In the last few months oil prices have declined by 30% from their recent highs. This has resulted in a commensurate decline in some of the highest quality, high-yield distribution investments in the MLP industry.
WTI Crude Oil Spot Price data by YCharts
Let's dig deeper into the two biggest reasons Enterprise Products Partners (EPD 0.48%) should be considered for a spot in your retirement income portfolio, whether you're already retired or still a few decades away.
What Enterprise does
Source: Enterprise Products Partners investor presentation.
Enterprise Products Partners is the second largest operator of midstream (pipeline, processing, and storage) services in the U.S. Its 52,000 miles of pipelines service all major U.S. shale oil and gas formations and 95% of Natural Gas Liquids processing centers east of the Rockies. The partnership maintains high cash-flow predictability through long-term contracts that include annual price increases tied to inflation and that aren't affected by commodity prices. Over the past two decades this stable source of cash flow has allowed the partnership to become one of the most consistent income growers in the midstream MLP industry, with 41 consecutive quarters of distribution growth.
What gives Enterprise an edge over its competition
One of the biggest advantages Enterprise has over its competition, is that it's one of only five midstream MLPs to lack a general partner and the incentive distribution rights, or IDRs that go with it. These fees result in an MLP paying a large proportion of marginal cash flow, typically up to 50%, to the general partner as distributions rise over time.
Because Enterprise Products Partners doesn't pay IDRs, it can retain more cash flow, both to fund growth projects, and to grow the distribution faster -- both of which the MLP has done to excellent effect. In fact, since 2010, Enterprise has retained $6.4 billion in excess distributable cash flow, or DCF, (from which distributions get paid) and maintained an average distribution coverage ratio of greater than 1.4. Typically a ratio greater than 1.1 indicates a safe payout that is ready to grow.
Enterprise Products Partners' excess DCF allows it to internally fund more of its projects and thus gives it less need to turn to either debt or equity markets for funding. This can be an enormous asset when interest rates are high -- prior to the credit crisis they were 5.25% -- or when credit markets dry up entirely as we saw during the 2008 to 2009 financial crisis.
U.S. Target Federal Funds Rate data by YCharts
Superior management means superb profitability
| MLP | Operating Margin | Net Margin | ROA | ROE | ROIC |
| Enterprise Products Partners | 7.40% | 5.60% | 6.80% | 18.70% | 9.77% |
| Energy Transfer Partners (NYSE: ETP) | 3.80% | 0.10% | 0.10% | 0.20% | 5.75% |
| Magellan Midstream Partners (NYSE: MMP) | 40.80% | 35.10% | 15.80% | 46.00% | 18.18% |
| Industry Average | 9.70% | 4.20% | 2.70% | 9.30% |
Source: Morningstar.com.
Great management often results in great profitability and here we see that Enterprise's return on equity, aka ROE, is more than double the industry average. However, with high debt leverage, this figure can be inflated. A high ROE but low return on invested capital, or ROIC, might indicate an MLP is over leveraged and not allocating its debt funding efficiently. However, the MLP's high ROIC indicates that Enterprise's management is indeed efficiently using its debt to generate long-term investor wealth. Thanks to an excellent net margin and much higher than average return on assets, I'm confident that Enterprise's quality management is another competitive advantage that will benefit investors in years to come.
Enterprise's growth drivers for the future
Enterprise Products Partners has a bright growth future ahead of it courtesy of several major trends in U.S. energy including growth in natural gas, oil production, and exports of natural gas liquids, or NGLs, such as ethane and liquefied petroleum gas, which is liquefied propane and butane (by products of oil refining and natural gas processing).
Source: Enterprise Products Partners investor presentation.
A good example of how Enterprise maximizes several avenues of growth synergistically is with NGLs. NGL production is expected to increase 79% by 2020 courtesy of America's incredible growth in gas production (from which NGLs are separated) and strong export demand from Europe and Asia.This large increase in NGLs provides several growth catalysts for Enterprise.
The first is the fact that an over production of ethane has resulted in a price crash and caught the attention of the U.S. Petrochemical industry which wishes to use this cheap and plentiful feed stock to produce valuable chemicals and products for export. In fact, cheap ethane is at the heart of a $176 billion investment boom taking place on the US Gulf Coast right now.
Enterprise plans on profiting from this trend by bringing on-line no less than 10 NGL and petrochemical projects between now and the end of 2016 including the ATEX and Aegis ethane pipelines.
Source: Enterprise Products Partners investor presentation.
These pipelines will connect the hyper prolific Marcellus and Utica shale with petrochemical plants on the Gulf coast. The Atex pipeline is expected to see contracted volume increase 130% by 2018 and with 15 year ship-or-pay contracts -- meaning Enterprise is paid for capacity even if customers don't transport ethane. However, Enterprise isn't stopping at ethane.
It's also constructing a propane dehydrogenation facility alongside its Mont Belvieu fractionators. This will allow it to utilize the cheap feedstock its transporting and processing, to manufacture valuable polypropylene which is used in dozens of other petrochemical and plastic applications.
Enterprise will also have the option of exporting liquid propane and butane as fuel to energy starved Europe and Japan, where prices are far higher.
Bottom line: old faithful of income growth
Enterprise Products Partners has proven itself one of the highest quality energy investments you can make thanks to its two major competitive advantages: excellent management and a lack of a general partner.. These two factors when combined with Its massive long-term growth potential, superb profitability, and one of the safest distributions in the industry, make it in my opinion, one of the best retirement investments you can make today.
