Enterprise Products Partners (NYSE:EPD) is unmatchable in terms of geographic diversity, midstream assets and exposure to a wide range of petrochemicals. EPD has also shown phenomenal organic growth over the last few years and has outrun its competitors by a huge margin. Moreover, the partnership is also an attractive deal for the investors due to the substantial growth in cash distributions to its unit holders over the last years. In this article, we will discuss the strong future growth prospects of the partnership and why it is a good investment.
Development of New Assets
EPD retains a large portion of its earnings to invest in growth projects. The partnership has moved towards fee-based projects and spent a huge amount of capital expenditures in developing fee-based assets. These projects have excelled in the last year, with more to be completed in the current year - these projects will benefit the partnership towards its production growth, and strong domestic and international demand for Natural Gas Liquids will allow the company to extract more from its asset base. The partnership grew its cash distribution by 6% recently - the huge asset base and future growth projects should enhance the future distributable cash flows for the company, and it should be able to grow its cash distributions in the foreseeable future. Furthermore, EPD has a coverage ratio of 1.5x, which gives it a considerable room to grow its assets and cash distributions over the next few years.
Where will the Future Growth Come from?
MLPs derive their future growth from the assets they acquire over the resource rich areas. Likewise, EPD is in continuous process of expanding its pipeline network across the U.S. With the start of 2014, the partnership delivered $2.3 billion worth of projects which includes ATEX ethane pipeline, Front Range pipeline, and Mid-America pipeline expansion. The ATEX pipeline which became operational at the start of the year has an initial capacity of 125MBPD, which will be expanded to 131 MBPD by 2018. This pipeline provides ethane access to majority of demand in the U.S. Similarly, the partnership also has several projects worth over $2.5 billion, which are expected to be operational during the current year.
Having huge reserves of natural gas with a vast exposure to NGLs allowed the partnership to extract in demand hydrocarbons such as ethane, propane and butane. Prices for these hydrocarbons are weak at the moment; however, strong demand from Asia is expected to push the prices for Ethane up over the next few months. The excessive supply in the domestic market has forced the prices to fall in the short-run. Though, the higher propane prices and development of petrochemical facilities at the Gulf Coast should shift the demand for ethane by 600,000- 750,000 barrels per day over the next few years. The prospect of export will allow the company to extract more from the NGLs segment of the business.
Europe is also an important market for the export of these hydrocarbons - at the Barclays Investment Grade Energy and Pipeline Conference, the company identified European market as one of the several opportunities for growing the U.S Ethane industry. EPD also estimates to attain huge profits from ethane and naphtha price spreads, contributing to an advantage of $600 million per year for a 1.5 billion lb/year cracker. Naphtha holds a 70% weight in the current feedstock mix of Europe, which posts a huge growth opportunity for ethane to be replaced with naphtha. The domestic market is expected to be suppressed by the excess supply of ethane for short-medium term, which encourages increased US exports of hydrocarbons.
EPD also confirmed that the partnership also enjoys several opportunities to be created on the demand side from the growing surplus of NGLs, crude oil and natural gas. Over the last year, the partnership has loaded over 80% of U.S propane export shipments in the Gulf Coast and projected to double its current capacity to about 16 million barrels of hydrocarbons per month. Moreover, at Analyst Conference Texas, EPD claimed to be the largest propane export service provider in the U.S which ensures its expanding footprints in the global markets.
Enterprise Products Partners have showed tremendous growth over the last couple of years -- with the recent increase in the asset base and further investment in growth projects; the company is set to see growth in its distributable cash flows for the foreseeable future. As a result, the cash distributions will continue to grow. In addition, as the growth projects start to bring in cash, the stock price will take-off and the capital gains will also be substantial over the next two-three years. The addition of the fee-based services has increased the profitability of the partnership. Enterprise Products Partners remains a solid long-term pick for income as well as growth investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.