Enterprise Products Partners: Big Yield, But Is Bigger Upside Ahead?

Key Points

• Enterprise turned in another steady quarter of solid results.

• The company is seeing some headwinds, but was able to navigate them.

• The stock looks attractive at current levels with new growth projects ramping up.

• 10 stocks we like better than Enterprise Products Partners ›

Enterprise Products Partners' (NYSE: EPD) consistency was on display once again in Q2, with the company reporting solid results this week despite facing some headwinds. However, with a bunch of growth projects beginning to either ramp up or be under construction, the master limited partnership (MLP) should start to see its growth pick up soon.

In the meantime, investors get to enjoy the stock's robust and increasing distribution and nearly 7% forward yield. (Note that when investing in MLPs, they do come with some extra paperwork at tax time, although they have some tax benefits as well.)

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Let's take a closer look at the company's recent quarterly results to see if the stock has good upside ahead.

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A steady performance

Enterprise's Q2 results were nothing to write home about, but they were steady. The company has a very steady business model, so it tends not to see too many big surprises. Historically, around 80% to 85% of its gross operating profits come from fee-based activities, and that was the case in the first half of this year, with it coming at 81%.

When the number is lower, it's typically good for the company as it usually means it's benefiting more from its commodity differential businesses. This was the case in 2022, when its fee-based gross operating profits dropped to only 74%, as it got a big lift from its percentage of proceeds and percentage of liquid contracts as natural gas and NGL (natural gas liquids) spreads widened due to the start of the Russia-Ukraine war.

This year, however, the company saw some spread compression negatively impact its propylene and octane enhancement businesses, as spreads have normalized. An even bigger issue, though, has been the pressure Enterprise saw in its LPG (liquified petroleum gas) business. The company had some attractive 10-year contracts roll off and experienced a 60% drop in spot rates. LPG exports are still a big focus for Enterprise, but it has seen some increased competition that is impacting pricing.

Even with these headwinds, the company still turned in steady Q2 results. Its total gross operating profit rose by 3% to $2.48 billion, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) edged up by 1% to $2.41 billion. It increased its distributable cash flow (DCF) by 7% to $1.94 billion. Its adjusted free cash flow was flat at $812 million.

Meanwhile, Enterprise's distribution remained well covered, and its balance sheet is in good shape. It had a 1.6x coverage ratio, based on its DCF, for the quarter, while it ended the first half with leverage (net debt adjusted for equity credit in junior subordinated notes divided by adjusted EBITDA) of 3.1x. The company has used its financial strength to buy back stock. It repurchased $110 million worth of stock in the quarter, while it increased its distribution by 3.8% year over year to $0.545 per unit.

More importantly, the company is set to see a nice jump in growth next year. It already has two new processing plants just starting to ramp up production, with a third expected to commence operation in the first half of 2026. It also expects its Neches River terminal expansion to be fully operational in the first half of 2026, expanding its ethane and propane exporting capabilities. The company currently has $5.6 billion in projects under construction, and has ramped its capital expenditure (capex) spending up to between $4 billion and $4.5 billion this year.

Is Enterprise Products Partners stock a buy?

While Enterprise deals with some headwinds, it's still putting up solid, steady results. That's the company's calling card, and why it's been able to increase its distribution for 26 years straight. These headwinds are generally minor compared to the company's overall picture.

Meanwhile, it has a big wave of growth projects that have come online or are about to commence in the next several months that should drive strong growth next year. With energy needs from artificial intelligence (AI) data centers and exports on the rise, the company is in solid shape for the long term.

On the valuation front, the stock trades at a forward enterprise value-to-EBITDA (EV/EBITDA) multiple of 10x based on analysts' 2025 estimates. That's below historical levels, and the company should see a nice EBITDA boost in 2026 as growth projects come online and begin to ramp.

With a well-covered distribution, strong balance sheet, and attractive valuation, the stock has solid upside ahead with growth projects set to begin ramping up its growth.

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Geoffrey Seiler has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.