Can Enterprise Products Partners Continue Their Dividend In A Recession? (NYSE:EPD) - Seeking Alpha

Can Enterprise Products Partners Continue Their Dividend In A Recession? (NYSE:EPD) | Seeking Alpha

Can Enterprise Products Partners Continue Their Dividend In A Recession?
Enterprise Products Partners L.P. (EPD) 48 Comments

Summary

- Enterprise Products Partners L.P. is well-positioned to withstand a potential recession due to its diverse network of midstream assets and vertical integration into the downstream market.
- The company has a strong commitment to returning value to shareholders, with a history of increasing dividends and a focus on managing debt levels.
- Enterprise Products Partners is currently valued lower than it has been in the past ten years, making it an attractive opportunity for dividend-focused investors.

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Note: This article uses the term "dividends," whereas EPD pays a distribution. There are differences, however in order to not confuse newer investors I have used the dividend terminology. Please research these differences and be aware of it.

Thesis

Enterprise Products Partners L.P.(NYSE: EPD) being in the midstream space primarily, should be positioned well away from the effects of a recession. As we'll explore their product segments, you'll see how the company has great insulation from another downturn in the economy or in energy pricing.

You'll also see how they've effectively managed their debt levels and are very strongly committed to returning value to their shareholders. They're just about to become a dividend aristocrat and all indications are that they can continue that status even in a potential economic crisis.

Company Overview

Enterprise Products Partners L.P. is a publicly traded partnership that began as a wholesale marketer of natural gas liquids. Today the company is an incredibly diversified midstream services company. The company provides midstream services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products, and petrochemicals.

Enterprise Products Partners links producers from some of the largest North American shale plays with domestic consumers and international markets. The company is vertically integrated into the downstream market as well with their petrochemical & refined products business segment.

Enterprise Products Partners has an extensive network of assets and infrastructure in some of the most prolific energy hubs in North America. The company features 29 natural gas processing plants, 25 fractionators, 20 deepwater docks, 260 MMBbls of liquid storage, and 50,000 miles of pipeline. Needless to say, the company is enormous and into just about everything in the midstream market.

Operations

The company features 4 primary business segments – Crude Oil, Natural Gas, Natural Gas Liquids, and Petrochemicals & Refined Products.

Crude Oil Pipelines & Services Segment
Crude Oil Segment (Author Generated (Matplotlib))

The company’s crude oil division consists of crude oil pipelines, crude oil storage & marine terminals, and crude oil marketing activities. The company’s crude pipeline systems gather and transport crude oil primarily to refineries, centralized storage terminals, and connecting pipelines in Oklahoma, New Mexico, and Texas.

Enterprise Products Partners owns and operates crude oil terminals located in high-profile crude hubs in the Texas cities of Houston, Midland, and Beaumont - and also in Cushing, Oklahoma, probably the most prolific pipeline gathering hub in the country that is also one of the most actively traded hubs.

Natural Gas Pipelines and Services Segment
Natural Gas Segment (Author Generated (Matplotlib))

The second business segment for Enterprise is the company’s natural gas segment. This includes the company’s natural gas pipeline systems that provide for the gathering, treating, and transportation of natural gas from production developments to regional natural gas plants for further processing.

The company’s pipelines then transport natural gas from these regional processing facilities to downstream electric generation plants, local gas distribution companies, industrial and municipal customers, storage facilities, or other connecting pipelines. This segment also includes related natural gas marketing activities which generate revenues from the sale and delivery of natural gas purchased from producers and processing facilities.

Natural Gas Liquids Segment
Natural Gas Liquids Segment (Author Generated (Matplotlib))

The next business segment for the company is the natural gas liquids (NGL’s) segment and this includes the company’s natural gas processing, NGL pipelines, NGL fractionation facilities, NGL product storage facilities, and NGL marine terminals.

Some of the purity NGL products include ethane, propane, normal butane, isobutane, and natural gasoline. These products are used by industrial and residential consumers as fuel, as feedstocks for other petrochemical companies, and by refineries in the production of motor gasoline.

Petrochemical and Refined Products Segment
Petrochemical and Refined Products Segment (Author Generated (Matplotlib))

Finally, the last business segment for the company is the petrochemical & refined products segment. This includes propylene production facilities, refined products pipelines, terminals and marketing activities, an ethylene export terminal, and a marine transportation business. The company is into numerous refined products and also features heavy investment in an enormous ethylene division.

Revenue
YCharts

What's important here, when forecasting recession resilience, is to look how the company has performed through poor times. We can easily see they handled the 2015 oil price crash in stride as they returned to their previous growth curve in 2022.

That's what's important for dividend investors who are in this for the long-haul: if the company suffers an unforeseen circumstance, can they recover? EPD absolutely can and it's proven that.

Debt

YCharts

Their debt has increased over time, but their leverage multiple has actually gone down. See the following slide from the investor presentation:
EPD Leverage Multiple (EPD Investor Presentation (FY 2022))

They're clearly attempting to control their overall debt levels to increase their financial flexibility. And they're currently able to easily service their debt at a 4.45x interest coverage ratio. They've also done well in ensuring their notes are fixed rates - preventing the interest rate crisis from having an overblown effect on their balance sheet. This gives them plenty of runway to use additional debt if necessary to fund additional expansion.

Returning Value to Shareholders

YCharts

EPD is just about to become a dividend aristocrat - that is that their dividends have increased every year for at least 25 years. It's a very exclusive list, and features some of the best companies in the market. In this case EPD will nearly top the list with its dividend yield. The company has made a very large point of returning value to its shareholders via distribution, and is unlikely to want to break this 25-year streak.

What we want to know for a recession is if they can keep paying that dividend. We have no further to look than history since they have almost 25 years of it. Through every recession and oil pricing crisis they have continued to pay it, including the price crash in 2015. Their payout ratio jumped a bit, but they made the payments. Check this slide from their Q1 2023 Presentation:
Cash Flow/Share (EPD Investor Presentation Q1 2023)

This is what I mean when I say "recession resilience." EPD is positioned so well into midstream that even energy price collapses barely affected their cashflow and they easily continued the payments.

Let's look at where that cash flow is going:
Returning Value to Shareholders (Investor Presentation Q1 2023)

Their percentage of Free Cash Flow returned is impressive at 75%. Really the only thing I can gripe on is their low amount of share buybacks, and their tendency to expand the share float over time, but perhaps that will change. Overall that isn't the biggest issue though, and is the one small mar in the surface of an otherwise great company.

Valuation

YCharts

Compared to a few of its peers it comes in fairly average in valuation. Compared to itself however, its valuation has dropped over the last 5 years. This is excellent news for investors who want to get into this company. Let's look at a blown-up chart of their EV/Revenues:

YCharts

I love this chart. It's currently valued lower than it's been in the last ten years, and its stock price is where it was in 2015 during the Great Oil Collapse, yet its revenue is at all-time highs and estimates are suggesting it will continue to grow. This is absolutely perfect positioning not just for a dividend investor, but a value investor.

Latest Earnings Call

The company reported strong increases in gross operating margin in various business segments, including NGL and natural gas pipeline, marketing, and octane enhancement. Enterprise Products Partners reported record pipeline and fee-based natural gas processing volumes, record NGL marine terminal volumes, and near-record total marine terminal volumes.

I fully expect these volumes to remain extremely high in the coming months as product transport to storage will become important for producers if commodity prices fall. Expect a flurry of storage transport and activity to continue increasing as producers face more and more uncertainty.

Enterprise is upgrading its export capacity and adding geographic diversity to its ethane assets as the US ethylene industry is the only region that has been consistently profitable while the rest of the world has been very selective in their operations. The company plans to commercialize an enormous oil project that includes a 24/7 manned platform, vapor combustion, and two pipelines by 2027.

The company indicated concerns about the global economy and central banks signaling rate increases, but the company remains constructive on global market fundamentals, citing low global inventories and OPEC+ managing global balances.

The company is less positive on the outlook of the natural gas market, citing a wide gas to crude spread (giving US petrochemicals a permanent structural feedstock advantage).

Conclusion

Enterprise Products Partners has an incredibly impressive and diverse network of midstream assets and the company is also vertically integrated into the downstream market with its petrochemical and refined products division.

With a large network of midstream infrastructure and assets, the company provides critical services to the oil & gas industry and should be in no danger of losing market share to competitors, especially in the ethylene market. Investors should be bullish on the future of the company and current investors should rest easy knowing they are well-protected from any potential upcoming industry volatility.

In the event of a recession, the company should be shielded incredibly well from any negative effects resulting from commodity price drops as the company has an extensive network of storage assets that would become extremely valuable and sought after in such an event.

Being primarily in the midstream market, the company is well protected from direct negative effects from commodity price drops as companies will still be processing, gathering, transporting, and storing crude oil, natural gas, and natural gas liquids.

When taking everything into account, I believe that not only is this company well positioned away from the effects of a recession, but they're also valued extremely well and will continue to grow in coming years. I have to rate this one a strong buy for any dividend focused investor.

About this article: When I research stocks I start with a "bird's eye view" of the target company. Many of the things I went through in this article are what I'll look at first.

When this bird's eye view is complete, I'll decide if I want to avoid the company for the time being or if it's a potential candidate for investment. This article that you are reading is the result of my bird's eye view examination.

It is designed to be an overall high-level view of the company that you can read to determine if this company is something that you might consider as a candidate for investment. It is not possible to report everything about a company in the space of a single article, nor is it possible for me as an author to learn every detail about a company in the amount of time allotted to write an article.

You should not take my final conclusion on the company as your sole recommendation for investment, and you should conduct further in-depth research on your own to come to your final conclusions.

As a result of this, my "buy" recommendations come with an asterisk. And that asterisk is that this is only a high-level examination, and in-depth research that can take many hours, or days, of your time is still required. This is why my articles are short and to the point, with no fluff or filler. Just the facts that you need to know to move forward.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in EPD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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