EPD Q3 Review:
Enterprise Products (NYSE:EPD) reported another solid quarter of cash generation this morning (10/31). EBITDA came in at $2.327 billion versus consensus of $2.318 billion. The strength was across all business lines, particularly in NGL Pipelines & Services (the division that really matter imo) reporting $1.199 billion excluding MTM gains/losses driven by slightly higher pipe and processing volumes, very strong fractionation, and slightly lower marine terminal volumes.
Crude oil and Petrochemical Refined Products were both up strongly (both around $450mm of EBITDA) while natural gas pipeline volumes were down slightly.
Leverage finished the quarter at 3x Debt/EBITDA and the distribution, which grew 5% y/y, was 1.7x covered. The company did not buy back any units this quarter as the VWAP was too close to the target price most of the quarter. The company mentioned on the conference call that they expect to be back in the market buying units during the fourth quarter. Since I imagine they’re not planning on the stock coming down in price, I’ll take that planned action to mean they’ll up their target buyback price.
Increased Capital Projects:
They increased its expected capital expenditures this year and next year. Both will be in the $3-3.5 billion range with maintenance expenditures comprising about $400 million per year. The bulk of the spending will be centered around the company’s core NGL franchise, primarily in the Delaware/Permian Basin. These projects will include natural gas processing and NGL pipelines and fractionation.
The company does not believe the higher capital spending will restrain it from buying back $200-250 million of units next year. My sense is that they’ll be more aggressive with the buyback should the stock drop materially, but that’s not certain. In the context of a $56 billion market cap, a $250mm buyback is a pittance.
Rock Solid Balance Sheet and Low Cost of Capital:
It’s hard to find a company that took more advantage of the low interest rate environment of the past few years. As of quarter end, the weighted average life of the company’s debt was about 19 years and the cost of capital is 4.6%, with 96% being fixed rate. Only 13% or about $4 billion of this debt matures before the end of 2026 and only $850 million maturing in 2024. The company could easily pay that off with excess cash flow should the cost of debt remain too high.
More importantly, it could handle those maturities without sacrificing capital spending, distributions or buybacks. A 1.7x distribution coverage at EPD’s absolute scale provides a lot of fiscal flexibility.
Valuation:
Even with the stock still being up over 7% ytd, valuation remains modest at 9x 2023 EBITDA and a 7.7% distribution yield. Taking into account the excess coverage bring the free cash flow yield through the equity to 13%. I still struggle to find a cheaper, more defensive name with better after tax cash flow yield.
Risk:
The main risk to these units stems more from trading correlation to oil prices rather than true operationally risk. If oil tanks, the units might too. That does not mean that the profits/cash flows will be impacted. It’s just how the units trade.
Of course, there’s always regulatory and accident risk with a name like this too but that’s impossible to handicap.
Conclusion:
I have been following this company for almost ten years and started writing about it over two years ago. While the units are up nicely since my first article, they remain below their pre-Covid high while EBITDA is on pace to be over 20% higher, the distribution is 15% higher and the company’s balance sheet has never been stronger. I consider it a long-term core holding that will deliver low-risk, at least high single digit, tax-efficient returns for the foreseeable futures.
Read the full article here