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

Business Analysis

The pipeline business has a number of appealing qualities. For one thing, constructing a pipeline can cost billions of dollars and take years to complete, resulting in high barriers to entry.

Few companies have the capital and industry connections (e.g. oil & gas producers, regulators) to build and operator pipeline systems. Only so many pipelines are needed within a particular geographic area as well, resulting in a consolidated market.

Pipelines have few substitutes given their safety and cost-efficiency, along with geographical constraints. They also enjoy relatively stable demand patterns since most of the products that require refined oil and gas are non-discretionary in nature.

Enterprise Products Partners’ claim to fame is its unbeatable track record of stable and consistent growth through all manner of commodity/economic/interest rate environments.

That’s thanks to its business model, which is less sensitive to oil & gas prices than one might initially think. This is because Enterprise’s cash flow is protected by long-term, fixed fee contracts (with minimum volume guarantees) and annual rate escalators (to offset inflation).

In addition, many of its contracts guarantee a minimum gross margin, which helps to further stabilize cash flows even if energy prices collapse (as long as customers can still pay).

The key to Enterprise’s success mainly has to do with its industry-leading, conservative management team.

For example, the MLP has focused on diversifying its cash flow through enormous scale (which also helps with boost margins) and a broad range of customers. The company’s top 200 customers accounted for 95.7% of Enterprise’s 2015 revenue and 75.3% of these customers maintain an investment grade credit rating. Only 3.1% of the company’s revenue is from non-rated or sub-investment grade independent companies.