I first made Enterprise Products Partners (EPD) a Long Idea in January 2023 and reiterated my thesis in May 2024. Enterprise Products has underperformed as a Long Idea and is one of many stocks that the market has overlooked despite the strength of the company’s business. I expect EPD to benefit from a market that allocates value more efficiently and awards the businesses and stocks that can create the most shareholder value.
EPD still offers favorable Risk/Reward based on the company’s:
- position to profit from rising oil & gas production and demand,
- “toll-taker” business model,
- investments to capitalize on future demand,
- strong cash flow generation and yield to investors, and
- cheap valuation.
What’s Working
U.S. Oil & Gas Demand Continues to Rise
2024 marked the seventh consecutive year that the U.S. produced more crude oil than any other country. U.S. crude oil production reached a record average of 13.2 million b/d, up from 12.9 million b/d in 2023. Production is projected to grow further to an average 13.6 million b/d in 2025 and 13.7 million b/d in 2026.
U.S. Natural Gas Liquids (NGL) exports have also consistently risen every year since 2010. U.S. NGL exports grew from 194 thousand barrels per day (Mbbl/d) in January 2010 to 3,280 Mbbl/d in November 2024. See Figure 1. Enterprise Products benefits from continued NGL growth as the company’s second largest segment by revenue is its NGL Pipelines & Services segment (34% of revenue).
Figure 1: U.S. NGL Exports Between January 2010 and November 2024
Record Growth
I’ve mentioned the key advantage of a “toll-taking” business model several times in prior reports, and that advantage is on full display in Enterprise Products’ operations. With rising oil and gas demand, Enterprise Products achieved record volumes in 2024.
In 2024, Enterprise Products grew its natural gas processing inlet volumes by 10% YoY, total equivalent pipeline volumes by 6% YoY, NGL fractionation volumes 3% YoY, and marine terminal volumes by 6% YoY. The volume levels achieved in each of these segments represent record highs for the company. Since 2020, Enterprise Products has grown volumes in these four segments by 7%, 7%, 8%, and 6% compounded annually, respectively.
Capitalizing on Future Demand
As I’ve highlighted in prior reports, Enterprise Products continues to invest in additional capacity to meet future oil and gas demand. The company has $7.6 billion of major capital projects under construction at the end of 2024. $6 billion of these projects are expected to be completed in 2025 and begin generating cash flow, according to management. The projects expected to be completed in 2025 include two natural gas processing plants in the Permian Basin, the Bahia NGL pipeline, Fractionator 14, the first phase of an NGL export facility on the Neches River, and expansion of ethane and ethylene marine terminals.
Management notes these projects “are supported by long-term contracts” and enable the company to continue to capitalize on growing demand for oil and gas.
On the ethane and propane front, the company is building a new export terminal in Orange County, TX, part of which will go live in 3Q25, with the project finishing in the first half of 2026. Additionally, Enterprise Products is adding a 900 Mbbl refrigerated ethane tank to its ethane terminal at Morgan’s Point, which will enable higher loading rates.
As a toll-taker, Enterprise is well-positioned to transport today’s oil and gas while also capitalizing on future demand.
Quality Fundamentals
Strong oil and gas demand results in strong sales and profits at Enterprise Products. In 3Q24, Enterprise grew revenue and Core Earnings by 6% and 11% YoY, respectively. Core Earnings in the TTM period are the highest of any annual period in company history.
Longer-term, Enterprise has grown revenue and Core Earnings by 2% and 8% compounded annually from 2013 through the trailing-twelve-months (TTM) ended 3Q24. See Figure 2. The company’s net operating profit after-tax (NOPAT) margin increased from 7% in 2013 to 13% in the TTM ended 3Q24, while the company’s return on invested capital (ROIC) improved from 10.7% to 11.8% over the same time.
Figure 2: EPD’s Revenue and Core Earnings: 2011 – TTM ended 3Q24
Distribution + Share Repurchase Yield = ~6.7%
Enterprise Products has an impressive record of returning capital to unitholders. 2024 represented the company’s 26th consecutive year of increasing its distribution. More recently, Enterprise increased its per unit distribution to $2.10/unit in 2024 compared to $1.27/unit in 2012. See Figure 3.
When annualized, the current distribution gives investors a 6.4% yield.
Enterprise Products also repurchases units, which provides additional return to investors. Enterprise Products repurchased $188 million worth of units in 2023 and repurchased $219 million worth of units in 2024. Enterprise Products has $1.1 billion remaining under its current authorization. Should the company repurchase units at the 2024 pace, the combined distribution and repurchase yield would be 6.7%.
Figure 3: Enterprise Products’ Distributions: 2012 – TTM end 3Q24
Strong Cash Flows Support Distributions
Enterprise Products paid out $27.2 billion in distributions from 2018 through 3Q24. Most importantly, the company generated a cumulative $27.4 billion (26% of enterprise value) in free cash flow (FCF) over the same time, or more than enough to cover the distributions. See Figure 4.
Figure 4: Enterprise Products’ Cumulative Free Cash Flow Since 2018
Leading Balance Sheet Efficiency
Over the TTM, Enterprise Products’ invested capital turns, a measure of balance sheet efficiency, of 0.9 is the highest amongst its peers. It’s ROIC of 12% ranks third, behind another Long Idea MPLX, and Western Midstream Partners (WES). See Figure 5.
Figure 5: Enterprise Products Partners’ Profitability Vs. Pipeline Peers: TTM
What’s Not Working
Growth Rates Are Expected to Slow
While demand for oil and gas is projected to rise, the rate at which it does so is expected to decline after a record 2024. According to energy executives at the Argus Global Crude Summit, oil output is expected to increase by 250k-300k bbl/day in the Permian Basin in 2025. Such growth, while positive, would be a decline from 2024’s growth of 380k bbl/day in the region.
Master Limited Partnership Risks Remain
Enterprise Products is clearly a successful business, as noted above. Nonetheless, as a master limited partnership (MLP), there is risk that the general partner’s interests conflict with those of unitholders.
As a result of this structural concern, I give all MLPs a suspended Stock Rating as the nature of MLP agreements creates risk of significant unitholder dilution. However, I think the cheap valuation of Enterprise Products Partners’ common units easily offsets the risks involved in owning this MLP.
This structure could account for EPD trading at a discount to non-MLP peers.
Per Figure 6, EPD’s price-to-economic book value (PEBV) ratio is 0.8, while the PEBV of its non-MLP peers range from 1.9 to 3.4, with an average of 2.5. In other words, the market has priced non-MLP peers much higher than their economic book value. This valuation gap may never close, due to EPD’s MLP structure, but the stock price trading so far below the company’s economic book value, or no-growth value, more than compensates investors for the MLP risk.
Figure 6: EPD’s PEBV Vs. Non-MLP Peers: TTM
Shares Have Strong Upside Potential
At its current price, EPD’s PEBV ratio is 0.8. This ratio means the market expects the company’s NOPAT to permanently fall 20% from TTM ended 3Q24 levels. For reference, Enterprise Products has grown NOPAT 5% and 7% compounded annually since 2018 and 2013, respectively.
Below, I use my reverse discounted cash flow (DCF) model to quantify the cash flow expectations for different stock price scenarios for EPD.
In the first scenario, I quantify the expectations baked into the current price. If I assume:
- NOPAT margin falls to 10% (below five-year average of 16% and TTM margin of 13%) from 2024 to 2033 and
- revenue grows just 3% compounded annually (lower than the 8% compounded annually in the last five years) through 2033.
In this scenario, Enterprise Products’ NOPAT would fall 1% compounded annually through 2033 and the stock would be worth $33/unit today – nearly equal to the current price. This scenario also implies that the company’s NOPAT in 2033 would be 7% less than the company’s TTM NOPAT.
Shares Could Go At Least 27% Higher
If I assume EPD’s:
- NOPAT margin falls to 12% from 2024 to 2033,
- revenue grows 3% compounded annually each year through 2033, then
EPD would be worth at least $42/unit today – a 27% upside to the current price. In this scenario, EPD’s NOPAT grows just 1.5% compounded annually over the next decade.
Should EPD grow profits more in line with historical levels, the stock has even more upside. Figure 7 compares EPD’s historical NOPAT to the NOPAT implied in each of the above DCF scenarios.
Figure 7: EPD’s Historical and Implied NOPAT: DCF Valuation Scenarios
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
Read the full article here
