Image source: Enterprise Products Partners investor presentation.
After watching Kinder Morgan cut its dividend just a few weeks ago, investors in any pipeline or midstream company are quite worried that payouts from other companies could be cut, suspended, or just not see the growth to which they have become accustomed. Not many companies in this space have been around long enough to develop long track records of distribution raises, but one that is on track to become a Dividend Aristocrat is Enterprise Products Partners (EPD +1.68%). Ever since its IPO in 1998, the company has seen at least one distribution increase per year and is now working on a streak of 45 straight quarters with an increase.
Will the oil and gas market finally cash up to Enterprise in 2016 and bring its distribution streak to an end? Let's take quick look at the company's current payout and what it has planned for the next year to see if it has the legs to keep the streak alive.
Plenty of room
When it comes to raising a distribution at a midstream and logistics company, perhaps the most critical aspect is that it is bringing in much more cash than what it pays out beforehand. Unlike many of its peers, Enterprise has excess cash in spades. This is best seen in its distribution coverage ratio, which is a measure of the total distributable cash flow coming in divided by the amount paid to shareholders.
| Company | Distribution Coverage Ratio |
|---|---|
| Enterprise Products Partners | 1.3x |
| Energy Transfer Partners (ETP +0.00%) | 1.09x |
| Williams Partners (NYSE: WPZ) | 1.04x |
| ONEOK Partners (OKS +0.00%) | 0.91x |
Data source: Earnings transcripts via S&P Capital IQ.
Enterprise's numbers alone suggest that it has plenty of room to raise its payout if it so pleases, but when compared to some of its peers, it becomes clear that it is in one of the best positions to do so in 2016. Energy Transfer Partners and Williams Partners are in a situation where raising their distribution will be difficult without an injection of cash flow from new projects, and ONEOK Partners is already dipping into cash and debt to support its payout.
For the most part, these companies cash flows don't change much from year to year from current assets. To raise them normally involves bringing new assets on line. However, they are not completely immune from prices and production. So when companies set payout policies that leave little room for variance in cash flow a la Energy Transfer, Williams, and ONEOK, times like this can compromise distribution growth. With a more conservative payout policy, Enterprise Products has set itself up much better to keep its streak of consecutive distribution increases in place.
More in the (ahem) pipeline
Even if we were to assume that Enterprise will have no cash flow growth in 2016, it looks like there is enough cash flow already coming in the door to raise the distribution. Luckily for Enterprise's investors, we don't need to worry about that situation because the company has a decent-sized suite of projects slated to come on line.
According to CEO Michael Creel on the most recent conference call, Enterprise currently has $7.8 billion worth of assets that will be completed by the end of 2017. With 2016's capital expenditures expected to be in the $3.2 billion-$3.5 billion range, you can assume that a decent clip of those projects will come on line in the coming year to support earnings and cash flow growth.
These are, of course, only the projects that the company has already under construction and not the total backlog of projects it has in the works. Unlike many of its MLP peers, Enterprise does not disclose its total project backlog.
What a Fool believes
It's totally understandable if your confidence in master limited partnerships and midstream companies has waned a bit recently. Industry giants like Kinder Morgan succumbing to a dividend cut is enough to scare anyone away from the industry. However, Enterprise Products Partners' management team has crafted a business and distribution payout plan that are much more capable of handling market downturns, and its ability to fund a good portion of growth internally suggests that it won't have the same debt issues that its peers find themselves in.
Based on this, barring any major unforeseen issues that are always a factor, all signs point to Enterprise being able to raise its dividend throughout 2016 at the same rate it has for the past several years.
