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Energy stocks have recently entered a revival phase that lifted the Energy Select Sector SPDR® Fund ETF (XLE) toward its recent highs. The sector has benefited from the resurgence in crude oil futures (CL1:COM), shaking off the bearish sentiments that saw CL1 bottom in December 2023. Coupled with the persistence of the OPEC+ production cuts and Russia’s assessed compliance, it has managed to drive the bullish momentum bets, leading to a broad sector re-rating.
Enterprise Products Partners L.P. (NYSE:EPD) has also performed admirably since my previous EPD update in late December 2023. I urged investors to capitalize on the market’s misunderstanding of Enterprise Products Partners’ business fundamentals and earnings growth profile. Accordingly, EPD has outperformed the S&P 500 (SPX, SPY) since my last article, as EPD surged toward a new recent high.
The energy infrastructure leader has continued exploiting growth opportunities in 2024, notwithstanding the weakness observed in its natural gas business in 2023. Although the weakness in underlying natural gas prices affected EPD’s natural gas gross operating profits, its well-diversified business model helped Enterprise Products Partners maintain relatively flat growth in adjusted EBITDA in 2023, up 0.1%.
Enterprise Products Partners management articulated more robust growth investments in 2024, surpassing the previous estimates. Accordingly, EPD is expected to achieve organic growth CapEx between $3.25B and $3.75B, up markedly from last year’s $2.9B in growth CapEx. It’s also “$250 million higher than its previous forecast,” suggesting the LP sees increased opportunities in 2024 to expand its influence in capturing longer-term volume growth. However, the momentum is expected to decelerate by 2025, with management projecting growth CapEx in the region of $3B, in line with 2023’s investments.
I assessed that Enterprise Products Partners’s operating model has provided substantial confidence for investors, performing remarkably well in 2023, as seen in its flat adjusted EBITDA growth. It was a tough 2023 for the energy sector following 2022’s cycle peak, as growth normalized from a high level. Therefore, it helps set the stage for a more stable base to achieve mid-single-digit growth in distributable cash flow, or DCF, in the medium term, bolstered by EPD’s relatively attractive valuation and solid profitability.
EPD Quant Grades (Seeking Alpha)
As seen above, EPD was assigned a “B-” valuation grade by Seeking Alpha Quant, supported by a robust “A-” profitability grade. Its improving momentum (“B-” grade) has corroborated my bullish thesis on EPD, as the market realized its pessimism on EPD was unjustified.
Unitholders in EPD have benefited from the earnings visibility of its fee-based model as a leading energy infrastructure player. Its high-margin NGL business has provided a solid footing for its lower-margin crude oil and petrochemical businesses. In addition, even weaker performance from EPD’s natural gas business didn’t crash its overall adjusted EBITDA. Therefore, I believe it has provided more confidence to income-focused investors about the resilience of its DCF and their payouts accordingly.
Analysts estimates are constructive, indicating a 5.1% growth in adjusted EBITDA and a 2.1% uptick in DCF per share in 2024. As a result, it suggests that 2023’s growth normalization phase is likely over, as Enterprise Products Partners benefits from its growth investments amid a recovering energy market.
Is EPD Stock A Buy, Sell, Or Hold?
A near-term consolidation should be expected after such a strong run over the past three months. However, such pullbacks are opportunities for energy investors to gain more exposure.
EPD is still valued at a forward distribution yield of 7.2%, well over its 10Y average of 6.9%. It aligns with its attractive “B-” valuation, auguring well for a continuation of EPD’s uptrend bias.
The Fed is expected to reduce interest rates three times this year, which should provide additional valuation support for EPD’s payouts as income investors look for appealing opportunities to capitalize.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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