For most of 2022, supply shortages, along with increasing energy demand have been pushing the prices of energy products, including crude oil and natural gas to levels not seen since 2014. Oil prices have softened over the last month or so, but energy commodity prices in general remain at levels not seen since 2014.
The Energy sector has a broad carryover effect on multiple other sectors in the economy, which is why I have learned that it’s useful to pay attention to the price of crude oil and other energy commodities, like natural gas on the global market. Despite increasing attention on things like electric vehicles, “green” technologies and solutions aimed at reducing carbon footprints, the plain and simple fact of the matter is that oil continues to be a key driver of economic stability all over the world. That even applies to the production of the material assets used in “green” technologies like electrical car batteries and solar panels, to name just a couple of simple examples. Oil and natural gas liquids (NGLs) are also used in a variety of other petrochemical applications and industries including plastics, home building, fertilizers, and pharmaceuticals to name just a few. It also means that when events threaten the stability of supply and price, the ripple effect could extend into just about every part of the global economy.
Over the last ten years, shale oil exploration and production have helped the U.S. narrow the gap between Brent (mostly oil from the Middle East) and WTI (the generalized benchmark for U.S. oil) crude production, with a major portion of shale oil coming from the Permian Basin of the southwestern part of the United States. The challenge associated with U.S. production – and one of the things that contributed to keep oil prices relatively low prior to the COVID-19 pandemic, which cratered demand for oil and many petrochemical products – is that exploration and production of shale oil 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 are involved in the ongoing construction, operation, and maintenance of pipelines and storage facilities out of the areas of the U.S. that drive shale production, like the Permian Basin. Limitations of existing pipeline and storage capacity have been the primary reason that inventory out of that area in particular remained stuck in the Basin through 2019 and kept the entire industry waiting for new pipeline projects to be completed. Many of those projects were delayed in 2020 because of the pandemic, but were near enough to completion that resumption of activity should increase the flow of crude out of the Permian through the rest of this year.
Enterprise Products Partners (EPD) is one of the biggest midstream companies with operations in crude oil, natural gas and liquified natural gas (LNG) transport and storage, among other things. EPD isn’t an easily recognizable company by name, but it is well-established and recognized among its peers, with a very interesting fundamental profile that includes a large dividend and critical fundamental metrics like free cash flow that have seen significant improvements over the past year. EPD’s management has also noted that operating margins ticked higher in 2021, driven primarily by strong export demand for natural gas liquids logistics and consumer-led demand for petrochemicals such as cleaning products and a built a useful backlog of pending orders into 2022. These are expected to provide a good tailwind into 2023 as previously suspended or deferred projects are carefully and deliberately brought back into production to keep pace with demand. Another element that could work in this company’s favor is its presence in the transportation systems used for LNG in the United States. With Russia exports being severely restricted in response to its aggression in Ukraine, demand for regionally produced LNG products should also remain high.
EPD peaked in June of 2021 at around $26 per share and dropped back towards the end of the year to a low point at around $20. From that low, the current geopolitical climate has given the stock a new tailwind, pushing it to a peak at almost $29 in June. The stock dropped off of that high to find strong support to start July at around $23. That provided a springboard for a new rally that has the stock a little above $27 as of this writing. I think that, on a selected basis, energy stocks continue to provide many of the best values in the marketplace, with commodity price support that should make these stocks more resilient than many other industries under current economic conditions. What about EPD’s fundamentals? Is it also a smart value? Let’s find out.
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 $59.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 25.5%, while revenues were almost 70% higher. In the last quarter, earnings increased by 6.67%, while sales were almost 23.5% higher. The company’s margin profile is healthy; in the last quarter, Net Income as a percentage of Revenues in the last quarter was 8.79%, declining only slightly from 9.54% over the last twelve months.
Free Cash Flow: EPD’s free cash flow is healthy and growing, at a little more than $7.1 billion over the last twelve months. That marks an increase from about $6.8 billion in the quarter prior and $5.6 billion a year ago. The current number also translates to a Free Cash Flow Yield of 12.14%.
Debt to Equity: EPD’s debt to equity is 1, which is a little higher than I prefer to see, but also isn’t unusual for stock’s in this industry; however the company’s margin profile indicates operating profits should be adequate to service their debt. Their balance sheet has been a bit of a concern, as liquidity has been cyclical, and limited in the last quarter, as the company reported $397 million in cash and liquid assets versus $26.9 billion in long-term debt, with no major near-term debt obligations. Their operating margins, along with healthy and growing free cash flow suggest that debt service isn’t a problem.
Dividend: EPD’s annual divided is $1.90 per share, which translates to a much larger-than-normal yield of about 7.05% at the stock’s current price. A number of other companies in the Energy sector have been forced to reduce or even eliminate dividend payments, so EPD’s ability to maintain their attractive dividend and even increase it (from $1.80 at the start of 2022) is a solid sign of strength.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at around $31.50 per share. That means that the stock is undervalued, with about 15% upside from its current price.
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 diagonal line traces the stock’s increase from about $20.50 in December to its peak in June at almost $29. It also informs the Fibonacci retracement lines shown on the right side of the chart. After dropping to $23 at the end of June, the stock rallied to start July, and has pushed above all of its major retracement lines to establish a new short-term upward trend. Current support is at the stock’s most recent pivot high at $27, with immediate resistance expected at the stock’s 52-week high at $29. A drop below $27 should find next support at the 38.2% retracement line, sitting right around $25.50. The stock has some room to immediate resistance, but if it can push above $29 it should find secondary resistance at around $31.
Near-term Keys: EPD’s fundamental strength remains solid, with strengthening Free Cash Flow and a still-useful value proposition. Its high, increasing dividend also offers an interesting argument for the stock as a useful long-term buy-and-hold position. If you prefer short-term trading strategies, the stock’s current push above resistance at $27 could offer a signal to consider buying the stock or using call options, with a quick target price at around $29 and $31 if buying activity increases. A drop below support at around $27 has limited downside, with next support expected at around $25.50, meaning that shorting the stock or buying put options right now is a very speculative, low-probability trade.