Is Enterprise Products Partners L.P.’s 10% Yield Safe?
July 7, 2020
Can You Trust Enterprise Products Partners L.P.’s Distribution?
We’re starting to get an idea as to how COVID-19 will impact the energy business. And for the most part, the news isn’t good.
The collapse in oil prices has wiped out billions of dollars in market value from energy-related companies. That has triggered a wave of dividend cuts and bankruptcies, with analysts expecting more bad news to come in the weeks ahead.
Enterprise Products Partners L.P. (NYSE:EPD) is no exception. Analysts worry that a downturn in the oil patch could hammer the pipeline partnership’s profits. That has triggered an investor exodus, with EPD units losing almost a third of their value since the start of the pandemic.
Which raises the question: Can Enterprise Products Partners L.P.’s 10% dividend yield survive the energy bust? Let’s dive into the numbers.
Admittedly, pipelines have struggled more than one might have originally expected.
Pipeline owners, as a rule of thumb, get paid a fixed fee for each barrel of crude that moves through their network. So in theory, that should allow pipeline owners to remain profitable whether oil trades for $20.00 a barrel or $200.00.
That theory, however, hasn’t worked out in practice. Following the drop in oil prices, producers have dramatically scaled back their drilling programs. And with fewer barrels coming out of the ground, pipeline owners have seen a drop in their revenues, too.
That drop has triggered a wave of dividend cuts. Highly leveraged names, such as Plains All American Pipeline, L.P. (NYSE:PAA), CNX Midstream Partners LP (NYSE:CNXM), and Western Midstream Partners LP (NYSE:WES), have all lowered their payouts in a bid to conserve cash.
But Enterprise Products Partners L.P. has held up better than most.
Unlike other master limited partnerships, which tend to only invest in pipelines, Enterprise also owns a vast oil storage network. Thanks to a drop in demand courtesy of the pandemic, storage tanks nationwide have filled almost to capacity. That has provided a nice hedge to the company’s struggling pipeline business.
Enterprise also boasted a fortress-like balance sheet heading into the downturn. As of March 30, the partnership had only $3.30 in debt for every dollar of earnings before interest, taxes, depreciation, and amortization—less than half the average debt load of its peers. (Source: “Investor Deck,” Enterprise Product Partners, L.P., last accessed July 6, 2020.)
This has left management with much more in the way of financial wiggle room. Even at the height of the crisis, Enterprise signed a deal to boost its bank credit line by $1.0 billion. With around $7.0 billion in liquidity on hand as of June 15, the business should have no issue funding operations and paying off maturing debt.
All of which means Enterprise should manage to keep paying unitholders.
In the first quarter of 2020, the partnership’s distributable cash flow dropped to $1.6 billion. Over the same period, management paid out $980.0 million. (Source: “Form 10-Q,” Enterprise Product Partners, L.P., last accessed July 6, 2020.)
Generally, I like to see companies pay out no more than 90% of their profits as dividends. That leaves management with a little bit of breathing space in the event of a downturn. So a 61% payout ratio means EPD unitholders have little reason to worry, as long as things don’t get too much worse.
In other words, Enterprise Products Partners L.P.’s 10% dividend yield looks safe for now.
