Enterprise Products Partners LP (EPD, Financial) is a master limited partnership that operates in the energy sector, engaging in the transportation and processing of natural gas and petrochemicals. I like this energy stock because it has four main factors supporting potential higher prices: it has upcoming development catalysts, it has a very high dividend yield, the profitability is very strong and it is undervalued based on measures such as the price-earnings ratio and GF Value chart.
Important catalysts
In late May 2023, the company announced the completion of an expansion of its Acadian Haynesville Extension natural gas pipeline, which is "the first of $3.8 billion of organic growth capital projects that are scheduled to be completed and begin service in 2023. This expansion adds approximately 400 million cubic feet per day of Haynesville natural gas takeaway capacity to meet growing industrial demand in the Mississippi River Corridor and supports the Louisiana liquefied natural gas (“LNG”) export market."
Upcoming capital projects include a second propane dehydrogenation facility during the second quarter, the NGL fractionator 12 in Chambers County, Texas, the Poseidon natural gas processing plant in the Midland Basin during the third quarter, the Mentone II natural gas processing plant in the Delaware Basin and the first phase of the Texas Western Products system in the fourth quarter.
A high dividend yield with consistent dividend growth
Enterprise has a 7.42% forward dividend yield, with a rather high payout ratio of 0.75. The dividend growth rate has been 2.5% for the past five years. The company has made no dividend reductions since 1998, which is quite impressive.
Impressive recent growth
Enterprise has a very high GuruFocus growth rank of 8 out of 10, with a three-year revenue per share growth rate of 21.1%,.
While earnings growth has lagged, another factor in the company's favor is the strong growth in its free cash flow. The three-year free cash flow per share growth rate is 45.2%, and during the past five years, the average free cash flow per share growth rate was 35.10% per year. This is a very positive trend, and the capital project that was completed recently along with the scheduled projects to finish later in 2023 makes me very optimistic that strong free cash growth will continue. This is promising for investors because in the long-term, the market tends to favor growth over financial strength.
Strong fundamentals
The GF Score of 89 out of 100 implies Enterprise has good future performance potential, though not the best, according to a historical study from GuruFocus. On the positive side, the company received high ranks for profitability, value, momentum and growth, and only a low rank for financial strength.
I do not consider the financial strength to pose any severe warnings now as the debt-to-equity ratio of 1.07 is only marginally above the neutral threshold of 1.0, and the Piotroski F-Score of 8 out of 9 is very high, indicating a very healthy situation.
The profitability is great with a net margin of 11.18% as of March 2023, which was the highest figure for the past seven consecutive quarters, and a return on equity of 20.84%. The return on equity has been increasing from a figure of 17.98% back in December 2018. For a company that is highly capital intensive, it is great news to see that its efficiency in generating profits using its assets is very high as well. The company has a return on assets of 8.22% as of March 2023.
Attractive valuation
Enterprise has a market cap of $57.472 billion and its shares closed at $26.43 apiece on Friday, July 7, with a price-earnings ratio of 10.41, a price-book ratio of 2.15, a price-sales ratio of 1.01 and a PEG ratio of 1.41.
According to the GF Value chart, the stock is modestly undervalued, with a margin of safety of 38%.
Conclusion
In conclusion, I see many positive factors that make Enterprise Products Partners stock an attractive value opportunity now. Profitability is very good, free cash flow is consistent, additional capital projects should generate more cash flow, the valuation is hard to ignore and the dividend yield is a rare find. Midstream companies tend to be less cyclical than the rest of the energy sector as they function as energy toll roads; customers have no choice but to pay up as they need to get their energy products from point A to point B, which is another reason why I have confidence in this company's long-term sustainability.
