On June 7th I wrote an article about Enterprise Products Partners L.P (EPD) and recommended a Bear Put Spread for a short income play. After some observations, here is the reasoning I gave for the play:
Reasoning behind the Trade
- EPD is heavy into natural gas and that is not coming around any time soon so it remains bearish.
- Oil & Gas remain bearish since they are overly supplied at the moment.
- Services in these sectors will continue to struggle and there is nothing motivating a turnaround.
I could not have been more wrong. The stock took a huge turn up after my ill fated play. What suddenly caused them to turn around so quickly? I believe it is the long term outlook on the stock that suddenly drove up the price because of the multiple revenue streams it is planning to open in the next few years.
In May it beat estimates by 3 cents and had a 27% increase over the same quarter in 2011. The gross operating margin rose 20% year-over-year to $1.053 billion. Operating income also increased 20% over the same period, to $749 million. With strong earnings momentum, a steadily rising distribution and reasonable valuation, Enterprise Products Partners continues to offer an attractive total return potential. Here's something rare - increased earnings and income. We haven't seen much of that lately. Here's another reason for the turn around.
Since the quick ride up, some analysts are now recommending caution because of price weaknesses in liquid gas. These are not long term, but short term outlooks.
Short Term Analysts are Saying Hold
Global Hunter Securities, LLC reiterated its Accumulate rating and $53.00 price target on EPD. Like many other analysts, they are downgrading some of the natural gas gathering and processing MLPs. They are also going to revise the estimates of others because they believe the NGL will keep ethane and propane prices low going forward. A weakening US economy, high propane inventories (and prices) and continued weakness in natural gas prices indicate NGL prices stay lower for longer.
70% of the company's revenue comes from pipeline and other assets that generate fees whether or not the pipeline is full. One benefit if this type of revenue base is less vulnerability to economic slump or commodity prices. Presently EPD is investing in new pipelines and processing facilities to the tune of $6.5 billion and many are scheduled for completion by 2014.
One thing that may hinder the company in the near future is that gross OMs from pipelines and services are mostly related to natural gas liquids (NGL) like propane, ethane and butane. Prices are predicting a major slump the second half of the year. Here is a breakdown of its business segments:
- 25 natural gas processing plants
- 21 NGL fractionators
- NGL pipelines and storage tanks
- NGL shipping terminals on the Gulf Coast.
The Gulf Coast shipping is the biggest cash flow producer and also offers the company its greatest potential for expansion.
Prices of ethane and propane may hinder cash flow to a point but if we take a long term picture of the business and see what it is working on for the future that will generate revenue, the future looks very bright. Here are some pipeline projects:
The Seaway pipeline from Cushing, Oklahoma to the Texas gulf coast has been open since earlier this year. It is a half partner with Enbridge (ENB) and is planning to bring on the "first" expansion of the pipeline the last quarter of this year. What is nice about this is that the extra 250k (barrels per day) is already sold. Cushing has a lot of oil that needs to be moved right now so this bodes well for the company. This same pipeline may be expanded further to 450,000 bpd. The target date for this is 2014.
Phase I of the Eagle Ford oil pipeline just opened and is accepting deliveries. Enterprise has a large crude terminal in Sealy, Texas that is still being built but will be able to entertain about 4 million bpd of refining. This line runs from Wilson County to the terminal at about 350,000 bpd. Remember I mentioned earlier about the concerns I had with NG prices? EPD is very dependent on NGL pipelines and services (56%). This is not good right now as the price of propane has dropped nearly 50% in the last year. Hopefully, the refinery will help create diversity for the company.
Finally, the Texas Express Pipeline project is projected to generate revenues starting in the first quarter, 2014. Three companies are working on this project together: Enterprise, Enbridge Energy Partners, L.P. (EEP) and Anadarko Petroleum Corporation (APC). It will extend 850 miles from Skellytown, Tex., to fractionation and storage facilities in Mont Belview, Tex., with a daily capacity of 280,000 bpd.
If there is any doubt that Enterprise Product Partners will have revenue stream problems in the future these examples should put it to rest. So it appears that the nice ride up that ruined my short term income opportunity may reach its peak soon (if not already), but the company looks very good long term right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.