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  • Roger S. Conrad

MLP Portfolio: Staying the Course

By Roger S. Conrad on Aug. 23, 2016

Enterprise Products Partners LP hiked its quarterly distribution by the familiar $0.005 per unit and generated enough cash flow to cover 120 percent of this higher payout while retaining $428 million to invest in growth projects.

The blue-chip master limited partnership’s (MLP) operating and distributable cash flow came in flat relative to year-ago levels, as strength in NGL pipelines & services (57 percent of second-quarter gross operating margin) offset weakness in crude oil and natural gas pipelines.

Although Enterprise Products Partners’ gas-processing business suffered a 17 percent decline in gross operating margin from year-ago levels, this headwind was more than offset by higher system throughput and a 31 percent increase in the gross operating margin at its NGL pipeline and storage business.

Much of this upside came from higher fractionation volumes and the start-up of ethane pipelines, while cancellation fees and an uptick in propylene exports helped to offset the loss of three propane shipments in July and another five in August. A slowdown in exports of liquefied petroleum gas would self-correct over time, as the inventory build eventually would compress prices to levels that would incentivize international shipments.

The crude oil pipelines & services segment’s gross operating margins tumbled to $177 million from $216 million in the second quarter of 2015. This weakness stemmed primarily three factors: reduced volumes at its marine terminals; lower throughput on the MLP’s South Texas system in the Eagle Ford Shale; and narrowing regional price differentials that weighed on results in its marketing business.

Similar challenges afflicted Enterprise Products Partners’ natural gas pipelines & services segment, which saw its gross operating margin slip to $177 million from $191 million during the year-ago period.

Enterprise Products Partners expects to complete another $1.4 billion worth of growth projects in the back half of the year, including a gas-processing plant in the Permian Basin and an ethane export facility on the Gulf Coast. Incremental cash flow from these assets, coupled with another $5.2 billion worth of infrastructure slated to come onstream over the subsequent two years, should help to offset volumetric weakness on some of the partnership’s legacy assets.

Enterprise Products Partners expects growing domestic ethane demand associated with the start-up of various world-scale petrochemical facilities on the Gulf Coast over the next few years to drive a 5 percent to 10 percent increase in the operating cash flow generated by its legacy assets and create additional growth opportunities.

The partnership’s ATEX ethane pipeline, for example, could require an expansion, while management also highlighted the potential to sign long-term ethylene export contracts.

Every MLP has its warts, especially those that have existed since the early years of the shale oil and gas revolution. But whereas too many MLPs focus on adding cash flow with little regard to an overarching strategy, Enterprise Products Partners’ prescient management team has amassed an unparalleled asset base in terms of its interconnections, geographic diversity and exposure to a wide range of hydrocarbons.

This integrated asset base gives Enterprise Products Partners a leg up on the competition in taking market share and signing up new volumes.

The stock has pulled back of late amid concerns about reports that the MLP had submitted a bid to acquire Williams Companies (NYSE: WMB), likely after Energy Transfer Equity LP’s (NYSE: ETE) takeover offer fell through.

Williams Companies rebuffed the overture, though reports from Reuters and the Financial Times differ on whether Enterprise Products Partners remains interested in pursuing its quarry.

The addition of an industry-leading gathering franchise in the Marcellus Shale and an impressive backlog of takeaway projects serving this play would address a hole in Enterprise Products Partners’ portfolio. And one salivates over what a high-quality management team could do with Williams Partners’ asset base.

At the same time, such a move would require Enterprise Products Partners to stretch its balance sheet and could raise concerns about whether the MLP has bit off more than it can chew.

 

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