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'Anemic' investor interest pushes Enterprise toward self-funding

Enterprise Products Partners LP is slowing its distribution growth and moving toward self-funding of its capital spending to account for wary midstream sector investors.

Shortly after the midstream master limited partnership announced a scaled back distribution increase on Oct. 12, its executives held an after-market call to explain why they decided to decrease its quarterly distribution growth from 0.5 cent per unit to 0.25 cent per unit and recommended the board of directors approve maintaining that moderation through 2018. Enterprise is one of the top midstream companies in the country with an experienced management team that analysts widely respect.

"Investor interest in the energy sector broadly, in the midstream space specifically, has been anemic, and we don't believe it's been rewarding our consistent 5-plus percent annual distribution growth," said A.J. Teague, CEO of Enterprise's general partner. "We believe the combination of the growth in our distributable cash flow ... plus the compounding effect from moderating our distribution growth through 2018 will move us closer to self-funding our capital investments in the future."

President and director of Enterprise Products Holdings LLC W. Randall Fowler seconded the frustration over lagging investor interest, calling recent fund flows to the midstream sector "tepid." He explained that while the distribution slow-down is a small step, the partnership will benefit from needing a little less outside equity.

"Our view is rather than ... continuing to, if you would, stay a little bit on this treadmill or pay it out and then go raise it and then dilute our limited partners ... let's go ahead and take this small step, it is, to go ahead and stay out of the equity markets a little bit more and retain some of that capital back in the business," he said during the call.

The cut will help enable Enterprise to self-fund its roughly $1.25 billion equity portion of 2019 capital expenditures by contributing 10% of that equity program, according to executives, while also leaving room for potential share buybacks at the right equity value. They added that Enterprise has no further equity needs for 2017 and has "a lot of flexibility" regarding 2018 equity raises.

Fowler noted that moderating distribution growth to execute more fiscal discipline represents a significant change in mindset since a commodity price downturn in 2014, which Enterprise weathered thanks to cash flow from its fee-based processing segment. Many midstream peers were forced to take much more drastic measures to shore up balance sheets.

"If you asked an investor 10 years ago, it was pay it all out, baby, and just go raise the equity in the capital market," he said. "That has not worked out very well for a lot of people."

Enterprise units briefly opened trading higher on Oct. 13, but were off by about 1.6% to $26.24 by mid-morning. Its share price is about where it was one year ago.