Tuesday October 25, 2011
by Tanjila Shafi, equity analyst S&P The Outlook
With a market cap of $34.9 billion, Enterprise Products Partners (EPD) is the largest publicly-traded pipeline limited partnership in the U.S.
We view EPD as a core master limited partnership holding, given its integrated assets that connect energy supply sources to end-markets, its large geographic footprint, and what we consider the sustain- ability of its cash distributions.
We see EPD benefiting from a strong presence in current and emerging shale plays, a favorable environment for natural gas liquids, and its $6 billion of major growth projects in development.
As a master limited partnership, EPD distributes much of its cash flow to its unitholders. From 2006 to 2010, cash distributions rose at a compound annual growth rate of 15.2%.
We estimate that EPD will increase its cash distributions by 4.6%, to $2.42 per unit in 2011, and by another 4.9% to $2.54 per unit in 2012. We believe that increases in distributions are sustainable given contributions from the new projects coming into service.
The partnership’s assets include 50,200 miles of onshore and off- shore pipelines; 192 million barrels of storage capacity for NGLs, refined products and crude oil; and 27 billion cubic feet of natural gas storage capacity.
EPD also provides crude oil and refined products storage and transportation; offshore production platform services; petrochemical transportation and storage.
EPD has a strong presence in shale plays such as the Haynesville, Eagle Ford and Permian Basin, which we believe gives it a competitive advantage versus its peers in meeting the demand for infrastructure build-out.
The partnership has also recently established a new fundamentals group to identify potential opportunities at shale plays such as the Niobrara and San Juan Basin that are near existing EPD assets.
We also believe that EPD is poised to benefit from the favorable NGL environment that is being driven by increased demand from the petrochemical industry.
The high oil/gas price ratio is also prompting exploration and production companies to increase natural gas liquids drilling.
We think that EPD will benefit from increased drilling activity through its current NGL pipelines and processing centers and its future investments in this area.
We expect rising pipeline volumes to boost earnings and cash flow over the next several years, as EPD has a large portfolio of projects that we believe offer potentially high returns at relatively low risk.
In 2011, we expect operating income to experience double-digit growth and exceed $2.6 billion, aided by growth at its onshore crude oil pipelines and services segment, and its NGL pipeline and services segment.
In our view, the expected increase in demand for natural gas liquids will improve EPD’s NGL transportation and fee-based gas processing volumes. We see a single-digit increase in EPD’s average NGL transportation volumes to 2.43 million barrels per day in 2011.
Approximately 70% of its businesses are fee-based, which we view positively as it reduces EPD’s vulnerability to commodity price volatility.
Our 12-month target price of $51 is based on a blend of our P/E and enterprise value/EBITDA analyses, using multiples higher than the five- year historical average.
We believe that EPD warrants a premium valuation given its growth prospects, strategically located assets, and sustainable distribution.
The primary risk we see to our recommendation and target price is a decline in economic activity. Meanwhile, the stock carries S&P Capital IQ’s highest investment recommendation of 5-STARS, or Strong Buy.
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