In addition, unlike other pipeline operators such as Kinder Morgan Inc(NYSE:KMI), which went debt crazy during the boom years of 2010 through 2014 (when oil was about $100 per barrel), Enterprise’s management has always been far more conservative in its growth approach.
It has chosen to retain far more distributable cash flow (over $6.2 billion since 2004), or DCF (the equivalent of free cash flow for MLPs, and what funds the distribution), which has allowed it to fund much more growth internally rather than depending on external debt and equity markets.
That in turn has meant less investor dilution and an easier time in growing its payout consistently, including its 58th consecutive quarterly increase of 5.2% year-over-year despite the worst oil crash in over 50 years. In other words, Enterprise Products Partners L.P. (NYSE:EPD) is effectively the dividend aristocrat of the MLP industry.
Part of the reason for this is also management’s extremely unit holder friendly, long-term focus. For example, in 2010 when its unit price was still depressed from the effects of the credit crisis, the MLP bought out its general partner’s incentive distribution rights, or IDRs, for $8 billion.
This brilliant move meant that rather than send 50% of marginal DCF to its management team (which would raise its cost of capital, and make future distribution growth more difficult), management instead ended up owning 33% of the MLP, and limited partners (retail investors) ended up with 100% of DCF and faster, more secure, and more consistent distribution growth.
Or to put it another way, management’s interests are now completely aligned with income focused investors, meaning that management only makes money as long as the payout continues growing steadily, and securely over time.
While Enterprise Products Partners may represent one of the seemingly lower risk midstream MLPs, there are still two main risks that investors need to be aware of.
First, the long-term growth story for Enterprise is tied to that of the U.S. shale industry. This means that, although the short-term price of Enterprise’s units, which generally trade along with oil prices, doesn’t affect its cash flow, the MLP’s ability to continue finding profitable projects to invest in and thus grow its DCF does require an eventual recovery in oil & gas prices.