The shale boom in America has propelled ethane production to new heights. In January 2006, ethane production stood at 20.3 million barrels (throughout the month). By January 2014, ethane output had surged to 31 million barrels. Plenty of crude infrastructure has been built out, but infrastructure for ethane production is still severely lacking.
Due to this lack of infrastructure, Enterprise Products Partners (EPD +2.08%) has decided to help out, generating substantial returns for its unitholders and giving ethane producers a chance to sell to foreign markets.
Exporting is better than rejecting
According to RBN Energy, roughly 250,000 barrels per day of ethane is being rejected in America. Future projections paint an even bleaker picture, as ethane rejection could potentially double within the next three years. To solve this problem, Enterprise Products Partners is building an ethane export terminal in Texas, right next to the Gulf.
The proposed capacity of the terminal is 10,000 barrels an hour, or 240,000 bpd, which is a substantial amount of export capacity. Even if ethane rejection was to double in three years, Enterprise Products Partners would be able to roughly cut that in half once the facility is completed.
The earnings potential
Not only will this export terminal boost economic activity and help out the environment by reducing ethane rejection, it will also provide a major new source of distributable cash flow for Enterprise Products Partners. Considering American ethane production will continue to rise, prices in the United States will remain depressed, which is why ethane producers need access to foreign markets.
This could give Enterprise a chance to boost the capacity of this terminal to further grow its distributable cash flow. Currently, Enterprise Products Partners pays out a 3.9% yield and has consecutively raised its distribution for each of the past 39 quarters. At year-end 2013, Enterprise Products Partners had a very high coverage ratio of 1.52. This is calculated by taking the $3.8 billion in distributable cash flow Enterprise generated in 2013 and then dividing it by the 913.1 million total units that received $2.74 in distributions last year.
What happens now?
With a coverage ratio of 1.52 and $5.6 billion of growth projects (not including the ethane export terminal) coming online within the next few years, Enterprise Products Partners has a solid plan to keep growing its payout. Enterprise has already raised its distribution to $2.84 per unit on an annualized basis, and that is just the beginning.
While management has alluded to issuing roughly 20 million units this year, investors shouldn't worry; that capital will be used to fund future growth, pay down debt, or given back to unitholders through a larger distribution. If you are worried about the coverage ratio plummeting, don't be. Even if distributable cash flow remained flat and more units were issued out, the coverage ratio would still be slightly more than 1.45.
In the first quarter of 2014, three projects were completed; and by year-end 2014, 14 additional projects are projected to be completed as well. This can only mean one thing: larger earnings and higher payouts, resulting in very happy investors.
Foolish conclusion
Enterprise Products Partners has a history of both income and distribution growth with no end in sight. Additional projects coming online, particularly those in high demand like the ethane export terminal, will keep driving investor returns higher as the payout increases alongside the unit price. For those looking for a rock-solid 3.9% yield with tons of upside, take a look at Enterprise Products Partners -- you might like what you see.
