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Growth at reasonable price, mutual fund analyst
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Summary

  • Major projects of EPD worth $5 billion are expected to commence operations during 2014, and a majority of revenues are fee-based.
  • The partnership has a substantial acreage in the shale plays that is expected to add 23 to 45 Bcf/day of net gas by 2025.
  • With the growth in volumes coupled with fee-based revenues the partnership is qualified to post higher operating margins that will be translated into a higher bottom line and distribution.
  • A sound credit rating and affordable long-term debt create ample room for additional borrowings.
  • The additional borrowings to be utilized in infrastructure projects will fill the widening gap of midstream infrastructure and oil and gas production.

Over the past five years, Enterprise Products Partners' (NYSE:EPD) stock has gained well over 170% and is currently trading at $66.85. The partnership has shown exponential growth over the past couple of years and has not only beaten the market, but also its competitors. During 2013, the partnership generated a price return of nearly 32% from $50.32 in Jan 2013 to $66.30 in December 2013. Although the past return doesn't guarantee the future prospects, the past performance gives a sense of where the company is heading in the future. Let's discuss why I believe the partnership is still worth investing in.

The partnership has substantial acreage in the shale plays coupled with decades of drilling. It also foresees a plentiful supply of natural gas. It anticipates adding 23 to 45 Bcf/day of natural gas by the end of 2025. It is of worth mentioning here that out of the expected net addition, almost 9 Bcf/day that is to be derived from the Utica Shale and the Eagle Ford Shale, is available at less than $1 per MMBTU, while the remaining is available at less than $5 per MMBTU. The figure below demonstrates the partnership's occupied acreage in the shale plays coupled with potential years of drilling.

Source: Investor Presentation

The core strength of the MLPs comes from the asset base it acquires. EPD has a diverse source of generating distributable cash flows from over $40 billion in assets with access to both major supply basins and markets in the U.S. The large asset base and the projects currently under construction will certainly add to the distributable cash flows. The figure below demonstrates the partnership's key assets and their description as enclosed by the company.

(click to enlarge)

Source: MLP website

In January 2014, the company announced a further expansion of LPG export terminal that is expected to increase its ability to load cargoes from approximately 9.0 MMBbls per month to approximately 16.0 MMBbls per month.

Upon successful completion of the expansion project, the company expects the loading capacity of the export terminal to reach approximately 27,000 barrels per hour. The expanded LPG export terminal is expected to be operational by the end of 2015 and is supported by long-term LPG export agreements.

Fee-based Business Model

During 2013, the company benefited from record volumes in their fee-based businesses attributed to production growth and strong domestic and international demand for NGLs, particularly from the US petrochemical industry.

Going forward, 2014 will also be positive for the company, as crude oil pipelines and storage facilities and LPG and refined product export terminals are expected to begin operations. In addition, the previously started projects worth $5 billion are expected to commence operations and start generating cash flows in 2014.

These projects will derive volume growth that will ensure gross operating margin growth. Moreover, the majority of the revenues associated with these projects are fee-based and will further minimize the company's risk.

Sound Balance Sheet

Enterprise Products Partners has one of the best credit ratings in the midstream sector. In October 2013, it received a credit rating of BBB+ from the rating agency Standard & Poor's. The impressive credit rating highlights the partnership's ability to add more debt to its portfolio. The figure below demonstrates the partnership's debt schedule as enclosed in the 10-K 2013 filing.

Source: 10-K filing

The company has nearly 50 percent of debt with maturity after 30+ years. It is worth mentioning here that the company has been able to extend maturities without increasing its cost of debt, as almost 97% of the debt is negotiated at a fixed rate.

Currently, the oil and gas industry is facing a huge gap between the midstream infrastructure and the quantity of oil produced. According to the US Energy Information Administration, the wastage caused by lack of infrastructure will reach an estimated $100 million a month.

Therefore, more channels need to be placed to lessen the gap. In such a scenario, the midstream companies need to source capital to meet the requirements, and this will put extra pressure on the cash flows. However, with the good credit rating and affordable long-term debt, Enterprise Product Partners can bear the extra burden of debt to finance the required infrastructure gap.

Final words

The shortfall in midstream infrastructure is expected to ensure robust growth for the US midstream sector. Given the scenario, I believe that EPD has the prerequisites to make the most of the benefits. Similarly, with the major projects coming online during the current year the partnership is set to drive robust growth in volumes.

In a nutshell, EPD is set to achieve higher top and bottom line growth. While the top line is supported by increased volumes and fee-based revenues, the higher bottom line growth is supported by lower interest expenses. Therefore, I recommend buying the stock.

Source: Enterprise Products Partners Is All Set To Grow