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Enterprise Products Partners L.P. is a North American provider of midstream energy services to producers Argus Recommendations
and consumers of natural gas, NGLs, crude oil, refined products and petrochemicals. The partnership's
assets include over 50,000 miles of natural gas, NGL, refined products, and petrochemical pipelines; 260
million barrels of storage capacity for NGLs, refined products and crude oil; and 14 billion cubic feet of Twelve Month Rating SELL HOLD BUY
natural gas storage capacity. The company completed its IPO in July 1998.
Five Year Rating SELL HOLD BUY
Analyst's Notes Under Market Over
Sector Rating Weight Weight Weight
Analysis by Bill Selesky, February 7, 2020
ARGUS RATING: BUY Argus assigns a 12-month BUY, HOLD, or SELL rating to each
stock under coverage.
• Reaffirming BUY following fourth-quarter 2019 results • BUY-rated stocks are expected to outperform the market (the
benchmark S&P 500 Index) on a risk-adjusted basis over the
• We view EPD as a leader in the midstream energy industry, and believe that the company will next year.
continue to benefit from its substantial asset base along the Gulf Coast as well as from projects slated • HOLD-rated stocks are expected to perform in line with the
to enter service over the next three years. market.
• On January 30, EPD reported adjusted 4Q19 net income attributable to limited partners of $1.125 • SELL-rated stocks are expected to underperform the market
on a risk-adjusted basis.
billion or $0.50 per diluted unit, down from $1.305 billion or $0.61 per unit in the prior-year quarter.
The distribution of ratings across Argus' entire company
EPS matched our quarterly estimate but fell short of the consensus estimate of $0.53. universe is: 65% Buy, 35% Hold, 0% Sell.
• The decline reflected lower average sales margins (natural gas processing business) and higher
operating expenses within the NGL Pipelines & Services segment, which felt the impact of lower NGL
(natural gas liquids) prices. Key Statistics
Key Statistics pricing data reflects previous trading day's closing
• On January 19, 2020, EPD announced its 62nd straight quarterly distribution increase, to $0.4445 price. Other applicable data are trailing 12-months unless
per unit, up 2% from the prior-year quarter. The annualized payout of $1.78 yields about 6.8%. otherwise specified
Market Overview
INVESTMENT THESIS Price $25.82
We are reiterating our BUY rating on Enterprise Products Partners LP (NYSE: EPD) Target Price $38.00
with a price target of $38. We view EPD as a leader in the midstream energy industry, and 52 Week Price Range $25.04 to $30.87
believe that the company will continue to benefit from its substantial asset base along the Shares Outstanding 2.19 Billion
Gulf Coast as well as from projects slated to enter service over the next three years. We Dividend $1.78
expect these projects and existing assets to support distribution growth of 5%-6% over the Sector Overview
next 18-24 months. Sector Energy
Enterprise remains levered to the NGL markets, which have been impacted by crude oil Sector Rating MARKET WEIGHT
price volatility. However, we have been impressed by EPD's ability to offset margin Total % of S&P 500 Market Cap. 4.00%
weakness in its NGL business by higher fee-based earnings on rising pipeline volumes. We Financial Strength
think this diversification is a unique aspect of EPD's business that has often been Financial Strength Rating MEDIUM-HIGH
overlooked by investors. In our view, NGL markets are likely to improve gradually over Debt/Capital Ratio 52.0%
the next few years as end-market demand from petrochemical customers' increases and Return on Equity 18.8%
new facilities enter service. Net Margin 14.0%
Payout Ratio 0.80
Market Data Pricing reflects previous trading week's closing price. Current Ratio 0.85
200-Day Moving Average Target Price: $38.00 52 Week High: $29.22 52 Week Low: $25.32 Closed at $25.77 on 1/31 Revenue $32.79 Billion
Price After-Tax Income $4.59 Billion
($)
Valuation
35
Current FY P/E 11.63
Prior FY P/E 12.41
30
Price/Sales 1.72
25 Price/Book 2.31
Book Value/Share $11.19
Market Capitalization $56.52 Billion
Rating BUY
HOLD
SELL Forecasted Growth
EPS 1 Year EPS Growth Forecast
($) 6.73%
5 Year EPS Growth Forecast
8.00%
Quarterly 0.64 0.41 0.54 0.61 0.57 0.55 0.46 0.50 0.53 0.55 0.57 0.58 0.55 0.59 0.59 0.58
2.20 2.08 2.22 ( Estimate) 2.29 ( Estimate)
1 Year Dividend Growth Forecast
Annual
1.14%
Revenue
($ in Bil.) Risk
Beta 0.77
Quarterly 8.4 8.5 9.6 9.2 8.5 8.3 8.0 8.0 8.5 8.6 8.7 8.8 8.7 8.8 8.9 9.1 Institutional Ownership 36.84%
Annual 35.7 32.8 34.6 ( Estimate) 35.4 ( Estimate)
FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Dec 31 2018 2019 2020 2021
Analyst's Notes...Continued
Our favorable long-term outlook for EPD is based on the reflecting weakness in the NGL Pipelines & Services segment. The
partnership's expanding operating margin; manageable long-term consensus revenue estimate was $8.600 billion.
debt; growing U.S. market share; accretive acquisitions; and, in our On an adjusted basis, Enterprise reported 4Q19 distributable
view, an impressive U.S. distribution system, both for natural gas cash flow of $1.634 billion, up 1% from the prior-year quarter.
and NGLs. The company's operating assets are also strategically Distributable cash flow covered the distribution by a factor of 1.7.
located near energy supply sources with a direct connection to The company reported a gross operating margin of $2.015 billion
areas of growing demand. In our view, management's expertise and in 4Q19, down 6% from 4Q18.
financial conservatism warrant a premium valuation. Our preferred metrics for evaluating EPD are adjusted EBITDA,
RECENT DEVELOPMENTS distributable cash flow, and gross operating margin. Net income
has little impact on our analysis as we prefer to evaluate the
EPD units have outperformed thus far in 2020, falling 8.5% company's performance on a cash flow basis, which excludes
while the S&P 500 Energy index has dropped 9.8%. In addition, noncash charges, namely, depreciation expense.
the shares have outperformed over the past year, declining 7.2% For 2019, the company reported fully diluted earnings per unit
while the Energy index has decreased 11.9%. of $2.08 compared to diluted earnings per unit of $2.22 in full year
On January 30, EPD reported adjusted 4Q19 net income 2018.
attributable to limited partners of $1.125 billion or $0.50 per
diluted unit, down from $1.305 billion or $0.61 per unit in the EARNINGS & GROWTH ANALYSIS
prior-year quarter. EPS matched our quarterly estimate but fell For 2020, the company plans to raise the distribution by
short of the consensus estimate of $0.53. $0.0025 per unit per quarter during the year, implying a 2.3%
The year-over-year decline in operating earnings primarily increase this year. EPD also intends to use approximately 2% of its
reflected lower average sales margins (natural gas processing 2020 cash from operations to buy back its common units.
business) and higher operating expenses within the NGL Pipelines We are reaffirming our above-consensus 2020 EPS estimate of
& Services segment, which felt the impact of lower NGL (natural $2.22, which reflects stronger overall volume growth compared to
gas liquids) prices. 2019 but also reflects our modestly lower price assumption for
Adjusted fourth-quarter EBITDA rose 8% to $2.019 billion. natural gas liquids (NGLs). The 2020 consensus estimate is
However, total company revenue fell 13% to $8.005 billion, currently $2.19.
Analyst's Notes...Continued
At the same time, we are establishing a 2021 EPS estimate of rights previously held by the general partner, and is transitioning
$2.30 per share, implying about 4% earnings growth from our the company to mainly fee-based businesses that are supported by
2020 estimate. The current consensus for 2021 is $2.29. long-term contracts. This allows the company to have one of the
With respect to long-term growth, we note that EPD has a lowest costs of capital in its MLP peer group.
leading position across the natural gas and NGL value chain in Long-term debt totaled $27.0 billion at the end of 4Q19, up
some of the largest-producing basins in the U.S. It also has about from $26.3 billion at the end of 4Q18. The increase reflected debt
$7.7 billion in growth projects that are expected to enter service issuance to help fund acquisitions. The company has minimal
over the next several years, and will continue to invest in natural short-term borrowings.
gas, NGL, and crude oil infrastructure to support shale play EPD had cash and cash equivalents of $111 million at the end
development. The growth in hydrocarbon production from shale of 4Q19, compared to $344 million at the end of 4Q18. Cash from
basins and unconventional drilling has resulted in structural cost operating activities fell to $1.694 billion in 4Q19 from $1.851
advantages for petrochemical production in the U.S. and has billion in the prior-year quarter.
increased NGL demand from the petrochemical industry. This On January 19, 2020, EPD announced its 62nd straight
should boost earnings visibility and support growth in the quarterly distribution increase, to $0.4445 per unit, up 2% from
distribution. EPD has the highest distributable cash flow coverage the prior-year quarter. The annualized payout of $1.78 yields
ratio in our MLP coverage universe. about 6.8%. We believe the current distribution is safe and
FINANCIAL STRENGTH & DIVIDEND sustainable. The quarterly distribution will be paid February 12,
2020, to unitholders of record as of the close of business January
We rate EPD's financial strength as Medium-High, the 31, 2020. Our revised distribution estimates are $1.78 for 2020
second-highest rating on our five-point scale. The company's debt and $1.80 for 2021.
is rated BBB+/stable by Standard & Poor's. Enterprise Products initiated a new $2.0 billion dollar share
At the end of 4Q19, EPD's total debt/capitalization ratio was repurchase program in January 2019. The company repurchased
52.1%, down slightly from 52.3% a year earlier. The debt/cap 1.0 million units during the third-quarter of 2019, following a
ratio is in line with the peer average and has averaged 51.9% over purchase of $1.1 million units in 2Q19. In its 2020 outlook, the
the past five years. company indicated that it was initiating a new program for this
Enterprise Products has eliminated the incentive distribution year.
Value
P/E
Analyst's Notes...Continued
MANAGEMENT & RISKS
Jim Teague, formerly the company's COO, became CEO on
December 31, 2015, succeeding Michael Creel. We think that EPD
management has performed well over the last several years through
a combination of accretive acquisitions and internal growth. Its
efforts have led to increased earnings and cash flow. We are also
impressed that management purchases outside energy assets only
after thorough due diligence.
MLPs face substantial funding risk as they are required to pay
out a significant portion of cash flow to unitholders and are thus
dependent on external funding. Investment in pipelines also
involves risks related to fires, explosions and environmental issues.
All of the company's pipelines are regulated by the Federal Energy
Regulatory Commission (FERC). The normal tax risks of investing
in MLPs apply to this investment. Unitholders are responsible for
payment of taxes on their pro rata share of company earnings,
whether or not any cash distribution is made. Unitholders have no
control over the general partner or the election of officers of the
general partner. In addition, investors' holdings could be diluted by
the issuance of additional partnership units. The controlling
unitholder of the partnership could also reduce the price by
disposing of a large number of units.
COMPANY DESCRIPTION
Enterprise Products Partners L.P. is a North American provider
of midstream energy services to producers and consumers of
natural gas, NGLs, crude oil, refined products and petrochemicals.
The partnership's assets include over 50,000 miles of natural gas,
NGL, refined products, and petrochemical pipelines; 260 million
barrels of storage capacity for NGLs, refined products and crude
oil; and 14 billion cubic feet of natural gas storage capacity. The
company completed its IPO in July 1998.
VALUATION
EPD units have traded between $25.04 and $30.87 over the
past 52 weeks and are currently slightly below the midpoint of the
range. They trade at 11.6-times our 2020 EPU estimate and at
11.2-times our 2021 forecast, compared to an eight-year historical
average range of 17-23. Our multistage dividend discount model
yields a fair value of $38 per share, which remains our target price.
We believe that Enterprise should trade at a premium to the
MLP peer group based on its prospects for further cash
distributions and earnings growth, and expect the company to
continue to benefit from solid cost controls and strategically placed
assets.
On February 7 at midday, BUY-rated EPD traded at $25.46,
down $0.30.
About Argus
Argus Research, founded by Economist Harold Dorsey in 1934, And finally, Argus’ Valuation Analysis model integrates a
has built a top-down, fundamental system that is used by Argus historical ratio matrix, discounted cash flow modeling, and peer
analysts. This six-point system includes Industry Analysis, Growth comparison.
Analysis, Financial Strength Analysis, Management Assessment, THE ARGUS RESEARCH RATING SYSTEM
Risk Analysis and Valuation Analysis. Argus uses three ratings for stocks: BUY, HOLD, and SELL.
Utilizing forecasts from Argus’ Economist, the Industry Analysis Stocks are rated relative to a benchmark, the S&P 500.
identifies industries expected to perform well over the next • A BUY-rated stock is expected to outperform the S&P 500 on
one-to-two years. a risk-adjusted basis over a 12-month period. To make this
The Growth Analysis generates proprietary estimates for determination, Argus Analysts set target prices, use beta as the
companies under coverage. measure of risk, and compare expected risk-adjusted stock
In the Financial Strength Analysis, analysts study ratios to returns to the S&P 500 forecasts set by the Argus Market
understand profitability, liquidity and capital structure. Strategist.
During the Management Assessment, analysts meet with and • A HOLD-rated stock is expected to perform in line with the
familiarize themselves with the processes of corporate management S&P 500.
teams. • A SELL-rated stock is expected to underperform the S&P 500.
Quantitative trends and qualitative threats are assessed under
the Risk Analysis.
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