Enterprise Products Partners’ distributions
On July 7, 2015, Enterprise Products Partners (EPD) declared a 1.3% quarter-over-quarter increase in its distribution to $0.38 per unit. The company’s distributions per unit increased for the 44th quarter in a row. The distribution growth reflects higher expected EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2Q15, as discussed previously. The consensus estimate for EPD’s per unit distribution for all of 2015 is $1.54. This is a 6% increase over 2014 actual distributions.
The above graph shows growth in the company’s quarterly per unit distribution. It also shows consensus per unit distribution estimates for the third and fourth quarters of 2015.
Declining distribution coverage
EPD’s distribution coverage ratio for 1Q15 was 1.4x. Distribution coverage is the ratio of distributable cash flow to total distributions. EPD’s distribution coverage ratio declined from 1.7x in 1Q14. The ratio was 1.86x, 1.52x, and 1.51x in 2012, 2013, and 2014, respectively.
Distribution growth without comparable growth in cash flow has likely caused the decline. Lower energy prices have impacted EPD’s cash flows. If the firm misses its revenue and EBITDA estimates for the second quarter, its coverage ratio might fall further in 2Q15.
Generally, MLPs with stable earnings target a distribution coverage ratio in the range of 1–1.1 times the distributable cash flow. On the other hand, MLPs whose operations are more sensitive to seasonal factors target a higher coverage ratio. Williams Partners’ (WPZ) 1Q15 distribution coverage ratio was 0.89x.
Enterprise Products trades at a distribution yield of ~4.9%. Energy Transfer Partners (ETP), Sunoco Logistics Partners (SXL), and Williams Partners trade at current distribution yields of ~7.4%, ~4.4%, and ~6.4%, respectively. One of the reasons for EPD’s relatively lower distribution yield might be its distribution coverage ratio. EPD’s distribution coverage ratio is well above 1x, making it relatively less risky. EPD’s distributions have grown for several quarters. This also explains its comparatively lower yields.
Yields tend to be higher for stocks that have less predictable earnings or have a high commodity price risk. A higher risk must be compensated for with higher yields.