Over the years, I’ve learned to pay attention to the Energy sector as a way to measure a number of different aspects of the global economy. One of the those elements that is very interesting is the difference between U.S. oil production versus the rest of the world. The financial markets use futures contracts on two primary types of crude oil to track oil prices. Contracts for Brent crude are the basic barometer for oil produced mostly in the Middle East by OPEC countries, while West Texas Intermediate (WTI) crude contracts act as the gauge for U.S. crude.
Over the last ten years, shale oil exploration and production have helped the U.S. narrow the gap between Brent and WTI crude production, with a major portion of shale oil coming from the Permian Basin, which is located primarily in Texas and parts of New Mexico and Oklahoma. The challenge associated with U.S. production – and one of the things that has helped keep oil prices relatively low for the past couple of years – is that exploration and production of shale oil has exceeded the capacity of midstream companies to transport the oil to its primary distribution centers before it is sold throughout the world.
Midstream oil companies include those that have been involved in the ongoing construction and maintenance of pipelines out of the Permian Basin; limitations of existing pipeline capacity have been the primary reason that inventory out of that area has remained stuck in the Basin, which has kept the entire industry waiting for new pipeline projects to be completed. Enterprise Products Partners (EPD) is on of the biggest midstream companies with operations in crude oil, natural gas and liquified natural gas (LNG) transport and storage among other things. It isn’t an easily recognizable company by name, but its fundamental profile is very interesting, and its value proposition is extremely attractive. Most analysts and industry experts expect Permian pipeline production to improve through the rest of the year and into 2020, as ongoing pipeline projects boost transport capacity. That means that companies like EPD are likely to be strong bets to grow profits in the next year. Let’s dive into the numbers.
Fundamental and Value Profile
Enterprise Products Partners L.P. (Enterprise) is a provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals and refined products in North America. The Company’s segments include NGL Pipelines & Services; Crude Oil Pipelines & Services; Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services. The Company’s midstream energy operations include natural gas gathering, treating, processing, transportation and storage; NGL transportation, fractionation, storage, and import and export terminals, including liquefied petroleum gas (LPG); crude oil gathering, transportation, storage and terminals; petrochemical and refined products transportation, storage, export and import terminals, and related services, and a marine transportation business that operates primarily on the United States inland and Intracoastal Waterway systems. EPD has a current market cap of about $57.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by about -2%, while revenues declined almost -17%. in the last quarter, the decline in earnings accelerated, to a little over -9% while sales dropped about -3.75%. The company’s margin profile is healthy, but narrowed in the last quarter, as Net Income as a percentage of Revenues in the last quarter was 12.79% versus 14.07% over the last twelve months.
Free Cash Flow: EPD’s free cash flow is healthy, at $2.2 billion. That translates to a modest Free Cash Flow Yield of 3.85% and marks and improvement from $1.1 billion in June of 2018.
Debt to Equity: EPD’s debt to equity is 1.06, which is a little higher than I prefer to see; however the company’s balance sheet indicates operating profits should be adequate to service their debt. Liquidity is a bit of a concern, since their balance sheet shows just $107.3 million in cash and liquid assets versus $25.6 billion in long-term debt.
Dividend: EPD’s annual divided is $1.77 per share, which translates to a much larger-than-normal yield of about 6.79% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for EPD is $11.41 and translates to a Price/Book ratio of 2.28. The stock’s historical average Price/Book ratio is 2.9, which puts the stock’s long-term target price at about $33.11 per share – about 27% above the stock’s current price. The stock is also trading almost 34% below its historical Price/Cash Flow ratio, which offers a target price at around $35.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red line traces the stock’s upward trend from the beginning of the year to its high point in July at around $31; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Since that high in July, EPD has moved into a clear downward trend, and recently dropped a little below the 61.8% Fibonacci retracement line at around $26 per share. The stock is currently sitting right at pivot support, and a drop below $26 could see the stock drop to as low as about $24, where the 88.6% retracement line. Resistance is around $28, in line with the 38.2% retracement line; a break above that point could see the stock push up to between and $29 and $30 per share.
Near-term Keys: Given the strength of the stock’s current bearish momentum, I think there is a stronger likelihood the stock should drop below support at $26. That would act as a strong signal to short the stock, or to buy put options, with an eye on $24 as a near-term price target. A pivot higher off of support around $26, on the other hand could be a useful signal to consider buying the stock or working with call options, with a bullish target around $26. EPD’s fundamental strength, along with its value proposition suggests the stock is an intriguing value opportunity that I think bodes well if you’re willing to work with a longer-term time horizon and perspective.to