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Enterprise Products’ Distribution: Growth Expectations in 2015?



EPD’s distributions

On October 1, 2015, Enterprise Products Partners (EPD) declared a 1.30% quarter-over-quarter rise in its distributions to $0.385 per unit. The company’s distributions per unit rose for the 45th quarter in a row. The consensus estimate for Enterprise Products’ per unit distribution for all of 2015 is $1.53—a 5.6% rise over distributions in 2014.

The above graph shows growth in EPD’s quarterly per unit distribution. It also shows the consensus per unit distribution estimates for 4Q15 and 1Q16. The expected growth in 3Q15 EBITDA likely drove the distribution increase for the quarter. EPD forms ~10.4% of the Global X MLP ETF (MLPA) and ~0.6% of the Guggenheim Multi-Asset Income ETF (CVY).

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EPD’s declining distribution coverage

A company’s distribution coverage is the ratio of its distributable cash flow to total distributions. Enterprise Products’ distribution coverage ratio for 2Q15 was 1.3x.

Enterprise Products’ distribution coverage ratios were 1.86x, 1.52x, and 1.51x in 2012, 2013, and 2014, respectively. Distribution growth without comparable growth in cash flow likely caused the fall. Lower energy prices have impacted Enterprise Products’ cash flows. If the firm misses its revenue and EBITDA estimates for 3Q15, its coverage ratio might fall further in 3Q15.

Generally, MLPs with stable earnings target a distribution coverage ratio in the range of 1x–1.1x the distributable cash flow. In contrast, MLPs whose operations are more sensitive to seasonal factors target a higher coverage ratio. EPD’s distribution coverage, though falling, is still higher than the generally targeted range.

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EPD’s distribution yield

Enterprise Products trades at a distribution yield of ~5.3%. Energy Transfer Partners (ETP), Enbridge Energy Partners (EEP), and Spectra Energy Partners (SEP) trade at current distribution yields of ~8.9%, ~8.5%, and ~5.9%, respectively. One of the reasons behind Enterprise Products’ relatively lower distribution yield might be its strong distribution coverage ratio, which is well above 1x. This makes it relatively less risky.

Enterprise Products Partners’ distributions have grown for 45 consecutive quarters. This also explains the company’s comparatively lower yields. The absence of IDRs (incentive distribution rights) in EPD’s structure also contributes to its relatively lower yield. Yields tend to be higher for MLPs that have less predictable earnings or a high commodity price risk. A higher risk must be compensated for with higher yields.

Continue to the next and final part of this series for a look at Wall Street targets for Enterprise Products Partners’ pending 3Q15 results.


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