It's no secret that I believe Enterprise Products Partners (EPD 0.48%) is an excellent company to own for the long term. Fueling that bullishness is the fact that the pipeline giant has a rock-solid business model and visible growth prospects on the horizon thanks to the $8.6 billion of capital projects it has lined up. These factors should enable the company to continue to grow its distribution to investors.
That said, just because I'm bullish on the company doesn't mean I don't pay attention to bearish arguments. Quite the opposite, in fact, since I have a growing portion of my net worth invested in the company, which is at risk if bears are right. That's why I think it's a good idea to review their case so that investors know full well the risks involved when investing in Enterprise Products Partners.
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Its access to cheap capital might dry up
Enterprise Products Partners is one of the most fiscally conservative master limited partnerships (MLPs) in the sector. By keeping its leverage ratio around 4.0 times or less, the company has earned one of the highest credit ratings among MLPs. Furthermore, it also maintains a large margin of safety on its distribution, averaging more than 1.2 times coverage last year, allowing it to retain $675 million of cash flow to finance growth projects. Because of that strong financial profile, it has never had any issues accessing the money it needs to fund expansion.
That said, the company typically needs to raise a boatload of outside capital to finance these projects. Last year, for example, it spent nearly $3.9 billion on capex. Since it only generated $709 million in excess cash for the year, it needed to issue roughly $3.2 billion of debt and equity to bridge the gap. While it didn't have any trouble raising that money last year, a deep credit market crisis in the future could make it hard for Enterprise to obtain the cash it needs to finance growth projects at acceptable rates.
That was the case for several of its rivals during the recent oil market downturn. For example, ONEOK's (OKE 0.75%) former MLP needed to secure $1 billion in bank financing early last year so it could refinance an upcoming bond maturity after longer-term funding options became prohibitively expensive. ONEOK's affiliate expected that the move would eliminate its need to access the public debt and equity markets until well into 2017, which bought it time while it waited for the capital markets to open back up. While Enterprise Products Partners avoided a similar fate last year, it did issue twice as much equity to finance growth projects as it usually does to keep its leverage metrics low, which shows that it's not completely immune to market dislocations.
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Opposition to new pipeline projects intensifies
Enterprise Products Partners has a long history of completing its growth projects on time and on budget. That's one reason why the company has been able to increase its distribution to investors in each of the last 52 quarters. Meanwhile, with $8.6 billion of capital projects under construction, Enterprise Products Partners should be able to keep that streak going for at least the next few years.
That said, Enterprise has been one of the lucky ones since it hasn't run into any major issues completing new projects. Rivals Energy Transfer Partners (ETP) and Williams Partners (NYSE: WPZ), on the other hand, have run into several unforeseen issues in recent years that have delayed major expansion projects. In Energy Transfer Partners' case, it encountered opposition that tried to block its attempts to finish the $4.78 billion Bakken Pipeline System, which ended up delaying its in-service date by more than six months, costing it millions in added expenses and cash flow. Meanwhile, Williams Partners experienced a delay in receiving approval for its $3 billion Atlantic Sunrise project and was denied a permit for its nearly $1 billion Constitution Pipeline due to opposition to those projects.
Given the increasing worries about climate change, opposition to new oil and gas projects will likely continue rising in the years ahead. That could eventually impact Enterprise Products Partners' growth plans by either causing a lengthy delay of a critical project or even forcing the company to cancel a project due to issues receiving permits. A string of costly delays or project cancellations could end up halting the company's distribution growth streak.
Investor takeaway
Bulls like me love Enterprise Products Partners' ability to leverage its vast portfolio of fee-based assets and deliver steady income growth over the long term. That said, for the company to continue growing, it needs access to cheap capital and the ability to move forward with its expansion projects without facing any significant delays or unforeseen expenses. Given the issues its peers have had in the recent past, these aren't risks that bulls should take lightly. However, because the company is more conservative than most rivals, it does have a greater cushion to withstand a setback. That's why I remain confident that it can continue to grow at a healthy rate for years to come.
