Over the last few years, record low interest rates have made Master Limited Partnerships, or MLPs, one of the hottest high-yield equity classes on Wall Street.
While it’s true that this sector has its own risk factors that investors need to be aware of, certain midstream MLPs (those that operate gathering, processing, storage, and transportation infrastructure such as pipelines) can make compelling long-term, high-yield dividend growth investments.
Let’s take a look at one of the largest midstream MLPs, Enterprise Products Partners L.P. (NYSE:EPD), to see if this high-yield energy stock is one of the few “sleep well at night” or SWAN names in its industry and a potential fit for our Conservative Retirees dividend portfolio.
More importantly, find out if Enterprise’s combination of world class conservative management, strong balance sheet, and solid long-term growth prospects make this a solid core holding for most diversified income portfolios, especially at today’s price.
Enterprise Products Partners is North America’s third largest midstream operator, with nearly 50,000 miles of natural gas, oil, natural gas liquid (NGL), and refined product pipelines. Enterprise also owns a number of storage facilities, processing assets, and terminals.
The company’s network of assets helps move different types of energy and fuel from one location to another for upstream exploration and production (E&P) companies. Enterprise primarily makes most of its money from fees it charges E&P customers for its services.
As you can see from the map below, it is tied into America’s largest and most prolific shale oil & gas formations, including the Eagle Ford (east Texas), Permian basin (west Texas), Niobrara (Colorado), and the Marcellus and Utica shale gas fields (Pennsylvania and Ohio, respectively).
Source: Enterprise Products Partners Investor Presentation
Natural gas liquids transportation and processing provides the majority of the MLP’s gross margins, which Enterprise is doubling down on because the shale gas boom has resulted in such an abundance of NGLs (which are used to make plastics) that there is a massive and fast growing export market for refined NGL products such as Ethylene and Propylene in Asia and Europe.