Company Overview: Enterprise Products Partners L.P. (NYSE: EPD) is engaged in the exploration, treatment, processing, transportation and storage of natural gas and crude oil. The company has a broad network of pipeline that extends across 50,000 miles. The pipeline of products includes natural gas, NGL, crude oil and refined products.

EPD Details

Robust Product Pipeline Indicating Bright Prospects for the Company: Enterprise Products Partners L.P. (NYSE: EPD) has its headquarters in Houston, TX. The company is one of the top mid-stream energy players in North America. The company has a wide base of midstream infrastructure assets, which is engaged in providing natural gas, natural gas liquids (NGL), oil and refined petrochemical products to producers and consumers of commodities. EPD has four operating segments namely (1) NGL Pipelines & Services, (2) Crude Oil Pipelines & Services, (3) Natural Gas Pipelines & Services and (4) Petrochemical & Refined Products Services.

The company has a steady business model and is not substantially revealed to volatility in oil and gas prices. EPD also produces stable fee-based revenues from the vast pipeline network that stretches across ~50,000 miles, which are connected to key shale plays in the United States. EPD also has a storage asset that has the capability to store ~260 million barrels of NGL, refined products, petrochemical, and crude oil. These assets also have the capacity to store 14 billion cubic feet of natural gas. Furthermore, EPD has $3.9 billion of major capital projects under construction that are likely to provide incremental fee-based revenues.

For the financial year ended on 31 December 2019, total net revenues stood at $32,789.2 million. Net income for the company stood at $4,687.1 million, up from the year-ago figure of $4,238.5 million. Looking at the past performance, EPD delivered a CAGR growth of ~4.9% in revenues over the period of FY15 to FY19, while net profit recorded a CAGR growth of ~16.3% over the same time span.

Past Performance (Source: Company Reports)

The company has 21 natural gas processing facilities, 25 fractionators, 11 condensate distillation facilities and 19 deepwater docks handling NGLs, thereby leveraging on the expected demand growth, including exports, for natural gas, crude oil & petrochemical NGLs, and refined products. Looking ahead, the company expects to adopt numerous strategies and is also taking necessary measures to expand its asset base via growth capital projects and accretive acquisition of complementary mid-stream energy assets, bolstering the stability of cash flows and other fee-based businesses.

Although the shape of economic recovery on the face of Covid-10 pandemic is still uncertain, the company is, however, leading to a remarkable rebound in the demand for energy and energy products. Keeping this in mind, we believe the requirement for dependable U.S. energy, petrochemicals and related products will continue to resume and spur long-term growth prospects.

 3QFY20 Key Financial Highlights: During the quarter, the company reported adjusted earnings per limited partner unit of 48 cents, up from the year-ago quarter’s figure of 46 cents per unit. Revenues in 3QFY20 came in at $6,922 million as compared to $7,964.1 million reported in the prior corresponding period. The results were primarily aided by higher transportation volumes in Petrochemical & Refined Products Services, and higher fee-based volumes from the Permian Basin at the partnership’s gas processing plants.

3QFY20 Key Highlights (Source: Company Reports)

Segmental Performance: During the quarter, the company reported gross operating income at NGL Pipelines & Services of $1,028.1 million, which increased from $1,008.3 million from the year-ago period. The segment benefitted from higher fee-based volumes from the Permian Basin at the partnership’s gas processing plants. Gross operating income from Natural Gas Pipelines and Services’ stood at $258.5 million as compared to $208.4 million reported in the year-ago quarter, due to lower natural gas pipeline transportation volumes. Gross operating income from Crude Oil Pipelines & Services came in at $481.8 million, down from $496.2 million reported in pcp. Gross operating income at Petrochemical & Refined Products Services stood at $315 million, up from $288.4 million from the year-ago quarter, owing to an increase in segment pipeline transportation volumes.

Segmental Performance (Source: Company Reports)

Balance Sheet & Liquidity Position: In 3QFY20, distribution stood at 44.50 cents per common unit or $1.78 per unit on an annualized basis, which increased a marginal 0.6% on pcp. Distributable cash flow on an adjusted basis came in at $1,647 million as compared to $1,639.5 million in the year-ago period and provided coverage of 1.7x. Particularly, EPD retained $669 million of distributable cash flow in 3QFY20. Total capital expenditure in 3QFY20 stood at $705 million. At the end of the quarter, the company’s total outstanding debt principal came in at $30.1 billion. EPD’s consolidated liquidity amounted to $6 billion, consisting of unrestricted cash on hand of $1 billion and available borrowing capacity of $5 billion.

Key Metrics: Gross Margin for 3QFY20 stood at 30.7%, higher than the previous corresponding period figure of 27.9%. EBITDA Margin for 3QFY20 stood at 27.3%, higher than the industry median of 22.5%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 42.11% of the total shareholding. Williams (Randa Duncan) and Harvest Fund Advisors LLC hold the maximum interests in the company at 32.16% and 2.02%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: Although EPD’s long-term business fundamentals look promising, the deteriorating production of commodities due to COVID-19-led dented energy demand is expected to weigh on the company’s short-term demand for the partnership’s midstream assets. Adding to the woes, lower natural gas pipeline transportation volumes and reduced propylene production volumes may hurt bottom-line, going forward. Moreover, higher expenses are expected to weigh on EPD’s performance, in the near-term. EPD’s leveraged balance sheet also poses risks with total debt of $29,862 million and a cash balance of $1,032.2 million as of September 30, 2020. This indicates that the company needs to be more focused on the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile.

What to Expect: For FY20, the company expects an investment of $2.9 billion for the growth capital project. Also, it expects sustaining capital expenditures to be ~$300 million in FY20. Growth capital investment for 2021 is expected to be $1.6 million, whereas the same for 2022 is expected to be $800 million. Further, the company predicts energy demand to increase in the long-term.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of EPD closed at $20.67 with a market capitalization of ~$45.1 billion. The stock is currently trading above the average of its 52-week low and high levels. The stock went up ~18.8% in the last three-month period. On a technical analysis front, the stock has a support level of ~$19.3 and a resistance level of ~$22.2. Considering the above factors, we have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like we have taken the peer group - Plains All American Pipeline LP (NYSE: PAA), ONEOK Inc (NYSE: OKE), and Magellan Midstream Partners LP (NYSE: MMP), to name a few. Hence, we recommend a “Buy” rating on the stock at the closing price of $20.67, down by 1.34% on 9 December 2020. 

EPD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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