2023-05-04 14:48:31 ET
Summary
- Enterprise Products Partners L.P. continues to generate attractive and generally growing cash flows.
- This was proven most recently when management announced financial results for the first quarter of the company's 2023 fiscal year.
- Add on top of this how cheap shares are, and Enterprise Products Partners is definitely worthy of optimism.
In my view, one of the most attractive pipeline / midstream plays on the market today is a company called Enterprise Products Partners L.P. ( EPD ). With a market capitalization of $56.3 billion as of this writing, the company is a sizable player in the market. With a special focus on NGLs, but with its hands also in pretty much everything else, the company makes for a very interesting opportunity for investors to consider.
But on top of this, cash flows are robust and EPD shares are trading on the cheap. Enterprise Products Partners is not the cheapest player in the space by any means. But it is cheap enough to warrant attractive upside. This was demonstrated yet again when management reported financial results covering the first quarter of the company's 2023 fiscal year.
Diving in
Before the market opened on May 2nd, the management team at Enterprise Products Partners announced financial results covering the first quarter of the company's 2023 fiscal year. Truth be told, the headline news provided by the company was somewhat mixed. Revenue, for instance, came in at $12.44 billion. This was down from the $13.01 billion reported one quarter earlier and it missed analysts’ expectations by $1.31 billion. Although this may look bad to some, the revenue picture for companies in this space is not all that significant. On the bottom line, meanwhile, earnings per share came in at $0.63. This was up from the $0.59 per share reported one year earlier, and it exceeded the expectations that analysts set for it by $0.01. On an adjusted basis, profits of $0.64 beat estimates by $0.02.
Although I would never exactly call profitability insignificant, I do think it is nowhere near as important in this space as other profitability metrics like cash flow. And when it came to this, Enterprise Products Partners really performed quite well. While operating cash flow did fall year-over-year from $2.15 billion to $1.58 billion, the number actually rose from $1.95 billion to $2.02 billion if we adjust for changes in working capital. In this space, there is another metric I like to pay attention to that I refer to as "true free cash flow." This takes out from the adjusted operating cash flow the maintenance or sustaining capital expenditures of the company that are needed to keep production running as is in perpetuity. Doing this, we end up with a reading of $1.94 billion compared to the $1.88 billion reported one year earlier. Another important metric is DCF, or distributable cash flow. This grew year-over-year from $1.84 billion to $1.94 billion. Meanwhile, EBITDA for the enterprise expanded from $2.26 billion to $2.32 billion.
When it comes to overall profitability, management has provided some interesting data on each segment by segment basis. But that really centers around the gross operating profits as opposed to anything lower on the income statement. But that works. For the overall increase in profitability that the company experienced year over year, the lions share came from the Natural Gas segment. The company benefited to the tune of $94 million on this front. The only other segment that reported and improvement was the Petrochemicals & Refined Products segment, with an increase of $15 million.
For the Natural Gas segment, there were multiple contributors that helped the company immensely. For instance, the firm benefited to the tune of $29 million from its Rocky Mountain gathering systems. And improvement in natural gas marketing profitability added another $24 million to the mix, while the Texas Interstate system was responsible for $18 million.
Year after year, Enterprise Products Partners has demonstrated pretty attractive growth for a company so large and requiring so much capital in order to continue expanding. NGL pipeline transportation volumes during the quarter, for instance, came out to 3.98 million boe (barrels of oil equivalent) per day. That was up 11.4% compared to the 3.57 million boe per day produced one year earlier. NGL marine terminal volumes grew 28.3% from 624 thousand boe per day to 824. NGL fractionation volumes expanded by 4%. The company did see growth in other products as well. For instance, fee based natural gas processing volumes jumped 13.2% year over year, while crude oil pipeline transportation volumes grew a more modest 4.6%. The list from here goes on. But as you can tell, the company has done quite well to continue expanding.
This has only been made possible by continued investments in new projects. For the 2023 fiscal year, for instance, management is planning $2.8 billion worth of organic capital project spending. The vast majority of this will fall under the NGL category. And in 2024, the company is currently forecasting $2.5 billion in spending. This does not mean the firm is not able to reward shareholders directly. Over the trailing 12 months ending in the first quarter of this year, the company allocated $4.2 billion to distributions. They also bought back around $0.3 billion worth of stock on the market. This is on top of $0.9 billion that the company allocated toward debt reduction.
One thing I really don't like about Enterprise Products Partners is the fact that management is pretty quiet when it comes to guidance. But if we annualize the results experienced so far for the first quarter, we can get an idea of, perhaps, what the picture might look like for the year. During this, we would get adjusted operating cash flow of $8.38 billion, true free cash flow of $7.98 billion, DCF of $8.18 billion, and EBITDA of $9.57 billion.
Based on these figures, I was able to value the company. In the chart above, you can see how the business is priced using estimates from 2023 and using actual data from 2022. Meanwhile, in the table below, you can see how shares are priced relative to five similar firms. This table looks at two of the metrics that I outlined. On a price to operating cash flow basis, two of the five companies were cheaper than Enterprise Products Partners. Meanwhile, using the EV to EBITDA approach, I calculated that one of the five was cheaper.
Company | Price / Operating Cash Flow | EV / EBITDA |
Enterprise Products Partners | 7.0 | 9.2 |
TC Energy ( TRP ) | 8.2 | 17.9 |
Kinder Morgan ( KMI ) | 7.2 | 11.0 |
The Williams Companies ( WMB ) | 7.3 | 10.9 |
Cheniere Energy ( LNG ) | 3.6 | 11.3 |
Energy Transfer ( ET ) | 3.8 | 4.9 |
Takeaway
From all that I can see, Enterprise Products Partners L.P. is doing quite well for itself. The company is investing significant amounts of capital into further growth. Although shares of Enterprise Products Partners L.P. are not as cheap as some of its other rivals, they are cheap enough to warrant significant optimism. In the long run, I have no doubt that the company will continue to generate strong returns for investors absent something significant and unexpected coming out of the woodwork. So while Enterprise Products Partners L.P. is not a top prospect for me, it is attractive enough in my book to rate a "strong buy."
For further details see:
Enterprise Products Partners: Attractive Cash Flows Make This A Great Prospect