Imagine an investment that not only offers growth but also yields a stable, 7%+ dividend. Enterprise Products Partners LP (NYSE: EPD) is the only stock with an "A" rating from Standard & Poor's that offers such a lucrative yield. Let's dive in.
EPD provides essential pipeline services for transporting and storing crude oil, natural gas, and natural gas liquids (NGLs). As one of the largest midstream energy companies, the company manages a vast network of over 50,000 miles of pipelines. This broad scope hedges sector-specific risks and keeps EPD's revenue streams stable.
The 'toll taker' approach is central to EPD's business model. By charging fees for the transportation and storage of energy products, EPD's revenue is largely insulated from the volatility of energy prices.
Approximately 85% of the company's revenues are fee-based, which reduces exposure to commodity price fluctuations and ensures a predictable cash flow. This business model makes EPD an attractive option for investors seeking reliable returns.
Natural Gas Boom
The U.S. is seeing a significant increase in natural gas demand, rising from 95 billion cubic feet per day (bcfd) to an anticipated 125 bcfd by 2035.
At the same time, America is emerging as a liquefied natural gas (LNG) hub, crucial in supplying gas to Europe amid the Russia-Ukraine war. In 2023, the U.S. became the world's largest LNG exporter, contributing 80% of the additional LNG supply.
This strategic position not only enhances the U.S.'s energy security but also opens new markets for EPD's services. As a major player in the midstream sector, EPD is well-positioned to capitalize on increased LNG exports and the robust demand for natural gas.
Distributions All Around
For Q1 2024, EPD reported net income attributable to common unitholders of $1.5 billion, marking a 5% increase from the same period in 2023.
The results include significant capital investments totaling $1.1 billion in Q1 2024, with $875 million allocated to growth projects and $180 million to sustaining capital expenditures.
As a master limited partnership (MLP), the company is required to pay out most of its profits as distributions to investors (called unitholders). The company has increased distributions for 25 consecutive years. For Q1 2024, EPD declared a distribution of $0.515 per common unit, representing a 5% increase over the previous year.
The annualized distribution now stands at $2.06 per unit, supported by strong operational cash flows and a robust coverage ratio of 1.7x, ensuring the sustainability of these payouts.
EPD's 2019 buyback program has also been effectively utilized, with around $40 million of unit repurchases in Q1 2024 and $1 billion in authorized repurchases left. Since 2017, EPD has paid out over $27 billion (over 43% of the company's market cap) in distributions to investors.
Operational Strength
EPD has approximately $6.9 billion worth of projects under construction. Key initiatives include the Bahia NGL Pipeline, the Neches River NGL Export Facility, and several natural gas processing plants in the Permian Basin (the hotspot of American energy), such as the Leonidas, Mentone 3, and Orion plants.
The Bahia NGL Pipeline, a 550-mile project with a capacity of 600,000 barrels per day (bpd), is scheduled to be operational by the first half of 2025. Similarly, the Neches River NGL Export Facility in Texas will expand EPD's export capabilities with phased completions between 2024 and 2026.
These projects and new processing plants set to increase natural gas processing capacity by 1.5 billion cubic feet per day (Bcf/d) by 2025 are laying the groundwork for future growth.
In addition to project expansions, EPD has seen a 4% year-over-year increase in pipeline volumes, reaching 12.3 million barrels per day in the first quarter of 2024. This growth is driven by higher demand, particularly in high-growth regions like the Permian Basin.
In Conclusion
Despite EPD's strong performance, its structure as a master limited partnership (MLP) can sometimes lead to conflicts of interest between general partners (management) and limited partners (investors).
However, EPD has proactively addressed these concerns by being the first company to eliminate incentive distribution rights (IDRs), a management-friendly provision, aligning the interests of general and limited partners.
The company's consistent cash flows, growing distributions, and strategic investments in expansion projects position it well for continued growth. Don't miss out on this unique opportunity to invest in a company that combines growth with an impressive yield.
