Three compelling reasons to heavily invest in Enterprise Products Partners' stock without considering future prospects.
Enterprising Investors Delve into Enterprise Products Partners (EPD 2.80%)
When considering long-term investments, Enterprise Products Partners, an unmatched master limited partnership (MLP) in the midstream energy space, deserves a close look. This company has an outstanding record of unwavering consistency, coupled with a promising growth outlook and an attractive valuation. Let's dive into three compelling reasons to consider buying EPD shares at the current price.
Steadfast Performance - Mr. Consistency
One of the most captivating aspects of Enterprise as an investment is its unparalleled consistency in the midstream energy sphere. For an astounding 26 years, the company has displayed unwavering resilience, raising its distribution year after year despite challenging economic and energy market periods.
The key to its resilience is an ingenious, fee-based business model, which minimizes commodity or spread risk. Around 90% of its contracts have built-in inflation escalators, safeguarding the company against price fluctuations. Moreover, Enterprise is known for its prudent debt management, low distribution coverage ratio, and disciplined growth capex spending.
At present, EPD boasts a forward yield of approximately 6.2%. Its distribution is well-supported by a significant distributable cash flow surplus, a healthy 1.7 coverage ratio in the last quarter. Its balance sheet remains robust, with net debt at a manageable three times adjusted EBITDA. Leveraging an investment-grade rating on its debt and an enticing 4.7% weighted average cost of debt, this company is primed to develop its distribution further.
Powerful Growth – The Next Phase
Previous to the COVID-19 pandemic, Enterprise deduced spending on growth projects considerably, reaching a low of $1.6 billion in 2022. However, the company is now boosting its expenses, aiming to invest $3.5 billion to $3.75 billion in 2024, with this figure increasing to $3.5 billion to $4 billion by 2025.
Much of this growth-related spending will be allocated to projects following EPD's recent acquisition of Pinon Midstream. Since 2018, Enterprise has averaged an impressive 13% return on invested capital (ROIC) for its growth projects. Currently, it houses approximately $6.9 billion in projects under construction, with the majority of them scheduled to commence in the second half of 2025 or beyond.
By 2026, this growth strategy will begin yielding results, leading to increased profitability and heightened returns for shareholders. Every $1 billion in growth projects completed by Enterprise should translate to around $130 million in additional annual gross operating profits, according to recent ROIC data.
Moreover, Enterprise is poised to capitalize extensively on the burgeoning power needs of data centers. As artificial intelligence continues to expand, the surge in power consumption will fuel an increased demand for natural gas. During its last earnings call, Enterprise described this surge in natural gas demand as a powerful beacon in the sector, and evidenced its unique position to harness this opportunity.
Attractive Valuation - A Bargain in Disguise
Despite its strong yearly performance, Enterprise's stock value remains attractively priced, providing ample headroom for appreciation. Its enterprise value to EBITDA (EV/EBITDA) multiple stands at a modest 10.5, based on this year's analyst estimates.
EV/EBITDA is considered a powerful metric for assessing midstream companies, as it takes debt-funded asset creation into account, eliminating non-cash depreciation expenses. Before the pandemic, Enterprise's EV/EBITDA multiple typically hovered around the 15 mark or higher. In addition, between 2011 to 2016, the midstream sector, on the whole, averaged an EV/EBITDA multiple of 13.7.
All these indications suggest that Enterprise has ample room for its EV/EBITDA multiple to increase as opportunities in growth and a more supportive energy policy administration emerge. Therefore, given the company's strong fundamentals, constructive financial outlook, and attractive valuation, it is a prudent investment choice for both growth-oriented and income-seeking investors.
The consistency in Enterprise Products Partners' financial performance, as demonstrated by its 26-year streak of raising distributions, makes it an appealing option for investors interested in long-term finance and investing opportunities in the midstream energy sector. Additionally, the company's disciplined growth strategy, featuring increased capital expenditures and a strong focus on data center power needs, offers promising financial returns, making EPD shares an attractive investment, particularly given its current, undervalued price.
