2023-09-13 08:45:00 ET
Summary
- Enterprise Products Partners is a highly regarded master limited partnership (MLP) in the energy infrastructure sector.
- EPD delivered strong Q2 results, with solid cash flows and business operations supporting a 5.3% increase in distribution per unit.
- EPD's consistency, ability to self-fund expansion, and track record of generating excess cash flow make it a solid income investment in the energy infrastructure space.
Enterprise Products Partners (EPD) is one of the most followed master limited partnerships [MLP] on Seeking Alpha , and contributors continue to have a bullish outlook on EPD. Unlike other energy infrastructure companies, finding a contributor on Seeking Alpha with a negative investment thesis is hard. Units of EPD are still in the red for 2023 by -0.22% despite rebounding 17.25% from its September 2022 lows of $22.90. I continue to remain bullish on EPD as it is one of the best-run MLPs in the energy infrastructure sector. The biggest downfall regarding EPD is the sector it operates in, as it's not that popular. Units of EPD have declined in value by -7.06% over the previous 5 years prior to taking the distribution into consideration. No matter how well run or how undervalued EPD may seem, it's not a company investors are piling into seeking capital appreciation. Energy infrastructure companies don't command the attention or headlines the way big tech does, and this has become an income-focused investment for many investors. While I believe EPD deserves a larger valuation, the long-term track record doesn't seem cooperative. I am bullish on EPD because of its viability to the United States energy landscape, the fact that its infrastructure is next to impossible to replace or replicate, and it's one of the most reliable high-yield investments in the market with 25 consecutive years of distribution growth.
Enterprise Products Partners delivered strong Q2 results that are setting the stage for future distribution increases
When I review an MLP's quarterly results, I tend to look at them from a different lens. I am well aware that the traditional energy landscape is unpopular, and a growing segment of the population wants to see renewable energy cannibalize and eradicate the oil and gas sector. I don't necessarily search quarterly results looking for potential catalysts to increase the unit of MLPs as I would a traditional equity such as PayPal (PYPL). I wrote a recent article on PYPL ( can be read here ), and in the article, I outline many reasons why I started a position and am adding shares to my position. I position my line of thinking to look for strong cash flows and business operations that can support a larger distribution in the future. Since I am often buying energy infrastructure companies for income, I am not concerned with a stagnant unit price as long as the fundamentals are strong and the income distributed to unitholders increases over time.
While EPD missed the top and bottom line on consensus estimates, they produced a strong quarter for the metrics I am concerned with. EPD produced $0.57 of GAAP EPS in Q2 2023, a miss by -$0.01, and $10.65 billion in revenue, a -$1.67 billion miss. When it comes to MLPs and EPD in particular, I am more concerned about the underlying metrics, including distributable cash flow [DCF], Adjusted Cash Flow From Operations ((ACFFO)), and information regarding business operations.
As an income investor, I want to ensure that the income I expect to flow into my account is covered by the amount of cash EPD produces. In Q2, EPD generated $1.9 billion in ACFFO, and its total DCF produced was $1.7 billion. EPD declared a $0.50 distribution per unit in Q2, a 5.3% increase QoQ. I focus on ACFFO because it represents the net cash flow provided by operating activities before the net effect of changes in operating accounts, and DCF because it's a liquidity indicator that tells unitholders if EPD is generating enough cash flow that can sustain and support the current distribution and future increases. The $1.7 billion in DCF provided a 1.6x coverage ratio on the declared distribution, and EPD retained $639 million of its DCF in Q2, bringing its retained DCF to $3.3 billion in the trailing twelve months [TTM].
The main reason why I am so bullish on EPD is their consistency. EPD doesn't make headlines by acquiring companies the way some of their peers do. Instead, investors like myself are drawn to EPD because of their methodical approach toward self-funding expansion. EPD has a consistent history of generating a level of DCF that exceeds its distribution and allows the retained DCF to be utilized for buybacks and expansion. In the current TTM, EPD has a distribution coverage ratio of 1.8x, its DCF coverage ratio hasn't fallen below 1.5x since 2017, and its DCF coverage ratio 5-year average is 1.74x. This indicates that EPD can pay its current distribution and continue its future annual increases while allocating future capital toward buybacks and its backlog of growth projects.
As EPD continues to increase the distribution, its DCF payout ratio will tighten as a larger amount of DCF is paid to unitholders. The key to EPD's distribution growth has been its ability to increase the amount of DCF it generates over time. EPD started Q2 with $6.1 billion in major growth projects under construction. During Q2, the Midland Basin Poseidon Plant, Frac XII, Acadian Expansion, and PDH 2 Facility have been placed into service, which is expected to provide new sources of generated cash for EPD. An additional $4.1 billion of approved products under construction is projected to be placed into service from Q4 2023 through the 1st half of 2026. There are 9 remaining projects in its approved backlog, and an additional $500 million worth of new projects are in the development stages. This is the key to EPD's success as it is able to fund its growth from the DCF it produces while increasing the level of DCF produced, which correlates to continuous distribution increases and buybacks for unitholders.
EPD is arguably the most solid income investment in the energy infrastructure space
When I look at income investments from the energy infrastructure sector, they are broken down into two types of entities, MLPs and c-corps. These have completely different tax implications, and EPD is classified as an MLP. MLPs generate a Schedule K-1 form that needs to be filed with your taxes. To learn more about the Schedule K-1 form, click here , and to learn about the advantages, disadvantages, and tax implications of an MLP structure, click here . I am not a CPA, and I suggest that if you have any questions about the tax implications of investing in an MLP, you should speak with your CPA.
Oil and gas companies are synonymous with dividends and distributions. From exploration and production companies such as Exxon Mobil (XOM) and Chevron (CVX) to energy infrastructure companies including Enbridge (ENB) and EPD, investors have found many investments to fuel their income generation over the years. In articles I have read by other contributors or in the comment section of my articles, I always see discussions regarding which company is the best for distributions or dividends. Some people grab for the highest-yielding entity, while others take other aspects into consideration. I will discuss what I look for and why I feel from an income standpoint, EPD is arguably the most solid income investment in the energy infrastructure sector.
There is a combination of companies I look at, and they include entities that have an MLP and c-Corp structure. These companies include:
- Energy Transfer ( ET )
- MPLX LP ( MPLX )
- Enbridge ( ENB )
- Enterprise Products Partners ( EPD )
- Plains All American ( PAA )
- Kinder Morgan ( KMI )
- Magellan Midstream Partners ( MMP )
- ONEOK ( OKE )
- The Williams Companies ( WMB )
- Targa Resources Corp ( TRGP )
Before assessing these companies from an income standpoint, I want to disclose that I am invested in ET, ENB, EPD, KMI, and OKE. From these companies, my largest investment is in ET, and my 2nd largest is in ENB.
These companies have a yield that ranges from 2.35% to 9.08%. When it comes to an MLP, I am investing strictly for income. If I were looking for capital appreciation, a technology investment would be more interesting for me due to its power to increase earnings and the level of interest that the sector generates. Therefore, I don't want to invest in anything that has a sub-5.5% yield as I need to generate a larger yield than a risk-free asset such as a T-bill or CD. This eliminates TRGP and WMB for me.
Next, I look at the longevity of a company's dividend/distribution, how many years of consecutive increases they have provided shareholders with, and if they have ever reduced their distributions or dividends. KMI, ET, and PAA have all reduced the income they pay to their investors so those get eliminated. This leaves ENB, EPD, MMP, MPLX, and OKE left on my list.
From a longevity aspect, all these investments are impressive as they have all paid income to their investors for at least a decade, while ENB and OKE have paid dividends for over 50 years. Now, my focus turns to the number of consecutive years investors have been rewarded with dividends or distribution increases. Over the past 15 years, we have lived through the financial crisis, the oil crisis, recessions, and the pandemic, so I would be looking for companies that have not just maintained but increased their dividends through these periods. OKE became an honorable mention for me as they have paid a dividend for 51 years, but they didn't increase the dividend during the pandemic and restarted their dividend growth last year. This leaves MPLX, MMP, EPD, and ENB.
From the remaining companies, MLPX doesn't have the multidecade track record that MMP, ENB, and EPD have created, so I eliminate it from my list. While MMP has more than 2 decades of paying and increasing their distributions under their belts, I am also eliminating them because there is a strong possibility that the upcoming vote on the OKE takeover will be approved. This leaves ENB and EPD.
ENB Dividend
EPD Distribution
The remaining companies are ENB And EPD. ENB has a current dividend yield of 7.67%, has paid dividends for 68 years, and provided investors with 28 years of consecutive increases. EPD has a distribution yield of 7.45%, has created a 25-year track record for paying distributions, and has also increased its distributions for 25 consecutive years. Both are phenomenal companies, and I am invested in both. I could make an agreement for either company and while some may not agree, I give the edge to EPD.
Over the past year, shares of ENB have fallen -20.24%, which has increased the dividend yield significantly, while units of EPD have declined by -0.22% over the past year. While ENB has a slightly larger yield, it's larger because of the decline in share value, not due to its dividend growth. The other main factor is that ENB has provided their latest string of dividend increases in 28 of their 68 years, which is 41.17% of their dividend history. EPD has a 100% record of increasing its distribution each year since the inception of its distribution program. I am invested in both EPD and ENB, and I have more capital allocated toward ENB, but from an income perspective, I would give EPD the edge over ENB.
Conclusion
I am generally bullish on the energy infrastructure space, and I am invested in many companies throughout the sector. While I feel that ET is still the most undervalued, I believe there is an argument to be made that EPD is the most solid income investment in the space. EPD is consistently delivering value for its unitholders, management is aligned with unitholders as they own 32% of the common units, and EPD's operations have produced a 1.8x distribution coverage ratio from their DCF in the TTM. EPD has a long pipeline of growth products coming online over the next several years in addition to the projects they just placed in service that will add additional streams of cash generation to their operations. From an income perspective, I feel that EPD could be the strongest income investment in the energy infrastructure space and that we will see many more years of consecutive distribution increases coming as time progresses.
For further details see:
Enterprise Products Partners: This Unofficial Dividend Aristocrat Has Much More Dividend Growth Ahead