Enterprise Products Partners (NYSE: EPD) has been one of the most consistent growers in the energy midstream sector. The master limited partnership (MLP) has increased its cash distribution (which yields 6.8%) for 26 straight years. That's due to the durability of its cash flow and its investments to expand its extensive midstream system.
While the MLP tends to grow relatively steadily, this year will be a bit of an outlier. It has $6 billion of growth capital projects on track to enter service through the end of the year. Because of that, its growth rate should accelerate as it heads into 2026, giving it plenty of fuel to continue increasing its lucrative distribution.
Another solid quarter
Enterprise Products Partners recently reported its first-quarter results. The midstream company generated $2 billion in distributable cash flow, a 5% increase from the prior year. The MLP "continued to benefit from Permian-driven volume growth and consistent domestic and international energy demand pull across our midstream infrastructure system," stated co-CEO Jim Teague in its earnings press release. The company delivered record natural gas processing and gas pipeline volumes during the period.
The pipeline company produced enough cash during the period to cover its cash distribution by a comfy 1.7 times. That enabled it to generate $894 million of excess free cash flow, which it used to help fund growth capital projects. That allowed the company to maintain a very strong balance sheet. Its leverage ratio entered the period at 3.1 times, a little higher than its target range of 3 times. That's still the lowest level in the midstream sector, which is why Enterprise is the only company in its space with A-rated credit.
Enterprise Products Partners' growing cash flow and strong coverage ratio enabled it to increase its distribution by 3.9% over the past year. With its cash flow growing faster than its distribution, its payout has become even safer over the past year.
The coming growth spurt
Enterprise Products Partners' growth rate should accelerate in the coming quarters. Teague highlighted in the earnings press release, "We have $6 billion of major organic growth projects scheduled to be completed and begin generating cash flow in 2025." The co-CEO noted that
These include two natural gas processing plants in the Permian Basin in the third quarter, Mont Belvieu area NGL fractionator 14 in the third quarter, the first phase of our NGL export facility on the Neches River in the third quarter, our Bahia NGL pipeline in the fourth quarter, and enhancements at our Morgan's Point marine terminal on the Houston Ship Channel in the fourth quarter.
These commercially secured capital projects will supply the company with incremental sources of stable cash flow. That should support continued distribution increases.
Those projects are part of the $7.6 billion of major capital projects the company currently has under construction that should come online through the end of next year. The MLP has more than $700 million of additional projects under development that it could approve over the next two years. That drives the company's belief its capital spending will be between $4 billion and $4.5 billion this year before falling in the $2 billion to $2.5 billion range in 2026.
With capital spending on track to fall and its cash flow rising, the MLP is on pace to produce significant excess free cash flow starting next year. It could use that financial flexibility to support distribution increases, unit repurchases, additional growth investments (acquisitions or organic expansion projects), or fortify its already elite balance sheet.
Ample fuel to keep the payout running higher
Enterprise Products Partners' growth engine continued to hum along during Q4. The company expects to hit the accelerator over the next few quarters as it completes its current wave of organic expansion projects. That growth spurt will provide the company with even more fuel to continue increasing its already lucrative payout. Because of that, it remains an excellent option for those seeking a high-yielding and steadily rising income stream.
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Matt DiLallo has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
