Enterprise Products Partners (NYSE:EPD) is the largest publicly traded energy partnership with market cap of about $62 billion. The partnership has showed exponential growth in the past few years by leading the market. However, like other partnerships, cash distribution is the most attractive factor when it comes to picking EPD, and growth in distributions has been strong for the partnership. The partnership has lead its industry with a total price return of over 27% in the last year - Kinder Morgan Energy Partners (NYSE:KMP) lost about 3.5% and Enbridge Energy Partners (NYSE:EEP) gained about 3.25%.
Growth in Cash Distribution
For a partnership to maintain healthy growth in cash distributions, it is vital to have strong growth in distributable cash flows. Distributable cash flow is the most important figure when it comes to measuring the performance of any partnership. EPD has reported a distributable cash flow of $3.8 billion in the last year, which has increased by a decent 2.8% compared to the previous year. The partnership has increased its cash distributions for each of the last 38 quarters, the longest period for any of the publicly traded energy partnerships, and in excess of 5 percent for each of the last nine years. The company has invested heavily in future projects that will make certain the future growth in distributable cash flows for its unit holders.
The core strength of the MLPs comes from the asset base it acquires. EPD has a diverse and large asset base and the current under construction projects will certainly add to the distributable cash flows. For future growth the company has also spent heavily on capital expenditures for ethane extraction to meet the requirements of petrochemical markets. EPD's yield at 4.1% is less than some of its peers - KMP and EEP offer 6.8% and 7.9%, respectively. The biggest criticism of EPD is that it pays too little to its unit holders, which is true when we look at the yields in the energy MLPs segment. However, strong growth opportunities, a solid asset base and visibility in earnings make it an attractive investment. The partnership has moved to fee-based projects which will strengthen its future cash flows and allow the partnership to distribute more cash.
Revenue and Future Growth
In the past few years, the partnership has spent a huge amount in capital expenditures mainly in fee based projects. These projects have excelled in the last year which benefited the partnership towards its production growth and strong domestic and international demand for Natural Gas Liquids, particularly from the US petrochemical industry. However, the partnership does not intend to grow its natural gas asset base in the coming year due to the continuation of low prices and reduced recoveries for ethane in the region. The ethane supply in the U.S. exceeds the demand which lowers its prices and shrinks the profit margins. The price per gallon of ethane has decreased by 56% in the last year compared to 2012. However the demand for ethane will grow over the next five years as the U.S. petrochemical industry modifies existing facilities and completes construction of new plants as well as the development of international demand.
No Obligations to the General Partner
With the largest market capitalization and the biggest pipelines network among its peers, EPD is different than many of the well-known MLPs. Most MLPs have separate general partners that take a sizable fee for running the partnership known as IDR (incentive distribution rights). The partnership has acquired its general partner (Enterprise GP Holdings), which means that there are no incentive distribution rights for the general partner. IDR fees can consume a big chunk of cash flows, which gives EPD a significant edge over MLPs. However, investors are a bit baffled as to why the partnership does not distribute more if it has no obligation to the general partners. Why is the partnership hoarding cash? I believe the distribution might increase as the future projects start to pay off. In my opinion, the partnership was solely focused on growing its portfolio and diversify the asset base.
EPD retains a larger portion of its earnings to invest in the growth projects. Without this excess cash, the company would have to borrow more on the debt market, increasing interest expense, or issue more equity, slowing the pace of distributable cash flows. Lowest cost base will allow the partnership to effectively expand its asset base. The partnership has increased its NGL, refinery products and petrochemical asset bases by 16% to a record volume of 5.2 million barrels per day.
The major capital projects have been completed and put into service in the last two years - theses projects have started generating fee-based cash flows. Moreover, the portion of these investments that was financed by excess cash from operations (rather than by issuing debt or partnership units) is far greater than almost all other energy MLPs. In the last two years, EPD retained approximately $1.3-1.9 billion of its distributable cash flows to reinvest in growth projects. The spread between the return on capital and the cost of capital for such internally financed projects are substantially greater than for projects financed with debt or equity. The benefits of this strategy are reflected in the results of last year and will be seen in future periods as well.
Enterprise Products Partners is the largest energy MLP, and the recent increase in the asset base has further enhanced its portfolio. Furthermore, the addition of fee-based services have somewhat decreased the partnership's exposure to commodity prices. However, the partnership is still exposed to NGL prices and macroeconomic environment. The next step for EPD is to increase its cash distributions and bring it close to its peers. If the partnership matches it peers on yield by increasing distributions, we will have the biggest upward movement in price from EPD. Cash distributions is the primary factor for investors while choosing a partnership and it is time EPD matches its peers in this regard.