March 9, 2012
Written By Chloe Lutts Jensen
“Enterprise Products Partners L.P. (EPD – yield 4.80%) is the largest master limited partnership (MLP) in America. In total, the partnership owns more than 50,000 miles of pipelines (enough to circle the planet twice) used to carry natural gas, oil, natural gas liquids and refined chemicals around the country. The MLP also has its hands in a number of other areas, including storage terminals, processing, tow boats, barges and import/export terminals. … About 70% of EPD’s business is fee-based—meaning most of its cash flow isn’t directly impacted by the price of oil or gas.
“It simply earns a fee for every barrel of oil or gas shipped through its network. And Enterprise returns as much of that money as possible to its investors. The partnership has increased its distribution 39 times since going public in 1998—and 30 consecutive times going back to 2004. In total, Enterprise has distributed nearly $2 billion in the past year—a tremendous amount of cash that shows it is dedicated to putting money in its investors’ pockets.
“Right now EPD pays a 4.8% yield, but investors who have held the stock for a few years are making considerably more thanks to Enterprise’s rising distribution payments. … The good news is that I don’t believe investors have missed their chance to benefit from Enterprise’s strong growth. EPD is likely to continue increasing its distributions for years to come. .
$4.5 Billion in Expansion Opportunities Will Almost Certainly Lead to Distribution Increases
“As of the end of 2011, the partnership had a staggering $4.5 billion in expansion projects on its books—including more than 300 miles of pipeline expansions to the valuable Eagle Ford shale field. In total, EPD has slated 22 new expansion products, many of them focused on infrastructure to connect to shale fields. That nearly $5 billion backlog of projects accounts for about 10% of the partnership’s current market capitalization—providing plenty of growth in the years ahead.
“But there are a couple more reasons EPD’s business— and its distributions—are likely to grow. First, more than half of EPD’s profits come not from shipping, storing, and processing crude oil or natural gas—but from something called natural gas liquids (NGLs). Natural gas liquids are naturally occurring elements found as a byproduct of natural gas. You’ve probably heard of them by their more specific names, such as ethane, propane and butane. NGLs are valuable as separate products, making it profitable to remove them from the natural gas itself.
“Because of the energy boom in shale, natural gas liquids have become an affordable feedstock for petrochemical plants around the country—making them more attractive for industrial users. EPD is reporting that demand for some of these NGLs is more than 20% higher than their recent average. In short, demand is soaring for natural gas liquids, and EPD is one of America’s most dominant suppliers. That’s good news going forward.
“But there is a better reason to believe that EPD will continue to pay its investors larger dividends. Enterprise has made what I think is the smartest move an MLP can make if it wants to increase its distributions. … In 2010, it bought out its general partner. Now all dividends go only to EPD investors— none are distributed to a general partner. This move should allow distributions to grow much faster in the years ahead. This recent move clearly demonstrates just how much Enterprise is committed to earning solid returns for its shareholders.
“Going forward, consensus estimates call for EPD to grow 30% per year over the next five years. And given the increasing distributions, steady cash flows and backlog of growth projects, I think investors will be rewarded handsomely for years to come. The stock has returned more than 14% per year during the past decade. It’s not guaranteed, but at this point I see no reason why EPD can’t continue that sort of performance for the next decade. … My ‘Buy Under’ price is $60 and my target for the security is $80.”
Paul Tracy, StreetAuthority’s Top 10 Stocks, February 29, 2012
“No stock is a buy at any price. Enterprise Products Partners’ stock has been on a tear in recent months, surging from less than $40 per unit in late 2011 to more than $50 per unit at the end of February. After this recent rally, the stock yields about 4.7%–close to the lowest rate of return in its trading history. Units of Enterprise Products Partners trade well above our buy target of $45.
“We continually reevaluate and revise our buy targets to ensure that yields adequately compensate for the risks associated with a particular MLP. Enterprise Products Partners is among the safest names in the Conservative Portfolio. However we can’t justify raising the buy target, especially when bouts of volatility in the stock market—a distinct possibility with the E.U. muddling along and a U.S. presidential election on the horizon—will likely furnish investors with an opportunity to buy the stock at a cheaper price.”
Roger S. Conrad and Elliott H. Gue, MLP Profits, 800-832-2330, 3/2/12