There has been a lot of fear lately about the master limited partnership model and its propensity to pay such generous yields, and that worry has weighed pretty heavily on shares of Enterprise Products Partners (EPD 0.21%).
The fact that Enterprise's shares have moved with the broader market for pipeline stocks and MLPs is nothing new, but when you look at the company's most recent earnings report, you have to wonder why Wall Street trades the stock like it does all the others. Let's take a look at its most recent results to see why, even at today's oil prices, investors shouldn't be overly concerned about Enterprise Products' shares.
By the numbers
Because of the way that revenue and direct costs are booked at Enterprise, it's always better to look at its gross operating margin rather than revenue purely as a gauge of the top line. Last quarter, it pulled in $1.35 billion in operating margin, a couple million short of the same quarter last year. Here's a breakdown of each business segment's operating margins:
Image source: Enterprise Products Partners earnings release and author's chart.
One thing to remember is that the company sold off its Offshore Pipeline portfolio in the third quarter of 2015. Part of the rationale was that the offshore pipeline business was one that couldn't be easily integrated into the company's other midstream assets, and the other was that the sale helped to facilitate the purchase of Pioneer Natural Resources' natural gas and NGL gathering system in the Eagle Ford shale.
From a profitability standpoint, results were similar as well. Adjusted EBITDA of $1,3 billion was $32 million less than the same time last year. The most important profitability for income invesors, though, is dstributable cash flow. On this front, the company was able to generate $1.08 billion in distributable cash, a 2.4% increase compared to last year. This gave Enterprise a distribution coverage ratio of 1.3 times, still a pretty healthy number in the middle of the downturn.
The big operational highlights
- Enterprise saw a volume decline of 100,000 barrels per day across all of its NGL, crude, refined products, and petrochemical pipelines. Similarly, natural gas volumes across the system declined 7.7% to 11.9 trillion BTUs a day.
- Declines in pipeline volumes were offset by increased volumes of natural gas processing and NGL fractionation.
- Capital investments for the quarter total $1.2 billion.
- The company put its LPG export facility expansion and the Aegis pipeline expansion into service at the end of 2015. So we should start to see cash flow from these assets start to come in starting next quarter.
- Its other projects still under construction remain on schedule.
Straight from the CEO's mouth
While the operating results from the past quarter were rather impressive, newly promoted CEO Jim Teague had this to say as part of the company's earnings release:
The energy industry is entering the second year of this price cycle, which will present new challenges and opportunities for the midstream energy sector. We believe Enterprise is well positioned to manage through this difficult period. Our integrated system provides both business and geographic diversification. Our largest customers are major consumers of energy such as integrated energy companies, petrochemical companies, crude oil refiners and utilities. We have spent the last five years developing markets and assets to cultivate incremental demand for U.S. NGLs, crude oil and refined products. Financially, we entered this cycle with strong cash flow coverage of our distributions and Baa1/BBB+ credit metrics. Our retained distributable cash flow has provided us flexibility in raising capital and a margin of safety for our distributions. Cash flow from existing assets and new assets under construction provide the foundation for continuing distribution growth in 2016,
What should give investors confidence here is that the company is still maintaining its investment grade rating. Back on Jan. 7, Williams Companies (WMB 0.08%) had its credit rating downgraded to junk status, which means that any newly issued debt will likely come at a higher price. The change in debt rating has had a pretty large impact on the stock price of Williams, its subsidiary partnership, and its potential acquirer.
As long as Enterprise can keep its cash situation as stable as it has been, then chances are the company won't run into any significant credit issues that would result in a downgrade.
What a Fool believes
Enterprise Products Partners is by no means a perfect stock. While it has remained rather resilient throughout this downturn, its steady-as-she-goes cash flow generation isn't going to grow rapidly. However, investors who have been selling Enterprise's stock out of fear that other companies have less conservative cash management policies and shakier balance sheets are probably being a little shortsighted. If Enterprise can keep up results like this while oil is in the $30 range, it bodes well for when the market rebounds.
