Jonathan Moreland

Inside the Markets: Sticking With This Enterprise

Solid total returns remain likely for some master limited partnerships.

November 16, 2009
by Jonathan Moreland

[DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted. Readers should note that the opinions expressed in this column are solely of the author’s and do not necessarily reflect the views of the AICPA or the AICPACPA Insider™ e-newsletter.]

In this very tricky market, it’s been difficult to feel comfortable letting one’s capital ride in many stocks that have risen by 50 percent or more in a matter of months. Profit-taking at this point seems just plain logical, especially when there are so many legitimate macro issues that could yet cause this amazing rally since March to go into retracement mode.

But I have no such qualms with holding onto my nicely appreciating position in Enterprise Products Partners LP (NYSE: EPD). As far as I’m concerned, this remains a solid position for the long term.

While my EPD investment hasn’t always treated me well, it has certainly been the right move to stick with when its peers fell into the depths of despair last year. The crash of the sector during the financial crisis resulted from funding concerns for this capital-intensive industry, reduced transport volumes through their energy pipelines and a violent unwinding of positions by large investors. That latter factor turned the downturn of many midstream energy master limited partnerships (MLPs) units from a drawn-out slide, into a sudden cascade.

As many CPA Insider™ readers may not know EPD’s MLP status means it must distribute the bulk of its quarterly earnings to its unit holders, if it is to be considered an income investment. Depending on when your clients entered EPD’s units over the past year, it has also thrown off one heck of a capital gain. EPD is now up over 75 percent from lows in March. The units also sported an indicated yield of over 10 percent at that time. Talk about the total package for total returns.

No Panic in the Executive Suite

My chronic bullishness on EPD only mirrors its executives. Since mid-2005 there has only been $329K worth of net options-related selling at the firm, while five executives have invested nearly $69 million over that same time. Insiders showed faith late last year by buying into their sliding units, and Dan Duncan, chairman and MLP icon, bought another $553K worth of the stock late last month after they recovered.

You would be surprised at how many firms had panicky insiders sell into their collapsing shares late last year, and have these same executives increasing their selling now that their shares have recovered with the market. At some point it’s normal for insiders to take profits after their stocks have risen significantly, but insiders who panicked late last year can’t hide behind that platitude. On the other hand, EPD execs expressed supreme confidence that their units would recover during the immense turmoil in their units and are still doing so by not selling into its massive rally.

Bullish Corporate Actions

But the company has managed to continue raising its distribution rate ever so slightly despite the hit to distributable cash-flow thanks to cost cuts and several rounds of new financing to fill its coffers. Even after its superior price run, EPD’s units still offer an attractive indicated yield of 7.7 percent. The trend of reduced distributable cash flow and increased distributions can’t continue forever, of course.

Enterprise’s management is in the middle of a corporate action that should only make its units more attractive. After months of negotiations, the firm and another midstream entity, Teppco Partners LP (NYSE: TPP), have agreed to merge. Teppco is part of the Duncan family of energy-related firms, which also include Duncan Energy Partners LP (NYSE: DEP), Enterprise GP Holdings LP (NYSE: EPE), and Energy Transfer Equity LP (NYSE: ETE).

The merger will broaden the operating platforms of both firms, which helps diversify the risks to distributions. While Teppco has refined products and marine transport businesses, EPD has natural gas liquids operations. Diversification will also occur geographically, since the firms aren’t operating in precisely the same places.

EPD’s better access to capital markets will help Teppco keep expanding, and there will likely be some cost synergies as well. CPA Insider™ readers and their investor-clients can expect the merger to be accretive, while diversifying operational risk and facilitating more growth opportunities for the combined entity.

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Jonathan Moreland is the director of research at New York-based InsiderInsights.com. Readers should note that the opinions expressed in this column are solely of the author’s and does not necessarily reflect the views of the AICPA or the AICPA CPA Insider™ e-newsletter.