Units of Enterprise Products Partners (NYSE:EPD) slumped 30.4% in 2020, according to data provided by S&P Global Market Intelligence. Weighing on the master limited partnership (MLP) was weakness in the oil market, which impacted its operations and growth prospects.
The oil market nearly collapsed during the second quarter after the COVID-19 outbreak forced the global economy to shut down, right as OPEC and Russia started an oil price war. Those dual headwinds caused oil demand and pricing to fall off a cliff. That impacted the volumes flowing through midstream systems, like those operated by Enterprise. As a result, its distributable cash flow declined by 4% through the third quarter.
Meanwhile, with the oil market in flux, Enterprise cut several expansion projects out of its backlog. The most notable was the Midland-to-ECHO 4 pipeline expansion in Texas. That move forced the company to record a $45 million impairment charge while reducing its planned capital spending by $800 million through 2022.
While the reduction in expansion-related spending will impact Enterprise’s growth prospects, it will improve its free cash flow. After investing about $2.6 billion last year, the company only expects to spend $1.5 billion in 2021 and $1.9 billion in the combined 2022-2023 timeframe. It’s therefore on track to produce an increasing amount of free cash flow, which it could use toward debt reduction, unit repurchases, or a higher distribution.
After tumbling more than 30% last year, Enterprise’s distribution now yields 8.4%. That payout looks increasingly sustainable, given the overall stability of the company’s cash flow and the expectation it will produce more excess cash in the coming years. Because of this, Enterprise looks like an attractive option for income investors to consider.