Enterprise Products Partners: A Safe And Growing 7.5% Yield

Why Enterprise Products Partners Is The Cream Of The MLP Crop

Summary

• Enterprise Products Partners is a Master Limited Partnership (MLP) with a market cap of $58B.

• Investors can collect a 7.5% distribution yield that has 25 years of consecutive growth.

• The valuation looks cheap at 7.3x cash flow, which is below the average valuation for EPD.

• The balance sheet is in great shape with arguably the best debt profile in the sector, and insiders own 32% of the outstanding units.

• I’m expecting double digit returns driven by the large distribution with a side of price appreciation.

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Enterprise Products Partners EPD 0.00%↑ is a Master Limited Partnership that is one of the largest networks of pipelines in the US, with over 50,000 miles spread primarily across the southeastern United States. While many energy businesses are exposed to commodity price fluctuations, most of EPD’s revenues are fee-based, so their results wouldn’t be as negatively impacted by a drop in oil or gas prices as Chevron CVX 0.00%↑ or Exxon Mobil XOM 0.00%↑, for example.

EPD Investor Presentation

Their current market cap of $58B might seem like a lot, but the continue to invest billions in new projects and they have a long history of double digit returns on investment and passing attractive returns along to unitholders. They also have an irreplaceable asset base that should be an important part of America’s energy infrastructure for decades to come.

Inside Ownership & Balance Sheet

One of the reasons I like EPD and sleep well at night is their massive insider ownership. 32% of the outstanding units are owned by management, creating obvious alignment with unitholders. Another reason to like EPD is their well managed balance sheet. MLPs typically carry large amounts of debt, and management used the low interest rates from the last couple years to extend their maturities at low interest rates.

EPD Investor Presentation

Assuming the final maturity date for our hybrids, the weighted average life of our debt portfolio was 20 years. Our weighted average cost of debt is 4.6%. And at June 30, approximately 97% of our debt was fixed rate.

Randy Fowler, Co-CEO and CFO, Q2 Earnings Call

They have a target leverage ratio of 3.0x (where they currently sit), which is conservative compared to some of their competitors. While MLPs are typically viewed as income investments, EPD’s valuation is cheap enough where I can see unit price upside to go with the large distribution.