Free cash flow is distorted by a company’s total capital expenditures, which bundle growth expenditures and maintenance expenditures together. For example, Enterprise expects 2016 capital expenditures to be close to $3.1 billion.
However, only $250 million is for sustaining capital expenditures. Enterprise would be throwing off substantial free cash flow if it wasn’t investing for future growth, but instead its reported free cash flow year-to-date is slightly above zero.
Or to put it another way, if you are only looking at GAAP EPS or FCF/share, then the payout for almost all MLPs, including best in class names such as Enterprise Products Partners, will appear alarmingly high.
However, when we look at the distribution coverage ratio, or DCR (distribution/DCF), the picture looks very different.
Specifically, Enterprise Products Partners L.P. (NYSE:EPD) reported $3.1 billion in DCF for the first three quarters of 2016, which means a DCR of 1.22. In the MLP industry, anything over 1.0 is thought to be sustainable, and 1.1 is considered secure.
And with $5.6 billion in projects currently under construction (to be completed through 2018), Enterprise should have no trouble continuing to provide secure and steadily growing income for long-term investors throughout this time horizon.
And then there’s the MLP’s strong balance sheet to consider.
Source: Simply Safe Dividends
At first glance, Enterprise’s high debt load might not appear all that safe. However, you need to remember that the midstream MLP industry is incredibly capital intensive, which means that high absolute debt loads are to be expected. This is why we need to look at these numbers in context.
When you compare Enterprise Product Partners credit metrics to its peers, you can see that the MLP actually has one of the strongest balance sheet’s in its industry. This explains why it has the highest credit rating of any MLP (actually it’s tied with Magellan Midstream Partners, L.P. (NYSE:MMP)).
| MLP | Debt / EBITDA | EBITDA / Interest | Debt / Capital Ratio | Current Ratio | S&P Credit Rating |
| Enterprise Products Partners | 4.47 | 5.22 | 45% | 0.76 | BBB+ |
| Industry Average | 9.14 | NA | 62% | 0.75 | NA |
Source: Morningstar
That helps keep its access to cheap credit plentiful, such as the current $3.5 billion in liquidity that ensures the MLP has enough capital to bring online its various growth projects, grow its DCF, and keep the payout highly secure in the coming years.
Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Enterprise Products Partners has a below average Dividend Growth Score, which seems to somewhat underplay the MLP’s strengths and continued ability and commitment to growing the payout.
For example, Enterprise Products is on the forefront of many of the greatest growth opportunities in the oil & gas industry, including exports of US crude oil, refined NGL products and liquefied natural gas, or LNG.
These are all huge potential growth runways for the entire oil & gas industry that could see production of both US oil & natural gas continue growing strongly for the next 10 to 15 years.
For example, the U.S. Geological Survey just announced the discovery of the single largest oil field in US history, in Texas’ Wolfcamp shale formation. This 20 billion barrel oil field, which also holds an estimated 16 trillion cubic feet of natural gas, is part of the larger Permian Basin, which is estimated to hold 75 billion barrels of recoverable oil.
Enterprise Products Partners is already one of the largest infrastructure providers in these areas, where there are about $4 trillion in oil & gas (at today’s prices) just waiting for U.S. shale producers to extract. That’s especially true given the highly favorable economics of these formations, meaning high internal rates of return if energy prices increase by just a little from today’s levels.
This creates a massive growth runway that should allow Enterprise Products Partners to realistically continue growing its DCF and its highly secure payout by around 5% over the next decade.
Enterprise Products’ quarterly distribution has been increased 58 times since the partnership went public in 1998, including 49 consecutive quarterly raises. As seen below, the partnership’s distribution has reliably compounded by 5-6% per year over most time periods, which is in line with my best guess of 5% annual dividend growth going forward.
Source: Simply Safe Dividends
