I have owned units of Enterprise Products Partners L.P. (NYSE:EPD) since 2007. However, I haven't added to my position since late 2008 as units had been on quite a tear coming out of the financial crisis.
However, as the chart above indicates, the company's current valuation of an EV-to-EBITDA ratio of 13.7 times is roughly on par with my initial purchase price and the best it has been in several years. So, while there's no guarantee that the valuation couldn't get even cheaper as it did during the financial crisis, I wanted to be sure I took advantage of the opportunity to add more of this great company at today's valuation.
As perfect as it gets
The compelling valuation aside, the real reason why I want to bolster my position in Enterprise Products Partners is because it is a great company. In fact, there is a case to be made that it is the perfect master limited partnership. That's because the company has all five of the characteristics that investors would want in an MLP. For a refresher, here's how it stacks up to the perfect MLP:
- The perfect MLP has 75% of its cash flow from fee-based assets: EPD's fee-based cash flow is above 80%.
- The perfect MLP has an investment grade credit rating and/or a debt-to-EBITDA ratio less than 4.0 times: EPD has one of the best credit ratios among MLPs and a debt-to-EBITDA ratio of 3.9 times.
- The perfect MLP has a distribution coverage ratio of at least 1.05 times: EPD's coverage ratio is 1.4 times.
- The perfect MLP has a long history of distribution growth: EPD has grown its distribution for 45 consecutive quarters.
- The perfect MLP will have a large project backlog to support future growth: EPD has $8.3 billion in primarily fee-based projects currently under construction.
Two big competitive advantages
Clearly, Enterprise Products Partners fits the bill as one of the best MLPs out there. However, there are two characteristics that really stand out. First of all is the company's really solid balance sheet, which is vitally important during a downturn like the one the energy industry is experiencing right now. There are grave concerns that a number of highly leveraged energy companies will go bankrupt, but that risk is virtually nil at Enterprise, which is a major competitive advantage for the company.
Further, I noted that the company has a very strong project backlog of projects currently under construction. This virtually assures that the company's growth will continue as these projects are scheduled to come online over the next few years. Not only that, but one thing I didn't note about the backlog is the fact that a majority of the company's projects are demand driven instead of supply-driven projects. In other words these projects actually benefit from lower commodity prices. We can see the company's focus on building demand pull projects on the slide below.
As that slide notes, the company has a number of key pipeline projects that are driven by the pull of demand for oil and natural gas liquids into the key refining and petrochemical hubs of the Gulf of Mexico. Further, the company has two export projects that will send cheap NGLs like propane and ethane to global markets. Finally, the company is building a PDH facility, which consumes cheap propane and turns it into higher valued petrochemical feedstocks. As such, Enterprise is primed to take advantage of the increased demand for cheap energy suggesting that the company's growth won't slow like it will for others as it is focused on building projects that are driven by demand growth as opposed to supply growth, which will likely be more muted as prices remain weak.
When we added it all up we have a great company that is selling for one of the fairest prices in years. It's a situation I've been waiting patiently for and it has finally arrived. While the price could always get cheaper, I still did not want to run the risk of missing out on this fine opportunity.