Enterprise Product Partners L.P. (EPD) Is Finally Making a Comeback

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Enterprise Product Partners L.P. (NYSE: EPD) is the largest natural gas pipeline company in the world. That means when economies are chugging along and energy is being used in increasing amounts, it’s a pretty good world for EPD.

Enterprise Product Partners L.P. (EPD) Is Finally Making a Comeback

But as we’ve seen, when the economy isn’t doing that well, the midstream market (i.e. pipelines) suffers along with the upstream (i.e., exploration and production) and downstream (i.e. distribution, refining).

The one thing that makes the midstream space attractive is the fact that it isn’t dependent on the price of the energy that passes through its pipes. It’s a toll taker and sets prices based on volume and content.

This is reflected in  Enterprise Product Partners’ stock price. While it fell almost 40% from its 2014 highs, it has been on the upswing now that all the industry volatility has subsided. Upstream was hurt the most by the falling oil and gas prices. Downstream margins were hurt.

The EPD Comeback

Now that prices have stabilized, and demand is more consistent, midstream is coming back. Plus, the conversion of power plants to natural gas from coal is also driving demand.

EPD is a master limited partnership, which means it is set up so that shareholders are actually business partners. Therefore,  by law, the MLP has to distribute a substantial amount of its profits to its owners.

MLPs were the way the U.S. energy sector grew so fast and so strong. New upstream firms were formed to exploit the energy in the massive U.S. shale reserves. New midstream firms came on board to get the energy from the fields to refineries and tank farms.

But it all blew up when energy prices collapsed along with global demand. The small MLPs were the first to go. They cut dividends dramatically to avoid bankruptcy, but in many cases, it didn’t help.

As much as there was a stampede into MLPs there was an equal and opposite reaction when energy prices tanked. That meant any decent MLPs were painted with the same brush as the troubled ones.

Enterprise Product Partners was a victim of this.

But the selloff has one benefit for solid MLPs like EPD. It means that these oversold stocks are throwing off big dividends — and these dividends are sustainable. Enterprise Product Partners is currently throwing off a 6% dividend yield.

Given the fragility of the energy patch right now in relation to the feeble global economy, recovery may not be imminent, but barring some unforeseen catastrophe, we’re much closer to a bottom than a top. And that is a good thing for EPD.

Bottom Line on Enterprise Product Partners

A guaranteed 6% while you wait for things to improve is not a bad deal. And it likely won’t last long. Most people aren’t looking to get back into the sector yet, so this is the ideal time to get involved, before the herd.

In recent days, EPD was in the news for bidding on midstream player Williams Companies Inc (NYSE:WMB). It sent WMB’s price up, but hurt  Enterprise Product Partners’ price. There’s no deal yet, but if there is, it will be a good merger for EPD.

And it can afford it, compiling as much as $3 billion in distributable cash flow in the last year. It has a strong cash position and it is looking to expand its reach while things are still cheap. Smart.

This isn’t EPD’s first rodeo.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/09/enterprise-product-partners-epd-comeback/.

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