EPD reported Q4’10 and full year 2010 results on February 17th, 2011 and again they were nothing short of impressive. The full earnings release can be found here. I also highly recommend their earnings calls where EPD always does a nice job of providing additional color to their earnings results. Results were reported for the combined entity, EPD + EPE, i.e. post acquisition.
EPD reported record volumes across all their businesses and record cash flows for Q4’10 and the full year. The metrics MLP investors should care about were all at very strong levels. Total DCF for Q4’10 and the year was $571M and $2.26B respectively. For Q4’10 they had a distribution coverage ratio of 1.2 times, even after issuing a bunch of new shares to acquire their general partner EPE. This was truly impressive and reflected how strong their year was with total DCF rising over 30% over 2009. DCF per unit increased just over 5% in Q4’10 from Q4’09 to $2.36 per unit annualized.
Almost all their businesses achieved record performance. The only weak segment was their off-shore oil and gas operations, mainly centered in the Gulf, and the weakness is related to the BP oil spill and the new restrictions on permitting, etc… EPD also noted that the recent fire at their Mont Bellevue facility should not materially impact full year 2011 results although it may impact Q1’11 a bit. EPD is really benefiting from their NGL businesses. With natural gas and natural gas liquids being so cheap relative to oil there is a lot of new demand coming on-line for NGLs, in particular Ethane. Also, their natural gas businesses are benefiting from the continued increases in shale gas production.
The future also looks bright. They expect to invest over $3B in new assets in 2011 focusing on organic growth, particularly in the Haynesville and Eagle Ford shales. What caught my ear in particular was what they said on the conference call regarding future prospects. They mentioned that just in the existing shale plays where they have their assets there are at least 20 years of remaining drilling locations without considering re-workings, or re-fittings of older wells. Also, they have a list of 20 new shale plays that are near existing assets that they could take advantage of. This all bodes well for future growth.
So, how do the shares look based on these results? Based on historical relationships of dividend yield and spreads to the 10yr note, EPD shares are very close to being expensive. EPD is trading at a yield of 5.39% and a spread of 1.8%. This compares to a historical average of 7.21% and 2.75%. In fact both metrics are at or below to their 20th percentile points. That means that in the past shares have traded at these valuations only 20% of the time. The only reason I’m not coming out and saying shares are expensive is that the spread has not reached the 20th percentile point of 1.74% yet. Below is my updated graph of the historical yield and spread.
EPD is an absolutely fantastic partnership that is executing on practically all cylinders but it seems to me the share price reflects that. In particular for any new purchases of EPD shares. Of course, this time could be different. Could be. Now that there is no general partner to take a share of the cash flows EPD could trade at different valuations. Growth in distributions should come a bit easier now as well due to the elimination of the general partner. At the current yield of 5.39% and growth rates of 5% in the future, new investors could see future returns of just over 10%. That’s a long way from EPD’s 18%+ historical returns but not too bad in the current environment. Of course, existing valuations would need to hold or those returns to be realized.
For existing investors, like myself, I think EPD is a great core holding. For long term investors, yield on cost could be approaching over 10%. I think growth in distributions for 2011 should easily hit 5%. I hope they give some more guidance on future distribution growth at their annual meeting later this year. So, EPD still makes a compelling long term investment.
In summary, EPD continues to perform well and still has great growth prospects. Based on historical relationships the shares seem a bit pricey for new investors. EPD would make a great new investment after a good correction. For existing investors, EPD is still a compelling holding for a long term portfolio.
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