MarsBars

In my previous article on Enterprise Products Partners (NYSE:EPD) titled “Enterprise Products Partners Vs. MPLX: Only One Of These Is A Buy,” I presented my bullish thesis for the company. Here are the key reasons why I believe EPD is a buy:

1. Well-diversified and integrated business model: EPD has a business model that generates stable and consistently growing cash flows, even during challenging times. Its returns on invested capital have consistently been in the double-digits over the past decade.
2. Strong balance sheet: EPD has a top-tier A- credit rating from S&P, making it the best in the sector.
3. Consistent distribution growth: EPD has grown its distribution every year for the past 25 years, positioning it as one of the few midstream businesses to achieve this feat. It is well-positioned to continue growing its distribution in the future.
4. Compelling valuation: Despite its strengths, EPD’s valuation remains attractive compared to its historical levels and peers.
5. Insider alignment and prudent management: Insiders own about one-third of EPD’s common equity, and management has a track record of being excellent capital allocators and prudent balance sheet managers.

After evaluating EPD’s performance in Q4, I am even more bullish on the company. In fact, it has become my top MLP pick, surpassing Energy Transfer (ET). Here’s why:

1. Increasingly compelling valuation: EPD’s unit price has remained stagnant while its fellow investment-grade MLPs have seen significant growth in their unit prices. This performance gap has been consistent over the past three years. Despite EPD’s strong performance, its valuation has narrowed compared to its peers, making it more attractive in terms of risk-adjusted returns.
2. Accelerating growth: EPD’s growth outlook is bullish, driven by macro factors that increase the value of North American hydrocarbons and its robust growth pipeline. The company has plenty of opportunities for further growth and has utilized its balance sheet to issue senior notes for funding its capital expenditure program.
3. Poised for capital returns acceleration: Despite heavy growth capital expenditures, EPD’s leverage ratio is already low and is unlikely to increase significantly in the coming years. The company has the flexibility to continue growing its distribution and pursuing opportunistic buybacks. Additionally, EPD is building up potential energy for capital returns as its free cash flow is expected to soar in the future.

In conclusion, EPD presents a compelling investment opportunity with its stable cash flows, strong balance sheet, consistent distribution growth, attractive valuation, insider alignment, and potential for accelerated capital returns.



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