Enterprise Awash in Liquids; Profit Sinks
Enterprise Products Partners (NYSE: EPD) is the largest master limited partnership (MLP) by far, with more than double the market capitalization of the second-largest MLP, Energy Transfer Partners (NYSE: ETP). Enterprise Products has extensive assets in most of the important oil and gas-producing regions of the country:
Source: Enterprise Products Partners
As a result, analysts closely follow the partnership’s earnings calls to gauge the health of the entire midstream energy sector. Last week Enterprise hosted an earnings call after reporting third-quarter results, and here are some highlights.
Net income for the third quarter was down relative to a year ago — $658 million compared to $699 million for the third quarter of 2014 — but the partnership reported a 13% increase in liquid transportation volumes to a record 5.9 million barrels per day (bpd). Liquid volumes transported increased for crude oil (+21% to a record 1.5 million bpd), refined products and petrochemical volumes (+12% to a record 904,000 bpd) and natural gas liquids (NGL) (+10% to a record 3.2 million bpd). The NGL transportation volumes included a 33% increase in LPG export volumes to a record 320,000 barrels a day.
Even though third-quarter income was $0.32 per unit compared with $0.37 per unit for the third quarter of 2014, Enterprise Products generated $970 million of distributable cash flow. This was sufficient for 1.3x distribution coverage and the 45th consecutive quarterly distribution increase. The annualized yield based on the announced distribution of $0.385 per unit is 5.6%.
Note that even though year-over year income only dropped by 13.5%, EPD units have been hit as hard as the shares of many oil producers. For the past 12 months, EPD has a total return of -25.1%, worse than the Energy Select Sector SPDR ETF (XLE), which is down 20.4% over the past year. Conservative investors looking to add exposure to the energy sector should take note of this opportunity.
The role of incentive distribution rights (IDRs) in the relationship between limited partners (LPs) and a general partner (GP) has been the topic of a great deal of discussion over the years. The idea is that by paying the GP a growing portion of the distribution, there is a greater incentive for the GP to grow the partnership’s distribution as quickly as is practical. EPD CEO Michael Creel left no doubt where he stands on the matter when he noted what would have happened had EPD’s IDRs not been eliminated in 2010:
“Enterprise would have paid more than $6 billion to its general partner under the IDR since the fourth quarter of 2010 and our distribution this quarter would be 0.7 times instead of 1.3 times, and that assumes that we would have the same growth trajectory, the same cash distribution and the same credit ratings and that’s a big assumption.”
Creel was skeptical that a potential change in IRS regulations could hurt the business, “Certainly to the extent that the IRS has expanded the scope of qualifying income over time, they may be trying to change that, but when they start trying to change the original legislation, that seems to be problematic. The end result is we don’t think there is going to be any significant impact on us.”
Creel also stressed the importance of the Permian Basin to the partnership, noting that some 30% of all U.S. rigs are now deployed there. EPD is building two new processing plants and adding to its takeaway capacity for natural gas liquids in the region.
Acknowledging the tough operating environment, Chief Operating Officer James Teague said that the partnership’s focus has shifted from moving greater volumes to moving volumes more efficiently. He further noted that “all indications are that demand is responding to low prices; a trend that we believe will continue in 2016 and one that will help the global oversupply situation that began in 2014.” Teague said Enterprise Products is driven to find “the opportunities that are invariably created during chaos” — which is good all around advice for energy investors in this market.