Enterprise Products Partners L.P. (NYSE: EPD) is hands down one of the best energy stocks and MLPs to buy for passive income investors seeking stability and growth.
As the largest publicly traded energy partnership in the United States, EPD offers a juicy 7.64% distribution with a rock-solid 1.6x distribution coverage ratio.
In this in-depth analysis, we’ll explore why Enterprise Products Partners stands tall above its competitors and deserves a spot in your income portfolio.
Overview of Enterprise Products Partners
Founded in 1968 and headquartered in Houston, Texas, Enterprise Products Partners L.P. provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals and refined products.
The company operates an extensive network of assets that includes:
- 51,000 miles of pipelines
- 260 million barrels of storage capacity
- 26 natural gas processing facilities
Enterprise Products Partners conducts operations through four business segments:
Natural Gas Pipelines & Services
The Natural Gas Pipelines & Services segment provides transportation and storage services to natural gas producers, utilities and other customers. Key assets include 19,840 miles of natural gas pipelines and 22 Bcf of working storage capacity.
NGL Pipelines & Services
The NGL Pipelines & Services segment operates 19,490 miles of NGL pipelines that transport NGLs from natural gas processing facilities to markets. It also provides fractionation, storage and marine terminal services.
Crude Oil Pipelines & Services
This segment operates 5,365 miles of crude oil pipelines and provides crude oil storage and marine terminal services. Key assets include the Midland-to-ECHO crude oil pipeline system.
Petrochemical & Refined Products Services
The Petrochemical & Refined Products Services segment operates propylene fractionation plants, butane isomerization complex and refined products pipelines. It provides the critical infrastructure to support petrochemical and refining operations.
With its diversified asset portfolio, Enterprise Products Partners provides mission-critical services across the energy value chain, enabling the company to generate stable cash flows across business cycles.
Reasons to Buy Enterprise Products Partners Stock
Here are some of the key reasons why Enterprise Products Partners stands out as a compelling investment opportunity:
1. Strong Track Record of Distribution Growth
Enterprise Products Partners has increased its cash distribution for 23 consecutive years – a remarkable track record in the volatile energy industry. Since the company’s IPO in 1998, distributions have grown at an impressive 7.4% compound annual rate.
With its fee-based contracts and efficient operations, EPD generates steady distributable cash flow to support continued payout increases in the years ahead.
2. Investment Grade Balance Sheet
Enterprise Products Partners maintains one of the strongest balance sheets in the midstream energy sector, with an investment grade credit rating of BBB+ from S&P.
At the end of Q3 2022, the company had a prudent 3.6x debt-to-EBITDA leverage ratio, providing ample flexibility and liquidity. The healthy balance sheet enables EPD to consistently fund growth projects and acquisitions.
3. High Distribution Coverage Ratio
In Q3 2023, Enterprise Products Partners generated $1.9 billion in distributable cash flow and paid out $1.3 billion in distributions. This resulted in a very comfortable 1.7x distribution coverage ratio.
The robust coverage ratio indicates the distribution is secure and leaves plenty of excess cash flow to reinvest in expansion projects. EPD’s distribution coverage ranks well above most other MLPs.
4. Large Scale Diversified Assets
With 50,000 miles of pipelines across 38 states, Enterprise Products Partners operates one of the largest and most diversified midstream networks in North America.
The company provides services across the full energy value chain – from wells to end-use markets. This integrated asset footprint enables Enterprise to deliver steady cash flows across all stages of the energy cycle.
5. Significant Growth Projects
Demand for EPD’s infrastructure services continues rising with U.S. energy production. The company has $5.5 billion of major capital projects underway, including natural gas processing plants and NGL pipelines.
These high-return projects should drive earnings and cash flow growth in 2024 and beyond. Management expects to invest $1.5 billion per year in organic growth opportunities.
6. Rising Distributions and Total Returns
Since listing publicly in 1998 through year-end 2021, Enterprise Products Partners has delivered a remarkable 17.4% average annual total return to unitholders.
Going forward, analysts estimate EPD can continue growing its distribution around 5-6% annually. With the high starting yield above 7%, Enterprise Products Partners offers income investors an exceptional total return proposition.
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Valuation and Expected Returns
With a distribution yield of 7.64%, Enterprise Products Partners offers one of the highest starting yields in the midstream energy sector. The company has guided to 5-6% annual distribution growth, which translates to expected total returns of 12-14% per year.
At the current unit price of $24, EPD trades at a very reasonable 11.3x forward earnings and 8.4x EBITDA. The cheap valuation adds to the stock’s appeal for long-term investors.
Final Thoughts on EPD Stock
In summary, Enterprise Products Partners stands out as a best-in-class MLP thanks to its impressive history of distribution growth, strong balance sheet, diversified assets and significant project backlog.
For dividend investors seeking large passive income and capital gains, EPD checks all the boxes. The company’s 7.64% distribution yield, cheap valuation and visible growth make Enterprise Products Partners a compelling stock to buy and hold forever.