Oil prices plunged 4.1% yesterday when the CEO of Kuwait's national oil company said he thought the price of oil would remain near $65 per barrel--its lowest level since the financial crisis--for the next six to seven months. As the chart below illustrates, the crash in oil prices has had a painful short-term effect on even the highest-quality master limited partnerships. 

WTI Crude Oil Spot Price Chart
WTI Crude Oil Spot Price data by YCharts

I have previously pointed to midstream specialist Enterprise Products Partners (NYSE:EPD) as one of the best retirement investments in America, but I want to explore three reasons why I think Enterprise's payout is safe and likely to keep growing despite cratering oil prices.

Minimal exposure to commodity prices

Enterprise Diversification Pie Chart

Source: Enterprise Products Partners investor presentation.

Unlike its non-MLP rival Kinder Morgan (NYSE:KMI), which owns oil wells in the Permian Basin that produce 57,000 barrels of oil per day,Enterprise Products Partners has no direct exposure to crude oil.

Its indirect exposure is limited to 16% of gross margin, a figure set to grow in the future but that will remain below 22%. In addition, the MLP generates the vast majority of its cash flow from long-term pipeline contracts with annual price increases (inflation plus a certain percentage) built in. As the table below shows, Enterprise's fixed contract protection compares very favorably to its competitors. 

MLP % Gross Margin from Fixed Rate Contracts
Enterprise Products Partners 85%
Magellan Midstream Partners (NYSE:MMP) 85%
Energy Transfer Partners (NYSE:ETP) 64.10%

Sources: investor presentations, MLP 10-Ks, 10-Qs.

In addition, Enterprise, like many of its competitors, hedges against the loss of oil transport volumes. For example, as of last quarter it has 7 million barrels hedged through the end of 2015 and an additional 500,000 barrels hedged through March 2018.

Will low oil prices result in decreased demand for Enterprise's services? 
Despite the shocking ferocity of crude's recent crash management is confident that: "U.S. crude and NGL production will grow in 2015 regardless of current oil prices."

According to its most recent investor presentation Enterprise is expecting growth in oil and NGL production in 2015 to decrease by 10%-27% and 10%-25%, respectively. 

Epd Effect Of

Epd Effects Of

Sources: Enterprise Products Partners investor presentation.

Enterprise believes, as do many economists, that the sharp decline in oil prices will spur demand, by approximately 1.31 million barrels per day at current prices. Specifically management cites China and India using the recent decline in crude prices as an opportunity for increasing their strategic petroleum reserves, as one of the most immediate demand growth catalysts. 

This extra demand, along with a 25%-35% decrease in oil well completionsshould eventually stabilize world oil prices however it will take time for these effects to take place. In the meantime what investors want to know is how safe is Enterprise's distribution and thankfully the answer is very. 

Bank vault-like coverage ratio

MLP TTM Distribution Coverage Ratio Last quarter's coverage ratio
Enterprise Products Partners 1.56 1.48
Magellan Midstream Partners 1.6 1.26
Energy Transfer Partners 1.22 1.25

Source: MLPdata.com.

The most important metric for MLP investors to consider in determining the safety of the distribution is the distribution coverage ratio. Typically, a ratio of 1.1 or higher means the distribution is safe and capable of sustainable growth. Enterprise's coverage ratio is not only among the highest in the midstream MLP industry, but the partnership has maintained a Volvo-safe coverage ratio of over 1.4 since 2010. This is thanks to $6.4 billion in retained distributable cash flow used to ensure the security of the distribution, as well as its continued growth even in times of industry or economic difficulty. 

Enterprise has been through this before 

EPD Dividend Chart
EPD Dividend data by YCharts

Although past performance doesn't necessarily predict future results, this chart shows how remarkable Enterprise's track record of 41 quarters of consecutive distribution growth truly is. During the financial panic, Enterprise Products Partners grew its distribution; unfettered by the respective 79% and 85% declines of oil and natural gas prices.

Bottom line: distribution growth king isn't about to be dethroned
Energy investments can be highly volatile due to the cyclical nature of oil and gas prices. That is why the long term-minded management at Enterprise Products Partners has wisely focused on building a bomb proof distribution coverage ratio to ensure it can continue its industry leading distribution growth reliability even during turbulent times, both in the energy industry and the economy. Enterprise sports incredible business diversification, a strong financial position, a safe distribution coverage ratio, and a superb distribution growth track record. For these reasons I believe Enterprise's distribution growth streak won't be threatened even if oil prices remain low over the next 12 to 18 months. 

 

 

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners, Kinder Morgan, and Magellan Midstream Partners. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.