Enterprise Products Partners: Defensive Business Model With Strong Distributions

| About: Enterprise Products (EPD)

By Siraj Sarwar

Enterprise Products Partners (NYSE:EPD) is among the largest Master Limited Partnerships in the U.S. The partnership processes and transports energy commodities, mainly natural gas, refined products and natural gas liquids. The huge majority of its pipelines and processing plants are focused along the Gulf Coast. Being a partnership, Enterprise pays no corporate income tax. Instead, the unit holders pay taxes on received distributions, which has some sort of tax benefits to unit holders.

As always, there are risks with any investment. Many of the risks faced by limited partnerships are macroeconomic. The most significant factors at present are banking troubles, upcoming fiscal cliff, and declining expansion in China. These challenges have an effect on the capacity for economic growth and, therefore, the demand for commodities. In this article, I dig into EPD's financial strength to analyze its quarterly distributions and future prospects.

Income, Debt and Other Ratios

At the end of Q3, Enterprise produced a record gross operating margin of $1.1 billion. In addition, the giant's net income stands at $588 million. Enterprise's net income is enormous in volatile economic conditions. Moreover, the company submitted record crude oil and natural gas pipeline volumes and record fee-based natural gas processing volumes. The growth in the company's fee-based is incredible.



Figure in millions except per unit

Nine Months Ended Sep. 30




Total Revenue



Total cost and expenses



Gross operating margin



Operating income



Net Income Attributable to partners



Source: 10Q form

As the table above demonstrates, gross operating margins trend higher in comparison to the same period past year. By and large, gross operating margins enhanced due to elevated tariffs and greater sales margins. Moreover, greater production, elevated storage volumes and better export volumes led to increase the partnership's gross operating margin. Enterprise produced a strong growth with a $167 million increase in gross operating margin for the Q3 of 2012, compared to the Q3 of last year.

At the end of the third quarter, Enterprise Products Partners had $14,747.2 million in outstanding debt. At the moment, the debt is not an issue for Enterprise; cash flows are enough at present to meet the obligation. In addition, current cash flows are large enough to pay increased distributions. The company's cash flow provided 1.3 times coverage for the cash distributions to unit holders at the end of Q3. Enterprise also showed a low current ratio of 0.81 for the most recent quarter, although its ratio looks healthier in comparison with its competitors. One of the competitors, Enbridge (NYSE:ENB) has a current ratio of 0.95.

EPD has consolidated liquidity, unrestricted cash and borrowing facility of $3.4 billion at the end of the third quarter of 2012. In addition, the MLP is investing its unit holders cash very sensibly in growth opportunities. The capital investments for the quarter stand at $1.1 billion, including $102 million of sustainable capital expenditure and $1 billion of growth capital expenditure.

Quarterly Distributions

Over the last 33 quarters, EPD has consistently raised its cash distributions. This MLP has an attractive yield of 4.80 percent. Recently, Enterprise increased its cash distribution to $0.65 per unit, or $2.60 per unit. This represents an increase of 6.1 percent, compared to the third quarter of 2011. This is the 33rd successive quarterly raise and the 42nd raise since the company's initial public offering in 1998. Enterprise's distributable cash flow provided 1.3 times coverage for the cash distributions to unit holders. In addition, Enterprise is switching to fee-based contracts. Fee-based contracts offer more sustainable cash flows and distributions.

EPD lately announced plans to lift fourth quarter distributions. It is expecting to lift its quarterly distribution by 6.5 percent in the Q4 of 2012. For dividend investors, this is surely nice news. The company cash flows, financial strength and move to fee-based business are justifying the lift in distribution.

Future Outlook

Looking forward, for the remainder of 2012 and 2013, the company scheduled to begin operations of around $3.7 billion of capital investment. These projects consist of three NGL fractionators at Mont Belvieu; the third natural gas processing train at the company's Yoakum plant and the ECHO crude oil terminal. In addition, EPD is looking to expand NGL export terminal on the Houston Ship Channel. Moreover, the company will invest for the improvements that will enhance the potential of the Seaway pipeline to carry crude oil to the Texas Gulf Coast. The company is also seeking its Eagle Ford crude oil pipeline's joint-venture with Plains All American.

These projects are important to facilitate the predicted natural gas, crude oil and NGL production growth in the United States. These projects will also create new resources of fee-based volume and cash flow for the company. The firm estimate the portion of fee-based business will rise from approximately 73% in 2011 to approximately 80% in 2013. The increase in fee-based cash flows gives the foundation to help future cash distribution raises.








Market Capitalization












Net Income




Source; Morningstar.com

Two major competitors of EPD are Kinder Morgan Inc (NYSE:KMI) and Enbridge. Enterprise has a market capitalization of $47.9 billion. Meanwhile, KMI and ENB have market capitalizations of $39.4 billion and $34.9 billion, respectively. EPD also has a good-looking yield of 4.8% and is predicting to increase its distributions by 6.5%. However, KMI still has a yield of 3.6 percent and has recently increased its distributions from 0.35 to 0.36 per unit. Moreover, Enterprise has augmented its distribution for the past 33 successive quarters, which makes it a superior dividend paying investment.


EPD gets a massive portion of its operating incomes from fee-based long-run deals. The defensive business model gives a good deal of cash flow security, along potential distribution raises. This MLP's business model is more defensive than most of its peers. For instance, EPD's revenue is generated mainly from fixed-fee contracted assets. These contracted assets seem to be secure from macroeconomic risks along with others. Hence, the cash flows from fee-based contracted pipelines are relatively stable and foreseeable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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