Since Kinder Morgan (KMI) and Williams Companies (WMB) decided to eat themselves, the number of blue-chip master limited partnerships (MLPs) continues to dwindle. Luckily for investors, one of the best — Enterprise Products Partners (EPD) — keeps improving.
EPD’s latest big buy, announced Monday, comes in the oil rich Eagle Ford shale.
The agreement by Pioneer Natural Resources (PXD) and India’s Reliance Industries to sell their combined Eagle Ford shale business to EPD for $2.1 billion will strengthen Enterprise Products’ presence in the faster growing — and still currently profitable — areas of the U.S. energy sector.
For investors, it means instantly accreditive cash flows and larger dividend checks from EPD stock.
At the end of the day, if you’re looking for a master limited partnership to buy, EPD stock should definitely be on your radar.
EPD’s $2 Billion Bolt-On
It takes a very large midstream firm to consider a $2 billion-plus purchase just as a bolt-on acquisition. For Enterprise Products, its latest buyout is just that. But that doesn’t mean the addition to its pipeline system is boring — there is plenty of growth to be had.
EPD will acquire EFS Midstream, which was founded in 2010 and is jointly owned by PXD and Reliance Industries. It features more than 460 miles of natural gas pipelines as well as 10 processing facilities.
All in all, EFS system has about 780 million cubic feet per day of natural gas treating capacity and throughout. The buy also gives Enterprise around 119,000 barrels a day worth of ultralight oil — called condensate — stabilization capacity.
The beauty is that both PXD and Reliance will continue to use the pipeline and gathering system under a 20-year contract. The duo developed EFS as way to move their own crude oil and natural gas production in the bountiful Eagle Ford.
Essentially, the deal is a sale-leaseback transaction. And as such, they’ll continue to pay EPD to use that system.
What’s more, PXD plans on using its $1 billion or so received from the deal to increase drilling activities in the Eagle Ford as oil/natural gas prices have stabilized. That will send more volume through the newly acquired system. Increased volume equals increased cash flows for EPD.
Enterprise Products also benefits from the increased condensate capacity.
In June of last year, EPD & PXD became the first U.S. energy companies to gain federal permission to export ultralight oil. While straight crude oil exports are still banned, condensate is considered a “refined fuel” even though its refining process is pretty basic.
Already, PXD has shipped about 600,000 barrels of condensate using EPD’s system. By buying EFS’s processing capacity, Enterprise will able to continue to syphon off more fees from PXD while potentially opening up condensate exports — since it can now process the fuel — for other Eagle Ford players.
For investors in EPD stock, all of this means higher dividends down the road. Enterprise Products estimates that the EFS Midstream buyout will boost its distributable cash flows (DCFs) as the minimum volume agreement in the deal “supports annual revenue growth and cash flow assurance.”
Additional volumes from PXD and other producers will boost that DCF metric even further. Not too shabby for just a bolt-on acquisition.
Time To Buy EPD Stock
While the 460 miles worth of pipelines may seem like a drop in the bucket when looking at EPD’s entire 51,000-mile system, it’s still an impressive deal given the export potential of the condensate assets in the Eagle Ford. And its one that will bear fruit over the longer haul.
EPD stock isn’t exactly the cheapest MLP on the planet. Even less so, considering much of investor money that was in Kinder Morgan’s former MLP has flown into Enterprise. However, the premium is warranted as EPD is basically the next largest midstream operator in the nation.
By buying EPD you’re getting exposure to every piece of the energy sector — from natural gas liquids (NGLs) and offshore underwater pipelines in the Gulf of Mexico to barges and terminaling assets.
The EFS buy highlights the kind of smart deals that management at EPD has made for their shareholders and just how easy it easy to strengthen that massive system — a system that for investors in EPD already yields a healthy 4.6% dividend.
The recent buyout, along with continued volume improvements along its entire midstream asset base will continue to boost that yield further into the future.
When it comes to MLPs, EPD continues to be one of the strongest portfolio contenders to buy.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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