Enterprise Products Partners (NYSE:EPD) delivered solid operational and financial results during the third quarter despite continued turbulence in the oil market. Because of that, the master limited partnership (MLP) generated more than enough cash to cover its 10.3%-yielding distribution. That enabled it to produce excess cash to satisfy most of its growth spending and maintain a strong balance sheet.

Drilling down into Enterprise Products Partners' third-quarter results

Metric

Q3 2020

Q3 2019

Change

Adjusted EBITDA

$2.06 billion

$2.023 billion

1.8%

Distributable cash flow (DCF)

$1.647 billion

$1.640 billion

0.4%

DCF per unit

$0.75

$0.74

1.4%

Distribution coverage ratio

1.7

1.7

0%

Data source: Enterprise Products Partners. 

Enterprise Products Partners benefited from having an integrated and diversified midstream energy system during the third quarter:

Enterprise Products Partners' earnings by segment in the third quarter of 2020 and 2019.

Data source: Enterprise Products Partners. Chart by the author.

Improvements in the MLP's natural gas liquids (NGLs) and petrochemical and refined products segments helped offset continued weakness in its crude oil and natural gas assets. The company's CEO, Jim Teague, discussed this in the earnings press release. He noted that "the performance of our marketing, storage, NGL fractionation, NGL pipeline, petrochemical pipeline, and Permian gathering and processing businesses largely offset the impact of lower margins, volumes and earnings from our natural gas gathering and processing assets in the Rockies, South Texas and the Haynesville and our crude oil pipelines and marine terminal." The petrochemical services segment's improvement was noteworthy, as it recorded a $124 million sequential increase from what was a very challenging second quarter.

Volumes across many of Enterprise Products Partners' midstream assets picked up during the third quarter. Teague noted that the company moved the equivalent of 9.5 million barrels across its pipeline systems during the period. Meanwhile, it fractionated a record 1.4 million barrels of NGLs during the quarter.

That stability amid the storm enabled the MLP to generate enough cash to cover its high-yielding distribution by a comfortable 1.7 times. That left it with nearly $670 million of excess cash, which helped fund almost all of the $705 million invested in capital projects during the quarter.

Pipelines heading to a refinery with the sun shining in the background.

Image source: Getty Images.

A look at what's ahead for Enterprise Products Partners

Enterprise Products Partners has spent $2.7 billion on growth projects through the first nine months of the year, representing the bulk of its planned $2.9 billion capital budget. Meanwhile, the MLP expects capital spending to decline to $1.6 billion next year and $800 million in 2022, though that doesn't include a potential investment in the SPOT export project with Enbridge, which the government hasn't approved.

With Enterprise Products Partners' capital spending winding down, the MLP is on track to start generating a growing supply of excess cash after paying its distribution and funding growth projects in the fourth quarter. That will give it the flexibility to use those funds to repay debt, buy back units more, invest in SPOT and other growth projects that emerge, and resume distribution growth. With the company's leverage ratio right at its target of 3.5 times debt to EBITDA, it's planning to reevaluate quarterly distribution growth.

Durability was on full display

Enterprise Products Partners built a highly resilient midstream business, which has enabled it to weather this year's storm better than most peers. With the worst seemingly in the rearview mirror, and Enterprise's capital spending winding down, the MLP is on track to generate an increasing amount of free cash, which will likely allow it to resume distribution growth. That makes it a very compelling option for income investors.

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