EPD - Enterprise Products Partners And DT Midstream: 2 Pipeline Stocks For Cash Flow

2023-11-27 16:02:38 ET

Summary

• Pipeline companies often provide predictable cash flows that can translate into predictable dividends for investors.
• Enterprise Products Partners L.P. and DT Midstream, Inc. are two options in the space, with the former being an MLP and DT Midstream being a C-corp.
• Enterprise Products Partners is significantly larger and much more popular, but smaller companies such as DT Midstream are still worthwhile and can provide potential upside.

Written by Nick Ackerman.

There's gold in them thar pipes! Well, not really, but energy infrastructure companies generally provide steady and fairly predictable cash flows. Those steady cash flows translate into fairly steady dividends to investors. Those cash dividends can then, in turn, be used to purchase gold, and gold is as good as gold.

Pipeline companies often have take-or-pay contracts that make them less volatile in terms of cash flows than whatever the price of energy might be at any time. However, energy prices can tend to have an impact, at least on the share or unit price of energy investments, even if the cash flows remain fairly stable. So, they aren't completely immune in terms of having volatility on that front.

Today, I wanted to take a look at two interesting players in the pipeline space that provide steady dividends to investors.

Enterprise Products Partners

First, we can start with the one that probably needs little introduction as it's among one of the most popular in the space. Enterprise Products Partners L.P. ( EPD ) is a master limited partnership ("MLP"), which some investors avoid due to the K-1 come tax time. However, for those willing to handle - or let their tax advisor handle - a bit of extra paperwork, it can be quite beneficial to have exposure to this steady MLP.

One of the reasons that EPD can be so popular is due to its sheer size. It is one of the largest MLPs, only being topped by peer Energy Transfer LP ( ET ).

Size can afford some stability for EPD, as its pipeline operations are spread throughout the U.S .

However, they also pump various products through their pipes. That includes an NGL segment, a crude segment, a natural gas segment and a petrochemical and refined products segment to provide further diversification. Further diversification helps their portfolio just as it would help any individual investor's portfolio to spread their bets across various holdings. The largest segment here, the NGL segment, accounts for nearly half of the total gross operating margin in the last quarter.

As noted, a large portion of pipeline operations are fee-based, and that is definitely true for EPD , with the bulk being fee-based contracts across all segments.

The steady operations here have translated into a steady distribution for unitholders for going on 25 years.

The only time there was a bit of a hiatus in increases was through Covid. They had been regularly increasing the distribution every single quarter for a number of years. During Covid, that stopped, but they did increase the payout once again in 2021. Starting in 2022, the trend has been investors getting a pay raise twice a year or semi-annually.

The latest quarter had a distributable cash flow of $1.869 billion, about flat year-over-year. However, with distribution coverage at 1.7x, they aren't in a position where we need to be worried that the current payout isn't sustainable. In fact, I would assume the semi-annual raises would continue for the foreseeable future. As growth projects come online, over time, discounted cash flow ("DCF") and free cash flow should trend higher.

As interest rates crept up, it has impacted several other income-oriented investments. EPD hasn't been able to seem to escape that as its yield has also trended higher as they increased the distribution, but without seeing its unit price benefiting.

According to the fair value range of EPD's historical yield level, it would suggest that it is currently trading just under its fair value range. That could indicate some upside, but the unit price is about where it was previously to pre-Covid, and it seems stuck in this range.

That being said, in my opinion, most of an investor's return is going to come via that 7.7% distribution rate. On the other hand, there could be some upside from here if interest rates fall. That could make EPD's yield once again look more competitive against risk-free rates for income-seeking investors. Of course, the caveat to that is why interest rates are being cut. If it's because we are sinking into a deep recession and energy prices are taking a significant hit, then more than likely, that would create an even better buying opportunity for EPD.

DT Midstream

The second pipeline operation I wanted to highlight is significantly smaller and came to the public market more recently. More specifically, it was spun off from DTE Energy ( DTE ) in 2021, and that was DT Midstream, Inc. ( DTM ). DTM came to the market as a C-Corp and not an MLP, so that could make some investors more comfortable - those who don't want to deal with a K-1.

That move to spin off DTM created two more focused companies and is how I originally became a shareholder of DTM in the first place, as I have held DTE shares for a number of years. DTM is the pure-play natural gas-focused midstream company, and DTE is the regulated utility business. So, while we don't have a long history to work off of as an independent company, what we have seen is quite promising.

To provide some context of just how small DTM is, we can compare it to the significantly larger EPD. EPD is about 10x larger in terms of enterprise value than DTM.

Given this size, it is probably no surprise that DTM isn't quite as sprawling in terms of where this company operates . Instead, they are much more focused, and that can make it riskier overall.

They seem to boast that their company is in a unique position as "the only independent, mid-cap, C-Corp, gas-focused midstream company in the premier areas of the Marcellus/Utica and Haynesville shales."

As we can see, the company has both pipeline and gathering assets. The pipelines segment, in terms of adjusted EBITDA, was the largest part of the company in the last quarter, and it has been similar over the last nine months. This has been a bit of a shift from the 2021 breakdown that had the divisions more balanced, with 53% of adjusted EBITDA from the pipelines and 47% from gathering.

For some further context on the size difference between EPD and DTM, DTM notes that they have 1200 miles of transportation pipelines and 1000 miles of gathering lines, or about 2200 miles of pipe in total. EPD can boast over 50,000 miles of pipelines.

Year-over-year, the company saw distributable cash flow climb quite materially.

However, their growth capital and maintenance capital have also grown. You have to spend money to make money, which should promote growth going forward. We see that playing out as well, as they narrowed the adjusted EBITDA guidance for 2023 and increased the DCF outlook.

We even saw a preview of the adjusted EBITDA for 2024, with an admittedly fairly wide range. Based on the mid-point, adjusted EBITDA is looking like it could grow from $915 to $945, or about 3.3%.

Based on the mid-point, the company expects DCF to come in at $662.5 million, and with an annualized dividend amount of $2.76 based on the number of shares outstanding, they'd pay roughly $268 million in dividends going forward.

Suffice it to say coverage of their dividend is incredibly strong, and that puts them in a position to grow their dividend materially going forward. Alternatively, it also means there is plenty of cash flow left over for growth projects to fuel growth in earnings. Either way, it should benefit current shareholders.

Since their spinoff, they've raised their dividend twice. It was a 6.7% bump heading into 2022 and then another 7.8% increase heading into 2023. That being said, the dividend is on the lower end for a midstream company, and that could make it relatively less attractive at this time. The yield currently comes to around 5%.

According to Seeking Alpha, EV/EBITDA for the trailing twelve months comes to 13.27x, which is richer than peers, and the forward EV/EBITDA does come down to 9.39x, but that still puts it in a place where it is trading above lists sector peers.

However, this is also a similar level that DTM has traded at in its short history, so relative to itself, it isn't overly expensive at this time.

Conclusion

MLP and midstream companies can provide steady cash flows for investors that can often translate into steady dividends. Enterprise Products Partners L.P. is amongst the most popular MLPs, and it has earned its spot with a solid track record. However, there are also smaller interesting plays in the pipeline business, such as DT Midstream, Inc., that also merit a look from investors. With EPD, it isn't likely to see significant upside movements in its price. Alternatively, for a company such as DTM, investors could wake up tomorrow and see news of it being acquired for a premium, with shares popping higher.

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