Enterprise Products Partners (EPD +0.94%) is a financial fortress. The master limited partnership (MLP) has the highest credit rating in the midstream energy space. That allows it to raise capital at lower rates and better terms than financially weaker rivals.
That strength also gives it the flexibility to pay a high-yielding distribution (currently 7.5%) while funding growth. It recently flexed those muscles by raising $2 billion in low-cost debt. That further enhanced its financial flexibility, and put its payout on an even firmer foundation.
NYSE: EPD
Key Data Points
Capitalizing on its cost of capital advantage
Enterprise Products Partners took care of its 2024 funding needs early. The MLP priced a public offering of $2 billion of senior notes this month. It sold $1 billion of 4.6% notes due in 2027 and $1 billion of 4.85% notes due in 2034. That's a bit cheaper than the last time it sold notes a year ago. (At that time, it sold $750 million of 5.05% notes due in 2026 and $1 billion of 5.35% notes due in 2033.) The company benefited from its investment-grade bond rating (A-/A3) and the expectation that the Federal Reserve will start cutting interest rates in 2024.
The midstream giant will use some of that money to refinance its lone 2024 debt maturity ($850 million of 3.9% notes due in February) and repay some of the balance on its commercial paper program. It will use the rest to help fund growth capital investments while maintaining a strong liquidity profile. (It had about $3.8 billion in liquidity at the end of the third quarter.) Given its low leverage ratio, the MLP had plenty of room to add debt. (Its leverage ratio was 3.0 at the end of the third quarter, right in the middle of its 2.75 to 3.25 target range.)
While Enterprise Products Partners will pay a higher rate on the new debt than it did on the maturing debt it's refinancing, its current borrowing rate is around its 4.6% weighted average cost of debt. That will help maintain the company's low cost of capital.
Ensuring it has the fuel to grow
Enterprise Products Partners took advantage of the expected decline in interest rates this year to raise more debt than it needed to fund next month's maturity. In doing so, it has insulated itself from any potential dislocation in the capital markets this year that could have hindered its growth plans. It now has the extra liquidity to fund projects currently under construction and make new investments if opportunities arise.
The MLP expects to invest between $3 billion and $3.5 billion into organic growth capital projects this year, up from $3 billion in 2023. Those projects are part of a $6.8 billion backlog of secured expansion projects that should come online through 2026, and will grow its cash flow as they enter service in the coming years.
That growing cash flow will give the midstream company more money to return to investors. It has sent them 56% of its cash flow over the past 12 months (53% via the distribution and 3% for unit buybacks). The MLP increased its payout by 5.3% in 2023, marking its 25th straight year of distribution hikes. The company retained the rest of its cash flow to fund growth projects (33%), maintain its existing assets (5%), and enhance its financial flexibility (6%).
The rising cash flows from the company's expansion projects should give it the fuel to continue increasing its distribution. That payout is on an extremely firm foundation, given its fortress-like balance sheet.
Enhancing its financial foundation
Enterprise Products Partners' financial strength is a big reason it has been able to deliver a quarter-century of distribution hikes. It seems like a lock that the MLP will continue increasing its payouts in 2024 and beyond, especially since it recently used its balance sheet strength to further bolster its liquidity. Those factors make it an excellent investment for those seeking a rock-solid and steadily rising income stream.
