This past year has been a tough one for pipeline stocks. Despite an improving oil market, most have declined in value even as the stock market has marched higher. Enterprise Products Partners (EPD +0.37%) is no exception: The MLP has fallen more than 11% through late November.
However, that decline masks a relatively solid year for the pipeline and processing company since distributable cash flow (DCF) rose every single quarter versus the year-ago period. Meanwhile, the company made excellent progress on its expansion strategy, not only putting the finishing touches on several projects but securing new ones to fuel growth. Because of that, and an increasingly strong financial position, the company looks like an excellent value for income seekers.
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Building a brighter future
Enterprise Products Partners entered the year with $5.3 billion of expansion projects under construction, including $2.9 billion that it expected to finish this year. While the company encountered a delay in finishing a large petrochemical project due to Hurricane Harvey, which pushed its in-service date back a few months, it now expects to complete $4.5 billion in projects by year-end. Driving the increase was the company's placing one of its large pipeline projects in service much sooner than anticipated. As a result of this progress, Enterprise should see a significant spike in DCF over the next couple of quarters.
The company also secured several additional projects this year and had nearly $5 billion of expansions lined up to go into service in 2018 and 2019. One of the largest is the Shin Oak pipeline, which will transport natural gas liquids (NGLs) like propane and butane from the fast-growing Permian Basin to the company's NGL hub in Mont Belvieu, Texas. The 571-mile pipeline should enter service and start generating cash flow in the second quarter of 2019. In addition, the company announced plans to build another petrochemical plant, which will turn butane into a higher-valued product. This facility should enter service in late 2019.
The company also pressed forward on several development-stage projects, which could extend the visibility of its growth beyond 2019. One of those expansions is a potential joint venture with Navigator Holdings (NVGS +3.27%) to build an ethylene marine export terminal in the Houston Ship Channel. That facility would enable Enterprise to export the widely used chemical, which is one of the building blocks of plastics. Navigator Holdings, meanwhile, would serve as the floating pipeline to move this product to world markets. Enterprise is also working on a large pipeline project to move natural gas from the Permian to the Gulf Coast, though it is a bit behind rivals.
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The foundation is growing firmer
Despite spending billions of dollars on expansion projects, Enterprise Products Partners has only strengthened its financial foundation in 2017. Its leverage ratio, for example, has fallen from an average of 4.4 in 2016 down to 3.8 as of the end of the third quarter. That's due in part to the incremental income from newly completed expansion projects.
The company recently announced plans to further strengthen its already top-tier financial position by slowing the pace of its distribution growth rate through 2019. That will enable the company to retain more cash flow, which will both widen the margin of safety on the distribution while giving it more cash to finance expansion projects. The company estimates that by 2019 it will be able to fund the equity portion of a $2.5 billion annual investment budget with internally generated cash flow, meaning it would no longer need to issue equity to finance that rate of spending on growth projects. Furthermore, the company said that it could even start using some of its growing cash flow to repurchase units, which could create greater long-term value for investors.
Don't let this opportunity slip away
With its recently completed expansion projects and a solid financial foundation, Enterprise Products Partners enters 2018 in an even stronger position than it started this year. Despite that progress, units are inexplicably down double digits this year. That dip, along with continued steady quarterly increases, has pushed the company's distribution yield up to an attractive 7%. That's just too good to pass up, in my opinion. Investors should consider taking advantage of this year's sell-off to scoop up this excellent income stock at one of its lowest values in years.
