3 Reasons to Buy Enterprise Products Partners Stock Like There’s No Tomorrow

Mr. Consistency

The first aspect to highlight when considering a long-term investment in Enterprise Products Partners is the company’s unmatched consistency in the midstream energy sector. This master limited partnership (MLP) has demonstrated an impressive ability to raise its distributions for 26 consecutive years. This remarkable achievement persists even through challenging periods for both the energy market and the broader economy. Enterprise’s consistency is primarily attributed to its largely fee-based business model, which minimizes its exposure to commodity and spread risks. Notably, about 90% of its contracts include inflation escalators, providing a shield against rising costs.

Furthermore, Enterprise has maintained a conservative approach to leverage, distribution coverage ratios, and growth capital expenditures. Currently, the stock boasts a forward yield of approximately 6.2%, with distributions well-supported by its distributable cash flow—operating cash flow minus maintenance capex. Last quarter, Enterprise noted a distribution coverage ratio of 1.7, showcasing its financial strength. Additionally, the company’s balance sheet shines, featuring net debt equivalent to three times adjusted EBITDA and an investment-grade rating on its debt. With a weighted average cost of debt at only 4.7%, Enterprise is well-positioned in today’s high-interest-rate environment. This financial robustness lays the groundwork for continued distribution growth in the future.

Growth Opportunities

Beyond its stellar track record, Enterprise is gearing up to expand its growth efforts after dialing back on projects in the wake of the COVID-19 pandemic. Following a dip in growth capex to $1.6 billion in 2022, the company is now poised to ramp spending significantly. For 2024, Enterprise plans to allocate between $3.5 billion and $3.75 billion for growth capital expenditures, anticipating this to increase further in 2025 to a range of $3.5 billion to $4 billion. Much of this additional investment is tied to projects stemming from the recent acquisition of Pinon Midstream.

Since 2018, Enterprise has enjoyed an average return on invested capital (ROIC) of approximately 13% on its growth projects. Currently, the company has $6.9 billion worth of projects under construction, with most set to be operational in the second half of 2025 or later. This alignment will likely trigger a surge in growth starting later next year, with even more robust results projected for 2026. On an optimistic note, for every $1 billion in completed growth projects, Enterprise anticipates an increase of around $130 million in additional annual gross operating profits based on its recent ROIC. Moreover, the growing demand for natural gas, spurred by rising energy needs from data centers driven by advancements in artificial intelligence, positions Enterprise favorably. In its latest earnings call, the company noted that the demand for natural gas has reached unprecedented levels, a signal the likes of which they haven’t seen in a long time.

Attractive Valuation

Even after a strong performance in the current year, Enterprise Products Partners stock trades at an appealing valuation when viewed through a historical lens. The company’s enterprise-value-to-EBITDA (EV/EBITDA) multiple stands at 10.5 based on this year’s forecasts. Employing the EV/EBITDA metric is crucial for valuing midstream companies, as it factors in the debt necessary for asset development while omitting non-cash depreciation costs recognized over asset lifespans. Prior to the pandemic, Enterprise consistently exhibited an EV/EBITDA multiple above 15. Comparatively, the MLP sector averaged a multiple of 13.7 from 2011 to 2016. This indicates substantial potential for Enterprise’s multiple to rebound in the coming years, particularly considering the array of growth opportunities on the horizon and the propitious energy-friendly policy landscape we can expect from a more pro-energy administration.

In conclusion, given Enterprise Products Partners’ solid foundation, growth trajectory, and attractive valuation, I stand firm in recommending the stock as a buy at its current levels. With consistent performance, a resurgence in growth investment, and favorable economic conditions ahead, the time to invest is now. Don’t let the opportunity slip by.