Key Points
Energy markets are experiencing their biggest supply disruption in decades due to the war with Iran. The country has effectively blocked the Strait of Hormuz, a key shipping lane for the energy sector. Before the war, 20% of the world’s oil and 20% of its liquefied natural gas (LNG) supply passed through the Strait each day. Today, that’s down to a trickle. As a result, energy prices have spiked.
Prices could continue rising if the war escalates further or tumble if there’s a peace deal. That’s leading me to focus on investing in energy stocks that can win either way. One energy stock that I’m buying right now is Enterprise Products Partners (NYSE: EPD). Here’s why.
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Image source: Getty Images.
Built for stability
Enterprise Products Partners owns and operates critical midstream infrastructure to support the energy industry, such as pipelines, processing plants, and export terminals. The master limited partnership (MLP) — an entity that sends a Schedule K-1 Federal tax form each year — generates very durable cash flows. Most of its assets operate under long-term, fixed-rate contracts or government-regulated rate structures. The following chart showcases the durability of its cash flows during periods of extreme oil price volatility:
Image source: Enterprise Products Partners.
The MLP’s durable cash flows allow it to pay a lucrative cash distribution to investors (currently yielding 5.6%). Enterprise Products Partners produced enough cash to cover its high-yielding distribution by a comfortable 1.7 times last year. That enabled it to retain $3.2 billion in cash to reinvest in the partnership.
Enterprise Products Partners also has a fortress balance sheet. The MLP has A-rated credit and a low leverage ratio. That gives it additional financial flexibility to invest in growing the partnership.
The coming growth wave
Enterprise Products Partners completed $6 billion of organic growth capital projects in the second half of last year. They’ll boost the MLP’s cash flow this year as they ramp up their volumes.
The MLP currently has another $4.8 billion in major growth projects under construction, which it should complete over the next two years. These projects will provide it with additional cash flow as they enter commercial service.
These drivers will grow the pipeline company’s cash flow, even if energy prices collapse following a major peace deal in the Middle East. That should enable Enterprise Products to continue increasing its distribution. The MLP has raised its payout for 27 straight years, an impressive streak considering all the volatility in the energy sector during that period.
A rock-solid investment amid the turmoil
Energy prices could surge or slump depending on the direction of the war with Iran. That uncertainty is leading me to focus on energy stocks like Enterprise Products Partners that can thrive either way. Its combination of stable cash flows, financial strength, and visible growth should enable it to continue increasing its high-yielding distribution for years to come. That’s why I recently added to my position and plan to continue doing so this year.
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
