Examples In MLP Due Diligence - Enterprise Products Partners

| About: Enterprise Products (EPD)

Summary

Many investor have few clues as to what good due diligence is. I will provide examples of what most investors would call hyper due diligence.

Investors spending due diligence time on articles where the authors spent inadequate time on their due diligence. This example can help you ID those.

Worst of all, one can find an abundance of examples of poor due diligence (due to a lack of key metrics) in brokerage reports.

I do not have all the answers - but I do have a lot. I do not have perfect knowledge as a result of hyper-intensive due diligence - but I have a lot. I do not have decades of investing experience - but I do have seven years of experience using metrically guided investing. And I have a ton of numbers.

The purpose of this series is to answer the question "What is good due diligence for MLP (energy Master Limited Partnership) investors?" Why try to answer that question?
(1) Many investor have few clues as to what good due diligence is. I will provide examples of what most investors would call hyper due diligence. You can opt to weed out some of the hyper to arrive at the level that feels right to you. Prune prudently.
(2) Many investors are spending due diligence time reading investment articles where the authors of those articles are doing an inadequate time on due diligence. Some of you could use a due diligence role model - so they know what authors and articles to ignore.
(3) A few of us lean on brokers for advice. Don't do that.
(4) Worst of all, one can find an abundance of examples of poor due diligence (due to a lack of key metrics) in brokerage reports.

The goal is to produce "advice about advice" and provide the reader with some of the skill about which Kenny Roger's sings, of knowing "when to hold'em; know when to fold'em; know when to walk away".
This fellow retail investor admits that he is not qualified to provide the definitive answer to those lyrical questions. On the other hand, those who might be qualified to provide those answers are happy with us not having a clue.

And with that, let's start with an examination of Enterprise Products Partners - or EPD - and answer the questions all income investors ask: "is the dividend or (correctly) distribution safe?" and "can the distribution grow?"

Let's begin with the year to date data for the full sector:

MLP Midstream 6-10-16

The consensus Distributable Cash Flow or DCF projections were last updated on 5-30-16. The distribution Compound Annual Growth Rate or CAGR projections were updated 5-30-16. Yields are based on the Q2-16 distribution. Under the 'year to date' header, the change in the distribution is the change since Q2-15 - or the change over the last twelve months. The change in the target, EPS and DCF is the percentage change in the consensus 2016 projection that has happened since the beginning of 2016. The Dist/DCF number is the ratio of the Q2-16 distribution to the 2016 DCF projection. The 2016 DCF projection is an adjusted average of eleven DCF projections from the major brokerages covering MLPs. The CAGR is intended to be the percentage change in my CAGR projection since the beginning of the year - but I lack confidence that I have the timing of this stat right. The target prices and EPS projections are from Yahoo Finance. EXLP is now APLP. AMID, APLP, KMI, TGP and TOO have 2016 distribution cuts.


Company Current Distrib/ Q2 Dist Dist/dcf Dist/dcf Year-to-Date Percent Change
Price Quarter Yield 2016 2017 Price Pr+Dist EPS Target DCF Dist* cagr

Antero Midstream Partners LP (NYSE:AM) 25.35 0.2350 3.71 61.84 59.49 11.09 13.15 -15.20 1.21 7.04 30.56 -1.41
American Midstream Partners, LP (NYSE:AMID) 12.04 0.4125 13.70 83.33 88.24 48.83 59.02 5.98 -2.58 -1.00 -12.70 -80.00
Blueknight Energy Partners, L.P. (NASDAQ:BKEP) 5.01 0.1450 11.58 61.05 58.00 -10.85 -5.69 -84.38 -16.22 11.76 3.94 -38.60
Buckeye Partners, L.P. (NYSE:BPL) 71.19 1.1875 6.67 89.79 86.84 7.93 11.53 0.24 -2.19 0.38 3.26 0.00
Boardwalk Pipeline Partners, LP (NYSE:BWP) 16.86 0.1000 2.37 22.22 20.00 29.89 31.43 10.00 0.89 1.69 0.00 400.00
Cone Midstream Partners LP (NYSE:CNNX) 17.56 0.2450 5.58 71.53 68.06 78.27 83.25 8.96 -2.82 7.87 15.57 0.00
Columbia Pipeline Partners LP (NYSE:CPPL) 15.42 0.1875 4.86 92.59 70.09 -11.78 -9.64 -10.78 -16.07 -10.00 11.94 -14.29
Delek Logistics Partners, LP (NYSE:DKL) 26.05 0.6100 9.37 76.73 73.94 -27.01 -23.59 -23.92 -14.57 -5.36 15.09 -18.75
Dominion Midstream Partners (NYSE:DM) 28.75 0.2245 3.12 71.27 59.47 -6.23 -4.77 1.64 -1.60 7.69 28.29 -0.71
DCP Midstream Partners LP (NYSE:DPM) 34.77 0.7800 8.97 96.30 99.68 40.94 47.26 -22.36 1.28 -2.99 0.00 -95.00
Enable Midstream Partners (NYSE:ENBL) 14.19 0.3180 8.96 102.58 100.16 54.24 61.15 -4.88 1.82 -10.79 1.76 -97.50
Enbridge Energy Partners, L.P. (NYSE:EEP) 22.60 0.5830 10.32 105.52 100.95 -2.04 3.02 -40.34 -28.99 -3.07 2.28 -86.84
EnLink Midstream Partners, LP (NYSE:ENLK) 15.45 0.3900 10.10 89.66 83.87 -6.82 -2.11 -91.80 -27.04 -3.87 2.63 -25.00
Enterprise Products Partners L.P. (NYSE:EPD) 28.20 0.3950 5.60 77.83 74.18 10.24 13.33 -6.85 -5.09 -2.87 5.33 -3.64
Energy Transfer Partners, L.P. (NYSE:ETP) 37.97 1.0550 11.11 107.93 91.94 12.57 18.83 -62.76 -19.96 -18.71 3.94 -66.10
EQT Midstream Partners, LP (NYSE:EQM) 75.98 0.7450 3.92 63.54 61.07 0.69 2.66 6.74 -0.94 -5.25 22.13 35.42
Exterran/Archrock (NASDAQ:APLP) 13.05 0.2850 8.74 46.72 42.38 6.01 10.64 -41.67 -30.68 -7.58 -49.33 -16.67
Genesis Energy LP (NYSE:GEL) 38.22 0.6700 7.01 75.07 71.28 4.03 7.68 -22.07 -20.77 -10.75 12.61 0.00
Holly Energy Partners L.P. (NYSE:HEP) 34.09 0.5750 6.75 87.12 83.33 9.47 13.17 8.52 9.83 -0.38 6.98 0.00
Kinder Morgan, Inc (NYSE:KMI) 17.51 0.1250 2.86 23.26 21.83 17.36 19.03 -6.67 -3.75 -5.70 -73.96 0.00
Midcoast Energy Partners, L.P. (NYSE:MEP) 8.40 0.3575 17.02 158.89 134.91 -13.58 -6.22 0.00 -48.09 -27.42 2.88 0.00
Martin Midstream Partners LP (NASDAQ:MMLP) 21.47 0.8125 15.14 100.93 97.89 -1.06 6.43 -25.00 -28.25 -4.17 0.00 -50.00
Magellan Midstream Partners LP (NYSE:MMP) 72.44 0.8025 4.43 80.05 72.46 6.62 8.99 -5.69 -0.88 1.01 11.85 -10.11
MPLX or Marathon LP (NYSE:MPLX) 33.01 0.5050 6.12 83.82 75.37 -16.07 -13.50 -43.33 -36.40 -10.74 23.17 -23.08
NuStar Energy L.P. (NYSE:NS) 51.27 1.0950 8.54 92.41 90.87 27.86 33.32 1.78 2.33 -3.66 0.00 -42.86
Oneok Partners, L.P. (NYSE:OKS) 37.80 0.7900 8.36 100.32 96.93 25.46 30.70 13.20 11.34 3.28 0.00 -20.00
Plains All American Pipeline, L.P. (NYSE:PAA) 27.05 0.7000 10.35 121.74 105.26 17.10 23.16 -31.67 -25.22 -14.50 2.19 -96.67
Phillips 66 Partners L.P. (NYSE:PSXP) 54.15 0.4810 3.55 68.47 54.50 -11.81 -10.24 -17.95 -2.40 0.72 30.00 -10.00
Spectra Energy Partners, LP (NYSE:SEP) 46.44 0.6338 5.46 81.00 74.56 -2.64 0.02 6.73 1.43 10.99 3.85 7.69
Shell Midstream Partners, LP (NYSE:SHLX) 33.12 0.2350 2.84 58.39 48.21 -30.57 -29.58 -1.23 0.89 0.63 34.29 0.00
Summit Midstream Partners, LP (NYSE:SMLP) 21.53 0.5750 10.68 87.45 76.41 14.95 21.09 -68.67 -59.97 -1.50 1.77 0.00
Sunoco Logistics Partners L.P. (NYSE:SXL) 27.87 0.4890 7.02 87.32 72.99 8.44 12.25 -23.26 37.98 -3.03 16.71 -2.11
TC PipeLines, LP (NYSE:TCP) 57.04 0.8900 6.24 79.46 74.32 14.75 18.33 8.59 42.95 -1.32 5.95 -10.00
Tallgrass Energy Partners, LP (NYSE:TEP) 47.07 0.7050 5.99 81.03 64.38 14.22 17.64 -8.16 -10.14 -1.14 45.36 10.00
Tesoro Logistics LP (NYSE:TLLP) 48.27 0.8100 6.71 78.07 72.32 -4.07 -0.85 -2.74 -9.31 -4.60 16.55 0.00
Transmontaigne Partners L.P. (NYSE:TLP) 38.54 0.6800 7.06 74.52 69.92 44.02 49.10 -16.38 37.50 0.27 2.26 11.11
Valero Energy Partners LP (NYSE:VLP) 44.45 0.3400 3.06 43.59 41.34 -13.87 -12.56 12.66 -1.39 6.48 22.74 -4.67
Western Gas Partners LP (NYSE:WES) 49.45 0.8150 6.59 85.56 77.80 4.04 7.47 7.78 -18.91 3.81 12.41 -2.86
Western Refining Logistics (NYSE:WNRL) 22.94 0.4025 7.02 83.42 74.54 -6.48 -3.20 -26.13 -10.50 -13.06 20.87 -4.76
Williams Partners L.P. (NYSE:WPZ) 33.13 0.8500 10.26 90.67 85.00 18.96 25.06 -48.65 0.00 -2.34 0.00 -33.33

Pipeline Average 7.44 81.07 74.37 9.08 13.17 -16.49 -7.38 5.99 7.08
Shipping
Golar LNG Partners LP (NASDAQ:GMLP) 18.21 0.5775 12.69 77.00 62.43 36.10 44.73 -9.96 -9.75 37.61 0.00 0.00
Navios Maritime Partners L.P. (NYSE:NMM) 1.42 0.0000 0.00 0.00 0.00 -52.98 -52.98 -75.93 -81.28 0.00 -100.00 0.00
Teekay LNG Partners LP. (NYSE:TGP) 12.36 0.1400 4.53 18.06 18.67 -6.01 -3.88 -27.27 -47.87 0.00 -80.00 -50.00
Teekay Offshore Partners LP. (NYSE:TOO) 5.39 0.1100 8.16 19.82 16.30 -16.82 -13.43 -19.27 -51.24 -11.90 -79.57 -71.43

Shipping Average 6.34 38.03 -9.93 -6.39 -33.11 -47.53

MidStream Average 7.34 76.32 69.82 7.35 11.39 -18.00 -11.03

The (price change only) Alerian MLP index [the ^AMZ - which includes other MLP sectors] is 6.95% year to date.
The Alerian MLP index ETN AMJ is 6.90% and with dividends is 10.61%.
The S&P500 index ETF SPY is 3.04% and with dividends is 3.56%.
The Russell 2000 index ETF IWM is 3.06% and with dividend is 3.35%.
With the 10yr Treasury @ 1.62% & the sector average yield on Q1 distributions at 7.34% - the spread is 572 bps.
With the JNK yielding 6.26% - spread to the Lehman U.S. High Yield Index is 109 bps.
With the HYG yielding 5.55% - the spread to the iBOXX High Yield Index is 179 bps.
Click to enlarge

I will start the EPD specific research with a review of the quarterly numbers - and do something that my research shows the average MLP investor can not do - produce of DCF/unit number for a MLP.

Enterprise Products Partners metrics: 59% NGLs; 15% Crude; 13% Natural Gas; 12% Refined Product

Q1-2016 Q4-2015 Q3-2015 Q2-2015 Q1-2015 Q4-2014 Q3-2014 Q2-2014 Q1-2014 Q4-2013 Q3-2013 Q2-2013 Q1-2013
Revenues 5,005.3 6,115.0 6,307.9 7,092.5 7,472.5 10,190.3 12,330.2 12,520.8 12,909.9 13,101.3 12,093.3 11,149.3 11,383.1
Costs 4,190.8 5,291.6 5,501.6 6,402.4 6,665.7 9,349.7 11,464.8 11,686.8 11,933.7 12,227.0 11,317.4 10,412.7 10,469.9
EBITDA 1,327.2 1,335.1 1,309.9 1,296.3 1,326.0 1,316.0 1,300.7 1,248.2 1,365.8 1,224.2 1,138.7 1,103.8 1,250.1
Unadjusted DCF dollars 1,053.6 1,088.8 2,501.3 987.5 1,029.7 1,063.0 974.8 953.8 1,087.0 1,021.1 907.6 924.7 897.0
DCF dollars from one time gains -6.6 71.3 1,531.4 5.4 0.1 23.8 8.3 16.9 89.6 24.3 10.2 68.7 130.5
Normalized DCF dollars 1060.2 1,017.5 969.9 982.1 1,029.6 1,039.2 966.5 936.9 997.4 996.8 897.4 856.0 766.5
Units 2,040.5 2,014.4 2,010.5 2,002.1 1,966.7 1,940.5 1,883.4 1,880.4 1,875.9 1,865.0 1,846.0 1,837.0 1,822.0
Unadjusted DCF/unit $0.5163 $0.5405 $1.2441 $0.4932 $0.5236 $0.5478 $0.5176 $0.5072 $0.5794 $0.5475 $0.4916 $0.5034 $0.4923
Normalized DCF/unit $0.5196 $0.5051 $0.4824 $0.4905 $0.5235 $0.5335 $0.5131 $0.4982 $0.5317 $0.5345 $0.4861 $0.4660 $0.4073
Upcoming Distribution $0.395 $0.390 $0.385 $0.380 $0.375 $0.370 $0.365 $0.360 $0.355 $0.350 $0.345 $0.340 $0.335
Unadjusted Coverage 1.3072 1.3859 3.2315 1.2979 1.3962 1.4805 1.4180 1.4089 1.6323 1.5643 1.4251 1.4805 1.4696
Adjusted Coverage 1.3154 1.2952 1.2503 1.2909 1.3960 1.4474 1.4059 1.3840 1.4978 1.5271 1.4091 1.3706 1.2158
Normalized DCF subtracts "cash proceeds from asset sales and insurance recoveries" - derivative gains do not appear to be included with DCF
Broker1 DCF/unit $0.52 $0.55 $0.50 $0.51 $0.54 $0.56 $0.54 $0.52 $0.59
Broker2 DCF/unit $0.51 $0.51 $0.49 $0.50 $0.53 $0.52 $0.49 $0.50 $0.53
Broker3 DCF/unit $0.54 $0.48 $0.49 $0.52
Broker4 DCF/unit $0.507 $0.539 $0.484 $0.493 $0.517 $0.549 $0.504 $0.508 $0.570 $0.549 $0.504 $0.508 $0.570
LTM EBITDA 5,268.5 5,267.3 5,232.9 5,239.0 5,190.9 5,230.7 5,138.9 4,976.9 4,832.5 4,716.8 4,624.7 4,549.2 4,490.6
Long Term Debt 20,826.7 20,840.7 20,892.9 20,192.2 19,157.4 17,706.5 17,062.9 17,467.8 16,226.5 16,481.6 16,429.6 16,393.7
Long Term Debt/EBITDA 3.95 3.98 3.99 3.89 3.66 3.44 3.43 3.61 3.44 3.56 3.61 3.65
Short Term Debt 1,863.9 1,619.4 1,400.1 1,399.8 2,206.4 1,939.9 1,300.0 900.0 1,125.0 1,049.9 540.0 1,150.0
Total Debt 22,946.4 22,690.6 22,460.1 22,293.0 21,592.0 21,363.8 19,646.4 18,362.9 18,367.8 17,351.5 17,531.5 16,969.6 17,543.7
Total Debt/EBITDA 4.35x 4.31x 4.29x 4.26x 4.16x 4.08x 3.82x 3.69x 3.80x 3.68x 3.79x 3.73x 3.91x
Interest Expense 240.6 238.6 243.7 240.4 239.1 241.4 229.8 228.9 220.9 198.1 208.3 200.2 195.9
Interest Coverage 5.52x 5.60 5.37 5.39 5.55 5.45 5.66 5.45 6.18 6.18 5.47 5.51 6.38
Historical Debt/EBITDA: 2010 3.9x; 2011 3.5x; 2012 3.6x; 2013 3.5x; 2014 3.8x (Oiltanking acquisition); 2015 4.2x (EFS Midstream acquisition)
Click to enlarge

What can we learn from these numbers?
1. First off, I have verified by DCF/unit (or Distributable Cash Flow per unit) calculations with the DCF numbers from four different brokerage analysts. If you network with fellow investors (friends, neighbors, relatives, net buddies and co-workers), you can do this, too. And you will need to. The EPD DCF calculation is relatively simple - there is only one normalization metric. Many MLPs require multiple adjustments.
2. I can have a decent level of confidence in my DCF calculation because my numbers are in the same neighborhood.
3. DCF/unit change since 2014 has been slightly negative. MLPs are not exactly toll roads. They have faced headwinds due to commodity price falls.
Let's move on to some attributes I know due to producing similar spreadsheets for many other MLPs. As you absorb the data from future articles in this series, you will have the data in which to arrive at similar assessments.
4. DCF/unit numbers are relatively stable. That is a good safety attribute. This is a byproduct of generating a relatively high percentage of EBITDA from fee based earnings.
5. The distribution coverage is relatively strong. That is both a safety and growth attribute.
6. The debt metrics are relatively strong. That produces a relatively low cost of debt capital - which is a good thing. Strong balance sheets also result in high valuations for the equity. I want to note that EPD has some extremely long dated debt that merits 'equity' treatment - and my metrics fail to adjust for that attribute.
7. In a low inertia environment, a good forward DCF projection will be close to the LTM (last twelve month) DCF number. For EPD, LTM DCF is (.5196 + .5051 + .4824 + .4905) $1.9976/unit.

And speaking of DCF projections, let's move on to that topic. I produce a spreadsheet with DCF projection numbers from 12 different brokerages. This is hyper due diligence - but I need an abundance of sources in order to have multiple projections for the smaller and newer MLPs. I will show a redacted version of a portion of that spreadsheet:

MLP 2016 DCF/Unit 6-10

Co. Broker1 Broker2 Broker3 Broker4 Broker5 Broker6 Broker7 Broker8 Broker9 Broker10 Broker11 Broker12 Average Consensus Price/DCF

AM 1.37 0.00 0.00 1.58 0.00 0.00 1.60 0.00 0.00 0.00 0.00 1.54 1.52 1.52 16.68
AMID 0.00 0.00 0.00 2.00 0.00 1.89 0.00 0.00 0.00 0.00 1.99 2.03 1.98 1.98 6.08
BKEP 0.00 0.00 0.00 0.93 0.00 0.68 0.00 0.00 0.00 1.39 0.00 0.86 0.96 0.95 5.27
BPL 0.00 0.00 0.00 5.13 5.46 5.37 0.00 5.07 5.30 5.37 5.34 5.26 5.29 5.29 13.46
BWP 2.11 0.00 0.00 1.83 1.85 1.80 0.00 0.00 1.73 1.83 1.50 1.77 1.80 1.80 9.37
CNNX 1.32 1.37 0.00 1.45 1.15 1.31 0.00 1.50 0.00 1.44 0.00 1.43 1.37 1.37 12.82
CPPL 0.76 0.00 0.00 1.80 0.95 0.81 0.00 0.70 0.00 0.00 0.00 0.87 0.98 0.81 19.04
DKL 0.00 0.00 0.00 3.14 0.00 3.58 0.00 3.12 0.00 0.00 0.00 2.89 3.18 3.18 8.19
DM 0.00 0.00 0.00 1.23 1.35 1.22 0.00 1.17 0.00 1.33 0.00 0.00 1.26 1.26 22.82
DPM 3.61 3.12 3.43 2.99 3.16 3.36 0.00 3.21 3.09 3.16 3.27 3.20 3.24 3.24 10.73
ENBL 1.26 0.00 0.00 1.27 1.04 1.27 0.00 1.28 0.00 1.26 1.24 1.31 1.24 1.24 11.44
EEP 2.32 0.00 0.00 1.89 2.08 1.86 0.00 2.13 2.23 2.46 2.57 2.11 2.18 2.21 10.23
ENLK 1.92 0.00 0.00 1.58 0.00 1.79 0.00 1.63 2.06 1.60 1.85 1.50 1.74 1.74 8.88
EPD 2.06 2.05 1.93 1.97 2.09 2.09 2.00 1.93 2.08 2.11 2.13 1.90 2.03 2.03 13.89
Click to enlarge

The 2016 projections for EPD range from $1.90 to $2.13 - with the average being $2.03. That projection is in alignment with the LTM DCF actual of $2.00 - thus I can have increased confidence in that projection due to that alignment. I currently have similar spreadsheets for DCF projections for 2017 and 2018. Now that I have a good DCF - let's move on the CAGRs - or a five year forward "Compound Annual Growth Rate" projection of the distribution.

If there is one universal investing concept that a new investor can vicariously derive from my experience, it is the realization that income investors are lost without good and multiple CAGR projections. A more mature investor will be able to find the data that supports a good projection - and thus will be able to weed out the bad projections. Good due diligence should allow you to make CAGR projections on your own that are confirmed and supported by the projections done by others. What follows is a portion of one of multiple CAGR projection spreadsheets that I produce. This one is for MLPs that have paid a distribution since the first quarter of 2006:

Long term metric trends
The average calculation for growth is for ten years - for 2006 through 2015
The first average is the sum of changes for each individual year over ten year period - with that result divided by 10
The 2nd average is the difference between the current and beginning number, divided by the beginning number - with that result divided by 10
The distributions shown are annualized first quarter distributions


Company 06 07 08 09 10 11 12 13 14 15 16 17 average average CAGRs PI-CAGRs

BPL DCF 3.19 3.27 3.50 4.05 4.13 3.63 3.76 4.17 4.38 4.70 5.29 5.47 My 4.40% RRR-yield 4.33%
growth 2.5% 7.0% 15.7% 2.0% -12.1% 3.6% 10.9% 5.0% 7.3% 12.6% 3.4% 5.79% 6.58% Last5 7.84% P/DCF Ratio 4.55%
Dist. 2.95 3.15 3.35 3.55 3.75 3.90 4.11 4.15 4.35 4.55 4.75 Broker1 2.50% Broker2 4.60%
growth 6.8% 6.3% 6.0% 5.6% 4.0% 5.4% 1.0% 4.8% 4.6% 4.4% 4.89% 6.10% Broker3 4.80% Broker4 0.00%
Dist/DCF 92% 96% 96% 88% 91% 107% 109% 100% 99% 97% 90% 97.27%

Co. 06 07 08 09 10 11 12 13 14 15 16 17 average average CAGRs PI-CAGRs

BWP DCF 1.96 2.23 2.05 1.67 2.16 1.95 2.17 2.08 1.77 1.63 1.80 2.00 My 5.00% RRR-yield 8.63%
growth 13.8% -8.1% -18.5% 29.3% -9.7% 11.3% -4.1% -14.9% -7.9% 10.4% 11.1% 1.26% -0.82% Last5 -1.08% P/DCF Ratio -3.02%
Dist. 1.36 1.66 1.84 1.92 2.00 2.08 2.12 2.13 0.40 0.40 0.40 Broker1 0.10% Broker2 0.00%
growth 22.1% 10.8% 4.3% 4.2% 4.0% 1.9% 0.5% -81.2% 0.0% 0.0% -3.34% -7.06% Broker3 0.00% Broker4 0.00%
Dist/DCF 69% 74% 90% 115% 93% 107% 98% 102% 23% 25% 22% 74.79%

Co. 06 07 08 09 10 11 12 13 14 15 16 17 average average CAGRs PI-CAGRs

EEP DCF 2.07 2.03 2.29 2.13 2.27 2.20 1.96 1.69 2.04 2.20 2.21 2.31 My 0.50% RRR-yield 1.68%
growth -1.9% 12.8% -7.0% 6.6% -3.1% -10.9% -13.8% 20.7% 7.8% 0.5% 4.5% 1.62% 0.68% Last5 3.95% P/DCF Ratio 0.42%
Dist. 1.85 1.85 1.90 1.98 1.98 2.05 2.13 2.17 2.17 2.28 2.33 Broker1 0.10% Broker2 0.00%
growth 0.0% 2.6% 4.2% 0.0% 3.8% 3.7% 2.1% 0.0% 4.9% 2.3% 2.35% 2.59% Broker3 4.30% Broker4 5.90%
Dist/DCF 89% 91% 83% 93% 87% 93% 109% 129% 107% 104% 106% 100.08%

Co. 06 07 08 09 10 11 12 13 14 15 16 17 average average CAGRs PI-CAGRs

ENLK DCF 1.93 1.89 2.53 1.37 1.64 2.00 1.65 1.36 1.54 1.53 1.74 1.86 My 3.00% RRR-yield 2.90%
growth -2.1% 33.9% -45.8% 19.7% 22.0% -17.5% -17.6% 13.2% -0.6% 13.7% 6.9% 2.57% -0.98% Last5 3.13% P/DCF Ratio -0.22%
Dist. 2.04 2.24 2.44 1.00 0.00 1.04 1.28 1.32 1.44 1.50 1.56 Broker1 0.20% Broker2 5.40%
growth 9.8% 8.9% -59.0% -100.0% n/a 23.1% 3.1% 9.1% 4.2% 4.0% n/a -2.35% Broker3 3.70% Broker4 7.80%
Dist/DCF 106% 119% 96% 73% 0% 52% 78% 97% 94% 98% 90% 79.58%

Co. 06 07 08 09 10 11 12 13 14 15 16 17 average average CAGRs PI-CAGRs

EPD DCF 0.98 0.98 1.34 1.30 1.58 1.77 1.73 2.00 2.14 2.01 2.03 2.13 My 5.30% RRR-yield 4.40%
growth 0.0% 36.7% -3.0% 21.5% 12.0% -2.3% 15.6% 7.0% -6.1% 1.0% 4.9% 8.75% 10.71% Last5 4.49% P/DCF Ratio 3.50%
Dist. 0.87 0.93 1.00 1.06 1.12 1.18 1.24 1.32 1.40 1.48 1.56 Broker1 5.30% Broker2 5.60%
growth 6.9% 7.0% 6.0% 5.7% 5.4% 5.1% 6.5% 6.1% 5.7% 5.4% 5.96% 7.83% Broker3 6.50% Broker4 7.00%
Dist/DCF 89% 95% 75% 82% 71% 67% 72% 66% 65% 74% 77% 74.27%

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The average distribution growth has been right at 6% while the distribution/DCF ratio has been 74%. Given that the current ratio is 77%, forward distribution growth should be slightly below average growth. Last 5 year DCF (ending with the 2017 projection) has averaged (+15.6 +7.0 -6.1 + 1.0 +4.9) 4.5% - and I want my distribution growth number to be in alignment with that number.
I show four CAGR projections from the major brokerages - and I want a personal projection that is in alignment with a conservative consensus. There are two PI-CAGRs or "price implied CAGRs". I will write more about them later. I want the price implied CAGRs to be high enough to show the market is (mostly) pricing in projections in the same neighborhood - while at the same time I want the price implied CAGRs to be under the fundamentally derived projection to indicate that the degree of goodness expected in EPD is not fully priced in. (Those are frequently mutually exclusive attributes.)
For EPD, I believe my CAGR projection is the right amount lower than the brokerage projections - AND my CAGR projection for EPD is a decent amount above the price-implied CAGRs - which would indicate EPD is under valued.

Now that I have arrived at a growth projection with which I can have a fair amount of confidence - it is time to make a numeric risk assessment. If I had decades of experience with MLPs, I could look at the assets and the contracts on those assets and come up with a risk assessment. Many of the MLPs assist investors by disclosing the percentage of EBITDA that is 'fee-based'. Where I have those numbers, I use them as a supplement to my risk assessment. But I want an objective method that works in all sectors. And for that, I use "historical earnings projection accuracy". Here is a portion of that spreadsheet:

Intra-year Changes in DCF estimates by Year: Some MLPs Have Assets That Produce More Predictable DCFs

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Accuracy Bond
Comp Chng Chng Chng Begin End Chng Begin End Chng Begin End Chng Begin End Chng Begin End Chng Begin End Chng Begin Cur Chng Rating Rating

AM 0.91 1.13 24% 1.42 1.52 7% 3.0 none
AMID 2.00 1.90 -5% 2.08 1.36 -35% 2.07 1.87 -10% 2.18 1.89 -13% 2.00 1.98 -1% 5.0 none
BKEP 0.75 0.70 -7% 0.85 0.90 6% 1.03 0.83 -19% 0.67 0.99 48% 0.85 0.95 12% 4.0 none
BPL -3% -6% 12% 4.23 4.13 -2% 4.17 3.63 -13% 4.37 3.76 -14% 4.33 4.17 -4% 4.70 4.38 -7% 4.93 4.70 -5% 5.27 5.29 0% 2.5 BBB-
BWP 20% -18% -27% 2.29 2.16 -6% 2.28 1.95 -14% 2.20 2.17 -1% 2.26 2.08 -8% 1.98 1.77 -11% 1.78 1.63 -8% 1.77 1.80 2% 4.5 BBB-
CNNX 0.99 1.11 12% 1.27 1.37 8% 2.0 none
CPPL 0.70 0.69 -1% 0.90 0.81 -10% 2.5 none
DKL 2.13 2.13 0% 3.15 3.15 0% 3.50 2.99 -15% 3.36 3.18 -5% 3.0 none
DM 0.92 1.13 23% 1.17 1.26 8% 1.5 none
DPM 23% -24% 8% 2.93 2.48 -15% 2.88 2.77 -4% 2.90 2.68 -8% 3.23 2.83 -12% 3.29 3.20 -3% 3.40 3.57 5% 3.34 3.24 -3% 2.5 BB
ENBL 0.95 0.95 0% 1.38 1.44 4% 1.59 1.31 -18% 1.39 1.24 -11% 3.0 BB+
EEP 4% 2% 4% 2.20 2.27 3% 2.27 2.20 -3% 2.37 1.96 -17% 2.23 1.69 -24% 2.13 2.04 -4% 2.21 2.20 -0% 2.28 2.21 -3% 2.0 BBB
ENLK -13% -5% -43% 1.33 1.64 23% 1.50 2.00 33% 1.70 1.65 -3% 2.17 1.36 -37% 1.57 1.54 -2% 1.86 1.53 -18% 1.81 1.74 -4% 3.5 BBB-
EPD -12% 19% -5% 1.39 1.58 14% 1.43 1.77 24% 1.57 1.73 10% 1.87 2.00 7% 2.07 2.14 3% 2.18 2.01 -8% 2.09 2.03 -3% 1.3 BBB+
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The lower the 'accuracy rating' the better the accuracy rating. I have a rough formula to derive the numbers. But I also want the numbers to reflect my gut impression. Having a long track record strongly assists in having an informed gut.

Due to great distribution coverage; much better than average credit metrics; a tie for the best credit rating; and excellent historical accuracy, I assess EPD with my lowest RRR of 10. Low RRRs are in the 10s and mainly go to BBB+ rated companies. Average RRRs for covered distributions are in the 11s and mainly go to BBB rated companies. Uncovered distributions result in RRRs in the 12s and mainly go to BBB- rated companies.

What follows is the data that supports my strong belief that a good RRR assessment matters. I believe the message in the data is powerful.

How do I know that risk is a MAJOR factor in valuations - even in a market that is apparently full of RRR agnostics?

The relationship between credit ratings and yields: While yields are also strongly influenced by distribution growth, the smaller influence of credit ratings can also be seen at times. The S&P corporate credit ratings are used for this data. Marine transportation MLPs are weeded out. BWP is also weeded out.
The following companies had corporate credit ratings of BBB+ or BBB: EEP, EPD, KMI, MMP, OKS, PAA, PSXP, SEP and SXL. Their average yield is 6.72%; CAGR is 5.61%; price/DCF is 13.07; Analyst Rating is 2.39; and Accuracy Rating is 1.74.
The following companies had corporate credit ratings of BBB-: BPL, ENLK, ETP, EQM, MPLX, TCP, WES and WPZ. Their average yield is 7.76%; CAGR is 5.96%; price/DCF is 11.89; Analyst Rating is 2.25; and Accuracy Rating is 2.27.
The following companies had corporate credit ratings of BB+, BB or BB-: DPM, ENBL, GEL, HEP, NS, TEP and TLLP. Their average yield is 7.69%; CAGR is 5.10%; Price/DCF is 11.49; Analyst Rating is 2.36; and Accuracy Rating is 2.26.
The following companies had corporate credit ratings of B, B+ or B-: APLP, MMLP, SMLP and WNRL. Their average yield is 10.12%; CAGR is 4.00%; Price/DCF is 8.23; Analyst Rating is 2.45; and Accuracy Rating is 3.38.

How does the risk influence compare to the growth influence on valuations?

The relationship between CAGR projections and yields: While yields are strongly influenced by risk, the influence of dividend growth projections can also be seen.
The following had CAGR projections over 8.5%: AM, CNNX, CPPL, DM, EQM, GEL, MPLX, PSXP, SHLX, SXL, TEP, TLLP, VLP and WNRL. Their average yield is 5.13%; Price/DCF is 15.21; Analyst Rating is 2.19; and Accuracy Rating is 1.94.
The following had CAGR projections under 8.5% but over 5.9%: DKL, KMI, MMP, SEP and WES. Their average yield is 5.75%; Price/DCF is 12.33; Analyst Rating is 2.26; and Accuracy Rating is 1.56.
The following had CAGR projections under 6.0% but over 3.5%: BKEP, BPL, BWP, EPD, HEP, SMLP, TCP and WPZ. Their average yield is 7.64%; price/DCF is 10.47; Analyst Rating is 2.28; and Accuracy Rating is 2.73.
The following had CAGR projections under 3.5%: AMID, DPM, ENBL, EEP, ENLK, ETP, APLP, MEP, MMLP, NS, OKS, PAA and TLP. Their average yield is 10.81%; price/DCF is 9.32; Analyst Rating is 2.62; and Accuracy Rating is 3.14.

For RRRs - the spread between high and low is (13.07 - 8.23) 484 bps. For CAGRs - the spread between the high and low groupings is (15.21 - 9.32) 589 bps.

Even in the current environment - where the market's antennae is more attuned for risk than normal - CAGR has a higher influence on valuations. But (and this is a BIG but) - CAGRs can oscillate with the wind. RRRs have strongly tended to be stable assessments. To those of us who want to be 'buy and hold' investors - "Assessment stability matters".

And with that - you should be sufficiently prepped for the ending spreadsheet that compared valuations:

Yield + CAGR Total Return Expectations


Company Q2-16 Consensus Total Bonds DCF My Total Rtn Consensus Price Implied CAGR Distrib Price
Yield CAGR Return Ratings Accr RRRs - RRR Ratings RRR-Yld P/DCF / DCF / DCF
Large Cap Midstream
Buckeye Partners, L.P. BPL 6.67% 4.40% 11.07% BBB- 2.50 11.00 0.07 2.1 4.33 4.55% 89.79 13.46
Enable Midstream Partners ENBL 8.96% 0.10% 9.06% BB+ 3.00 12.50 -3.44 2.6 3.54 1.75% 102.58 11.44
Enbridge Energy Partners, L.P. EEP 10.32% 0.50% 10.82% BBB 2.00 12.00 -1.18 2.9 1.68 0.42% 105.52 10.23
Enterprise Products Partners L.P. EPD 5.60% 5.30% 10.90% BBB+ 1.30 10.00 0.90 1.7 4.40 3.50% 77.83 13.89
Energy Transfer Partners, L.P. ETP 11.11% 2.00% 13.11% BBB- 3.00 12.50 0.61 2.2 1.39 0.39% 107.93 9.71
Kinder Morgan, Inc KMI 2.86% 6.00% 8.86% BBB- 1.30 11.00 -2.14 2.4 8.14 -5.28% 23.26 8.14
Magellan Midstream Partners LP MMP 4.43% 8.00% 12.43% BBB+ 1.00 10.30 2.13 2.1 5.87 11.77% 80.05 18.06
Oneok Partners, L.P. OKS 8.36% 0.80% 9.16% BBB 3.00 12.50 -3.34 2.9 4.14 4.63% 100.32 12.00
Plains All American Pipeline, L.P. PAA 10.35% 0.10% 10.45% BBB 3.00 12.50 -2.05 2.7 2.15 4.18% 121.74 11.76
Spectra Energy Partners, LP SEP 5.46% 7.00% 12.46% BBB 1.00 10.00 2.46 2.2 4.54 5.25% 81.00 14.84
Sunoco Logistics Partners L.P. SXL 7.02% 9.30% 16.32% BBB 1.10 12.00 4.32 2.1 4.98 4.52% 87.32 12.44

Average 7.38% 3.95% 11.33% 2.35 4.10% 3.24% 12.36

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"Total Return minus RRR" is my the buy, hold or sell number. Positive is buy - the stock is selling below what the valuation assessments suggest. Negative is sell - the stock is selling above what the valuation assessment suggest. Close to zero means the stock is correctly priced. In most sectors there is superior metric transparency compared to MLPs - and I produce TR - RRR numbers that are close to zero. Total Return or "TR" = Yield + CAGR.

The Correlation between Total Return - RRR and Analyst Ratings:

The following stocks had TR - RRR of less than 0: BWP, DPM, ENBL, EEP, HEP, MEP, NS, OKS, PAA, TCP and TLP. Their YTD mean price change = 22.56% and 9 of the 11 beat the sector mean yearly price gain [7.89%]. Their mean yield = 8.63% and they had an average price/DCF ratio = 11.08. Their mean LTM distribution growth = 2.21% and they had an average CAGR projection of 1.88. They had an average analyst rating projection of 2.60.

The following had TR - RRR of more than 0: AM, BKEP, BPL, CNNX, CPPL, DKL, DM, ENLK, EPD, ETP, EQM, GEL, MMLP, MMP, MPLX, PSXP, SEP, SHLX, SMLP, SXL, TEP, TLLP, VLP, WES, WNRL and WPZ. Their YTD mean price change = 1.65% and 9 of the 26 beat the sector mean yearly price gain. Their mean yield = 6.83% - and they sold at an average price/DCF ratio = 13.25. Their mean LTM distribution growth = 15.19% and they had an average CAGR projection of 8.39. They had an average analyst rating projection of 2.21.

Getting more selective of positive attributes, the following had TR - RRR of more than 3.0: GEL, MPLX, SXL, TEP, TLLP and WNRL. Their YTD mean price change = 0.01% and 2 of the 6 beat the sector mean yearly price gain. Their mean yield = 6.65% - and they sold at an average price/DCF ratio = 12.31. Their mean LTM distribution growth = 22.54% and they had an average CAGR projection of 9.72. They had an average analyst rating projection of 2.07.

I committed to a brief explanation of "price implied" CAGRs. Here is a brief and relatively wonkish explanation.

Because the distribution/DCF ratio can vary significantly, the meaningfulness of the price-implied DCF derived from "RRR - yield" can vary significantly. Because of this variance, we need a second picture of a price-implied CAGR.

Logic tells us that (1) the higher the perceived distribution growth, the higher the Price/Earnings ratio of a stock. And (2) the higher the perceived risk, the lower the Price/Earnings ratio of a stock. I produce formulas that vary by sub-sector to pry loose the message in the price to earnings ratio.

The formulas slightly vary by sub-sector because I want the 'average price implied' number to roughly equal the 'average CAGR projection'.

The Price/DCF Ratio 'price-implied' CAGR = 1.85 * (Price/2016 DCF projection) minus an adjustment number specific to the stock. The higher the RRR, the lower the adjustment. For almost all MLPs, the RRR + the adjustment = 22. For example, the RRR for EPD is 10 - so the adjustment is 12. For PAA, the RRR is 12.5 - so the adjustment is 9.5.

What does all of this math mean?

EPD is a relative buy based on current valuations. It is a much safer or predictable MLP than average. This is a time where such MLPs have relatively high valuations. One should expect some short to mid term under performance due to those valuations. At the same time, retail investors will be well served to stick with a heavy weighting in the investment grade MLPs.

Allow me to use a decent dose of hyperbole to put the same thought in different words. For those who are retired or near retirement and are also income investors, if EPD, MMP and SEP (the large-cap MLPs with great balance sheets) are not your #1, #2 and #3 MLP holdings - you are probably doing something wrong. Or - if more than 30% of your MLP holdings have current yields over 7% - you are probably doing something wrong. If your gut is not telling you that - then you have a defective gut.

I expect to test reader feedback on this point in a poll in the comment section - and I expect that I hold a minority opinion. What we have here is another case of mutually exclusive attributes. Metric obfuscation combined with a lack of metric transparency results in MLP investors needing to be significantly more adventurous than average. At the same time, a history of market volatily should also result in MLP investors needing or wanting to be more conservative than average. It is hard to be 'both'.

And what is good due diligence?

For me, it is processing the numbers to arrive at a growth projection and a risk assessment with which one can have sufficient confidence. It is not enough to arrive at a conclusion that a specific stock is good. One needs to know the degree of good - and be able to compare the level of goodness priced in to the level of goodness in your due diligence assessment.

I expect to take you through this same process several more times as I produce articles on BPL, ETP, MMP, PAA and SEP.

Disclosure: I am/we are long EPD, GEL, MMP, PSXP, SHLX, TLLP, WES.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.