Enterprise Products Partners (EPD 0.45%) has been one of the most durable income stocks in the energy sector over the years. The master limited partnership (MLP) recently finished its 25th year as a public company operating in the sector. It has increased its distribution every single year since coming public, which is no small task in the volatile sector.
The MLP continued that trend in its 26th year, starting 2024 off with another distribution increase. It's in an excellent position to keep growing its payout, which was evident in its recently reported results for 2023 and outlook for what's ahead.
A durable cash-flow machine
Last year was a more challenging one for the energy sector. Enterprise Products Partners' co-CEO Jim Teague pointed that out in the company's fourth-quarter and full-year earnings report. He noted that the pipeline operator faced "significantly lower commodity prices and natural gas processing margins in 2023 compared to 2022."
However, despite those issues, the company reported similar results in 2023, compared to its record-setting year in 2022. Those results "demonstrated the value and resiliency of our diversified, fee-based midstream businesses," according to the co-CEO.
The MLP produced $7.5 billion in operational distributable cash flow for the year, within $100 million of 2022's record tally. That provided it with enough cash to cover its monster payout (currently yielding 7.7%) by a comfy 1.6x, even though it increased its distribution by 5.3% during the year. That was its 25th straight year of distribution growth.
Enterprise Products Partners' strong coverage ratio enabled it to retain $3.2 billion in cash flow. The MLP used those funds to invest in its growth projects, repurchase units, and repay debt.
It ended the year with a 3x leverage ratio, putting it in the middle of its target range. That's one of the lowest leverage ratios in the midstream sector and backs its elite credit rating.
Getting back to growth
While Enterprise Products Partners' cash flow was stuck in neutral last year due to a more challenging market environment, it should return to growth mode in 2024. The MLP completed construction on $3.5 billion of growth projects last year. It finished two more natural gas processing plants in the Permian Basin and its 12th natural gas liquids fractionator at its Chambers County facility in the second half of the year. They were essentially running at full capacity shortly after entering service.
The company also completed its second PDH facility in the third quarter. However, process and mechanical issues prevented it from being a meaningful contributor last year. It has addressed those problems, putting it on track to see much higher utilization rates and cash flow from the facility this year. The MLP also completed a small $65 million acquisition of a gas storage facility it previously leased.
These expansion-related investments will supply the MLP with incremental cash flow in 2024. In addition, the company expects to complete $1.1 billion of expansion projects this year, including its Texas Western Products System and two more natural gas processing plants in the Permian Basin. "These projects provide visibility to new sources of cash flow for the partnership for this year and beyond," stated Teague in the earnings press release.
Those capital projects are part of the $6.8 billion the company currently has under construction. It expects to fund $3.25 billion to $3.75 billion of those projects this year. That's a slight increase from last year's $2.9 billion capital spending level, largely driven by rolling $250 million in planned investment spending from 2022 into 2023.
Given its strong excess free cash flow and balance sheet capacity, the MLP can easily afford the increase in growth capital spending. That large slate of expansion projects should help grow the MLP's cash flow over the next few years.
Solid as a rock
Enterprise Products Partners generates very durable cash flow, which was on full display in last year's more turbulent energy markets. That gives the MLP a strong foundation of cash flow to support its high-yielding payout.
Its conservative financial profile further underpins that payout and gives it the flexibility to invest in its steady expansion. With more cash-flow growth ahead, Enterprise Products Partners should have the fuel to continue increasing its high-yielding payout. That makes it an excellent option for investors seeking a rock-solid income stream.
