Enterprise Products Partners Limited (EPD) is one of largest master limited partnerships (MLP) in the energy sector. EPD operates more than 50,000-miles of oil and natural gas pipelines in the United States, concentrated primarily in Texas, Louisiana, Oklahoma, Utah, Montana and Colorado and off the Gulf Coast.

EPD pipelines connect to virtually every major shale basin and 90% of refineries east of the Rocky Mountain. Salt dome facilities along its major pipeline routes have a storage capacity of more than 200 million barrels of natural gas, refined petroleum and crude oil.

EPD serves domestic as well as international clients through a network of trucking and marine fleets, as well as an export terminal through the Houston Ship Terminal. The partnership plans to continue to increase its export capacity by 2016, a move which insulates it from the fluctuations of domestic demand.

Founded in 1968, EPD is headquartered in Houston, Texas, the epicenter of the shale gas revolution. A strong export capacity, new pipeline projects and a commitment to continued distribution growth make this midstream MLP an attractive choice for dividend investors in an energy sector hammered by low oil prices.

Weakness is Strength: EPD is at an Entry-Level Price

This Houston-based partnership is an attractive prospect for dividend investors looking for a safe harbor in the energy sector as oil prices decline and the majors face difficulty maintaining distribution growth.

Since WTI prices sank below $50 in April and May, EPD’s stock price has lost nearly 20% of its value. EPD is hovering around its 52-week low of $27.03. This is a perfect entry point for new investors: EPD is trading below $30 for the first time since 2013. With the fall in share price, EDP’s dividend yield now stands at 5.55%, which is slightly above-average for the energy sector.

EPD’s fall is not attributable to financial or fundamental vulnerability. Weak oil prices have affected virtually all energy stocks, from midstream pipeline operators to companies in the solar sector. As we’ve stated elsewhere, low oil prices can actually act as a boon for pipeline MLPs by boosting demand and thus increasing the volume of gas and oil moved. Investors should see the current weakness in valuations as an opportunity to lock-in high dividends while the getting is good.

EPD vs. KMI

Enterprise Products Partners is often compared to the industry leader, Kinder Morgan (KMI). The two MLPs have comparable market capitalization and dividend yields, although EPD boasts higher year-to-date revenues ($45 billion vs. $15 billion), a better PE ratio (20.35 v. 46.09) and a better return on equity (15.5% vs. 4.7%).

At the $27 range, with an annual dividend distribution of $1.52, EPD stacks up favorably against KMI, currently trading at $34 and offering a annual distribution of $1.96. The only question is whether valuations of midstream MLPs have hit bedrock or still have further to fall. At its current range, EPD is ideally priced.

In the current low-oil price scenario, a robust dividend portfolio in the energy sector should spread weight across midstream pipeline operators such as EPD, KMI, TCP and SXL. The general downturn in midstream MLPs’ valuation caused by the temporary fall of oil prices makes for an excellent entry point into a sector rich with high-yield dividend stocks.

Financials

Following its Q1 2015 earnings report, EPD boosted its quarterly dividend distribution from $0.37 to $0.38 in response to better-than-expected earnings. In Q1 2015, EPD reported $141 million of distributable cash flow, down from $704 million in Q4 2014. Like many MLPs, EDP’s quarterly revenues are lumpy, responding to seasonal and cyclical changes in demand for oil and natural gas. Coverage of the dividend distribution was 1.4x in Q1 2015, with a payout ratio of 113%. Despite the downturn, with $3.80 quarterly revenue per share, EDP still has more than enough distributable cash flow to fund continued dividend growth.

EPD’s quarterly dividend distribution at the start of 2015 stood at $0.38, a yield of 5.55%, which remains slightly above-average for the midstream sector. The partnership has a 16-year record of increasing dividend distributions and we expect that trend to continue as the partnership continues to expand its export operations.

Strong Units and Export Capacity Expansions

Enterprise Product Partner has five units, the largest of which, Onshore Crude Oil Pipelines & Services, accounts for 41% of total revenue. The next largest contributor of EPD’s revenue is its NGL (natural gas liquids) Pipelines and Services unit, which accounts for 36% of total revenue. Both units provide fee-based revenues that fluctuate according to volume of oil and gas transported, independent of commodities prices.

In April 2015, EPD increased its loading capacity at its LPG (liquefied petroleum gas) export terminal at the Houston Ship Terminal to 9.5 million barrels per month. The April expansion comes two years after an earlier enlargement which saw EPD’s export capacity increase from 4 million barrels per month to 7.5 million barrels per month. Another expansion phase is already in the works, set to be completed by Q4 2015, and which will increase EPD’s export capacity 16 million barrels per month—the equivalent of 29 vessels.

EPD’s expansion of its Houston export terminal has been a key factor in making the United States the largest exporter of propane in the world. The partnership has more than 1,800 shipments scheduled from 2015 to 2024, . The export business also helps insulate EPD from seasonal and cyclical downturns in domestic demand for LPG, making it more robust than other, purely domestic midstream pipeline operators.

Know what You Own

Midstream entities offer a growing dividend payout. Strong management can predict the direction of the market. Strong companies have their financial house in order prior to a financial lock-up in borrowing access. Enterprise Products Partners and Kinder Morgan are both innovative and successful.

An investor must look at the short term pain as an important consideration if the lending markets lock-up. An investor should know who they are and whether then can withstand a temporary 30% loss in any given midstream name.

Summary

Trading near its 52-week low of $27.02, with a 16-year record of consistently increasing dividend distributions, an expanded export capacity, new pipelines set to come online by the end of the year and improved revenues despite a downturn in oil prices, Enterprise Products Partners (EPD) is an exceptional dividend stock among midstream pipeline operators. Investors should consider the downturn in valuations in MLPs like EPD as an entry point into a dividend-rich environment.

 

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