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Go Big or Go Home

By Roger S. Conrad on Mar. 23, 2015

The largest publicly traded partnership by market capitalization, Enterprise Products Partners boasts an unparalleled asset base in terms of its geographic diversity and interconnections. The MLP is also helmed by a prescient management team that always seems to be ahead of the crowd.

Over the past few years, the MLP has invested heavily in developing innovative, demand-based solutions that support domestic production growth and take advantage of favorable differentials between North American and international energy prices.

These projects include expansions to the firm’s industry-leading propane and butane, the start-up of a major ethane export facility on the Gulf Coast, international shipments of minimally processed condensate, a propane dehydrogenation unit and a header pipeline to deliver ethane to a number of planned petrochemical facilities on the Gulf Coast.

Not only do these demand-oriented projects generate incremental cash flow themselves, but these investments also increase throughput on Enterprise Products Partners’ midstream assets.

Enterprise Products Partners boasts one of the lowest costs of capital in the MLP space, thanks to its lack of a general partner, BBB+ credit rating, solid balance sheet and robust distribution coverage. In fact, the partnership last year became the first MLP to issue 40-year notes.

The MLP last fall leveraged this advantage in its acquisition of former Conservative Portfolio holding Oiltanking Partners LP.

Although some investors might bemoan the fact that Enterprise Products Partners doesn’t expect the deal to be accretive to cash flow until 2016, the strategic importance of Oiltanking Partners’ assets should not be overlooked.

After dedicating its Morgan Point facility to ship ethane internationally, Enterprise Products Partners needed room to expand its capacity to export petroleum products—gasoline, diesel and minimally processed condensate, an ultra-light hydrocarbon that predominates in the Eagle Ford Shale.

Oiltanking Partners’ terminal assets and dock space would give Enterprise Products Partners ample opportunity to ramp up this business and take advantage of the spread between condensate prices on the Gulf Coast and in international markets. The start-up of the Rancho II pipeline in August 2015 should expand the volume of condensate that the MLP can aggregate for seaborne export.

The acquisition also provides exposure to growing US exports of refined and petrochemical products and puts the firm in pole position to take advantage of any relaxation of the prohibition on crude-oil exports.

During Enterprise Products Partners’ fourth-quarter earnings call, CEO Michael Creel acknowledged the headwinds facing the energy patch and midstream operators:

There is no doubt that 2015 will present significant challenges across the entire upstream and therefore related midstream value chain. Margins will be thinner, and landing new projects will be competitive.

The MLP also reduced its planned capital expenditures for this year to about $3.5 billion from previous guidance of $4 billion to reflect customers demand and pushed back plans to build a ninth fractionator (a facility that separates NGLs into discrete components) at its complex in Mont Belvieu, Texas.

Although Enterprise Products Partners could also face some volumetric and pricing risk from the severe downdraft in NGLs and crude oil, the MLP should have enough near-term growth projects coming onstream over the next two years to help to offset this weakness. Highlights include a doubling of its propane and butane export capacity this year and the start-up of its ethane export terminal in 2016.

We also like Enterprise Products Partners’ growing storage and export capacity on the Gulf Coast, which should enable the MLP to expand beyond NGLs and refined products into future opportunities in ethylene and Canadian crude oil.

Enterprise Products Partners’ extensive portfolio of integrated assets uniquely positions the firm to segregate various products throughout their transmission and storage to ensure compliance with current export rules.

The MLP also boasts robust gathering and processing operations in the Permian Basin and Eagle Ford Shale, two unconventional plays that benefit from their close proximity to refining and fractionation capacity on the Gulf Coast.

In the fourth quarter, the MLP covered its distribution by 1.4 times, an impressive show of strength in a difficult environment. This margin of safety and pipeline of growth projects should ensure that Enterprise Products Partners continues to grow its distribution at the familiar annual rate of about 5.8 percent.

We also trust management to take advantage of the MLP’s low cost of capital to make the right acquisitions to build a platform for future growth.

A prominent weighting in the Alerian MLP Index and many MLP investment strategies that could lead to downside pressure as capital shifts away from the energy sector.

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