Enterprise Products Partners: Your Pipeline to Profits

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

We are on the cusp of a domestic energy revolution that could see our country become energy independent.  While production growth is one key aspect necessary to get us independent, we still need massive amounts of infrastructure to move energy from the production basins to the market centers.  Enterprise Products Partners (NYSE: EPD) is one of the midstream companies leading the way to build out this critical infrastructure.

The Opportunity
Enterprise has $7.7 billion worth of growth projects under construction.  As these projects come online it will not only help increase the flow of energy but it will also increase the cash available to be distributed to investors. 

Enterprise is one of the best in its industry at getting projects done and on time.  Since 2009 the company has executed 22 major capital growth projects totaling $5.1 billion.  Each project was completed on time and at an average of 7% under budget.  This, along with the company’s investor-friendly structure gives it a huge cost of capital advantage.

The company continues to create value for investors by retaining capital that it can reinvest in these growth projects.  By retaining capital it has avoided the excessive dilution and leverage that has weighed down the units of many of its peers.  The company’s disciplined approach has yielded exceptional long term returns for investors.

The Risks
The midstream industry needs to spend billions of dollars to keep up with production growth.  Because of these growth opportunities, the industry is attracting a lot of capital, which will compete for the best projects.  Although Enterprise has enormous size and scale to build or buy future growth, as more capital chases returns it could have a negative effect on Enterprise’s future opportunities to grow.

One risk to watch is the trend of a growing number of energy companies that are spinning off midstream infrastructure into MLPs to take advantage of both investors’ thirst for yield as well as these opportunities to grow.  One recent expample has a downstream company like Phillips 66 (NYSE: PSX) announcing the formation of an MLP to take advantage of the funding opportunities created by the grown in oil and gas production.  The company already owns half of the general partner of DCP Midstream Partners, but it sees even greater value creation by creating an MLP of its own.  It's just one of the many dollars that's going to be chasing midstream growth.

The industry continues to crowd and unlike top competitor Kinder Morgan (NYSE: KMI), Enterprise has consolidated its operation instead of the industry trend to offer investors a smorgasbord of opportunities.   Kinder Morgan offers investors four ways to invest in its growth with Kinder Morgan Partners (NYSE: KMP) being just one of its publicly traded partnerships that offer investors access to the company’s growth opportunities.  While Kinder Morgan has created volumes of value for its investors, I think that Enterprise's one stop shop is the best way to invest in midstream.

The Trade
I like the steady growth that Enterprise is poised to deliver.  That’s why I plan to continue to invest in the company via my “No Drip, No Mess” Portfolio.  Since my first trade on Enterprise expired worthless earlier this month, I’m going back to the well with those same $50 puts, but this time I’m writing one that will expire in March.  Currently those puts pay around $190, which is good for a 3.8% yield in just three months.  In three months I’ll either own shares outright or will have the option of writing puts again.

The Bottom Line
The growth opportunities by far outweigh the risks facing Enterprise.  Despite the company’s practice of retaining capital to grow, it has still grown its distribution to unit holders each quarter.  That trend shows no signs of slowing down with all those projects in the pipeline.  Enterprise is a great long term buy and it’s your pipeline to future profits.


latimerburned owns shares of Phillips 66 and Enterprise Products Partners L.P. The Motley Fool owns shares of Kinder Morgan. Motley Fool newsletter services recommend DCP Midstream Partners, LP, Enterprise Products Partners L.P., and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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