Why Enterprise Products Partners LP Is a Core Energy Holding

Enterprise Products Partners' strategically located assets, low cost of capital, and strong cash flow diversification support favorable growth prospects and stability.

May 18, 2014 at 10:26AM

Enterprise Products Partners LP (NYSE:EPD) is a leading North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), and crude oil. Enterprise Products Partners not only offers investors exposure to favorable NGL fundamentals, but the company's strategically located assets, low cost of capital, and strong cash flow diversification also support favorable growth prospects and stability.

Enterprise Products Partners offers investors a compelling investment opportunity. It has a strategic, integrated asset platform with growing exposure to downstream opportunities (ethane exports, condensate splitters, PDH facilities). The company is a dominant player in the NGL markets with market-leading positions all along the NGL value chain (gathering, transportation, storage, and fractionation).

It also offers strong returns on capital, and the new projects placed into service (ATEX, Front Range, and LPG expansion) set up Enterprise to continue achieving strong returns from its integrated NGL footprint. The company's capital discipline, coupled with a growing opportunity set, creates visible long-term distribution growth. Enterprise Products Partners has also outperformed its peers so far in 2014. Year-to-date Enterprise is up 11%; in comparison Plains All American Pipeline (NYSE:PAA) is up 9.4% while Kinder Morgan Energy Partners (NYSE:KMP) is down 5.6% over the same period.

Ethane export project
The company recently announced that it has signed sufficient long-term contracts to build a fully refrigerated ethane export facility on the Texas Gulf Coast. This is a very positive development for Enterprise Products Partners, as it adds to the company's large project inventory, leverages its expansive NGL infrastructure asset base, and helps address the oversupplied U.S. ethane market.

The export facility is expected to be in service by 3Q16, and is designed to have a loading capacity of up to 240,000 barrels per day. While the company has not disclosed volumes and specific project costs, it did confirm that contracts should be 10-plus years, and the project will not involve the company taking contract risk.

Enterprise Products Partners is seizing the export opportunity. Earlier this year, the company also announced its Houston LPG export terminal expansion, which will increase loading capacity to more than 16 million barrels per month -- an increase of 8.5 million barrels -- by the end of 2015. From an industry perspective, EPD's ethane export project marks another data point in the U.S., becoming a larger player in energy exports driven by growing domestic production.

Project backlog of $6.8 billion
Since the beginning of the year, EPD has placed $2.5 billion of projects in service. EPD's project backlog, including the ethane export facility, has moved from $7.8 billion to $6.8 billion, indicating another $1.5 billion of projects have been added since the company's February earnings call. It again underscores the underlying strength of EPD's midstream franchise.

Raised distributions
The company reported first quarter adjusted earnings per unit, or EPU, of $0.79, topping Wall Street estimates of $0.75 by 5%. Strong volume growth on the company's crude/NGL pipelines and new projects placed into service helped deliver solid results.

Enterprise raised its quarterly distribution by 6% year over year, and 1.4% quarter over quarter, to $0.71 per unit ($2.84 annualized). The hike marks EPD's 39th consecutive quarterly increase. It's important to note here that, even with narrower crude price differentials and lower petrochemical results, the company's distribution coverage remains robust.

The second biggest U.S. pipeline company by market value, Kinder Morgan Energy Partners also reported solid quarterly results driven by higher gas volumes. The company reported first quarter EPS of $0.73, in line with consensus estimates of $0.73. Moreover, the company's CEO said that supplies out of the Marcellus and Utica regions could reach "mind-boggling" levels, boosting revenue for the pipeline companies. The company also increased its quarterly cash distribution by 6% year over year and 1.5% quarter over quarter.

Plains All American also reported strong quarterly results (first quarter EPS of $0.65 compared to consensus estimates of $0.65), driven by continued growth in its fee-based transportation and facilities segment. Similar to its peers, Plains also increased its quarterly cash distributions. The quarterly distribution of $0.63 per unit represents an increases of 9.6% year over year and 2.4% quarter over quarter. 

Bottom line
Enterprise Products Partners offers investors exposure to the favorable NGL infrastructure cycle. It offers visible growth and a robust backlog of $6.8 billion through 2016. The company continues to evolve, as highlighted by its recently announced 240,000-barrel-per-day ethane export facility. The fundamentals remain attractive for NGL infrastructure providers. Enterprise Products Partners, with its integrated processing, pipeline, fractionation, storage, and export facilities, remains well positioned to serve growing supply and demand in this dynamic market. The company's shift to repeatable, fee-based earnings, with significant latent upside from higher commodity prices or spreads, is also positive.

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Jan-e- Alam 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.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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