The Street currently rates Enterprise Products (EPD) a "strong buy" compared to just a "buy" for both Chesapeake Energy (CHK) and El Paso (EP). While Chesapeake has built a solid brand name off of natural gas, it is now focusing on liquids and it is not a utilities firm like the other two. Based on my multiples analysis and review of the fundamentals, I find that Chesapeake - contrary to popular opinion of late - is the most undervalued of the three.
From a multiples perspective, Chesapeake is by far the cheapest of the three. It trades at a respective 11.9x and 10.2x past and forward earnings while El Paso , Enterprise, and Kinder Morgan (KMP) trade at a respective 21.4x, 21.4x, and 33.2x forward earnings. Enterprise (5.2%) and Kinder Morgan (5.4%) off the highest dividend yields.
At the M&A call, Kinder Morgan's CEO, Richard Kinder, explained why the combination with El Paso will be accretive to shareholder value.
"There are not a lot of times in your career when you can say that a transaction of this size and magnitude is really a win-win for both the acquirer and the company being bought, but I think that's particularly true here today. First of all, I think putting these two companies together strategically is a great fit. When we put these two companies together, we'll have 80,000 miles of pipeline, 67,000 of which will be natural gas pipes. It will create a company that when you take the whole family of companies, including the two MLPs together, will have an enterprise value of approximately $94 billion. So the result is that we will be, by far, the largest midstream energy player in North America and also in terms of enterprise value, the fourth largest energy company of any kind in North America. We will be the largest natural gas transporter. We're already the largest pipeline producer -- products pipeline system in America. We're the largest transporter of CO2 and the largest independent owner operator of terminals, both liquids and bulk".
Consensus estimates for El Paso's EPS forecast that it will grow by 5.1% to $1.03 in 2011 and then by 18.4% and 23% more in the following two years. Assuming a multiple of 21.5x and a conservative 2012 EPS of $1.18, the stock is roughly at fair value.
Enterprise has slightly greater upside given how well positioned it its growing capital allocation over the next few years. The dividend yield was recently raised by 5.4% y-o-y to $0.62/unit, which was in-line with expectations. WACC is further dropping as the company yields solid organic growth backed by a health balance sheet. Enterprise recently announced a joint venture for a pipeline specialized in offshore crude oil, which will get going some time around the middle of 2014. It is further creating a 1.2 mile long pipeline for Marcellus and Utica ethane.
Consensus estimates for Enterprise's EPS forecast that it will grow by 77.3% and $2.11 in 2011 and then by 7.6% and 7% more in the following two years.
Yet higher upside can be found in Chesapeake - an oil & gas firm that has been unreasonably criticized of late due to compensation and and financial practices. While the company technically reduced leverage by $2.2B through issuing perpetual preferred shares (basically a debt equivalent), this helped the company finance cash shortfall. Going forward, management plans to cut LT net debt by 25%. With China recently taking a one-third position in the Eagle Ford projects, momentum is starting to improve for Chesapeake.
Consensus estimates for Chesapeake's EPS forecast that it will decline by 5.4% to $2.79 in 2011, decline by 24% in 2012, and then grow by 63.7%. Of the 26 revisions to EPS, 18 have gone down for a net change of -1.1%. If the multiple increases to 14x and 2012 EPS turns out to be $2.27, the rough intrinsic value of the stock is $31.78, implying 44.1% upside.