Enterprise Products Partners (EPD) remains my favorite midstream energy income security. Enterprise Products Partners is a partnership taxed in a similar way as a master limited partnership (MLP). I believe Enterprise Products Partners will benefit from increased quarterly distributions, accretive midstream MLP acquisitions, and capital share gains. These factors highlight the rationale to buy the "best in breed" midstream partnership. Income investors will benefit from the ongoing 33rd consecutive quarterly distribution increase. I recommend investors buy Enterprise Products Partners today. I reinvest distributions into additional units.
33rd Consecutive Quarterly Distribution Increase
Over the past 32 quarters, Enterprise Products Partners has regularly increased cash distributions, with increases of more than 5% in the last seven years. In fiscal 2011, Enterprise paid out $2.435 in unit distributions. Most recently, Enterprise paid $0.635 in distributions per common unit on August 8, 2012, up from $0.6275 in the prior quarter and $0.62 two quarters earlier.
EPD Dividend data by YCharts
Enterprise Products Partners, on September 20, announced plans to increase 2012 3rd- and 4th-quarter distributions. For income investor seekers, this is "financially satisfying" news. Enterprise Products Partners announced that its management planned quarterly 3rd- and 4th-quarter distributions. These increases would reflect increases of 6.1% and 6.5% percent, respectively, compared with the 2011 3rd- and 4th-quarter distributions. Yes, this is positive action for one's checking account.
Current Business Model
The company retains the initial vision since its 1998 initial public offering (IPO) of 12 million limited partner common units at $22 per unit. The company raised $247.2 million in 1998. As of October 4, the company has a market cap of $48.1 billion.
With stock as its new liquid currency, Enterprise Products Partners launched into a spree of mergers and acquisitions after its IPO, with major deals and business agreements announced every year.
September 25 Public Unit Offering
Enterprise Products Partners, on September 25, announced a public offering of 8,000,000 common units at $53.07 per common unit. The company will use the proceeds to reduce temporary borrowings. As MLP investors know, buying quality stocks on secondary price dips can be opportunistic.
Enterprise Products Partners' revenue is fee based, with long-term customer contracts often with minimum volume commitments. This is consistent with a midstream MLP. Enterprise Products Partners also has business alliances where the company jointly owns and operates midstream assets with energy majors such as ExxonMobil (XOM), Chevron (CVX) and Conoco (COP). This fee-based arrangement, to some extent, protects Enterprise from volatile natural gas, natural gas liquids
(NGL) and crude prices and their impact on related petrochemicals and refined products. However, demand, supply, market prices and the state of the overall economy do impact results.
Over the years, Enterprise Products Partners has also established itself as a credit worthy consumer of large scale equity and debt transactions, with proven access to low-cost capital even in the worst of times. Enterprise also has a seasoned management team with good relationships within the industry and with Wall Street.
Enterprise's competitive strengths can be summed up as its seasoned management team, midstream energy leadership position, complementary and well diversified assets, long-term fee based contracts, strategic alliances with major energy players, access to low-cost capital at all times, and its solid asset base for continued growth and expansion.
Enterprise Products Partners' has 7 integrated networks of the following midstream energy assets:
- Pipelines: Over 50,000 miles of pipelines for the transport of natural gas, NGLs, petrochemicals and refined products.
- Storage: Salt domes with capacity to store 190 million barrels (MMBbls) of NGL, crude oil and refined products, and 14 billion cubic feet (BCF) of natural gas.
- Fractionation: 20 fractionation plants for NGLs and propylene.
- Natural Gas Processing: 24 plants for the processing of natural gas.
- NGL Terminals: In Houston, Texas, Enterprise operates an import terminal with a flow capacity of 14 MBbls/hour and an export terminal with flow capacity of 7 MBbls/hour.
- Platforms: Enterprise Products Partners owns and operates 6 offshore hub platforms.
- Marine Services: In addition, Enterprise has 125 barges and 58 tow boats.
This complementary, strategically located and inter-connected network of energy assets uniquely positions Enterprise Products Partners to service demand for natural gas, NGLs and crude oil for U.S. domestic consumption and export.
The U.S. tops the list of countries with the highest energy consumption per year, primarily because the U.S. has a much bigger population than other developed economies like say, France and Canada. Moreover, U.S. population growth will increase total energy demand in the years to come. The U.S. also has sizable oil and natural gas reserves - the U.S. ranks #5 in the world on proven natural gas reserves and #13 on proven oil reserves.
In parallel, many in the U.S. advocate energy independence or at least steps toward reducing our dependence on foreign oil. These factors, collectively, have resulted in robust energy production and distribution in the U.S., which is only likely to grow in the coming years. As a result, energy companies are gradually ramping up domestic production of natural gas and crude oil to bolster predictability on their profits and reduce the volatile effects of energy shocks.
This bodes well for Enterprise Products Partners because it is one of the largest midstream energy companies in the U.S. More specifically, Enterprise's assets are well positioned to capitalize on the increasing production of natural gas, crude oil and NGLs in the Rocky Mountains and along the U.S. Gulf Coast at sites like Barnett Shale, Eagle Ford Shale and Haynesville Shale producing regions, and on expected demand increases.
In parallel, Enterprise Products Partners plans to grow through capital investments in ongoing and future projects, through selective acquisitions and by parlaying its strategic relations with major energy companies into joint ventures or alliances with contractually shared costs and guaranteed future revenue.
In early August 2012, Enterprise announced a 210 MBPD crude oil pipeline joint venture (50% each) with Plains All American Pipeline L.P. to serve energy companies operating in the Eagle Ford Shale in South Texas, with long-term contract commitments.
In early August 2012, Enterprise also announced a $650 million Senior Notes offering due August 2015, a $1.1 billion Senior Notes offering due February 2043, and a commercial paper program under which Enterprise may issue up to $2 billion of short-term notes.
In June 2012, Enterprise reported its intent to build a propane dehydrogenation (PDH) unit. This PDH plant will rank amongst the world's largest. It will be built next to the Gulf Coast in southeastern Texas, and is expected to be operational in 2015.
In June 2012, the Seaway pipeline jointly owned by Enterprise and Enbridge, Inc., made its first crude oil delivery to Texas, giving producers in Cushing access to refineries in the greater Houston area. Earlier, in March 2012, the partnership received commitments from shippers to further expand the Seaway pipeline.
In May 2012, the first phase of Enterprise's natural gas processing plant in Yoakum, Texas, commenced operations. The plant has a capacity of 300 MMcf/d and can extract over 40 MBPD of NGLs. The second phase, which will double the plant's processing capacity to 600 MMcf/d, is expected to come online around mid-August 2012.
In April 2012, Enterprise teamed with Anadarko Petroleum and DCP Midstream LLC to design and construct the new 435-mile Front Range NGL pipeline from Colorado to Texas, giving Colorado producers access to the largest NGL market in the Texas Gulf Coast area.
Enterprise Products Partners recently reported results for its second quarter ended June 30, 2012. On a consolidated basis, revenue was down 12.7% versus 2nd quarter 2011, due primarily to sizable declines in the NGL Pipelines & Services segment and in the Petrochemical & Refined Products Services segment. Overall, revenue was down in each of the five reportable segments, with the lowest drop in Onshore Crude Oil Pipelines & Services (see table below). These declines were driven by lower crude oil, natural gas, NGL and petrochemical prices.
Operating costs and expenses were down 14.5% in the second quarter, again due to lower energy commodity prices. General and administrative expenses were marginally lower due to lower compensation expenses. Lower costs and expenses drove operating and net income higher compared with 2nd quarter 2011.
As the table below shows, gross operating margins were generally higher across the board except for Offshore Pipelines & Services due to lower platform demand fees and lower throughput volumes in the quarter.
Overall, gross operating margins improved due to higher tariffs, higher sales margins, increased production, higher storage volumes, higher export volumes, increased pipeline throughput and new systems coming on-line such as new extension pipelines. NGL pipelines and services drive almost 55% of Enterprise Products Partners' gross operating income while onshore natural gas pipelines and services contribute 17%, petrochemical and refined products account for 15%, onshore crude oil pipelines and services contribute 9%, and offshore pipelines and services bring in about 4% but are a strategic addition to offshore operations.
Average debt in the second quarter was higher than in the year-earlier quarter and the end of the year, and resulted in higher interest expenses. At quarter end, Enterprise had approximately $15 billion in outstanding debt. Enterprise Products Partners reported consolidated liquidity - unrestricted cash and borrowing capacity - of $3.1 billion at quarter end.
Enterprise Products Partners' cash from operating activities was down 23.7% over the past six months due to the timing of certain disbursements and cash receipts. Approximately 50% less cash was used in investing activities due to proceeds from asset sales that were partly offset by expansion capital investments at Eagle Ford Shale and in newly formed joint ventures. $375.1 million more cash was used in financing activities due to the net result of increased borrowings, monetization of certain derivative trades and cash paid to unit holders as distributions.
Enterprise Products Partners' peers include midstream Kinder Morgan, Inc. (KMI). Kinder Morgan is the General Partner, with Incentive Distribution Rights (IDR) for Kinder Morgan Partnership (KMP). Richard Kinder is the MLP industry grandfather. As the below distribution growth indicates, Kinder Morgan Partnership's distributions have grown for many years.
KMI Dividend data by YCharts
In this September 17 article, I highlight why investors should strongly consider investing in the Kinder Morgan General Partnership. The General IDR's are strongly aligned with owning the General Partner shares.
Enterprise Products Partners has grown relentlessly through acquisitions, alliances and internal capital investments over the years and is now a leading midstream NGL and natural gas services provider with a vast integrated network of onshore and offshore pipeline, processing, storage and transportation assets - and so is well positioned to benefit from increasing U.S. demand for natural gas and witness continued revenue and profit growth in the years ahead.
In 30-plus years of investing, I have learned to invest in the companies that provide results. I recommend buying Enterprise Products Partners units today.