Enterprise Products Partners L.P. (EPD +2.04%) is one of the largest midstream master limited partnerships in America. The company owns and operates more than 50,000 miles of energy pipelines in America, which, if laid end to end would circle the globe twice. Those pipelines, along with the company's processing and storage assets, fuel the company's very generous quarterly distribution to investors. However, as the old saying goes, the company needs to spend money to make money. So, let's see how Enterprise Products Partners is doing in that regard.
When physics meets economics
The second law of thermodynamics is the bane of business. That law basically says everything is breaking down. It comes into play when a company, like Enterprise Products Partners, invests capital to build a new asset in order to grow its business. That asset, thanks to the laws of physics, will slowly break down, so in order to offset that impact, money needs to be spent to repair the asset just so it can maintain its performance.
We see this at work all the time as businesses depreciate assets. So, just to maintain business operations, a company needs to invest money to maintain its current assets, which we typically refer to as maintenance capex. Any money spent above the cost of depreciation is capital spent to grow the business, and is therefore known as growth capex.
A look at the numbers
Using data from S&P Cap IQ, we can see how Enterprise Products Partners is doing at maintaining its myriad pipeline and processing assets in order to keep its distribution flowing to investors. Here is what those numbers looked like over the past five years:
Raw data from S&P Cap IQ, chart prepared by author.
What we see from this chart is that Enterprise Products Partners does indeed spend adequate capital to offset depreciation and maintain is operations. However, in addition to simply maintaining its business, the company spent just over $10 billion on projects designed to grow its business.
This was money very well spent, as we can see from the following chart -- it fueled a steadily growing distribution to investors as well as strong capital gains.
Enterprise Products Partners grew its payout to investors by 32% over the past five years. In fact, the company has actually increased its payout for 41 straight quarters. On top of that, investors have enjoyed very strong capital gains as the company's units are up 161% over that time frame. Clearly, the $10 billion Enterprise Products Partners spent to make more money really did deliver as planned.
Enterprise Products Partners has done a solid job spending the necessary money to keep its operations running near capacity by offsetting depreciation. On top of that, the company is investing to grow its business so it can earn even more money for its investors. This is exactly what we want to see happen.
