Why You Should Shy Away From Enterprise Products Partners LP Right Now

Over the last five years, Enterprise Products Partners (NYSE: EPD  ) has been a retail investor's best friend. This midstream partnership has broad exposure to several commodities and themes: increasing domestic crude oil production, steady growth in dry-gas demand, and a huge position in the increasingly complex industry of natural gas liquids.

As most pipeline operators do, Enterprise secures long-lasting contracts with upstream companies, thereby providing highly visible cash flow, which the partnership then generously distributes to shareholders. Enterprise's business structure is also very simple: There are no general partners that have distribution priority. Finally, Enterprise is one of the least levered of the midstream partnerships and often has the highest coverage ratio for its distributions.

Sounds great, doesn't it? Well, unfortunately shares of Enterprise have been loved a little too much (although one can't blame risk-averse investors for doing so). Enterprise now trades at a significant premium to several of its pipeline peers. While risk aversion is an important aspect of investing, and Enterprise probably is the 'least risky' midstream partnership there is, the safety premium Enterprise carries is overdone at this point in time. Therefore, it would be wise for retail investors to look at other pipeline partnerships instead.

Depressed yield
 

Source: YCharts

This chart illustrates the inversely correlated relationship between dividend yield and unit price. Generally speaking, the higher the price, the lower the distribution yield. A high distribution yield has often provided a floor for Enterprise's unit price; a low yield often provides a ceiling. With a yield only in the 3.9% range, I believe we are getting close to that ceiling. Enterprise now yields less than most utilities do, where pipelines have traditionally yielded more.

Alternative options
While Enterprise may be the 'safest bet' of all pipelines out there, it really isn't the best deal anymore. Thankfully, there are some alternatives which I think are better buys at this time. The first of these is MarkWest Energy Partners (NYSE: MWE  ) . MarkWest is the largest midstream operator in the Marcellus and Utica shales. These are shale plays which span both Ohio and Pennsylvania. Unlike Enterprise, MarkWest is in a rapid growth phase because these two shale plays are in areas which previously had no midstream infrastructure. 

With all this growth comes growing pains, however. MarkWest finished 2013 with just about 1 times distribution coverage on the year, meaning its distributable cash flow fell just short of distributions. Put it into perspective: Distributable cash flow in 2013 jumped by nearly 16% compared to last year, and distributable cash flow is expected to increase another 34% in 2014. Best of all, MarkWest yields 5.3%, considerably higher than Enterprise's yield.

Another option to consider would be the partnership shares of Kinder Morgan Energy Partners  (NYSE: KMP  ) . While Kinder units do have a general partnership obligation, which means that distributions must first go to the general partner, management expects per-unit distributions to grow a solid 5% in 2014.

Kinder Morgan generally pays all of its cash flow in distributions, and so cash flow coverage for its distributions is a tight 1.01 times. However, management has a long history of delivering on its distribution promises, and this year should be no exception. Best of all? Kinder yields a very nice 7.1%. While Kinder units may be a bit riskier than Enterprise's are, that risk is more than compensated for in the valuation.

Bottom line
Enterprise has had a good run. In looking at the pipeline industry as a whole, Enterprise may very well be the best choice for income-minded retail investors who like to keep things simple. However, the premium at which Enterprise now trades is far too high in my opinion. For those who want to invest in energy infrastructure, there are a few better choices out there right now.

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Read/Post Comments (6) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2014, at 8:46 PM, stevebry56 wrote:

    Kinder Morgan may seem to be in some financial trouble, but Analysts are maintaining its hold rating for the company because of its cheap valuation.

  • Report this Comment On April 08, 2014, at 8:56 PM, davidscott1 wrote:

    Kinder Morgan is a Master Limited Partnership and through its subsidiaries, it is the largest independent owner and operator of petroleum product pipelines in the US.

  • Report this Comment On April 08, 2014, at 8:57 PM, stevebry56 wrote:

    Kinder Morgan charges a fee from the companies that utilize its assets, and for the most part, is not directly impacted by commodity prices .

  • Report this Comment On April 08, 2014, at 8:57 PM, davidscott1 wrote:

    According to the Kinder Morgan’s reports, a $1 increase in crude oil prices results in a $6 million increase in earnings from its crude oil segment.

  • Report this Comment On April 08, 2014, at 9:00 PM, stevebry56 wrote:

    In general, Kinder Morgan offer high dividend yields on their stocks to its investors. An investment in MLPs also provides additional security in that the company is legally bound to pay out most of its cash to its share holders.

  • Report this Comment On April 09, 2014, at 10:22 AM, HoerthCM wrote:

    Thanks for all the comments. I don't believe Kinder Morgan is any financial trouble at all. Debt/EBITDA levels are stable. Granted, Kinder Morgan does operate closer to the 'edge' than does most other pipelines, no doubt.

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