Pipeline company Enterprise Products Partners (EPD -0.23%) has had a strong year, with its stock price up about 30% as of this writing, while also paying out a very attractive distribution. Despite its solid performance this year, there is good reason to believe that the stock is well-positioned to continue to be a strong performer in the years ahead.
Let's look at three reasons why investors should consider buying Enterprise Products Partners' stock at current levels.
Mr. Consistency
The first thing to note when looking at Enterprise as a long-term investment is that the master limited partnership (MLP) has an unparalleled track record of consistency in the midstream energy space.
The company has raised its distribution for 26 consecutive years despite having to deal with a number of difficult periods for the energy market and economy during that span. Enterprise's consistency stems from its largely fee-based model, where the company only takes on minimal commodity or spread risk. Approximately 90% of its contracts also have inflation escalators. Meanwhile, it has historically been conservative with its leverage, distribution coverage ratio, and growth capital expenditure (capex) spending.
Currently, the stock carries a forward yield of about 6.2%. Its distribution, meanwhile, is well covered by its distributable cash flow, which is operating cash flow minus maintenance capex. Last quarter, Enterprise Products Partners had a distribution coverage ratio of 1.7.
The company's balance sheet also remains in good shape, with net debt (adjusted for equity credit in junior subordinated notes) standing at three times adjusted EBITDA. It has an investment-grade rating on its debt and its weighted average cost of debt is only 4.7%, which is attractive in the current high interest rate environment.
This all sets the company up to continue nicely increasing its distribution moving forward.
Image source: Getty Images.
Growth opportunities
In addition to its consistent track record, Enterprise is also set to ramp up its growth efforts after pulling back on growth projects following the pandemic. In the aftermath of the COVID-19 pandemic, the company had dropped its growth capex to a low of $1.6 billion in 2022, but it has begun to increase spending.
For 2024, it plans on spending $3.5 billion to $3.75 billion in growth capex, while taking that up to a range of $3.5 billion to $4 billion in 2025. It said much of this additional spending will be related to projects stemming from its recent acquisition of Pinon Midstream.
Since 2018, Enterprise has averaged an approximately 13% return on invested capital (ROIC) on its growth projects. It currently has $6.9 billion in projects that are under construction, most of which are not set to commence until the second half of 2025 or beyond. This should start to lead to some increased growth starting in the back half of next year, but even more so in 2026. For every $1 billion in growth projects that Enterprise completes, it should lead to about $130 million in additional annual gross operating profit based on its recent ROIC.
In addition, Enterprise is well-positioned to benefit from the increasing demand for natural gas that is coming from the ballooning power needs of data centers due to artificial intelligence. On its last earnings call, the company said this was one of the best signals in natural gas that it has seen in a long time, and that given its assets it was one of the few companies to really be able to take advantage of this opportunity.
Attractive valuation
Despite its strong performance this year, Enterprise's stock still trades at an attractive valuation from a historical perspective. Its enterprise-value-to-EBITDA (EV/EBITDA) multiple stands at 10.5, based on this year's analyst estimates.
EV/EBITDA is one of the best metrics to use when valuing midstream companies as it takes into account the debt the companies carry to build out their assets, while removing the non-cash depreciation costs that get spread across the life of these assets.
Before the pandemic, Enterprise would often carry an EV/EBITDA multiple of 15 or more. The MLP sector as a whole traded at a multiple of 13.7, on average, between 2011 and 2016.
EPD EV to EBITDA (Forward) data by YCharts
This suggests that Enterprise has plenty of room to see its multiple increase in the coming years, especially given the growth opportunities in front of it, as well as a more pro-energy government administration set to take office. As a result, I would be a buyer of the stock at current levels.
