Enterprise Products Partners (NYSE: EPD) is one of the largest master limited partnerships (MLPs) in the world. However, what's interesting about the company is that oil and natural gas weren't the primary fuels used to grow it into its current massive size. Instead, the company has focused its attention on serving the natural gas liquids (NGLs) market, where it is the dominant infrastructure provider. The company not only makes a boatload of money from the space, which helps support its lucrative distribution to investors, but it has a vast pipeline of growth opportunities that should keep that payout growing for years to come.
Making a mint on NGLs
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Given its dominance in the NGL space, it's not surprising that the company makes most of its money from assets serving that sector. In fact, of the $5.4 billion in gross operating margin Enterprise Products Partners has pulled in over the past year, 57% came from its NGL pipelines and services segment. Contrast that with the contributions from its other three segments: Its crude oil pipelines and services segment supplied 17% of the total, while the natural gas pipelines and services and the petrochemical and refined products services segments each contributed 13%.
Enterprise Products Partners' NGL business operates several noteworthy assets. The crown jewel is its Mont Belvieu hub, in Texas, where it operates eight fractionation facilities that process mixed NGL streams into purity products such as ethane, propane, and butane. In addition, the company operates several pipelines that move NGLs from production basins to that hub and others. The largest is the more than 8,000-mile Mid-America Pipeline system that ships mixed NGLs produced in the Rockies to West Texas. The company typically earns a fee for transporting and fractionating these NGLs, which provides it with steady cash flow quarter after quarter.
In addition to moving and fractionating NGLs, Enterprise operates storage facilities and export docks. In fact, the company is the world leader in exporting liquid petroleum gases (LPG) like propane and butane. It currently has the capacity to ship 14 million barrels per month, all of which is under contract through the next year. (For perspective, LPG export rival Targa Resources (NYSE: TRGP) has half that capacity, and last quarter shipped only 4.7 million barrels per month due to weak short-term market fundamentals since it hasn't fully contracted its available capacity.) Furthermore, Enterprise recently built the world's largest ethane export terminal. Again, these assets primarily earn the company fees as it stores or exports volumes for customers.
Overall, these assets produced $760 million in gross margin last quarter, which is up 6% year over year thanks in part to higher fees as a result of an increase in volumes flowing across Enterprise Products' network.
More NGL fee revenue is coming down the pipeline
Enterprise Products Partners currently has $8.6 billion of capital projects underway across its four segments, 28% of which will get invested into new NGL-related infrastructure. One of the largest projects is the Shin Oak NGL pipeline that the company announced in April. The 571-mile, 250,000-barrel-per-day pipeline would move mixed NGLs from the Permian Basin to Mont Belvieu when it enters service in 2019. Enterprise could expand that pipeline to 600,000 barrels per day if it secured a joint venture partner. In the meantime, it's building a ninth fractionator at Mont Belvieu that should enter service in 2018.
There should be plenty of additional expansion opportunities for Enterprise Products Partners in the coming years given the current demand forecast for NGL-related infrastructure. According to a study by the INGAA Foundation (a research organization for the natural gas industry), over the next two decades, the U.S. and Canada will need to invest $43 billion to $55 billion into new NGL infrastructure, including transmission pipelines, fractionation capacity, and export facilities. While that's only a fraction of the $546 billion in midstream infrastructure the industry needs to build, it still represents a massive opportunity for Enterprise since the company is one of the few players focused on this niche. Besides, it has a stronger financial position than rivals like Targa Resources, which gives it a leg up in securing and funding projects.
A lucrative niche
Enterprise's emergence as the dominant player in NGL logistics has served investors well over the years. By steadily expanding its network of fee-bearing assets, the company has grown its cash flow at a healthy rate, which has helped support 52 consecutive quarterly distribution increases. And with a large backlog of fee-based growth projects underway, it should have no problems continuing that trend. That's great news for income-focused investors -- they can pick up an already generous 6.3% yield that's likely to expand at a healthy rate for years to come, thanks to the company's top-tier NGL infrastructure network.
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