Enterprise Products Partners L.P. (EPD 0.18%) is one of the largest oil and natural gas midstream partnerships in the country, and its shares have fallen roughly 10% since hitting a peak in February. Is it time for you to start adding this industry giant to your portfolio? The numbers say yes; here are six things you need to know before you pull the trigger.
1. Scale
Enterprise is one of the largest midstream companies in the United States. That means growth will be slower than at a smaller industry player, but it also means the partnership can take on deals and projects that not many of its peers could handle. So, scale has its advantages.
Image source: Getty Images.
Enterprise is also one of the most diversified midstream names, partially a function of its size. It owns pipelines, storage facilities, products terminals, processing plants, and even a fleet of ships. It has assets spread across a huge swatch of the country. That means if one product it moves or regional area is under pressure, Enterprise has the flexibility to adjust its business to deal with the issue.
2. Throughput, not commodities
The vast majority of Enterprise's business is fee-based. This point isn't unique to Enterprise. For example, Holly Energy Partners gets 100% of its revenues from fees. But it is still an important reason for owning Enterprise. Essentially, a fee-based business means that the price of oil and natural gas has a limited impact on Enterprise's business. Demand is a much more important determinant of success.
To give you an idea of what this means, oil prices tumbled in mid-2014 and still hadn't fully recovered by year end 2016. But over that span, Enterprise's core distributable cash flow grew from $3.9 billion to $4.1 billion. That's not amazing growth, but it happened at a time when oil prices fell from over $100 a barrel to around $30 at the worst point. Withstanding that kind of price drop highlights the value of Enterprise's business model... even if it isn't unique.
Enterprise's results held up well even during a deep oil downturn. Image Source: Enterprise Products Partners L.P.
3. Buying growth
Another benefit of Enterprise's size is that it allows the midstream giant to make big moves in down markets. For example, it completed the acquisition of its oil tankers business in early 2015 while oil prices were still falling. And more recently it bought the midstream assets of Azure Midstream Partners at a bankruptcy auction. Both show Enterprise's ability to expand its business opportunistically in downturns so it can come out the other side a stronger company.
Of course downturns aren't the only time it expands this way. But the ability to take a contrarian stance is a key differentiating factor. That said, to give you a broader sense of the company's history, Enterprise has spent $26 billion on acquisitions since its initial public offering in 1998.
4. A builder
While acquisitions are an important piece of the growth equation for Enterprise, it isn't the only thing to watch. Construction is another key avenue for growth. On that front, the partnership has $8.4 billion of growth projects in the works between now and 2019.
Enterprise is building its business from the ground up. Image Source: Enterprise Products Partners L.P. IMAGE: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjczMTU0fENoaWxkSUQ9MzgwOTQ1fFR5cGU9MQ==&t=1 page 33
Size is important here, too, because Enterprise can comfortably take on projects that smaller peers don't have the scale to get done. In fact, Enterprise has spent around $38 billion on organic growth projects since it came public, far more than it's spent on acquisitions.
5. Good quarter
That said, you might be asking what's going on today at Enterprise... Motley Fool's Tyler Crowe recently highlighted the good news here. In the first quarter, Enterprise saw nice jumps in net income, earnings, and distributable cash flow year over year and sequentially compared to the fourth quarter. All three had been in something of a holding pattern during the oil downturn, with new assets offsetting slow demand for existing assets.
With drilling activity picking up in the United States, however, Enterprise's expansion efforts are really starting to show results. Assuming this trend continues the partnership should have a pretty good year.
6. Distribution
All of this leads to a discussion of the partnership's distribution, which is likely what attracted you to Enterprise in the first place. For starters, it offers a robust 6.2% distribution yield. That's toward the high end of its historical range. The distribution was covered by 1.3 times in the first quarter, which provides plenty of safety and room for future increases.
Note that the distribution was increased by 5% in the quarter, marking the 51st consecutive quarter in which Enterprise has upped the disbursement. However, the longer streak is 20 -- the number of consecutive years that Enterprise has increased its distribution. If you like dividend increases, Enterprise has you covered.
Would there be a bad time to buy?
All in, Enterprise is likely among the best-run participants in the oil and natural gas midstream industry. In fact, some might argue that there's never a bad time to buy this limited partnership for long-term investors seeking income (that's hyperbole, of course). But today, after a 10% pullback, is certainly not a bad time. With a well-covered 6.2% distribution yield and two decades worth of dividend growth behind it, investors would be well served to do a deep dive here.
