One of the most consistent companies in the midstream space, Partners for business products(NYSE:EPD)is looking to increase its spending on growth projects as the company sees a strong set of project opportunities ahead. At the same time, the pipeline operator continues to deliver good results, with solid results in the third quarter.
The share pays a very attractive distribution with a forward yield of 7.2%. Let’s take a look at the company’s Q3 results to see if this is a good time to buy the stock, as it looks like it will boost growth.
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With a stable, mostly fee-based business model, Enterprise doesn’t tend to give investors many surprises, and that’s a good thing. This continued last quarter as the company delivered solid growth.
In the third quarter, Enterprise’s total gross operating profit increased 5% to $2.45 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also rose 5% to nearly $2.44 billion.
It produced distributable cash flow (DCF) of $1.96 billion, up 5%. Meanwhile, adjusted free cash flow was $943 million. DCF is similar to free cash flow, except that operating cash flow is only reduced by maintenance capital expenditures (capex) and not by growth investments. As the company spent more money on growth projects, adjusted free cash flow declined year over year.
Based on DCF, Enterprise’s distribution coverage ratio was 1.7x. It ended the quarter with a leverage ratio of 3x, which is defined as net debt adjusted for equity credits in junior subordinated bonds (hybrids) divided by adjusted EBITDA.
What all these fancy acronyms ultimately show is that Enterprise is generating a lot of cash flow that it is directing toward its distribution and growth projects, while keeping its debt levels at an appropriate and manageable level. Free cash flow is likely to decline as it spends more of this cash flow on growth, and the company has started to spend slightly more on distributions and capital expenditures than it generates in operating cash flow.
While that’s something to keep an eye on, Enterprise’s balance sheet is one of the best in the midstream space, and its distribution has increased for 26 years in a row. Nothing in Enterprise’s history suggests it will spend money recklessly, but it will take advantage of attractive projects when it comes across them, and it has strengthened its balance sheet to do just that.
As for the distribution, it currently stands at $0.525 per quarter, up 5% from a year ago. I expect Enterprise to continue to increase this in the coming years.
Image source: Getty Images.
After scaling back growth projects stemming from the pandemic, Enterprise has begun to ramp up spending. This year it expects to spend between $3.5 billion and $3.75 billion on growth projects. That’s up from a low of just $1.6 billion in spending in 2022.
Next year, the company will increase its growth investments even further, partly due to its recent acquisition of Pinon Midstream, with plans to spend between $3.5 billion and $4 billion. That’s an increase from a previous forecast of $3.25 billion to $3.75 billion.
Enterprise currently has $6.9 billion in projects under construction. Many of these projects are not expected to come online until the second half of 2025, and a few as late as 2026. The report noted that it has delivered a return on invested capital of approximately 12% over the past decade. That means if the company spends $4 billion on growth projects, it should ultimately lead to about $480 million in additional annual gross operating profit.
Enterprise said it is one of the few companies in the midstream space with the resources to take advantage of increased natural demand from data center buildouts and increased energy consumption from artificial intelligence. While it couldn’t quantify the opportunities, it said this is one of the best signals in natural gas it has seen in a long time.
After the current period of excessive spending on growth projects, Enterprise expects to return to a lower level.
One of the most common ways investors value midstream companies is by using a multiple of enterprise value and EBITDA (EV/EBITDA). This is because building long-lived pipelines and other midstream assets is a capital-intensive business. This measure takes into account the debt companies take on for these projects while eliminating non-cash depreciation costs that are spread over the life of these assets. Using EV/EBITDA, spending on these projects is included in net debt, while EBITDA gives investors a better picture of the company’s current operating profitability.
On that front, Enterprise trades at a forward EV/EBITDA multiple of 9.5x, based on analyst estimates for 2024. That’s well below the multiple at which the stock traded before the pandemic, and well below the level at which the midstream industry as a whole has acted in the past. Between 2011 and 2016, midstream master limited partnerships (MLPs) traded on average at an EV/EBITDA multiple of 13.7 times.
With Enterprise seeing some of the best growth opportunities it has seen in a long time, now seems like a good time to buy the stock. Investors get a stock with a 7%+ yield from a company with a history of consistently increasing distribution, trading at a historically low valuation with strong growth leading the way.
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Geoffrey Seiler holds positions at Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Is it time to tap into Enterprise Products Partners stock as it looks to boost growth? was originally published by The Motley Fool
