There aren't any certainties in the investing world. One thing that you can reasonably depend upon, though, is Enterprise Products Partners (NYSE:EPD) meeting or exceeding the goals its management team sets. This past quarter and year were a perfect example of this, as the company consistently raised guidance, grew faster than expected, and was able to meet a major management objective faster than most expected.
This past year's performance and expected growth in 2019 gave management the ability to announce a new shareholder-friendly initiative: a $2 billion buyback program. Let's take a look at what Enterprise Products Partners did this past quarter and what investors can expect in 2019 and beyond.
Enterprise Products Partners results: The raw numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Gross operating margin||$2.14 billion||$2.12 billion||$1.52 billion|
|Net income||$1.30 billion||$1.33 billion||$797 million|
|Distributable cash flow||$1.62 billion||$1.58 billion||$1.26 billion|
As per the norm, Enterprise's earnings results have been remarkably consistent and have grown at a decent clip. This past quarter, the company reported record results for three of its operating segments. Some of those gains were a result of gains related to fair value accounting standards, but these paper gains and losses are common for companies in the oil and gas business and tend to even out over time.
What happened with Enterprise Products Partners this quarter?
- Even after raising its capital spending guidance three times in 2018, Enterprise's capital spending for the year came in higher than it forecast at $4.5 billion. Management now expects 2019 spending to be in the $3.5 billion to $3.9 billion range. If last year was any indication, though, don't be surprised if those numbers increase.
- For the year, Enterprise started operations with $1.9 billion worth of capital projects. Going into 2019, it has $6.7 billion in projects under construction and expects five projects to become operational.
- Compared to recent quarters, there wasn't much news in regards to new projects getting the green light. Instead of adding new assets, management announced it was planning to expand capacity at two of its natural gas liquids (NGL) processing facilities.
- Enterprise Products Partners elected to maintain its current distribution growth plan by raising its payout by $0.0025 to $0.435. This most recent increase represented 20 consecutive years of payout growth.
What management had to say
With all this cash coming in the door and management starting to slow its capital spending rate, I'm sure many investors were expecting a larger payout increase than the 2.7% boost. The reason that management elected to do this is probably connected to this statement CEO Jim Teague made in the company's press release: "We achieved our goal of equity self-funding a year earlier than expected. Today, we announced the authorization of a $2.0 billion multi-year, common unit buyback program that provides us with an alternative means to opportunistically return capital to our limited partners."
Back in 2017, when management elected to slow the pace of its payout growth, it hinted at the possibility of starting a buyback program once it was retaining enough cash to pay for the equity portion of its capital spending (equity portion means it was issuing units in the partnership to raise cash). The fact that the company announced a buyback this large and this soon after that decision less than 18 months ago is a bit of a surprise.
One thing to note: This buyback program isn't set in stone. The authority for this program has no definitive end, and there are some strict rules regarding maintaining certain debt leverage ratios and prioritizing high-return projects before buybacks. Management also has the authority to suspend or discontinue it at any time.
Executing its plan faster than expected
The assumption was that when Enterprise Products Partners' management elected to slow its payout to invest in growth, it would take a couple years before it generated enough excess cash to start giving it back to investors. The fact that it was able to achieve its goals of self-funding and start a sizable unit repurchase program is remarkable.
Throughout 2019, we can reasonably expect earnings and cash flow to grow from assets becoming operational last year ramping up to full capacity and the start-up of the five new projects slated to go live in 2019. Putting it all together, investors can probably expect another good year of earnings results from Enterprise Products Partners regardless of what its stock price does.