canakat
Enterprise Products Partners (NYSE:EPD) is my top pick in the midstream space right now due to its attractive and well-covered high yield, sector-best balance sheet, well-diversified and high-performing portfolio, and relatively attractive valuation. Since we last covered EPD, it has reported Q2 results, and in this article, I will provide four important takeaways from its latest quarterly report as well as an updated outlook for the company.
Takeaway #1
The first major takeaway is that management is sticking with a very disciplined approach to capital allocation. This manifests itself in several ways. First of all, in response to analyst questions on the earnings call, the company’s management emphasized that, rather than aggressively pursuing mergers and acquisitions as an industry consolidator, it is focused on maximizing returns on invested capital. At the moment, it is finding the most attractive options to do this via organic growth projects. This contrasts with peers like Energy Transfer (ET) and others that are investing more aggressively in acquisitions.
Another way in which EPD is being disciplined with its capital allocation is in terms of unit repurchases. It is only repurchasing a few hundred million dollars’ worth of units per year, even though it could do much more. The reason it is following this policy is because the company wants to maintain its leverage ratio at about 3.0 times while still ensuring that it fully repurchases the units it issues as part of insider compensation. Meanwhile, it is looking ahead to 2026 when its CapEx budget is expected to dip considerably and its leverage ratio will also likely dip as numerous growth projects come online by then, increasing its EBITDA generation. At that time, the company will likely consider meaningful increases in its unit repurchases and/or distribution growth.
Takeaway #2
The second major takeaway from the quarter is that headwinds from its PDH facilities’ turnarounds are a short-term speed bump that should be cleared up soon. As management stated on the earnings call:
We had a very good quarter in spite of the challenges of our PDH plants. They have been somewhat of a headwind throughout the year. We recently completed our turnaround at PDH 1. Planning for the turnaround took over a year and involved a dedicated turnaround team in addition to field engineering and maintenance personnel. This team documented every issue we’ve had with this plant and developed solutions for each one.
The turnaround took 100 days. A few factoids, turnaround was over 1.25 million hours worked. At the peak, we had 1,250 people per shift. We had 590 work packages executed, 17 million pounds of catalysts handled 1,465 crane lifts, 190 18-wheeler deliveries, 52,800 bricks and inspected over 41,000 replaced. Those bricks are the catalyst support and the catalyst reactor. The plan is now up and running and exceeding its nameplate. PDH 2 is currently in turnaround. We expect it to be producing PGP sometime around mid-August. The PDH 2 turnaround is not nearly as involved as PDH 1.
While this event did temporarily increase sustaining CapEx guidance for the year, pushing the company’s likely outcome to the high end of its previous guidance for CapEx, this spend should roll off moving forward, and cash flow from its PDH facilities should increase.
Takeaway #3
The third takeaway is that LPG exports continue to be a major growth driver. The company is seeing growing global demand for these exports from the Americas, Europe, and especially China. To capitalize on this strong demand growth, EPD is pursuing an additional expansion of its Houston LPG export facility, which should add 300,000 barrels per day of capacity. This export expansion is nearly fully contracted, with about 85% to 90% of the expanded capacity already under contract, which helps to de-risk the project considerably.
Takeaway #4
The final major takeaway from the quarter is that EPD remains a compelling risk-adjusted value opportunity. Its A- credit rating, 3.0 times leverage ratio, significant liquidity, and over 18-year weighted average term to maturity on its debt give it a low-risk profile. Meanwhile, its 7.5% next 12 months distribution yield and its 9.38 times EV/EBITDA multiple compare very favorably to its 10-year distribution yield average of 7% and 11.7 times EV/EBITDA multiple, respectively. Moving forward, analysts expect the distribution to grow at a roughly 5% CAGR and distributable cash flow per unit to grow at a 6.3% CAGR through 2028, making EPD an attractive combination of yield plus growth for the foreseeable future.
Investor Takeaway
EPD continues to be a passive income fortress in increasingly troubled times, and Q2 showed that this remains the case now more than ever. While its CapEx will end up being a little higher this year due to the PDH turnaround being more challenging than expected, this is but a small speed bump for an otherwise wonderful company. Additionally, EPD enjoys strong growth projects that are providing high returns with relatively low risk, especially because management generally pursues near or full contracting of assets before spending on them. Meanwhile, its disciplined approach to capital allocation is keeping the company in a very conservative position that should lead to a significant acceleration of unit-holder capital returns in the next few years. As a result, I remain very bullish on EPD, and it is my largest position in the midstream sector as a result.
