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 – including a large, increasing dividend – 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 $56.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by about -8.5%, while revenues declined almost -13%. in the last quarter, earnings improved by 8% while sales were flat, but positive by about 0.5%. The company’s margin profile is healthy; in the last quarter, Net Income as a percentage of Revenues in the last quarter was 13.7% – just a little below 14% over the last twelve months.
Free Cash Flow: EPD’s free cash flow is healthy, at $2.47 billion. That translates to a modest Free Cash Flow Yield of 4.35% and marks and improvement from $1.1 billion in June of 2018.
Debt to Equity: EPD’s debt to equity is 1.0, 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. Their balance sheet also shows 1.2 billion million in cash and liquid assets versus $27.9 billion in long-term debt.
Dividend: EPD’s annual divided is $1.78 per share, which translates to a much larger-than-normal yield of about 6.86% at the stock’s current price. It is also noteworthy that in the company’s latest earnings report, they discussed their intention to increase the dividend in 2020 to $1.80 per share. That’s only a bit more than 1% higher than it was; but the fact the company is hiking the dividend.
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 $11.66 and translates to a Price/Book ratio of 2.23. The stock’s historical average Price/Book ratio is 2.52, which puts the stock’s long-term target price at about $29 per share. That’s only about 13% above the current price, which isn’t great; but EPD is also trading 22% below its historical Price/Cash Flow ratio, which offers a target price at around $32.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last two years of price activity. The stock has followed a downward trend since a peak at about $31 in July 2019, with bearish momentum picking up over the last month as the stock dropped from about $29 to its current price a little below $26. Immediate support is around $25, with resistance at about $28. A drop below $25 could give the stock room to test its multiyear lows around $23 per share. The stock does appear to be stabilizing around $25.50; a push to about $27 could see the stock pick up bullish momentum to get back to about $29 per share.
Near-term Keys: EPD’s current stabilization around $25 appears to be a good set up for short-term trading opportunities, depending on which direction the stock moves in the near term. A break below $25 could offer a signal to consider shorting the stock or working with put options, with a quick-hit target price at around $23 per share. If the stock pushes to about $27, you could also consider buying the stock or working with call options, with a target at around $29 per share. Given the nature of current market sentiment and fear around coronavirus, and its effect on global energy prices, the stock is likely to see continued volatility; but its much-higher-than-average dividend and fundamental strength offer strong reasons to believe in the stock’s long-term prospects and its value proposition.
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