Piper Sandler also likes this energy stock and just shifted its rating to ‘Overweight’.
Enterprise Products Partners L.P. (EPD)
From Cabot Dividend Investor
Master Limited Partnership (MLP) Enterprise Product Partners (EPD) is one of the largest midstream energy companies in the country with a vast portfolio of service assets connected to the heart of American energy production. It has $36 billion in annual revenues from an unparalleled reach in the industry with over 49,000 miles of oil and gas pipelines connected to every major US shale basin and 90% of American refiners east of the Rockies, and offers export facilities as well in the Gulf of Mexico.
The stock was recommended at the beginning of the year because it had a very stable business, of which more than 85% is fee-based and contracted and not very vulnerable to volatile commodity prices. It had a growing business, with many billions worth of new projects coming on line this year and next. And the stock was cheap, selling at more than 30% below the 2014 high, despite the fact that earnings had grown an average of 11% per year since 2014.
Then, Covid-19 hit.
Now it’s really, really cheap. The stock is down over 36% so far this year. The energy sector has been in the crosshairs of the lockdown. Demand for oil and gas crashed and prices followed suit. And the same time, a price war ignited with Russia and Saudi Arabia, which further hurt commodity prices. EPD has been dragged down along with this worst performing sector of the market.
Is EPD worth buying now? I believe it is for two primary reasons; it has a stable business and the current stratospheric 10.3% yielding distribution should be safe.
As I mentioned, EPD derives revenue primarily for the service of piping, processing and storing oil and gas. It makes money on the fact there will continue to be a lot of oil and gas sloshing around the country, as the U.S. is now the world’s number one producer of both oil and natural gas. While volumes have been disrupted, this company won’t take nearly the earnings hit during this recession as most energy companies. Distributable cash flow was only down 4.5% in the first quarter.
Energy will power this recovery, which is already underway in haste. Earnings for EPD will come back much faster than companies with more exposure to oil and gas prices. Plus, the midstream operator has many growth projects coming online in the near future.
Then there’s that huge distribution. Here’s why I think it’s safe. The company has raised the distribution every single year since its IPO in 1998, even through the financial crisis and the carnage in the industry for 2014 to 2016 when many of its peers slashed payouts. It also entered the year in what management described as the best financial shape ever with low debt and a strong cash position.
Enterprise has a peer low 60% payout ratio of distributable cash flow and 1.6 times distribution coverage. A rate of 1.2 times is considered solid and conservative in the industry. The company has also cut back on growth projects during the recession to preserve cash. It is highly unlikely that earnings will be negatively affected to the extent that they won’t easily cover the distribution, even for one quarter. But even if that were to happen, EPD has over $6 billion in cash from which to help pay $4.5 billion in annual distributions.
The stock is a great value with a massive 10.3% yield that should be quite safe. It’s difficult to say when the market will turn around and start rewarding this neglected stock. But you generate a huge income while you wait for the stock to appreciate over time.
Tom Hutchinson, Cabot Dividend Investor, cabotwealth.com, 978-745-5532, July 10, 2020