Oil and natural gas prices have a significant impact on corporate results in the energy industry. They can change significantly from quarter to quarter, which impacts the cash flows of companies sensitive to energy commodity prices.
However, not all energy stocks experience the full impact of commodity price volatility. Midstream companies like Enterprise Products Partners (EPD 0.45%) have business models that largely dampen the effect of that volatility on their cash flows. That was on full display in 2023 when the master limited partnership (MLP) set several financial and operational records despite more challenging conditions for energy sector companies broadly. That durability during turbulent periods has enabled the company to continue paying and increasing its distribution, which at current share prices yields a hefty 7.7%.
NYSE: EPD
Key Data Points
Strength amid the storm
Last year was an unexpectedly volatile one for the energy industry. Oil and natural gas prices came down from their war-driven highs of 2022. Because of that, companies that produce and sell those commodities saw their earnings and cash flows decline.
While that volatility had some impact on Enterprise Products Partners, it was relatively muted. The company produced $7.6 billion of distributable cash flow last year. That was within $100 million of 2022's record despite 2023 being "a relatively weak year, especially for natural gas and natural gas liquids (NGLs)," according to comments by co-CEO Jim Teague on the fourth-quarter conference call. That provided the MLP with enough cash to cover its distribution by a comfortable 1.7 times, allowing it to retain $3.2 billion to fund expansion projects while maintaining its strong balance sheet.
Even though the company's cash flow didn't hit a new record, it was a record-setting year by many other metrics.
"We set nine financial records and 13 operating records in '23," said Teague. "Our '23 operating results included records in NGL pipeline transportation, ethane exports, total NGL marine terminal volumes, NGL fractionation volumes, fee-based natural gas processing volumes, and crude pipeline and natural gas transportation volumes."
The CEO noted that the company transported a record 12.2 million barrels of oil equivalent per day (BOE/d) last year, 1 million BOE/d more than in 2022. Meanwhile, it exported a record 2.3 million barrels per day of liquid hydrocarbons, which Teague noted, "includes everything from crude oil to LPG to ethane, refined products and basic petrochemicals, ethane, and propylene." That showcases the diversified nature of the company's export business.
In sum, said Teague, "Enterprise proved once again that we don't need really high prices to make substantial returns." The company is in the volume business. As long as demand is strong (which it was last year), it can generate significant earnings even when commodity prices are down sharply (natural gas was down 60%, crude oil slumped 20%, and NGLs tumbled 35% to 50%).
Building to break records
Enterprise Products Partners expects demand for energy commodities to continue growing in the coming years. "We see supply and demand opportunities as the Permian continues to grow and the world continues to have an ever-increasing appetite for U.S. hydrocarbons," Teague said. That should fuel higher volumes across its midstream infrastructure. That's driving the company to invest heavily in building more capacity so it can support higher volumes in the future.
The company completed $3.5 billion of expansion projects last year. Significant projects included two new natural gas processing plants in the Permian Basin and a third NGL fractionator at its Chambers County complex. "All of these assets were essentially full after operations began," Teague noted.
Meanwhile, another large project, its PDH 2 facility, entered service during the third quarter. While it experienced some start-up issues, it has since resolved those problems and expects higher utilization in 2024.
On top of those projects, the company anticipates finishing another $1.1 billion of expansions in 2024 -- part of a $6.8 billion backlog of expansions it currently has under construction. "All of these projects provide strategic growth to our system and can add considerable visibility to new sources of cash flow," stated Teague on the call. The additional cash flow from those projects will give the MLP more fuel to increase its distributions. Last year marked its 25th consecutive year of distribution growth.
A rock-solid dividend stock
Enterprise Products Partners generates durable cash flow since it makes money based on the volume of oil and natural gas flowing through its network, regardless of those commodities' prices. Because of that, the MLP delivered a record-breaking year across many metrics despite weaker commodity prices. It should continue to break records as it builds out additional capacity to support steady volume growth. That should give the MLP the fuel to continue increasing its high-yielding payout. This steady growth makes it a great option for income-seeking investors.
