Published:
August 7, 2007
Houston-based Enterprise Products
Partners (NYSE: EPD, $29.60) is
the largest
master limited partnership (MLP)
in the country by market
capitalization. It operates an
extensive natural gas and
natural-gas liquids (NGL) network.
The Gulf Coast is the most prolific
natural gas producing region in the
country, and that's where the
majority of the Enterprise's
gathering and processing facilities
are located.
According to the Energy Information
Administration, the U.S. will also
need to import increasing amounts of
natural gas and liquefied natural
gas to meet growing demand. Here
again, Enterprise's terminals are
strategically located in the Gulf
Coast region where the majority of
imports will be delivered. Over 90%
of Enterprise's revenue comes from
fee-based businesses that can
capitalize on these projected
production increases.
In September 2006, the company spun
off some of its assets into a new
master limited partnership. Duncan
Energy (NYSE: DEP) debuted on the
New York Stock Exchange on January
31, 2007. Duncan now owns a 66%
interest in a portfolio of assets,
leaving Enterprise with a 34%
interest in those assets.
Dividend:
Enterprise has been paying dividends
at an increasing rate since 1998.
Its latest quarterly dividend of
$0.483 equates to $1.93 per share
annually and gives the stock a yield
of 6.5%. The firm's distributions
have increased an average of +11% a
year over the past five years, in
line with cash flow. The company
maintains around an 80% payout
ratio, which should allow room for
future dividend growth. Enterprise
has a generous dividend reinvestment
plan, which lets you purchase EPD
shares at a 5% discount to current
market prices without service or
brokerage fees.
Growth Drivers:
Formed in 1968, the company has
completed over $11 billion of
acquisitions and expansion projects
since going public in 1998. Most
recently, the firm's 2004 merger
with GulfTerra more than doubled its
size. The company has financed a
major portion of these acquisitions
with equity, giving it a debt to
total capitalization figure of just
42%. About 80% of the debt is set
for a 16-year term at an average
fixed rate of only 6.2%, giving the
firm plenty of financial flexibility
to extend its recent growth streak.
Outlook:
Enterprise has its footprint in just
about every aspect of the petroleum
and natural gas supply chain, from
production platforms and gathering
pipelines to gas processing and
natural gas liquids separation to
distribution. Although most of the
company's revenue is not secured by
government-regulated tariffs, its
diverse operations provide multiple
earnings streams, which help reduce
risk.
The company has grown earnings at an
average annual pace of +12% over the
past five years. Going forward,
EPD's growth will be driven largely
by internal projects that will allow
it to expand its capacity to process
and ship natural gas and NGLs.
Earnings are projected to rise +4%
this year, another +24% in 2008, and
continue accelerating at a healthy
+9% clip over the next five years.
Risks to these projections include
an economic slowdown, which could
reduce demand for EPD's services.
The company's assets are also
vulnerable to hurricanes and other
natural disasters in the area.
Carla Pasternak
Editor
High-Yield
Investing
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