Enterprise Products Partners (EPD) offers investors a big-time cash distribution. The master limited partnership (MLP) currently yields an eye-popping 7.7%. While high yields are often higher risk, that’s not the case with Enterprise Products Partners’ payout.
This was abundantly clear in the MLP’s first-quarter financial results. Here’s a closer look at the numbers backing the energy company’s rock-solid payout.
Drilling down into the numbers
Enterprise Products Partners delivered another solid quarter. It generated $1.9 billion in distributable cash flow, a 5.5% increase from the prior-year period. The pipeline company benefited from the overall stability of its cash flow, as 74% comes from fee-based contracts and government-regulated rate structures.
According to comments by co-CEO Jim Teague in the first-quarter earnings press release, Enterprise also “benefited from record pipeline transportation and fee-based natural gas processing volumes and near record marine terminal volumes. In March, our marine terminals handled a record 2.3 million barrels per day of [natural gas liquids], crude oil, refined products and petrochemical exports.”
The MLP generated enough cash in the period to cover its hefty distribution by a comfy 1.8 times, allowing it to retain $863 million in cash. That retained cash completely funded the company’s capital program. Enterprise invested $654 million in the first quarter, including $570 million on growth projects.
The company used the remaining money to repurchase $17 million of its common units and to strengthen its already top-notch balance sheet. Enterprise ended the quarter with a leverage ratio in the middle of its 2.75-to-3.25 target range. That low leverage ratio backs the company’s strong investment-grade bond rating of A-/Baa1, the highest in the midstream sector. Because of that, it has lots of financial flexibility.
Enterprise Products Partners’ steady cash generation, conservative payout ratio, and strong investment-grade balance sheet puts its distribution on an extremely firm foundation.
The fuel to continue growing
Enterprise benefited from strong market conditions during the first quarter, which helped grow its cash flow. The MLP should capitalize on a different tailwind in the coming quarters.
Teague pointed out in the earnings press release that “the partnership is on schedule to put approximately $3.8 billion of assets in service in 2023.” It will finish its second large-scale petrochemical plant in the second quarter and the expansion of its Acadian Gas Pipeline system.
Meanwhile, the second half will see several more expansion projects enter service across its footprint. Teague stated that “these projects will provide new sources of fee-based cash flow for the partnership and support future distribution growth.”
The company has increased its distribution by 5.4% over the past year. That has continued the steady upward trend in the payout over the years. This year marks the 25th straight year of growing its distribution.
The MLP has plenty of fuel to continue growing the payout. It has $6.1 billion of major projects currently under construction, including the $3.8 billion it expects to finish this year. These projects will grow its cash flow over the next few years.
Meanwhile, it’s pursuing several other expansion projects it could begin building over the next few years. Among the notable projects under development are a large offshore oil-export terminal and a potential carbon capture and sequestration solution.
Given its retained cash flow and top-notch balance sheet, Enterprise has ample financial flexibility to fund new expansion projects. It can also make accretive acquisitions as it finds compelling deals.
An elite passive-income investment
Enterprise Products Partners pays a big-time distribution. It’s on as firm a foundation as investors will find, especially in the volatile energy sector. Meanwhile, that payout should continue heading higher as the company expands its midstream portfolio. Enterprise’s big-time, growing payout makes it a fantastic option for investors seeking to generate some passive income.
— Matthew DiLallo
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Source: The Motley Fool