Enterprise Products Partners Remains A Solid Long-Term Pick

Aug.14.14 | About: Enterprise Products (EPD)


The recent fall in the unit price will be temporary as the long-term growth prospects of the partnership remain intact.

Global markets will play a key role in the future growth of the partnership as the demand for condensate and petrochemicals remains strong in Asia and Latin America.

Agreements like Arkema show that the partnership is making the right moves to exploit the growth opportunity in the global markets.

Enterprise Products Partners (NYSE:EPD) has seen some negative price movement over the last two weeks - the unit price is down about 6%. The partnership has had a good run over the last few months and the unit price has recorded considerable gains.

We believe this fall in price is temporary and it offers its long-term investors an opportunity to add to their positions. The fundamentals of the partnership remain intact and the business growth will continue. As we have said in our previous articles, we are expecting strong growth from domestic as well international markets. The prospects of exports as well as the expansion of its major pipelines will considerably enhance the revenues and operating cash flows of the partnership over the next few quarters. Moreover, the strength of EPD's operations continues with the strong second quarter earnings and ensuring solid distribution growth sustainability in the long-run. The partnership has also inked an agreement with Arkema S.A. to supply propylene as raw materials required for key product line of the company.

Strong Backlog Ensures Future Growth

The international demand will be key for the U.S. energy companies as the domestic market is expected to show a decline over the next few years. Due to this change in demand source, energy companies are shifting their focus towards crude and condensate exports. The country has become a net exporter of refined products as International Energy Agency [IEA] expects U.S. demand for refined products to decline steadily in the domestic market.

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Source: Investor Presentation, June 2014

EPD has identified the opportunity in the rising global energy demand and the partnership has increased its production volumes. The partnership reported increased average daily production volumes during the second quarter - production went up by 7% to a record 5.2 million barrels per day [BPD] compared to the same period last year. EPD is following a strict growth path where it managed to achieve higher production volumes and increased sales revenues due to increased order backlogs and additional condensate oil exports in the global markets. Further, the partnership has continued to reap higher profitability due to the stabilizing natural gas prices in the second quarter. The market price of natural gas averaged $4.68 per MMBtu during the second quarter compared to $4.10 per MMBtu for the same period last year - the increase is mainly due to higher natural gas demand for power generation.

EPD is well-positioned to benefit from this situation and secured huge order backlog including impressive condensate export contracts in the high margin Asian markets. The partnership has sold its first condensate cargo to a Japanese trading house, and is expecting more customers in Latin America - we discussed these deals in detail in a previous article. The demand of condensate is relatively higher in the Asian region as compared to the rest of the world, which is expected to play a major role in the future growth of EPD. The partnership is going to add about $6.8 billion worth of organic growth capital projects, including Lucius Offshore Crude Oil pipeline, PDH facility and Aegis Ethane Header pipeline, which will substantially increase the operating cash flows and revenues for EPD over the next few years.

Source: Investor Presentation, June 2014

EPD recently entered into an agreement with Arkema S.A., a France-based company which specializes in the manufacturing and marketing of chemical products, to enhance the propylene supply to the company. Propylene is petroleum variant which is a byproduct of oil and natural gas, and is used for producing acrylics - one of the key product lines of Arkema. EPD will benefit from this agreement due to its vast exposure in the shale development in the U.S. Moreover, the contract is based on long-term supply tenure (more than 10 years) of propylene, which will be produced by the propane dehydrogenation [PDH] facility of EPD. Further, EPD's PDH facility has the capacity to produce up to 1.65 billion pounds per year of polymer grade propylene and the project will be completed by the mid-2016. EPD has contracted almost 100% of its PDH capacity under fee-based contracts, with tenure ranging to an average of 15 years with investment grade companies.

Increased Cash Distributions

EPD managed to increase its cash distributions to $0.72 per common unit in the second quarter - $2.88 per common unit on annualized basis, which represents a 5.9% increase compared to the same period last year. Moreover, the partnership reported distributable cash flows of around $954 million in the second quarter, providing an increased distribution coverage ratio of approximately 1.4 times. This increase is mainly due to the increased revenues from the natural gas liquids, crude oil and other petrochemical variants pipeline volumes for the second quarter, which reported an increase of 7% during the period.


As the demand for energy is growing globally, EPD continues to mark impressive milestones towards success. The partnership has been able to cater to domestic as well as the international energy demand and has reported substantial gains during the second quarter. Moreover, the future growth of the partnership is ensured by a strong backlog of and fee-based agreements. We believe the long-term pattern of the unit price will be upwards and the recent fall will be temporary.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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.