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Will Enterprise Products Partners Start to Crack Under Oil Price Pressure This Earnings Season?

By Tyler Crowe - Jan 26, 2016 at 12:15PM

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The company has shown quite a bit of resilience to low commodity prices thus far, but it has yet to face the ramifications of sub-$30 oil.

Image source: Enterprise Products Partners.

Looking around the master limited partnership space, companies are starting to crack under the pressure of low oil prices left and right. Even those considered safer investments thanks to their size and scale have been forced to take drastic measures to shore up balance sheets. And yet, so far Enterprise Products Partners (EPD 0.96%) results haven't shown many signs of weakness

That was before oil prices started to dip below $30, though.

Could the company's upcoming earnings results start to show signs of weakness? Let's take a look at what's working for Enterprise and what investors should watch for when it reports earnings on Jan. 28.

Lots of wiggle room
There are several reasons why companies in the pipeline business or those structured as MLPs have been struggling lately, but one common thread among those hurting more than others is that their management teams pushed payouts to investors to levels that required everything to go right in the quarter to meet those obligations. What's even more challenging is that many of these companies have contracts in place that don't ensure certain volume commitments from customers or have some correlation to commodity prices such as percentage-of-profit contracts that are relatively common.

This is a realm where Enterprise differs immensely from many others. While cash flows over the past few quarters have suffered some declines from lower commodity prices, a slew of new assets coming on line have helped to offset those such that distributable cash flow only declined 0.5% last quarter on a year-over-year basis. Since Enterprise's management has adopted a policy of keeping its payout well below the amount of cash coming in the door, it had more than $200 million in excess cash flow last quarter, about 1.3 times more than what was needed to cover its distribution.

Chances are, there will be some more declines in cash flow from lower commodity prices, but that cash flow cushion Enterprise has in place should be more than enough to prevent the company from needing to discontinue its streak of consecutive distribution increases, at least for a little while longer. 

What to watch for: Changes to construction plans
The only way that a company in the energy space can maintain payout increases is to invest rather consistently through the commodity cycle. This is how the integrated majors ExxonMobil and Chevron have been able to achieve Dividend Aristocrat status, and so far Enterprise has done a bang-up job of either investing in new projects or making smart acquisitions to keep investment levels strong through the good times and bad. 

In 2015, Enterprise brought about $2.7 billion worth of new assets on line, including its very lucrative Liquid Petroleum Gas export facility in the Gulf Coast. Even with this strong growth, 2016 looks to be an even bigger year, with $4.5 billion in assets set to be completed this year.

Image source: Enterprise Products Partners investor presentation.

As great as that sounds for the coming year, it doesn't leave us with a whole lot of visibility beyond 2016 in terms of what the company has planned. So if there is anything to watch for in this coming earnings report, aside from any effects from lower commodity prices and slowing production rates, investors should have an eye out for any outlook into growth plans for 2017 and possibly 2018 as new projects should start to be announced. 

What a Fool believes
While there are always the unexpected things that can set a company off its current course, it doesn't appear thus far that lower oil and gas prices are going to make much of a dent in Enterprise Products' results this coming quarter. As long as management continues to show discipline in setting payouts to investors and shows that there is still some robust growth opportunities over the next couple of years in this market, investors shouldn't need to sweat Enterprise's upcoming earnings that much.

Tyler Crowe owns shares of Enterprise Products Partners and ExxonMobil. You can follow him at or on Twitter @TylerCroweFool.

The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron and Enterprise Products Partners. 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.

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