Focus on Midstream Fundamentals to Meet Changing Global Needs
Enterprise Products Partners L.P. (NYSE: EPD) is a fully integrated midstream energy company providing fiscal and supply stability for both customers and investors. The company’s assets include ~50,000 miles of pipeline supplying natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals; storage capacity for 260 million barrels of NGLs, petrochemicals, refined products, crude oil and 14 billion cubic feet of natural gas; 21 natural gas processing facilities, 25 fractionators, and 11 condensate distillation facilities; and 19 deep-water docks handling NGLs, PGP, crude oil and refined products. For more information, visit www.enterpriseproducts.com.
- Enterprise value of $84 billion
- Market capitalization of $53 billion
- 22 consecutive years of distribution increases
- The world’s leading exporter of liquefied petroleum gas (LPG) for household use
Click HERE to view the Enterprise Products Partners Investor Presentation.
Adviser Access spoke to EPD’s co-CEO A.J. “Jim” Teague.
Advisor Access: You posted strong results in 2020 and in the first quarter of this year, which, given the impact of COVID-19 on global economies and the slow recovery of the energy industry, was remarkable. How did you accomplish this?
Jim Teague: Our employees are Enterprise’s most valuable asset. They exhibited great teamwork and outdid themselves in 2020. They are flexible, driven, and have shown time and again their ability to perform, even in the most challenging and unprecedented conditions.
It’s also important to understand we operate an integrated system of assets. This “value chain” approach to building and/or acquiring assets has provided reliability and a greater stability of cash flows across our business segments throughout business cycles.
We operate four main business segments—natural gas liquids (NGLs), crude oil, natural gas, and petrochemicals and refined products. The products we transport and handle in each of our businesses are essential for everyday life, and the services we provide generate stable cash flows due to our fee-based business model.
In addition to traditional asset management teams, we have dedicated marketing teams embedded in each our business segments. These teams not only serve customers, but also identify and execute on opportunities that result from volatility or regional price dislocations. For example, when crude oil prices went into “contango” in April 2020, due to the pandemic and global price war, we turned a daunting dilemma into a tremendous opportunity by using our storage assets to hold crude oil, which we had purchased at historically low prices and were able to sell later at higher prices.
The bottom line is that the diversification of our business across multiple commodities, the magnitude of our transportation and storage assets, the depth of our marketing activities, and our cost control efforts enabled us to generate 2020 distributable cash flow just 3% shy of the record cash flow we earned in 2019.
AA: You have a long track record of paying quarterly dividends—you have raised it every year since your initial public offering (IPO) in 1998. How were you able to maintain this record, and do you expect to be able to continue raising the distribution?
JT: We have raised our distribution rate in each of the last 22 years, and have returned approximately $40 billion of capital to common unit holders over that period, including $4.2 billion in 2020 (approximately $4 billion in distributions and $200 million in buybacks).
Returning capital to our investors has always been one of our primary financial objectives. Over the past 15 years we have returned, on average, 67% of our cash flow from operations (CFFO) to our common unit holders. We remain committed to building a company that is sustainable for the long term by maintaining financial flexibility, preserving a strong balance sheet, investing in organic growth projects with attractive returns on capital, and responsibly returning capital to our investors through distributions and buybacks.
AA: Most analysts expect you to generate positive free cash flow (FCF) after paying your distributions and capital expenditures. You have one of the strongest balance sheets in the sector, with a leverage ratio in the 3.5x range. What are some of the options for use of FCF?
JT: One of the ways Enterprise has differentiated itself from its peers is through its investment-grade credit ratings, which are among the strongest in the midstream energy sector (BBB+ from S&P; Baa1 from Moody’s). As of 1Q/2021, our leverage ratio (net debt/adjusted EBITDA [earnings before interest, taxes, depreciation, amortization]) was 3.3x, which is at the lower end of our guided range of 3.5x +/– 0.25x. We generated over $350 million in FCF after distributions and capital expenditures in 1Q/2021, and we believe we will remain on track to be FCF-positive for the entire year.
We have not announced any plans for capital allocation this year, beyond capital spending of approximately $1.6 billion this year and $800 million in 2022 on projects currently under construction. Earlier this year, we increased our cash distribution to $1.80 per unit on an annualized basis, providing a current yield of approximately 7.5%. Given the political and regulatory environment, coupled with interest in growth capital projects supporting a lower carbon world, we continue to prioritize responsibly returning capital to our limited partners while maintaining financial flexibility.
AA: Given your sizeable footprint of assets and integrated operations, what are your main growth drivers?
JT: We are focused on opportunities across all four of our business segments, including capital-efficient asset expansions, facilities to upgrade the value of energy products, and repurposing underutilized assets.
Our asset base has become increasingly downstream, or “demand pull” focused. One area in which we are differentiated from our peers, and in which we see the most future opportunity, is our petrochemical services segment. This segment is focused on the processing, transportation, and storage of primary petrochemicals, such as ethylene, propylene, isobutylene, and motor gasoline additives that reduce emissions and increase octane.
Historically, ethylene and propylene demand has grown in excess of global GDP growth. With global population growth and the expanding middle class driving global energy and product consumption, we see increasing demand for petrochemical products for the foreseeable future.
We like exposure to international demand, and align ourselves with “demand pull” through our export-oriented marine terminal assets. We are also proud of our liquefied petroleum gas (LPG)—a mix of propane and butane—export business. Enterprise is the world’s largest exporter of LPG via our marine terminal on the Houston Ship Channel.
We estimate 70% of our LPG exports serve the global residential market. LPG is a transformational fuel that allows households to transition away from coal, wood, and animal waste to a cleaner burning and, given its energy density, easily transportable fuel. We have seen a tremendous market for LPG in Asia, and predict sub-Saharan Africa as the next growth market.
AA: Enterprise is one of only a few midstream companies with a petrochemical business segment. What is the outlook for the petrochemical industry, and your business, in the evolution to a lower carbon era?
JT: We think it’s very strong. We are dedicating the majority of our sanctioned capital spending to this segment over the next few years.
The world will continue to need petrochemicals. Long term, we expect petrochemical demand to account for 60% of oil demand growth, largely due to the growing demand for plastics.
It is often forgotten that more than 96% of all manufactured goods are touched by petrochemicals. Uses include consumer packaging, clothing, pharmaceuticals, medical devices, lightweight materials for cars, airplanes, and buildings, paint, flooring, and furniture. As the global population continues to increase and developing countries become more energy proficient, these chemicals will remain extremely vital to everyday life and modern society.
AA: You stated in your environment, social, and governance (ESG) disclosures that propane has a lower carbon intensity than other hydrocarbons. Do you expect demand for LPG to continue to grow, especially in Asia for consumer use?
JT: It’s hard to overstate the magnitude of the human health and environmental benefits LPG affords. From a human health perspective, over one-third of the world’s 7.8 billion people live in energy poverty and lack access to clean cooking fuels, relying on biomass. Lack of access to clean fuel contributes to four million premature deaths per year, many under 5 years of age.
From an environmental perspective, LPG has a high energy density, emits 34% less CO2 than coal on a million-BTU (British thermal unit) basis, is safe to transport, and accounts for a predominant energy source across the world.
When comparing global emissions avoided by using U.S. LPG exports to displace the equivalent amount of coal, annual global emissions are reduced by 50 million metric tons of CO2, which is equivalent to the emissions from 10.5 million cars.1
In addition, exports of U.S. LPG are enhancing people’s lives, as data from the United Nations has consistently shown an increase in energy consumption per capita in developing countries leads to longer life expectancies, higher levels of education, and higher income per capita.
AA: Any final thoughts?
JT: I would like to reiterate our view that, while many believe the world will rapidly move away from hydrocarbons, demand for hydrocarbon-based petrochemicals in consumer goods is increasing with the global population. We believe petrochemicals will also be prevalent in the production of renewables, such as wind turbines, electric vehicles, batteries, solar panels, etc. We believe there will be a need for an “all of the above” approach when it comes to energy supplies—fossil fuels, nuclear, and renewables.
An ESG project may be in our future, but only when we believe it will provide an attractive economic return to our investors, integrate with our existing value chain, and add value to our business model.
In the meantime, we will continue to execute on growth opportunities, operate our businesses to the best of our ability, and provide reliable midstream energy services to our customers in a cost-efficient manner. We believe focusing on these fundamentals, and on the efforts of our 7,000 employees, will support the continued growth of our partnership.
AA: Thank you, Jim.
1: Source: EPD Fundamentals
A. J. (Jim) Teague has served as co-Chief Executive Officer of Enterprise Products Partners since January 2020 and has been a director of Enterprise GP since November 2010. He also serves as co-chair of the Capital Projects Committee. Mr. Teague previously served as CEO of Enterprise GP from January 2016 to January 2020, chief operating officer of Enterprise GP from November 2010 to December 2015, and executive vice president of Enterprise GP from November 2010 to February 2013. He served as executive vice president of EPGP from November 1999 to November 2010, as a director from July 2008 to November 2010, and as COO from September 2010 to November 2010. In addition, he served as EPGP’s chief commercial officer from July 2008 to September 2010. He served as executive vice president and chief commercial officer of DEP GP from July 2008 to September 2011. He previously served as a director of DEP GP from July 2008 to May 2010, and as a director of Holdings GP from October 2009 to May 2010. Mr. Teague joined Enterprise in connection with its purchase of certain midstream energy assets from affiliates of Shell Oil in 1999. From 1998 to 1999, he served as president of Tejas Natural Gas Liquids LLC, then an affiliate of Shell. From 1997 to 1998, he was president of Marketing and Trading for MAPCO, Inc. Mr. Teague also serves on the board of Solaris Oilfield Infrastructure Inc.
Forward-Looking Statement and Non-GAAP Financial Measures
This interview with A.J. “Jim” Teague, Co-CEO of Enterprise’s general partner, includes “forward-looking statements” as defined by the Securities and Exchange Commission. All statements, other than statements of historical fact, included herein that address activities, events, developments or transactions that Enterprise and its general partner expect, believe or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations, including required approvals by regulatory agencies, the possibility that the anticipated benefits from such activities, events, developments or transactions cannot be fully realized, the possibility that costs or difficulties related thereto will be greater than expected, the impact of competition, and other risk factors included in Enterprise’s reports filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. Except as required by law, Enterprise does not intend to update or revise its forward-looking statements, whether as a result of new information, future events or otherwise. Also included in Mr. Teague’s responses to questions in the interview are references to Enterprise’s non-GAAP financial measures. For a discussion of these metrics and reconciliations to their nearest GAAP counterparts, see “Non-GAAP Financial Measures” under the “Investors” section of Enterprise’s website at www.enterpriseproducts.com.
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