Why You Should Buy Enterprise Products Partners L.P. for the Long Haul

Enterprise Products Partners' bullish run has not played to completion, and this may present a buying opportunity.

Feb 5, 2014 at 2:54PM

Enterprise Products Partners (NYSE:EPD), a bigwig in the midstream oil business, has received a lot of attention in the past several weeks. This is primarily in response to its record full year and fourth quarter earnings for fiscal 2014, which we reported on earlier. Just as a brief recap, Enterprise Products Partners posted an attributable net income of $2.6 billion, or $2.86 per diluted unit, on revenue of $47.7 billion, breaking fiscal year records in both cases.

Enterprise Products Partners' impressive performance in the past year is reflective of the momentum it has gained ever since the U.S. oil production boom. As expected, this has been priced into its stock. Over the past five years, Enterprise Products Partners' stock has gained well over 170% and is currently trading in previously uncharted territory. Naturally, some investors are holding back and mulling over possible scenarios; will there be a pullback? Is there more upside? Has the bullish cycle run its entire course?

While there is no blanket statement to answer all these concerns, one thing remains candidly clear; underlying fundamentals as well as wider industry and economic trends support the argument for more upside in Enterprise Products Partners.

Ability to take on more debt a plus
Enterprise Products Partners has one of the best credit ratings in the midstream sector. In October 2013, for instance, it received a credit rating of BBB+ from rating agency Standard & Poor's. This was not only the best in the midstream sector, but also qualified as an investment grade rating, which the S&P defines as anything better than BBB-.

Why is this important for investors?

Enterprise Product Partners' impressive credit rating highlights its ability to take on more debt. This is critically important as there is a huge mismatch between the current midstream infrastructure and the quantity of oil being produced. To put this into clearer perspective, around 35% of the Bakken natural gas production -- a valuable natural byproduct of oil extraction -- is flared (burned at the well) due to lack of infrastructure to store and transport it, according to the US Energy Information Administration. This wastage, caused by lack of infrastructure, runs into an estimated $100 million a month.

More transport channels need to be put in place sooner rather than later. In consideration of this, midstream companies require significantly more cash relative to the years before the production boom. However, taking this cash right out of the coffers can put an uncomfortable level of stress on cash flows. Midstream companies are thereby turning to external sources of capital. Since 2008, at the outset of the shale boom, more than 95% of midstream capital expenditures and acquisitions have been financed through equity and debt, according to a report released in November 2013 by the Deloitte Center for Energy Solutions.

Moreover, external financing to meet high capital requirements in the midstream sector is likely to continue. Shale plays are expected to keep the midstream demand momentum going over the next 10-20 years.

Clearly, the ability to source external capital (e.g. debt) needed to finance much-needed infrastructure development products is paramount. With one of the best credit ratings in the mainstream business, Enterprise Products Partners is well positioned to fill the gaping midstream infrastructure gap relative to its competitors. This will translate into more revenue and growth in the long term.

Conditions point toward a higher yield for investors
In addition to being able to seize more impending opportunities in the midstream space relative to its peers, Enterprise Products Partners greatly rewards its shareholders. It currently yields a savory 4.20%, and this could increase going forward.

Why? The Federal Reserve's decision to scale back on its monthly bond buying has led to an inevitable uptick in U.S. interest rates. Naturally, fixed-income investors have developed a liking for previously unattractive federal bonds. This has in turn led to an exodus from less attractive fixed-income plays, including emerging markets and some local equities.

In response to the Fed taper and rising interest rates, Enterprise Products Partners is likely to revise its distribution policy in favor of fixed-income investors going forward. This is because it can't afford to lose investors at such a time when pressing midstream demand magnifies the need for external capital.

More importantly, Enterprise Products Partners can revise its distribution policy more freely than its peers. This is because it is one of the few master limited partnerships in its space that does not have a general partner. General partners hold incentive distribution rights. This is an entitlement to a higher proportion of the MLP's quarterly distribution, or essentially a euphemism for management fees. Because of the lack of general partners, Enterprise Products Partners, unlike most of its peers, can get more cash to the individual investor without making radical policy changes that gnaw into its retained earnings.

Therefore, as long as the Fed continues to taper its bond buying, the more likely it is that Enterprise Products Partners shareholders will enjoy greater returns in the future. After all, Enterprise Products Partners has already set a precedent. For the past consecutive 37 quarters, it has continually increased its distribution to unitholders.

More ways to boost your income with The Motley Fool
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it’s true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor’s portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers