Enterprise Products Up 16% in a Year: Should Investors Still Chase it?

Enterprise Products Partners LP EPD has surged 16.3% over the past year, outpacing the industry’s 10.3% improvement. Robust growth projects underway are likely to have supported the stock price movement. Still, before drawing any investment conclusions, it’s better to analyze the fundamentals of the partnership and its overall business environment.

One-Year Price Chart

EPD’s Stable Business Model & Robust Project Backlog

Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. This includes more than 50,000 miles of pipelines and a storage capacity of 300 million barrels. These assets are utilized by shippers on long-term contracts to transport and store natural gas liquids, crude oil, refined products and petrochemicals. The partnership also has 14 billion cubic feet of natural gas storage capacity, securing stable fee-based revenues.

On top of that, the partnership has $6 billion worth of key projects under construction, with the maximum in-service date by the end of 2026. These include new gas processing plants in the Permian Basin, a major NGL pipeline (Bahia) and expansions at export terminals. Once all the projects come online, it will generate additional cash flows for the unit holders.

EPD’s Competitive Advantage in Retaining & Attracting Customers

The partnership’s extensive network of midstream assets handles large volumes of processing and transportation. This includes processing approximately 7.8 billion cubic feet of natural gas daily and transporting more than 1 million barrels of refined products and petrochemicals per day.

Enterprise Products benefits from a strong competitive edge, as its midstream network is linked to all U.S. ethylene plants and nearly 90% of refineries located east of the Rockies, enabling it to attract and retain customers more effectively.

Should Investors Bet on EPD Right Away?

Apart from the positive developments, Enterprise Products’ units are also undervalued. The stock is currently trading at a trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) of 10.16x. This represents a discount compared with the broader industry average of 11.01x and midstream giants like Kinder Morgan KMI and Enbridge ENB, which trade at 13.71x and 15.32x, respectively.

Is now the moment to invest in the stock that generates stable fee-based revenues like Kinder Morgan and Enbridge? There are a few uncertainties to keep in mind first. Before getting to the topic, let’s discuss KMI and ENB a little bit.

Considering KMI’s business, it operates an extensive network of pipelines spanning 79,000 miles, transporting natural gas, gasoline, crude oil and carbon dioxide. In addition, the company owns 139 terminals that store a variety of products, including renewable fuels, petroleum products, chemicals and vegetable oils.

As a leading midstream service provider, Kinder Morgan’s pipeline and storage assets are secured under long-term take-or-pay contracts. These contracts ensure the stability of Kinder Morgan’s business.

Similarly, Enbridge benefits from the long-term, fee-based nature of its midstream operations. Its pipelines transport 20% of the total natural gas consumed in the United States. The company generates stable, fee-based revenues from these midstream assets, as they are booked by shippers on a long-term basis, minimizing commodity price volatility and volume risks.

Now coming back to EPD’s story. Unit holders should note that more players are now competing in the LPG export business, which has pushed prices that customers pay to use terminals down from about 10–15 cents per gallon to much lower levels. This tougher competition means Enterprise Products might earn less profit from the exports in the future, especially when older, higher-paying contracts run out.

Moreover, analysts are concerned that there are too many pipelines and processing plants being built, which could hurt profits if demand doesn’t keep up, though EPD’s long-term contracts offer some protection.

Thus, investors shouldn’t rush to bet on the stock right away. However, those who have already invested should retain EPD, which carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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