Enterprise Low on Fuel

This nearly finished year has been one long Groundhog Day for Enterprise Products Partners (NYSE: EPD), which finds itself trading a little over 1% above its close last Dec. 31. Until the largest master limited partnership can get untracked, there’s probably no point expecting much from the entire midstream sector.

Size is part of the problem here: EPD is simply too large to escape the pain of low energy prices. These have not only hurt the margins it realizes from purifying natural gas liquids but also depressed drilling activity and therefore the volumes moving through Enterprise’s pipes, docks and processing plants.

The third-quarter results confirmed as much, all the throughput stats down modestly year-over-year and distributable cash flow marginally lower despite the billions spent on expansion projects completed this year. Distributable coverage dipped to 1.15x, while debt/EBITDA is up to nearly 4.5.

Both of these metrics are expected to improve modestly in the coming quarters even without a continued recovery in energy prices. But EPD needs more than a cosmetic touch-up with its distribution growing at barely more than 4% a year, and still yielding an unremarkable 6.3%.

There are plenty of hopeful green shoots sprouting  even in this mire, naturally. Natural gas liquids prices, while still a modest fraction of those prevailing three years ago, have at least rebounded sharply off the springtime lows. Oil prices have firmed as well, and OPEC’s recent agreement to curb exports has accelerated shale drilling plans in EPD’s Texas heartland and elsewhere.

If our forecast for even higher crude prices next year proves correct, that might open up new markets for the liquid fuels EPD distills from natural gas. Companies are also building new U.S. petrochemical plants that will use more of those liquids as a feedstock in the coming years.

EPD’s unrivaled processing and shipping infrastructure taps into the Permian, the hottest and busiest shale basin, and other energy plays near the Texas and Louisiana coasts profitable for producers even at today’s low prices.

Despite pulling the plug on its spurned recent merger approach to Williams (NYSE: WMB), management retains strong interest in long-haul gas pipes running from the Marcellus and Utica shales in the Northeast toward the Gulf Coast, where demand is expected to grow most. But “price matters and we’re not going to chase them,” as the CEO put it on the most recent conference call.

Price matters in terms of investing in EPD as well, of course, and the current one looks attractive given the partnership’s record of resilience, in combination with plenty of upside exposure to higher energy prices and the coming rebound in domestic output. Conservative pick EPD remains the #11 Best Buy below $33.

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