Enterprise Products Partners LP (EPD) provides midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products, and petrochemicals in North America. EPD's assets include approximately 50,600 miles of onshore and offshore pipelines; 188 million barrels of storage capacity for NGLs, refined products, and crude oil; and 27 Bcf of natural gas storage capacity. Its services include natural gas transportation, gathering, processing, and storage; NGL fractionation (20 NGL and propylene fractionators), transportation, storage, and import and export terminaling; offshore production platform; petrochemical transportation and storage; and a marine transportation business that operates primarily in the US inland and Intracoastal Waterway systems and in the Gulf of Mexico (Yahoo Finance).
EPD has $3.9B gross operating margin for the year ended Dec. 31, 2011. Approximately 70% of this was fee based. NGL pipelines and services accounted for 56% of the $3.9B. Onshore natural gas pipelines and services accounted for 18%. Petrochemical and refined products services accounted for 14%. These included: refined products and petrochemical pipelines, butane isomerization facilities, octane enhancement and high purity isobutylene facilities, and marine terminals and transportation.. Onshore crude oil pipelines and services accounted for 6%. Offshore pipelines and services accounted for 6%.
The above is an impressive amount of infrastructure, but EPD is not resting on its laurels. It currently has $6.5B in growth projects under construction. These will support the new unconventional shale plays in: the Haynesville/Bossier shale, the Eagle Ford shale, the Rockies, the Permian Basin / Avalon Shale / Bone Spring, and the Marcellus / Utica.
Many are worried about the low natural gas prices the US has been experiencing. However, the currently low prices are likely temporary. President Obama announced a change in the US energy policy to subsidize natural gas for trucking in his State Of The Union address. On top of this LNG liquefaction factories are being planned and built. These should allow the US to export natural gas starting in 2015. More than this you should have noticed above that 56% of operating margins come from NGL pipelines and services. Plus a good proportion come from petrochemicals. EPD is not heavily natural gas dependent.
Since the new unconventional shale fields are producing a lot more NGLs, some might worry that these will be produced in such large amounts that the prices will go down. This seems to make logical sense, but the reality so far is that the extra NGLs are replacing more costly crude oil derivatives. The demand for NGLs is going up dramatically not down. In fact the US is exporting some of these, as they are cheaper than comparable crude oil derived products.
For example, US ethylene equivalent exports for 2011 represent over 20% of total US production. Plus the ethylene exported currently commands roughly double the price of that sold locally. This can only help profitability. Ethane and derived products alone are forecast to continue to expand for the next 5 years at least. The average ethane demand in Dec. 2011 was a record 1 MMBpd. This is forecast to expand by approximately 500 MBpd by 2017/18, and that could well be a gross underestimate.
Emerging market demand growth likely has not begun to be fully calculated yet. As an example ethylene is used to ripen fruit after it has been transported in less ripe states. Emerging markets will eat more and more of this as time goes on. I doubt that the current estimates have taken this and other factors fully into account. The growth in NGL demand along with the new unconventional oil and gas additions to supply should keep EPD growing for quite some time. Plus the short term weakness in natural gas prices is just that short term.
The BP Energy Outlook forecasts natural gas supply and demand will grow three times as fast as oil demand over the next twenty years. From the way Exxon (XOM), BHP Billiton (BHP), and others have been buying up natural gas properties, it is clear that most major energy companies agree with BP's assessment. This means that EPD has great long term prospects, especially with the huge new unconventional oil and gas fields that will need pipeline services, etc.
Another significant point in EPD's favor is that its distributions to the General Partner are very low. This means more of its profits get plowed back into the company - leading to increased unit holder value, or the profits get distributed to the unit holders as dividends. Only a few other MLPs have such a low distribution to the GP. These include: Buckeye Partners (BPL), Magellan Midstream Partners (MMP), and MarkWest Energy Partners (MWE).
If you add to this EPD's steady operating margin increases (from $1.8B in 2006 to $3.9B in 2011) and EPD's steady increases in declared dividends (from $1.83 in 2006 to $2.44 in 2011) you get the picture of a very healthy company. EPD has an excellent dividend of 4.7%, but that pales in comparison to its next five year EPS growth estimate per annum of 30.20%. EPD has a 3-year total return CAGR of 39.9%, a 5-year CAGR of 17.5% (with a recession thrown in), and a 10-year CAGR of 14.4% (with two recessions in the mix).
EPD's performance has been nothing short of outstanding. Its current size, a $45.53B market cap and a $60.85B enterprise value, may keep it from rising quite so quickly in the future. However, it should still outperform most other investment vehicles, and one cannot overlook its history. It is currently trading at a P/E of 21.97 and an FPE of 20.11. This is easily within its historical (5 year) range of 10 to 41. One might even argue that EPD is cheap given its high five year EPS growth rate estimate of 30.20%.
The two year chart of EPD gives some technical direction for this trade.
click to enlarge
The slow stochastic sub chart shows EPD is over bought in the near term. The main chart shows that EPD is far above both its 200-day SMA and its 50-day SMA. It is as far above these averages as it has gotten at any time in the last two years. Since the overall market is also over bought, I am inclined to think that EPD will move back toward its 50-day SMA when the overall market eventually retraces. This would likely provide a good buying opportunity.
One thing the investor should take note of is the year long consolidation phase (from Oct. 2010 to Oct. 2011) that EPD went through. This is likely to give more impetus to the now obvious breakout to the upside. If you can get a retracement to the $48 to $49 area, that should be a good buy area. However, the stock does not appear to be over priced at its current price of $52.29.
As always averaging in over time is a good strategy. In EPD you are hoping for a good stock price appreciation return. In this historically steady grower, you don't want to fully buy in at a near term top. This is especially true when the world economic situation is so uncertain. Some might even say bleak. There is talk of a "lost decade" for western economies. There is talk of a 50% down move in US markets. There is the virtual certainty of the coming EU recession. Now is the time to manage your money. It is not the time to bet the farm.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
