Enterprise: A High-Quality Midstream MLP for Income

Since its creation in 1968 as a simple wholesale marketer of natural gas liquids (NGLs), Enterprise Products Partners has grown into one of America's largest midstream master limited partnerships (MLPs) that services both producers and consumers of NGLs, natural gas, crude oil, refined products, and petrochemicals.

The MLP's services include everything needed to get raw fossil fuels from the producer's wellhead to the end consumer in a ready-to-use state. More specifically, this process involves gathering, treating, processing, storage, and transportation.

In addition to its diversified operations, Enterprise's network of assets is connected to nearly every major U.S. shale basin and throughout the Gulf Coast. The company's broad geographical reach allows energy producers to enter a single relationship to move their products to downstream buyers.

Buoyed by America's energy "renaissance," Enterprise has historically seen strong demand for its services and, in turn, has paid its distribution without interruption since going public in 1998.

To maintain a reliable distribution, Enterprise has had to navigate a number of extreme commodity price cycles over time. This has been possible thanks to the firm's business model, which is less sensitive to oil and gas prices than one might initially think.

Most of Enterprise’s cash flow is protected by long-term, fixed-fee contracts with minimum volume guarantees and annual rate escalators to offset inflation. Many of its contracts also guarantee a minimum gross margin, which helps to further stabilize cash flows even if energy prices fall (as long as customers can still pay). 

Enterprise's risk profile is further strengthened by the firm's financial conservatism. In addition to its BBB+ credit rating, one of the highest ratings in the midstream industry, the business implemented a self-funding business model in 2018.

Under this structure, Enterprise does not need to issue equity to help fund its expansion projects. Instead, Enterprise uses a mix of internally generated cash flow and debt, reducing its financing risk and lowering its cost of capital.     

While Enterprise appears well-positioned for the foreseeable future, the long-term outlook for Enterprise will depend on the path of fossil fuels.

Concern over climate change is growing and could eventually impact the global consumption of fossil fuels, and thus the need for all of America's midstream infrastructure. But, as of today, the world has not agreed upon a path forward.

Regardless of the energy source, global energy demand will continue to expand from population growth and a growing middle class in emerging and developing nations.

And while the International Energy Agency expects oil to become a smaller percentage of overall global energy consumption over the next twenty years, it expects total consumption to increase.

Ultimately, we expect fossil fuel demand to remain stable with a gradual pace of decline over the long-term horizon. This should support the value of Enterprise's midstream infrastructure, but investors should remain mindful of the evolving energy industry.

Overall, Enterprise Products Partners appears to be one of the lower-risk choices in the midstream energy space due to its strong balance sheet, access to low-cost capital, low-risk self-funding business model, and conservative management team.