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Enterprise Products to Buy Pinon Midstream: Time to Bet on the Stock?
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Last Wednesday, Enterprise Products Partners LP (EPD - Free Report) announced an agreement to acquire Piñon Midstream for $950 million in an all-cash transaction. Piñon, a key player in gas gathering, compression and treating, operates in the Delaware Basin, a sub-basin of the Permian.
The acquisition is expected to be accretive to the partnership’s earnings. The key question for investors now is how to strategically position themselves in light of this acquisition. First, let’s check some fundamental aspects of the fully integrated midstream energy player.
EPD to Buy Delaware Midstream Player: Fee-Based Earnings?
Once the acquisition of all the equity interests in Piñon is completed, likely in the fourth quarter of this year, Enterprise Products will secure additional fee-based earnings. This is because Piñon’s assets, comprising 50 miles of natural gas gathering pipelines, compressor stations and treating facilities with plans for significant capacity expansion, are backed by long-term fee-based contracts, minimizing exposure to commodity price fluctuations and reducing volume risks.
Piñon operates a premier sour gas treatment system in the Delaware Basin, an area with significant untapped potential. With the acquisition, EPD will be able to establish a significant presence in the basin much faster. Read our blog: Enterprise Products Signs Deal to Acquire Pinon Midstream.
EPD’s Diversified Asset Base & Attractive Distribution Yield
Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. This includes more than 50,000 miles of pipelines and a storage capacity of 300 million barrels. These assets are utilized by shippers on long-term contracts to transport and store natural gas liquids, crude oil, refined products and petrochemicals. The partnership also has 14 billion cubic feet of natural gas storage capacity, securing stable fee-based revenues.
Additionally, EPD is set to generate additional fee-based earnings with $6.7 billion worth of major capital projects either currently in service or under construction. These project backlogs will not only secure stable cashflows but will also generate handsome unit-holder returns.
Image Source: Enterprise Products Partners LP
Supported by its stable and resilient business model, Enterprise Products has achieved 26 consecutive years of distribution hikes. The current distribution yield of the partnership stands at 7.2%, higher than 3.7% of the composite stocks belonging to the oil-energy sector.
Image Source: Zacks Investment Research
How Should Investors Play EPD Stock?
All these positive developments are reflected in Enterprise Products’ one-year stock price chart. Over the period, the units of the partnership have gained 19.2%, outperforming the 8.7% growth of the composite stocks belonging to the oil-energy sector. Kinder Morgan Inc (KMI - Free Report) stock and Enbridge Inc. (ENB - Free Report) stock, two other leading midstream energy players, have gained 31.3% and 23.9%, respectively, over the same period.
One-Year Stock Price Chart
Image Source: Zacks Investment Research
However, investors should be aware of certain concerns. The planned expansion of Piñon's facilities, including the addition of a third acid gas injection well, will require substantial capital investment. EPD must ensure that these investments are effectively managed to realize the anticipated returns. Furthermore, integrating Piñon's operations into EPD's existing structure could present logistical and operational challenges.
Also, as a midstream company heavily involved in fossil fuels, EPD faces potential risks from shifts in energy policies and the global transition to renewable energy. These long-term risks could affect the demand for EPD's services and hurt its growth prospects.
Despite these negatives, the partnership’s long-term outlook looks promising, backed by stable fee-based cash flows and attractive distribution yields. However, investors are advised to be cautious. Instead of rushing to add the Zacks Rank #3 (Hold) stock to their portfolios, it may be prudent to wait for a more opportune entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This is because, at this moment, units are somewhat expensive on a relative basis, with the current 9.84X trailing 12-month enterprise value/earnings before interest tax depreciation and amortization staying above the 9.53X five-year median. Also, the partnership is trading at a premium to the broader sector average of 3.19X.
Image Source: Zacks Investment Research
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Enterprise Products to Buy Pinon Midstream: Time to Bet on the Stock?
Last Wednesday, Enterprise Products Partners LP (EPD - Free Report) announced an agreement to acquire Piñon Midstream for $950 million in an all-cash transaction. Piñon, a key player in gas gathering, compression and treating, operates in the Delaware Basin, a sub-basin of the Permian.
The acquisition is expected to be accretive to the partnership’s earnings. The key question for investors now is how to strategically position themselves in light of this acquisition. First, let’s check some fundamental aspects of the fully integrated midstream energy player.
EPD to Buy Delaware Midstream Player: Fee-Based Earnings?
Once the acquisition of all the equity interests in Piñon is completed, likely in the fourth quarter of this year, Enterprise Products will secure additional fee-based earnings. This is because Piñon’s assets, comprising 50 miles of natural gas gathering pipelines, compressor stations and treating facilities with plans for significant capacity expansion, are backed by long-term fee-based contracts, minimizing exposure to commodity price fluctuations and reducing volume risks.
Piñon operates a premier sour gas treatment system in the Delaware Basin, an area with significant untapped potential. With the acquisition, EPD will be able to establish a significant presence in the basin much faster. Read our blog: Enterprise Products Signs Deal to Acquire Pinon Midstream.
EPD’s Diversified Asset Base & Attractive Distribution Yield
Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. This includes more than 50,000 miles of pipelines and a storage capacity of 300 million barrels. These assets are utilized by shippers on long-term contracts to transport and store natural gas liquids, crude oil, refined products and petrochemicals. The partnership also has 14 billion cubic feet of natural gas storage capacity, securing stable fee-based revenues.
Additionally, EPD is set to generate additional fee-based earnings with $6.7 billion worth of major capital projects either currently in service or under construction. These project backlogs will not only secure stable cashflows but will also generate handsome unit-holder returns.
Supported by its stable and resilient business model, Enterprise Products has achieved 26 consecutive years of distribution hikes. The current distribution yield of the partnership stands at 7.2%, higher than 3.7% of the composite stocks belonging to the oil-energy sector.
How Should Investors Play EPD Stock?
All these positive developments are reflected in Enterprise Products’ one-year stock price chart. Over the period, the units of the partnership have gained 19.2%, outperforming the 8.7% growth of the composite stocks belonging to the oil-energy sector. Kinder Morgan Inc (KMI - Free Report) stock and Enbridge Inc. (ENB - Free Report) stock, two other leading midstream energy players, have gained 31.3% and 23.9%, respectively, over the same period.
One-Year Stock Price Chart
Image Source: Zacks Investment Research
However, investors should be aware of certain concerns. The planned expansion of Piñon's facilities, including the addition of a third acid gas injection well, will require substantial capital investment. EPD must ensure that these investments are effectively managed to realize the anticipated returns. Furthermore, integrating Piñon's operations into EPD's existing structure could present logistical and operational challenges.
Also, as a midstream company heavily involved in fossil fuels, EPD faces potential risks from shifts in energy policies and the global transition to renewable energy. These long-term risks could affect the demand for EPD's services and hurt its growth prospects.
Despite these negatives, the partnership’s long-term outlook looks promising, backed by stable fee-based cash flows and attractive distribution yields. However, investors are advised to be cautious. Instead of rushing to add the Zacks Rank #3 (Hold) stock to their portfolios, it may be prudent to wait for a more opportune entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This is because, at this moment, units are somewhat expensive on a relative basis, with the current 9.84X trailing 12-month enterprise value/earnings before interest tax depreciation and amortization staying above the 9.53X five-year median. Also, the partnership is trading at a premium to the broader sector average of 3.19X.