Expansive geographic footprint, diversified asset base, strong balance sheet, impressive track record of executing organic growth projects on budget and on time, and top-tier experienced management make Enterprise Products Partners (NYSE:EPD) a compelling investment opportunity and a core MLP holding. Enterprise Partners continues to demonstrate the strength of its platform through strong quarterly results and new project identification. A proactive yet disciplined approach should support solid distribution growth sustainability with relatively limited execution risk.
$6.0 Billion Project Backlog Supports Distribution Growth
Market-leading positions all along the NGL value chain: gathering, transportation, storage and fractionation make EPD a dominant player in the NGL markets. The partnership has approx. $6.0 billion of expansion projects under construction which are scheduled to begin service between 2H14 and 2016. Most of these projects are supported by long-term fee-based contracts. Given EPD's ultralow cost of capital of ~5-6%, the projects give its growth potential high visibility.
As recently completed projects ramp-up and new assets begin service, the cash flows from those investments should support future distribution growth. However, the growth capex is likely to be higher from 2014-2016 as the backlog fills in and given management's repeated indications that ~$4.0 billion per year of expansion projects are likely to continue for at least the next several years despite the fall-off in specifically announced projects post 2016.
EPD reported 2Q14 adjusted EPU of $0.70 vs. consensus estimates of $0.74. Weak NGL segment results due to lower natural gas processing unit margins drove the EPU miss. EPD posted distributable cash flow of $954 million and raised its distribution 1.4% sequentially and 5.9% Y/Y to $0.72 ($2.88 annualized). The increase marks the partnership's 40th consecutive quarterly increase. EPD's distribution coverage remains robust at 1.4x.
Leading the Export Charge
Along with 2Q earnings, EPD announced the execution of an additional long-term ethane contract for the Houston Ship Channel, bringing the long-term commitments up to 85% of the capacity for its ethane export facility expected to be in-service in 3Q16. EPD expects to be fully contracted soon and is evaluating a capacity expansion of the 240,000 b/d terminal due to strong shipper demand. The partnership has not yet provided any information on the potential size of the expansion or the names/location of new customers for the ethane export facility. Such developing LPG, condensate and ethane export opportunities will be a key driver of distribution growth for EPD going forward.
EPD announced back in April that it has signed sufficient long-term contracts to build a fully refrigerated ethane export facility on the Texas Gulf Coast. The development does not only address the oversupplied U.S. ethane market but is also positive for EPD as it adds to the company's large project inventory and leverages its expansive NGL infrastructure asset base. While many suspected the viability of the project at the time of announcement, only 3 months since the announcement and the project, with a loading capacity of up to 240,000 barrels per day, is 85% subscribed.
In late June, EPD and Pioneer Natural Resources (NYSE:PXD) received a private ruling from the Commerce Department classifying processed (stabilized) condensate as a petroleum product (not crude oil) and thus exportable. While the Commerce Department stated the ruling does not change current crude export policy, the outcome is incrementally positive for EPD as its Eagle Ford crude pipe and Gulf Coast storage/dock assets provide the means to export stabilized condensate.
I'm bullish on Enterprise Products Partners. EPD's expansive midstream asset footprint continues to manifest itself in new growth opportunities for EPD ahead of competitors, with ethane and now condensate exports the latest such examples. EPD continues to impress with its execution and the ethane export project increases confidence in the return potential of its backlog. The partnership's capital discipline coupled with a growing opportunity set creates visible, compelling long-term distribution growth for a large-cap MLP. EPD is a core MLP holding, as it offers a high component of stable, fee-based cash flows, well positioned network of assets across multiple supply basins and demand centers, including increasingly important commodity exports and significant financial flexibility.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.