Units of Enterprise Products Partners L.P. started the week off right, reaching a new 52-week high on Monday and closing near $40. The stock has been on a tear in 2014, up more than 20% year to date, and more than 24% on a total return basis. That's significantly better than the S&P 500's total return of 9.5%, and the 14.5% return of the Alerian Index, which tracks a large group of master limited partnerships. Clearly Enterprise is having a great year, but questions remain: What is driving its performance, and can it continue to outperform over time? Let's take a closer look.
Part of Enterprise's strong performance this year is undoubtedly due to the "rising tide lifts all boats" aspect of MLP performance in general. Many MLPs are benefiting from increased investor attention, deal activity, and a booming energy sector. What investors need to look at is what it is specifically about Enterprise that is pushing it to outperform the Alerian Index comprised of its peers.
Financial fortitude
From a financial metric standpoint, Enterprise is extremely fiscally fit. It maintains the highest possible credit rating for an MLP from Moody's and Standard & Poor's, an excellent distribution coverage ratio, and a low leverage ratio, all while posting growth in revenue, net income, and earnings per unit. Master limited partnerships are inherently risky because of their structure, and Enterprise Products Partners is able to capitalize on that by being arguably the least risky option in the asset class.
But is that enough to convince analysts to rate it a buy, much less encourage individual investors to actually pick up units? Perhaps, but the driving force for Enterprise stock is its growth story, which is enhanced by the partnership's commitment to visibility.
High visibility
Management is remarkably candid when it comes to sharing its growth prospects and its financials, particularly when it comes to debt. MLPs rely heavily on debt to finance growth, and in that sense a partnership's growth story is only as good as its debt story.
For example, here is a slide from Enterprise Products Partners' most recent presentation:
Source: Company presentation
Investors come away with a clear understanding of Enterprise's debt story with just two easy-to-grasp images on a single slide. We now know how much debt has been issued in the last five years, how much it costs, and when it comes due. Management is peerless when it comes to debt management, allowing the partnership to use cash today to get projects up and running and generating revenue long before the bill for those projects comes due.
A sound debt story allows investors to focus on the actual projects that will drive future distribution growth, which is ultimately what makes Enterprise such a reliable investment to begin with.
The partnership's growth capital program entails spending roughly $12 billion from 2013 through 2016, the majority of that dedicated to growing its natural gas liquids business segment and building out its export capacity as domestic demand shrinks and the global market grows. Here is a quick rundown of some key demand opportunities for Enterprise Products Partners:
- Refined products, Latin America
- Ethane, northwest Europe
- Propane, Asia
And here is a snapshot of Enterprise's planned projects that will capitalize on that demand:
- Gulf Coast NGL export facility (4Q 2015)
- Gulf Coast ethane export facility (2016)
- Propane dehydrogenation unit (2016)
- Refined products export dock (recently completed)
Management is proving it has its finger on the pulse of the world energy story. Given Enterprise's propensity to finish projects on time and under budget, there is a lot for investors to like about its future. Beyond that, the partnership provides remarkable detail for its demand stories and corresponding projects in its investor presentations. You can find the latest one here.
Bottom line
Naturally, the downside to a soaring stock is a lower yield, which can dissuade many MLP investors. In Enterprise's case, the yield has dropped about 40 basis points since the beginning of the year to 3.8%. If you are an investor who is chasing yield, you might choose to sit this one out. There is a lot to like about this stock, but that doesn't mean it's a buy for your portfolio right now. Given the tax ramifications of buying and selling MLPs, investors are wise to look at the complete picture, which includes the needs of their portfolio, before buying units of Enterprise Products Partners, despite its many strengths.
