Enterprise Products Partners LP (NYSE: EPD) is winning in part from an analyst research call and mostly on its own merits.  While the MLP has stalled out in the last couple of weeks, the MLP is up 10% from the October lows and up 15% from the August lows.  After seeing some fresh research notes on the company, we wanted to take a look under the hood to see if there is still upside for what is one of the three leaders of the limited partnership segment for investors.

The “units” have been extremely popular with income-oriented investors as investors look for high cash flow back into their accounts and while still looking for upside participation from the markets.  This morning came a report from Zacks naming Enterprise as the “Bull of the Day” when it raised its rating to Outperform from Neutral. More important than the Zacks upgrade is that it has a $54.00 price target objective and that appears to be a “street high” target.

As far as how this compares to analyst calls elsewhere: BofA/Merrill Lynch has a “Buy” rating with a $50.00 target, Morningstar has a “Hold” rating, and S&P has a “Buy” rating.  Thomson Reuters has a $48.40 consensus price target, almost 10% above the $44.13 close on Wednesday.

Here are ten things we have considered…

Chesapeake Energy Corporation (NYSE: CHK) recently announced that it reached an agreement to supply Enterprise with ethane for its proposed pipeline that connects the Marcellus Shale with the Gulf Coast.

The integration of Duncan Energy Partners LP should be beneficial for the partnership and unit holders.  The partnership with Enbridge Energy Partners LP (NYSE: EEP) and Anadarko Petroleum Corporation (NYSE: APC) for building a pipeline called the Texas Express should address transport constraints in place today on the Gulf Coast NGL market.

It is a heavy-weight in the sector with its $37 billion market cap.  The JPMorgan Alerian MLP Index ETN (NYSE: AMJ) lists that Enterprise is the largest single holding in its underlying index with a weighting of almost 15.8%. Kayne Anderson MLP Investment Company (NYSE:KYN), a closed-end MLP fund, also has Enterprise as its highest weighting at 9.4% in its latest report.

Besides being a leader above many peers, its projects tend to generate stable cash flow and they tend to add to the value in the company’s existing portfolio.

The company’s opportunity in the Eagle Ford and Haynesville Acadian Expansion should be great long-term catalysts.  Here is its existing pipeline and facilities system-wide map.

The company increased its quarterly distribution for the umpteenth time in a row and its dividend equivalent is currently over 5.5%. 

Distributable cash flow was $856 million with a coverage ratio of 1.7, and the $341 million in retained cash flow has seemingly lowered its financing needs.

The most recent earnings report was a record for the third quarter in part due to growth in the shale regions and high demand for NGLs in the petrochemical sector.  Earnings per unit were $0.55 (above a $0.50 target from Zacks) and up over 200% from a year earlier.
Revenues was up 40% from a year earlier.

Operating income in the NGL pipeline & services unit was up over 37% and gross operating income in its nat-gas processing segment rose 55%.  Its gross operating income from onshore crude pipelines and services were up over 90% from a year earlier.

The area of contraction was the Offshore Pipelines & Services on the gross operating income, which came down to $53.9 million versus $68.3 million a year earlier, on what was called lower Gulf of Mexico exploration and development on federal regulations.

There are many other things to consider for Enterprise (and other MLPs) for longer term income-oriented investors.  Investors in MLPs in general have to consider the tax ramifications as many quarterly payouts have to be considered “yield equivalent” rather than true income because a large portion of the payouts in the MLP sector are treated as return of capital with a variable portion often treated as income.  Barron’s noted it in the “Top MLPs for Investors” but we would note that Seeking Alpha recently raised a flag of caution on the group and on Enterprise itself.  We like to feature both good and bad when possible.

JON C. OGG

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