Enterprise Products Partners (EPD 1.12%) is not your typical oil and natural gas stock. In fact, its business, moving oil and natural gas, tends to hold up well regardless of whether or not oil prices are high or low. Right now, while investors are bidding up the shares of oil and gas producers because of a commodity rally, you might want to step back and consider the merits of Enterprise's hefty 6.7% yield and slightly more boring business model.
Ups and downs
The energy industry is highly cyclical, with oil and natural gas prices often moving higher and lower in dramatic fashion. However, the midstream niche, which is Enterprise's focus, operates a little differently. Essentially, companies like Enterprise charge fees to energy companies as they move oil and natural gas through its systems of pipes, storage, processing, and transportation assets. Enterprise, with a $60 billion market cap, happens to be one of the largest and most diversified midstream players in North America.
That core is good, but the real number that should interest investors is the first-quarter 2022 distribution coverage ratio of 1.8 times. The partnership's distributable cash flows were way above what was needed to pay the distribution, affording investors a great deal of income security even if Enterprise faces some adversity.
EPD Financial Debt to EBITDA (TTM) data by YCharts
On top of that, Enterprise has long focused on maintaining a strong balance sheet. The partnership's financial debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio is just 3.5 times, and at the low end of its peer group. That's normal for this conservatively run midstream giant, and gives it even more financial flexibility in times of uncertainty.
A record of success
That brings out story to the really exciting number: 23. This is the number of consecutive years that Enterprise has increased its distribution, despite the highly cyclical nature of the industry in which it operates. The company is slowly working its way up to the Dividend Aristocrat space of 25 annual increases. Given the strength of its underlying business, there's no reason to believe it won't get there.
First, Enterprise's size makes it an ideal consolidator in the midstream space. That's important today, because it is getting increasingly difficult to get approval to build major oil and natural gas assets. Second, Enterprise has positioned itself as a major player in the natural gas space, a fuel which is expected to help support the world's shift toward cleaner alternatives. So Enterprise appears fairly well-positioned as the world moves in a cleaner direction.
Slow and steady
Enterprise is not an exciting name. Its business model is about collecting tolls, which is a slow and methodical approach in the energy patch. But it is also very reliable, since oil and natural gas still have to be moved from where they are drilled to where they get used regardless of the price they fetch in the commodity markets. If you are the kind of investor who appreciates a tortoise-like approach that pays you a hefty income stream through thick and thin, then Enterprise and its rock-solid distribution should probably be on your research list today.
