Image source: Enterprise Products Partners corporate website
There has been a lot of fear surrounding master limited partnerships and their ability to maintain their high distribution yields now that we have seen America's oil boom get knocked down a few notches. Like in any industry, though, there are the standout players among master limited partnerships that investors should follow, and Enterprise Products Partners (EPD 1.41%) is one of them. The company has been able to maintain a long history of consistently increasing payouts to shareholders though thick and thin.
To understand how it is able to do so, management does a pretty good job of explaining how the business ticks and what it has planned for the coming quarters. In that spirit, here are 5 can't miss quotes from Enterprise Products Partners that will help you better understand where the business is today and where it's headed from here.
Maintaining strong results
Enterprise Products Partners is just like every other energy company in the sense that it does feel the impacts of the decline in oil and gas prices. Unlike so many other energy companies, though, the company has been able to mostly insulate its bottom line result from the impacts. CEO A. James Teague summed it up rather succinctly when he gave a quick run down of the company's results.
Two years ago, in the first quarter of 2014, oil prices were $98 a barrel, natural gas was $4.75, ethane was $0.35 a gallon, propane was $1.30, processing margins were over $0.60 a gallon, and Enterprise reported 1.6x coverage. One year later, in the first quarter of 2015, oil had dropped by 50% to $48 a barrel, natural gas was $3, ethane was $0.19 a gallon, propane had fallen to $0.53 a gallon, processing margins had fallen to $0.25 a gallon, and we delivered 1.4x coverage. In this -- last quarter, oil prices were as low as $26, natural gas was around $2, ethane was $0.16 a gallon, propane $0.39 a gallon, processing margins were less than $0.20 a gallon, and Enterprise delivered a 1.3x coverage.
This hasn't been easy, and we don't take these coverage ratios for granted. However, our results do continue to show that our business model is effective, that we remain extremely focused on our costs, and that our people are creative and hard working.
Maintaining a high distribution coverage ratio -- greater than 1.2x -- means that the company is pulling in more than enough cash to cover its generous payout to customers. In this case, the company has been able to keep its cash coverage high enough that there are few worries the company can continue its streak of payout increases and high enough to pay for some of its growth.
Value in flexibility
One of the ways that Enterprise has been able to maintain those strong results throughout this downturn is in part because the company has an integrated network of assets that can be utilized in different ways to capture both market share and profitability. Or, as Teague put it:
New assets are continually coming online and ramping up, commodity prices have obviously changed, and flows around the country and around the world have changed over the last 3 years. For example, this quarter, our contracted volumes were down. However, our throughput from incremental volumes were up. While processing margins are down fairly dramatically because of depressed prices, the value of storage assets has increased substantially.
Three years ago, you could not find a spare crude oil truck or a driver. Today, we are reassigning many of our crude drivers in order to move LPG truck volumes from stranded locations.The point of this is it's a few examples of the complementing synergies that one finds in our integrated systems.
This has been one of the calling cards for Enterprise as it has developed its infrastructure network. Rather than simply growing for growths sake, it has gone to great lengths to develop a network that will give the company plenty of options in how to best create value regardless of the current oil price environment.
Still solid growth to come
Speaking of growth. Enterprise still has as pretty large stable of projects in the wings that should help both give its infrastructure network greater flexibility and generate greater flows of cash. According to Teague, both this year and next investors should expect the company to put a lot of projects into service.
Moving on to capital projects. We completed $300 million of projects in the first quarter and expect to place about $2.5 million of projects in service during 2016. These include 2 natural gas processing plants and related infrastructure in the Permian Basin, one of which, our South Eddy Plant, is being -- is in commissioning mode as we speak. Our ethane export terminal will be online during the third quarter, and additional crude oil storage is being put into service in the Houston and Beaumont areas. We also have $4.2 billion of growth projects scheduled to be completed in 2017 and 2018, with our 2 largest projects being the PDH plant, which we expect to be bringing online early next year, and our Midland to Sealy crude oil pipeline system expected to be in service by the middle of 2018. The Aegis pipeline is complete and volumes will be ramping up through 2019.
The real big ones to watch here are the PDH (propane dehydrogenation) plant and the Aegis pipeline. The two represent huge cash outlays that should ramp up to be major cash cows.
Keeping financing costs low
The only way for all of this development to be worth something, though, is if Enterprise can access capital through the debt and equity market. This is an issue we have seen pop up numerous times during the oil crash as companies have been forced to cut payouts and revise guidance to ensure cheaper credit is available. According to CFO Bryan Bulawa, Enterprise doesn't seem to be having that problem.
We remain committed to maintaining a low and competitive overall cost of capital. To that end, our issuance of new long-term debt and equity capital so far this year, when combined with the $229 million of retained distributable cash flow in the first quarter, resulted in a 60-40 split of equity and debt with a spot weighted average cost of capital of approximately 4.9%.
A low cost of capital like that means that it should be relatively easy for Enterprise to grow through new projects. If that number were to start to creep up, though, it would be worth your time to dig into why that is the case.
Taking advantage of the market
Another big fear for many master limited partnerships as of late is that many contracts signed with producers are starting to expire, and that gives producers either the option to go renegotiate a lower price or even go to another customer. Teague wanted to let everyone know that those companies that looked great were making easy money, but Enterprise will be looking to take their lunch money as those contracts expire.
we're pretty aggressive in going out and grabbing incremental volumes, like I said, using the strength of our value chain, be that in natural gas processing or gathering or crude oil. And we see that working in 2 ways. #1, you get more volume through your system. You may not make as much money as you made in the first quarter of 2014 when anybody could make money, but you're making more money than anyone else. The other thing it does for you is it puts you in a position, as contracts roll off, to be able to renew more contracts and get more market share.
What a Fool believes
There are a lot of reasons to like shares of Enterprise Products Partners, and some of the things that management is saying right now give even more reason to like them. As we head in to the next quarter, look to see if the company is keeping its large development projects on track and if there is any uptick in cost of capital. Those are two yellow flags that would bring Enterprise's profit train to a screeching halt.
