its reputation enhanced by the energy crash. A big part of that is due to its relative conservatism.

Unlike its more profligate peers, who pursued distribution growth at all costs, EPD has kept leverage under control and even retains a portion of distributable cash flow to reinvest in its business. In 2016, for example, that amount totaled around $709 million.

And while many MLPs barely earn their payouts, EPD routinely covers its quarterly distribution with ample room to spare. In 2016, the MLP’s distributable cash flow covered its distribution by 1.2 times.

EPD is forecast to grow EBITDA (earnings before interest, taxation, depreciation, and amortization) by 8.2% annually over the next three years, driving distribution growth of 5% annually over the same period.

Put all these attributes together, and it’s easy to see why EPD is a core holding for most MLP investors and one of our top picks for long-term growth and income.

At the heart of EPD’s investment story is an irreplaceable asset base that spans the full midstream value chain—from the wellhead to the market. The MLP boasts more than 49,000 miles of pipelines, 260 million barrels of storage capacity, dozens of natural gas processing plants, and even export facilities.

In particular, EPD has a strong focus on natural gas liquids (NGLs), with a significant presence along the Gulf Coast, in proximity to producers, refiners, and the country’s main NGLs hub in Mont Belvieu, Texas.

Cheap natural gas has created a renaissance for the U.S. petrochemicals industry. EPD is betting on this resurgence in a major way, with opportunities to profit both domestically and via exports. Enterprise Products Partners remains a buy below $32 in the Income Portfolio.

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