When it comes to the midstream sector, my top pick is Enterprise Products Partners (NYSE:EPD). While the sector as a whole attracts investors with its high distribution yields, EPD stands out for its strong execution, low leverage ratio, and history of consistent distribution growth. Despite its dominant market position and conservative balance sheet, the market is undervaluing EPD. I strongly recommend buying this stock.

EPD Stock Price

EPD’s stock price has remained relatively stagnant over the past decade, creating an attractive opportunity for investors. Unlike other high yield plays in the market, EPD is priced attractively relative to the broader market.

EPD Stock Key Metrics

EPD is one of the largest midstream energy companies in North America, owning a comprehensive pipeline system for transporting and storing commodities. Its primary focus is on NGLs and natural gas, which contribute significantly to its total segment gross operating margin.

In the most recent quarter, EPD saw a decline in distributable cash flow (DCF), mainly due to lower prices for NGLs. However, the company remains resilient, generating most of its cash flows from fee-based contracts. Additionally, EPD has a solid history of maintaining strong free cash flow.

EPD has been able to distribute significant amounts of cash to shareholders, repurchase stock, and pay down debt, all while funding ambitious growth capital expenditure plans. Despite the high growth CapEx, EPD has reduced its debt principal and maintained a strong balance sheet with a low leverage ratio.

Is EPD Stock a Buy, Sell, or Hold?

At its current price, EPD offers a distribution yield of nearly 8%, which is among the highest over the past decade. This high yield can be partly attributed to the cyclical nature of the energy sector. However, EPD is experiencing a sort of “K-1 discount” compared to its c-corp midstream peers, which trade at premium valuations despite having higher leverage and less exemplary management teams.

EPD has internally funded its growth capital expenditure since 2018, demonstrating its ability to generate strong returns from growth projects. The company also has a long history of distribution growth and a commitment to reducing leverage. With the potential for a 5% distribution growth rate and further leverage reduction, EPD presents a unique opportunity for investors to reinvest distributions at a high yield.

While there are risks associated with commodity pricing and limited voting rights for limited partners, EPD’s conservative balance sheet and exemplary management stewardship mitigate these concerns. Overall, EPD’s current valuation does not adequately reflect its strengths, making it an attractive investment.