Enterprise Products Partners L.P. (EPD): How Safe Is This High-Yield MLP’s Distribution?

Since pipelines have high fixed costs, their profitability is sensitive to the amount of fees they charge and how much product volume they are able to move. If energy production were to fall, the need for pipelines could theoretically decline and E&P customers might not be able to pay the fees outlined in their contracts with Enterprise Products Partners and other midstream MLPs. The long-term growth rate of MLPs has come into question for some of these reasons, resulting in the sharp sell-off that has taken place since late 2014.

Take a look at U.S. natural gas production, which increased nearly 50% in less than a decade. More recently, natural gas production has started declining. Year-to-date, U.S. natural gas production is down about 1%, including 2-3% year-over-year declines in June, July, and August.

Source: U.S. Energy Information Administration (1)

The picture for U.S. crude oil is similar. Production nearly doubled over the last five years but has slumped 5%+ year-over-year in recent weeks. Average daily U.S. crude oil production is expected to fall by 6.4% in 2016 and 1.1% in 2017, according to the U.S. Energy Information Administration.

Source: U.S. Energy Information Administration (2)

Ironically enough, the problem for the U.S. energy industry is that the oil crash has forced it to become so much more efficient, optimizing fracking techniques though things like multiple wells per drill pad, longer horizontal laterals, multiple fracking stages, and greater use of frack sand.

This has greatly lowered the breakeven price for various shale formations over the last two years.