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Is Enterprise's Cheap Valuation an Opportunity to Invest in the Stock?
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Enterprise Products Partners LP (EPD - Free Report) is currently considered undervalued, trading at a 9.81x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is below the broader industry average of 11.89x.
Image Source: Zacks Investment Research
While a discount valuation often presents a potentially profitable opportunity for investors, it is essential to investigate whether the partnership is facing any internal challenges. A more comprehensive analysis is required to determine if EPD’s discounted valuation is justified based on its fundamentals, growth prospects and prevailing market conditions.
EPD’s $7B Key Projects & Handsome 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 6.5% of the composite stocks belonging to the industry.
Distribution Yield
Image Source: Zacks Investment Research
EPD to Buy Pinon Midstream: Additional Fee-Based Earnings?
On Aug. 21, Enterprise Products 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.
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.
Should Investors Take a Chance on Undervalued EPD Stock?
Despite these positive developments, the partnership's stock is trading at a discount to its true value. Year to date, its units have jumped 17.3%, lagging the industry's composite stock growth of 24.2%. Prominent midstream companies such as Kinder Morgan Inc. (KMI - Free Report) and Enbridge Inc. (ENB - Free Report) have also surpassed EPD, achieving gains of 31% and 20.5%, respectively, during the same timeframe.
Year-To-Date Price Chart
Image Source: Zacks Investment Research
It appears that Enterprise Products has the potential to outperform the industry once the stock market begins to acknowledge its true value. However, there are concerns surrounding the stock, particularly regarding EPD's rising long-term debt, which is near its highest level in over a decade. This debt is primarily being utilized to finance substantial capital projects, and analysts worry that significant debt reduction may not occur in the near term. Recently, the company issued $2.5 billion in bonds at relatively favorable rates, but current borrowing rates exceed historical averages, resulting in increasingly rapid interest payments.
While EPD is currently undervalued, investors are probably better off not buying the stock until there is greater clarity on the partnership's future. Those who already own the stock should hold on to it. The stock carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, major brokers have increased EPD’s short-term price target by 14.1% from its recent closing price of $29.25, with the highest target set at $37, indicating a potential upside of 26.5%. Consequently, current investors holding their units stand to benefit from this upward price trend in the interim.
Image Source: Zacks Investment Research
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Is Enterprise's Cheap Valuation an Opportunity to Invest in the Stock?
Enterprise Products Partners LP (EPD - Free Report) is currently considered undervalued, trading at a 9.81x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is below the broader industry average of 11.89x.
While a discount valuation often presents a potentially profitable opportunity for investors, it is essential to investigate whether the partnership is facing any internal challenges. A more comprehensive analysis is required to determine if EPD’s discounted valuation is justified based on its fundamentals, growth prospects and prevailing market conditions.
EPD’s $7B Key Projects & Handsome 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 6.5% of the composite stocks belonging to the industry.
Distribution Yield
EPD to Buy Pinon Midstream: Additional Fee-Based Earnings?
On Aug. 21, Enterprise Products 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.
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.
Should Investors Take a Chance on Undervalued EPD Stock?
Despite these positive developments, the partnership's stock is trading at a discount to its true value. Year to date, its units have jumped 17.3%, lagging the industry's composite stock growth of 24.2%. Prominent midstream companies such as Kinder Morgan Inc. (KMI - Free Report) and Enbridge Inc. (ENB - Free Report) have also surpassed EPD, achieving gains of 31% and 20.5%, respectively, during the same timeframe.
Year-To-Date Price Chart
It appears that Enterprise Products has the potential to outperform the industry once the stock market begins to acknowledge its true value. However, there are concerns surrounding the stock, particularly regarding EPD's rising long-term debt, which is near its highest level in over a decade. This debt is primarily being utilized to finance substantial capital projects, and analysts worry that significant debt reduction may not occur in the near term. Recently, the company issued $2.5 billion in bonds at relatively favorable rates, but current borrowing rates exceed historical averages, resulting in increasingly rapid interest payments.
While EPD is currently undervalued, investors are probably better off not buying the stock until there is greater clarity on the partnership's future. Those who already own the stock should hold on to it. The stock carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, major brokers have increased EPD’s short-term price target by 14.1% from its recent closing price of $29.25, with the highest target set at $37, indicating a potential upside of 26.5%. Consequently, current investors holding their units stand to benefit from this upward price trend in the interim.