Enterprise Products Partners: Driving on Autopilot

Enterprise Products Partners’ Stellar Performance

The monetary engine that is Enterprise Products Partners (NYSE:EPD) keeps turning heads with its impressive financial results. The company exhilarated investors by exceeding estimates on earnings, EBITDA, and DCF (distributable cash flow) at $.72 vs $.68, $2.50 billion vs $2.45 billion, and $2.06 billion vs $1.99 billion respectively.

The company showcased its robust financial position with a leverage of 3x and liquidity of $3.9 billion, which further fueled an increase in distribution to $0.515/unit, representing a substantial 5.1% surge over the previous period. This left the indicated yield at an enticing 7.7% with the units priced at $26.75. The company also flexed its financial muscle by repurchasing 6.6 million common units over the course of the year.

The operating margin, anchored in the high 70’s percentage primarily by NGL’s (natural gas liquids), showed remarkable resilience with differentials holding the fort. Although these are somewhat related to commodity pricing, the company steers clear of significant commodity pricing risk.

Deep at its core, EPD emerges as predominantly an NGL luminary, and this segment delivered a stellar performance in Q4 and throughout the year.

Fueling Growth Capital

In line with its capital expenditure plans, the company has carried over some of Q4’s capital projects into the current year. Furthermore, initial plans for 2025 growth have also been outlined, although these are subject to amendments as new opportunities emerge, as is customary for the company.

Valuation Rollercoaster

Despite its continued stellar performance, it’s puzzling that the company’s unit price still lags its pre-Covid high. Comparatively, its distribution is over 10% higher, its leverage is a turn lower, and it has moved beyond a massive capex cycle, with the full benefits now reflected in EBITDA, projected to be 30% higher this year than pre-Covid levels. Surprisingly, the units are now languishing more than 10% below the pre-Covid high, resulting in a valuation over 20% lower at 9x 2024 EBITDA.

Navigating Risks

Like anything tethered to energy, EPD’s unit price appears sensitive to oil prices, particularly sharp fluctuations. However, it’s imperative to note that while the unit price is sensitive to oil prices, the actual operations exhibit minimal sensitivity to such price movements. The most substantial impact is witnessed in differentials when oil and natural gas prices converge, leading to reduced opportunities to capitalize on price discrepancies.

Closing Thoughts

For an extensive period, I’ve held the view that EPD is a fundamental asset for any investor, particularly those seeking income with a dash of growth. While the MLP structure imposes certain limitations on ownership, and restrictions on their placement (as they tend to fare poorly in IRAs), the appeal of these assets, combined with the impeccable management team and the tax-deferred nature of distributions, make them an alluring proposition.