Units of Enterprise Products Partners (NYSE:EPD) slumped by about 10% in September, according to data provided by S&P Global Market Intelligence. Weighing on the MLP was an update on its growth prospects.
Enterprise Products Partners and certain of its customers amended their crude oil contracts last month. As a result, the company agreed to use its existing pipelines to support these oil transportation agreements and cancel construction of the Midland-to-ECHO 4 (M2E4) pipeline. M2E4, which would have shipped 450,000 barrels of oil per day, was initially expected to be ready to go into service in the first half of 2021.
On the one hand, the project cancellation will save the company about $800 million in capital costs. Further, it will enhance the value of its existing assets by spreading the volumes previously earmarked for M2E4 across those legacy systems. However, it will impact the company's longer-term earnings growth as M2E4 would have provided Enterprise with another income stream. Management hopes to mute that effect somewhat by reallocating the capital it would have invested in the system toward reducing debt, boosting its distribution, and further funding its unit buyback program.
All the turbulence in the oil market this year is forcing pipeline companies to reevaluate their growth projects based on shifting industry needs. The sector requires less additional pipeline capacity than was previously anticipated, and that will impact the growth plans of MLPs like Enterprise. However, because their legacy assets generate lots of cash, Enterprise can allocate its funds to create value for investors in other ways, including enhancing the sustainability of its 10.6%-yielding distribution and buying back its beaten-down units.