EPD Analyst Day Recap: Pursuing Broad Appeal in an MLP Structure

Summary

• While retaining the MLP structure, EPD continues to highlight ESG priorities and more traditional financial metrics in an appeal to generalists.
• The company’s integrated Houston operations, including pipeline and storage assets, provide efficiencies for crude exports that management believes differentiates its terminals.
• Enterprise announced it has a $5-10 billion growth project backlog over the next three to four years, including petrochemicals projects expected to provide a diversified stream of revenue with the added benefit of a high barrier to entry.

Last week, we attended the analyst day for Enterprise Products Partners (EPD) in Houston, which included a bus tour to the company’s fractionation and petrochemicals complex in Mont Belvieu. Enterprise is widely considered a bellwether in the MLP sector as the largest MLP by market cap and a midstream trailblazer in some regards given its early adoption of equity self-funding and buyback authorization. Company management provided commentary on a wide range of issues, including the MLP vs. C-Corp debate, crude exports, petrochemicals, and other topics that have high-level implications for the rest of the midstream space.

EPD to remain an MLP but highlights shift to “traditional financial model.”
Even with the bulk of expected MLP consolidations and C-Corp conversions behind the space (read more), the MLP vs. C-Corp structure question remains in focus for MLPs, including EPD, which continues to monitor market developments. EPD’s management provided the three key considerations for evaluating structure questions: 1) taxes, 2) the relative valuation of MLPs compared to C-Corps, and 3) access to capital. Management noted that operating as an MLP is not hindering their execution on market opportunities, and they are maintaining flexibility.

While the structure question continues to be evaluated, EPD is actively pursuing a more generalist-friendly traditional financial model through equity self-funding, lower leverage, buybacks, and distribution growth. EPD’s presentation included environmental, social, and governance priorities as well as free cash flow metrics and performance comparisons against the broader market and each sector of the S&P 500. These initiatives clearly reflect consideration beyond the traditional MLP or energy investor base and aspirations to attract generalist investors. With energy companies broadly trying to court and gain favor with generalists by focusing on returns and capital discipline, MLPs should do their part as well by making MLP investing more user-friendly. IDR eliminations, lower leverage, and more savvy capital allocation decisions are steps in the right direction, but progress can still be made for the space in terms of corporate governance, increased transparency, and a shift towards more widely-used financial metrics.

A key tenet of EPD’s traditional financial model is its $2 billion buyback authorization, which certainly represents a reversal of the historical MLP model of issuing units. EPD management noted that organic growth opportunities will remain the top priority for capital allocation, so buybacks will be opportunistic. Management noted that buybacks are not as tax efficient as distribution growth for MLPs. EPD indicated that it would likely evaluate recurring returns to unitholders, including the distribution growth rate, early next year.

Flood of Permian crude driving Gulf Coast exports.
Given EPD’s respected macro insights and its Permian exposure, management spoke in detail on the balance between Permian oil production growth and takeaway capacity as well as the export opportunities related to production growth. As shown in the chart below, EPD is forecasting an overbuild of oil takeaway capacity from the Permian that will last for three to four years from early 2020, assuming all announced projects get built. In its forecast, EPD projects Permian oil production at nearly 8 million barrels per day (MMBpd) by the end of 2024 – nearly double March 2019 production of 4.1 MMBpd.