We are maintaining our long-term Neutral recommendation for Enterprise Products Partners L.P. (EPD). Given the partnership’s string of organic growth projects, significant geographic and business diversity, strong balance sheet and solid liquidity position, we believe it is one of the largest fully-integrated midstream service providers with a positive long-term outlook.
Management expects to invest approximately $2.5 billion on growth projects in 2011. A major portion of the capex will be used to complete Enterprise Product’s largest projects in the Haynesville and Eagle Ford Shales.
Moreover, it will mainly focus on projects that can generate stable cash flow, contribute to its integrated value chain and are located onshore. It has also highlighted the importance of transporting ethane out of the Marcellus Shale, considering that it is the most cost-effective pipeline project.
Although Enterprise indicated that it does not have any major organic growth projects beyond 2011, it has a backlog of $6–7 billion of potential projects.
The partnership remains engaged in expanding its midstream platform in the Eagle Ford with the construction of crude oil, natural gas liquids (NGL) & natural gas pipelines, processing plants, fractionators as well as storage facilities.
It was through a 10-year service contract with Pioneer Natural Resources (PXD), Reliance Eagleford Upstream Holdings LP and Newpek, LLC, jointly referred to as “Pioneer JV.”
Additionally, Enterprise continues to secure long-term agreements with different producers for NGL transportation and fractionation capacity at attractive rates that are expected to drive an improved visibility for the partnership’s NGL assets. Consequently, this will also help to drive a strong distribution growth.
In the third quarter, Enterprise Products Partners increased its quarterly distribution by 5.4% year over year to an annualized run rate of $2.33 per unit. This was the 25th consecutive quarterly distribution increase. Distribution coverage was solid at 1.4x, providing $133 million of retained cash flow, which reduces the need for financing.
At September 30, 2010, Enterprise had liquidity of approximately $1.8 billion, which reflects availability under Enterprise’s credit facilities and unrestricted cash.
We believe Enterprise has been balancing well between distribution of cash flow and retained earnings. While the partnership increased its cash flow distribution in the reported quarter, it has also deployed money in various fee-based development projects that will generate operating cash flow to support Enterprise’s future distribution growth.
Though we believe that the partnership possesses solid cash flow stability from quality pipeline and storage assets as well as geographic diversity, the positives are already reflected in its current valuation, leaving little room for further upside. Again, volume risk and areas of commodity price exposure can negatively impact near-term results.
ENTERPRISE PROD (EPD): Free Stock Analysis Report
PIONEER NAT RES (PXD): Free Stock Analysis Report
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