Enterprise Products Partners (EPD 1.07%) has spent the past several years building out additional energy midstream infrastructure. The master limited partnership (MLP) is working to complete the last of its major growth capital projects. As these projects wrap up, the company will reach an inflection point, where it will transition from heavy capital spending to generating higher free cash flow.
Here's a look at what's ahead for the MLP and its high-yielding distribution (7% current yield).
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Battling a barrage of headwinds
Enterprise Products Partners recently reported its third-quarter financial results. They were a step back from the same period of last year, as its distributable cash flow fell from $2 billion to $1.8 billion.
While the company established nine new operational records across its platform, driven by strong natural gas and natural gas liquids (NGL) volumes, several headwinds impacted its cash flow, including lower sales and processing margins, lower LPG loading fees at an export terminal due to the expiration of a legacy contract, and downtime associated with maintenance at several facilities.
The company still produced an abundance of cash during the period. It covered its high-yielding distribution by a comfortable 1.5 times, even after raising the payout by 3.8% over the past year. That allowed it to retain $635 million of excess free cash flow.
NYSE: EPD
Key Data Points
The company utilized its retained cash and available balance sheet capacity to invest in expanding its business. It spent $2 billion of capital during the quarter, including $1.2 billion on organic growth projects, $583 million related to the acquisition of natural gas-gathering systems from Occidental Petroleum, and another $198 million on maintenance capital projects.
The coming growth tailwind
Enterprise Products Partners is on track to invest $4.5 billion into organic growth capital projects this year. That represents the peak of a multiyear capital deployment cycle that began in 2022.
Over the past few years, the company has constructed several large-scale pipelines and marine terminal facilities as part of its strategy to develop infrastructure for transporting hydrocarbons from the wellhead to the water. Additionally, the company has completed a couple of platform acquisitions to further enhance its midstream footprint. These investments "put Enterprise in a position to support production growth from the Permian and Haynesville basins for years to come," commented co-CEO Jim Teague in the third-quarter earnings press release.
The last of its major capital projects is the Neches River Terminal. The company recently completed phase one of that ethane and propane export terminal, with phase two expected to enter commercial service in the first half of next year.
Enterprise has also recently completed its 14th NGL fractionator, following a three-month delay, and expects to start service on its 600,000 barrel-per-day Bahia NGL pipeline later this month. Once complete, these projects will supply the company with meaningful incremental cash flow.
With this major buildout phase nearing completion, Enterprise Products Partners is about to reach an inflection point in its free cash flow. As these large projects come online, the company will transition from significant capital spending to generating substantially increased free cash flow next year. The MLP expects its capital spending to decrease from $4.5 billion this year to a range of $2.2 billion to $2.5 billion next year.
This surge in excess cash positions the company to return even more money to investors. To that end, it recently added $3 billion to its buyback program, boosting its remaining capacity to $3.6 billion (and total authorization to $5 billion). Additionally, the company expects to continue increasing its distribution, which remains the primary way it returns cash to investors. It has raised that payment for 27 straight years.
Meanwhile, the company will have ample financial capacity to continue expanding its midstream operations in the future as acquisition and organic project opportunities arise. It has the strongest balance sheet in the energy midstream sector, ending the last quarter with a low leverage ratio of 3.3 times.
While that's currently above its conservative target of 3.0x, leverage will fall as its cash flow surges next year. Future investments will give the MLP even more fuel to continue growing its high-yielding payout.
Entering an exciting new chapter
Enterprise Products Partners is nearing the completion of a multiyear investment cycle. As a result, it should produce significantly more free cash flow next year, positioning it to return more money to investors. "We are enthusiastic about the next chapter to increase the value of our partnership," stated co-CEO Jim Teague in the earnings press release.
The MLP's combination of growth and increased cash returns could provide it with the fuel to produce strong total returns in the coming years, making it an ideal long-term investment opportunity for those comfortable receiving the Schedule K-1 federal tax form it sends each year.
