Is This MLP is a Good Buy for Income Seekers?

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

Shares of master limited partnership (MLP) stocks can be some of the strongest dividend-paying securities available to investors. These securities typically feature a high level of income while offering investors some attractive tax advantages. Being incorporated as limited partnerships, they do not face double taxation; MLPs are subject to no taxes at the corporate level.

Enterprise Product Partners (NYSE: EPD)is one of the best MLPs operating in Oil & Gas Midstream industry. Enterprise offers a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil and certain petrochemicals. In this article, I look at this MLP’s distributions and how safe they are for income seekers.

Enterprise Products Partners distributions

Enterprise Products Partners offers a quarterly distribution of $0.68/unit. The partnership is offering quarterly increases in its distributions as well. In the last five years, it has increased its quarterly distributions by 30.54%. The table below shows its five-year dividend history and strong yield.

<table> <thead> <tr><th> <p><strong>Years</strong></p> </th><th> <p><strong>Dividend </strong></p> </th><th> <p><strong>Yield %</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>2008</strong></p> </td> <td> <p>$2.045</p> </td> <td> <p>9.86</p> </td> </tr> <tr> <td> <p><strong>2009</strong></p> </td> <td> <p>$2.165</p> </td> <td> <p>6.89</p> </td> </tr> <tr> <td> <p><strong>2010</strong></p> </td> <td> <p>$2.285</p> </td> <td> <p>5.49</p> </td> </tr> <tr> <td> <p><strong>2011</strong></p> </td> <td> <p>$2.405</p> </td> <td> <p>5.19</p> </td> </tr> <tr> <td> <p><strong>2012</strong></p> </td> <td> <p>$2.532</p> </td> <td> <p>5.06</p> </td> </tr> </tbody> </table>


How distributions are safe

Enterprise has strong potential to generate increasing distributable cash flows. At the end of recent quarter, its distributable cash flow provided 1.4 times coverage to its cash distribution, representing a 19% increase over the same quarter a year ago. Additionally, the MLP has retained $318 million of its distributable cash flow to reinvest in growth capital projects and reduce its debt.

Enterprise is aggressively looking to enhance its earnings and cash flows. To do this, it is continuously investing in growth opportunities. In the past quarter, it has completed and begun operations on assets of almost $700 million of capital investment; this includes its NGL pipelines serving the Eagle Ford shale and an expansion of its propylene fractionation complex in Mont Belvieu. These assets will increase its cash generating potential in the current quarter.

In the future, the partnership is looking to complete growth capital projects of $1.5 billion in the second half of the year. To support its growth capital program, it is planning to further strengthen the credit quality of its balance sheet and increase its liquidity. It has retained $318 million of distributable cash flow from the second quarter for this purpose.

Enterprise is issuing equity to raise funds for capital investment. It also refinanced its bank credit facilities in June of this year, extending the maturity of its $3.5 billion multi-year revolving credit facility to June 2018. These steps will provide additional financial flexibility to fund its capital investments going forward.

Industry peers

Enterprise's main industry peers are Kinder Morgan Partners (NYSE: KMP) and Enbridge Inc (NYSE: ENB).

Kinder Morgan is a pipeline transportation and energy storage MLP in North America. The partnership owns and manages a portfolio of energy transportation and storage assets. The partnership's operations span the entire midstream energy space, with a network of pipeline and storage assets that crosses the continent. The partnership transports and stores natural gas, natural gas liquids, crude oil, refined products, and ethanol.

At present, Kinder Morgan offers a quarterly distribution of $1.32 per share, yielding 6.33%. It also offers quarterly raises in its distributions. Its shares look fairly priced, trading at 21.1 times earnings, which is well below the industry average of 31.1. Its returns look completely safe, as it earns well in excess of its capital costs.

In the latest quarterly report, Kinder Morgan generated $1.337 billion in segment earnings before depletion, depreciation and amortization (DD&A) which represents a 29% increase over the same quarter a year ago. With its presence in many segments and dominance in some, Kinder Morgan is stable MLP to buy.

Enbridge is engaged in the transportation and distribution of crude oil and natural gas. In the first half of 2013, Enbridge has shown significant growth of 23% in earnings over the previous year. With this strong growth in earnings, it is on track to meet its adjusted earnings guidance range of $1.74 to $1.90 per share.

To do this, Enbridge is investing heavily in growth opportunities. In the second quarter, it added a record slate of commercially secured growth projects and made good progress on significant additional opportunities. Additionally, it has secured a $0.3 billion project to provide terminal services for the Surmont Phase 2 project and 50% interest in the development of the 300-megawatt Blackspring Ridge Wind Project. It also added a 50% interest in the 80-megawatt Saint Robert Bellarmin Wind Project. With a quarterly dividend of $0.315 cents per share, Enbridge looks like a safe bet to me.

In conclusion

Enterprise Product Partners is one of the best MLPs among its peers. It offers relatively safe distributions with capital appreciation. Enterprise has a strong asset base, liquidity position, and ability to complete mega projects that can generate strong cash flow growth. Its recent merger with Teppco Partners and its general partner set Enterprise apart from its large-cap peers. Its capital investment in growth opportunities allows it to generate massive cash for consistently increasing distributions.

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siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. 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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