Maybe it’s the contrarian in me but I keep expecting EPD to disappoint. Or maybe I’m hoping they disappoint so I can buy a ton more shares. But alas I was the one disappointed yet again. EPD reported strong Q2 2012 results on Aug 1st. Full release is here. Lets see how strong and resilient their results were.
We are now smack in the middle of MLP earnings season with Kinder Morgan having kicked it off last week. So far the trend in the results has been some weakness in the numbers mainly due to lower oil and NGL prices. In particular, NGL prices were down about 25% from last quarter. This weakness in NGL prices has been mainly felt by the gas processing MLPs. For example, MWE, NGLS, and WPZ all pre-announced weaker Q2 numbers. Even the mighty Kinder Morgan felt some weakness from these lower commodity prices. But then again these results also show the resiliency of the MLP business model. Despite this weak environment all the MLPs I mentioned are sticking to their distribution growth targets for 2012. Their distribution coverage ratios have come down significantly but that’s why they have them in the first place, for times like this. Of course, EPD, along with a few others, has bucked this trend.
Despite NGLs being their largest business, and the weak NGL environment, EPD reported strong numbers and continued strong distribution coverage ratios. The distribution coverage ratio was 1.4x for Q2 2012 after excluding one time gains. From the release:
“Enterprise reported strong results for the second quarter of 2012 with four of our five business segments posting higher gross operating margin than the second quarter of last year,” stated Michael A. Creel, president and CEO of Enterprise. “Gross operating margin for the second quarter of 2012 increased 12 percent from the second quarter of 2011 primarily due to higher volumes of NGLs, natural gas and crude oil handled by our integrated midstream system of assets. The partnership set records with respect to fee-based natural gas processing volumes, natural gas pipeline volumes and NGL fractionation volumes.”
Business is doing well and growth opportunities look great. While EPD is my favorite large cap MLP, results at the other big boys look pretty good too. KMP reported decent numbers despite some weakness. OKS also continues to shine. And I expect PAA which reports this week will also do well. In tougher times the MLPs with diversified business models will tend to perform better. As far as the smaller cap MLPs these tough times may present nice buying opportunities for patient long term investors.
Disclosure: long EPD, KMI
7 Comments
Joe · August 3, 2012 at 9:45 am
Appreciate the update. I’ve owned EPD for a few years and think it’s a good investment.
I also own OKS and KMP. I’ve seen sooo many article about KMP, KMI, KMR and which is best to own – it’s confusing to me, so I just stick with KMP.
I’m a dividend investor and hold these MLPs in my IRA + reinvest all proceeds.
Thanks again for the update on EPD.
libertatemamo · August 4, 2012 at 9:13 am
Glad to help Joe. Let me see if I can make the difference between KMP, KMR, and KMI really simple.
KMP and KMR are almost the same thing. They are just different share types in the same company. They pay exactly the same dividend every quarter. The only difference is that KMP pays a cash dividend and KMR pays the dividend in stock. If you are reinvesting the dividends then they are both exactly the same. The benefit of KMR is that it is cheaper so you get a higher yield and thus your total return will be higher versus KMP. For example KMR currently trades at a 5% discount to KMP.
As far as taxes go, KMR is the one to own in an IRA. By owning KMP in an IRA you potentially expose yourself to UBTI (unrelated business tax income). You may not own enough to hit this threshold but in the future you may. If the UBTI does exceed $1000, the custodian that holds your IRA would have to file a form 990T to the IRS. The tax is paid out of the IRA on the net income from your MLP distributions, which are taxed at the corporate rate. This is not as scary as it sounds. You can solve this easily whenever you want by switching to KMR or just wait until it becomes an issue, it won’t be a major one as most people point it out to be.
KMI is basically just the management company of KMP/KMR. So basically for its management skills and support it is entitled to about 50% of the cash generated by KMP/KMR. Sounds like a pretty sweet deal and it is. KMI pays taxes so you can own it in any type of account and there is no need to fill out K-1s. In return, as an investor, you get a lower dividend yield, currently about 4%, but higher dividend growth, about 12.5%/yr projected. So you get a 16.5% potential return per year vs about 13% (6% yield + 7% growth) for KMP/KMR.
Hope that helps a bit.
Paul
Joe · August 4, 2012 at 9:35 am
That does help Paul. Very good explanation.
I appreciate your support.
Thanks
Joe
Mark · August 3, 2012 at 6:17 pm
Preaching to the choir here Paul. I’ve been a long time investor in the pipe patch jumped with glee during the 2008-9 downturn.
Tell me though, does it concern you at all that KMI is currently overpaying it’s dividend? I own it as well but I watch it a lot more closely then say EPD or KMP.
Glad to see you back writing and thanks for taking the time to do so.
Mark
libertatemamo · August 4, 2012 at 8:40 am
Hey Mark. For investors with your kind of fortitude 2008-9 was nirvana to buy MLPs. I backed up the truck as much in EPD as well back then. Most investors can’t bring themselves do buy when in those times so good for you.
For Q2, KMI is not overpaying their dividend but KMP is. KMP had a DCF/unit in Q2 of $1.07 but payed out $1.23/unit. KMI had a DCF/unit of $0.36 and payed out $0.35/unit. Regardless, since all of KMI’s cash for distributions come from KMP, KMP is the entity to watch over. KMP manages their distribution payout for the year not quarter on quarter, year to date the coverage ratios is still above 1. One the earnings call they expect to end the year at a coverage ratio of 1 or just below 1. Given their track record I give them the benefit of the doubt. They definitely run the business a little close to the edge than EPD. So, relative to EPD I guess yes I’m a little concerned but not overly so.
Paul
Mark · August 4, 2012 at 6:58 pm
Well, to the best of our knowledge Richard Kinder has started taking stupid pills so I’m inclined to give him the benefit of the doubt.
Thanks Paul.
September 2012 portfolio review « Investing For A Living · September 12, 2012 at 9:20 am
[…] EPD – my largest position and has been for quite some time. This company is firing on all cylinders. The strength and resiliency of its business were quite evident Q2 2012. While many if not most MLPs showed declining DCF coverage ratios during the quarter due to falling commodity prices, EPD’s coverage ratio held firm. It has a ton of capital projects under construction, all organically built, which bodes well for future growth. MLPs have been relatively weak this year but EPD is one of the few beating the S&P500 YTD. This is a long term holding for me. I expect about 10% annual returns going forward from today’s prices, 5% forward yield plus 5% growth. […]
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