- EPD has one of the best dividend/distributions an income investor can find with 22 years of consecutive increases, a yield that exceeds 8% and a 1.6x DCF coverage ratio.
- EPD has strong fundamentals as it returned $38.8 billion to shareholders since 1998 and increased its distribution through the financial crisis, oil price crisis and COVID-19 pandemic.
- EPD finished 2020 in a position of strength as their net income was in the billions and margins remained intact.
- I believe EPD will trade in the high $20s by end of 2021 and there is an 8% distribution to go along with the unit appreciation.
On 1/10/21 I wrote an article on Enterprise Products Partners (NYSE:EPD) indicating that there was significant unit appreciation left in its recovery. Since that article units have increased by 4.65% trailing the 5.70% the S&P 500 has appreciated by. I have been long on EPD and others in the sector for some time and believe EPD is still a buy. EPD closed on 4/1/21 at $22.27 per unit with a distribution yield of 8.08% as it pays $1.80 per unit. From the beginning of 2019 to the start of the pandemic EPD traded in the mid to upper $20 range on a consistent basis. 2020 was one of the worst business environments EPD had to endure yet their net cash flow from operating activities of $5.9 billion, free cash flow of $2.7 billion and distributable cash flow of $6.4 billion showed incredible stability.
Throughout the pandemic when energy companies were in their darkest hour EPD maintained its distribution while providing unitholders with another increase in 2021 maintaining their 22 consecutive years of distribution increases. Recently President Biden unveiled an infrastructure plan in excess of $2 trillion which will allocate:
- $621 billion into transportation infrastructure such as bridges, roads, public transit, ports, airports and electric vehicle development
- $400 billion to care for elderly and disabled Americans
- $300 billion into improving drinking-water infrastructure, expanding broadband access and upgrading electric grids
- $300 billion into building and retrofitting affordable housing, along with constructing and upgrading schools
- $580 billion in American manufacturing, research and development and job training efforts
The scale of this infrastructure bill is going to require a massive amount of energy in the form of fossil fuels which is spectacular for EPD. EPD is also going to benefit from the increasing global demand of liquified natural gas (LNG). EPD operates over 50,000 miles of NGL, crude, natural has, petrochemical and refined products pipelines with massive storage capacity, robust processing facilities and 19 deep-water docks. Based on EPD’s performance in 2020 I believe the combination of life getting back to normal, the infrastructure plan and LNG exports EPD will deliver a solid 2021 and units will continue their road to recovery. I think units are still undervalued by 25% and my 2021 target is at least $28 per unit.
(Source: Enterprise Products Partners)
Through a pandemic which shut the country down and drastically changed life EPD still delivered a strong 2021
Sometimes the headlines can be deceiving and not every energy company got decimated throughout this pandemic. EPD stood their ground and in my opinion delivered a respectable 2020 given the operating environment. Revenue decreased by $5.59 billion (-17.05%) from $32.79 to $27.20 billion in 2020. On the surface that’s a drastic reduction but a decrease in revenue had to be expected. The interesting part is what EPD’s gross income, net income and their ratios looked like. EPD managed to keep their gross profit inline with 2019 as it only declined by $63.70 million (-1.10%) to $5.71 billion. EPD also produced $3.78 billion in net income which was a decline of $815.7 million (-17.77%). Given the dramatic decrease in revenue EPD’s management team persevered in the face of adversity as they still generated billions in pure profit and kept their gross income inline.
EPD’s ratios were surprisingly impressive for 2020. EPD’s gross profit margin was 21.01% ($5.7147 / $27.1997) which was the largest it's been in the past decade. In 2019 EPD’s gross profit margin was 17.62% ($5.7784 / $32.7892). EPD also had an impressive net income conversion ratio. In 2019 EPD converted 14% ($4.5913 / $32.7892) of their revenue to net income and in 2020 EPD converted 13.88% ($3.7756 / $27.1997). This is an indication of strong management which can absolutely do more with less.
(Source: Steven Fiorillo) (Data Source: Seeking Alpha)
One of the things to remember about EPD is they throw off a tremendous amount of cash to their unit holders. This isn’t an investment where share appreciation is the end all be all. Many people are invested in EPD because of its income producing capabilities. In 2020 EPD generated net income attributable to common unitholders of $3.8 billion. Net cash flow provided by operating activities came in at $5.9 billion. Free cash flow increased 8% to $2.7 billion in 2020 from $2.5 billion for 2019. Distributable cash flow (DCF) was $6.4 billion in 2020 compared to $6.6 billion in 2019. EPD’s DCF in 2020 was large enough to create a 1.6x coverage ratio over its distributions and EPD was able to retain $2.5 billion of its DCF to reinvest after its distributions were paid.
(Source: Enterprise Products Partners)
EPD’s distribution remained intact and unitholders received their 22nd consecutive annual increase in 2021
There are many companies that pay a dividend or distribution but there aren’t many that can compete with EPD. In 2020 the S&P 500 dividend yield was 1.58% and the dividend aristocrats had an average yield of 2.9%. It's not uncommon to see dividend/distribution cuts when times are bad and quite a few high yielding Energy companies & REITs did exactly that in 2020. Unitholders of EPD faced a different reality as an increase was provided in 2020 then again in 2021. Some people say sound the alarm when the yield is as high as EPD’s but I say look at the metrics. EPD’s distribution is solid and approaching dividend aristocrat status.
There is nothing to complain about or not to like about EPD’s distribution. EPD’s $1.80 per unit distribution has a yield of 8.1% without a single blemish. EPD has returned $38.8 billion back to unitholders in distributions and buybacks since 1998. Over the past two decades EPD didn’t just maintain but they increased their distribution throughout the financial crisis in 2007 – 2008, the oil price crisis 2014 – 2016 and through COVID 2020 – Current. Since 2004 EPD’s operational & DCF coverage ratio has exceeded 1x.
EPD has a best in class distribution that can rival any companies. By investing in EPD you are getting an 8.1% yield, 22 consecutive years of dividend growth, a 1.6x coverage ratio and a track record of returning capital to unitholders. If you’re an income investor there are many choices in the market but not many provide a dividend / distribution that can compare to EPD’s. In three years EPD will be crowned a dividend aristocrat and holders of EPD will enjoy three more years of distribution increases along the way.
(Source: Enterprise Products Partners)
I continue to believe LNG will be the fuel of the future and as the U.S. exports continue to increase EPD will reap the benefits
The EIA is predicting that the global energy demand will increase by 50% over the next three decades. An increase in energy demand of 50% may seem drastic but in the year 2057 there will be an additional 2.2 billion people in the global population so it makes sense. The EIA is projecting that in their reference case the United States is both an importer and an exporter of petroleum liquids as they import mostly heavy crude and export products such as gasoline and diesel. The EIA’s reference case projects that the U.S will see high levels of exports for petroleum and other liquid exports through 2050 to support the global demand. The EIA is also projecting that natural gas consumption will grow from 2020 through 2050 in both domestic industrial use and exports. The largest growth in natural gas exports will be seen from 2020 – 2030 as it increases by a rate of 4x then a gradual increase to the 5x level in 2050 based off of 2020 export levels.
U.S Natural gas and LNG exports have increased dramatically over the past 6 years. From 2015 – 2020 the total U.S natural gas exports increased 296% from 1,783,512mcf to 5,281,017mcf and LNG exports increased by 8,421% from 28,381mcf to 2,389,838. In 2020 LNG exports reached a new record of 2.39 trillion cubic feet which is a 32% YoY increase as LNG was exported from the U.S to 37 countries. In 2020 U.S. LNG exports to Asia increased by 67U.S. LNG exports to Europe averaged 2.5 Bcf/d which was an increase of 0.6Bcf/d from 2019. Based on the prior data from the EIA and their future predictions I believe their use case about U.S exports will come to fruition.
(Source: Steven Fiorillo) (Data Source: EIA)
I am bullish on exports for two reasons. The first reason is for an export to occur it needs to be transported, processed and stored first. The second reason is midstream companies such as EPD will see additional fuels running through their system and collect the fees associated with the demand. EPD is one of the best situated companies to capitalize on what I believe will be a growing trend. In 2020 EPD’s operations saw:
- NGL pipeline transportation volumes 3,589Mbpd
- NGL marine terminal volumes 722Mbpd
- NGL fractionation volumes 1,359Mbpd
- Fee-based natural gas processing volumes 4,285MMcf/d
- Crude oil pipeline transportation volumes 2,166Mbpd
- Crude oil marine terminal volumes 724Mbpd
- Natural gas pipeline transportation volumes 13,421BBtus/d
- Propylene production volumes 89Mbpd
- Butane isomerization volumes 96Mbpd
- Pipeline transportation volumes, primarily refined products 802Mbpd
- Refined products and petrochemicals marine terminal volumes 262Mbpd
These fossil fuels are raw materials which are critical to everyday life. EPD earns fees throughout their entire transportation process. When you think about companies that have a moat around their business EPD has to be in the conversation. This isn’t an industry you can just build from the ground up anymore. There is a reason Warren Buffett bought Dominion’s (D) natural gas assets and it's simply easier to acquire existing infrastructure than going through a rough permitting process and dealing with all of the uncertainties. With 19 deepwater docks and a massive infrastructure EPD is in prime position to see increased revenues from the growing energy demand.
(Source: Enterprise Products Partners)
Why I am not worried about green energy replacing fossil fuels over the next 2 decades
I am putting a disclaimer here, I am not against clean energy, renewable resources, or renewable energy increasing its position in the global energy mix. This section isn’t meant to be political and isn’t a political statement. Please do not turn this into a political debate in the comments and I will not respond to anything political. This section is my personal point of view based on the current facts. I am invested in Star Peak Energy Transition Corp. (STPK) which is a clean energy company and wrote an article to outline my thesis on STPK.
Recently President Joe Biden signed an executive order to rejoin the Paris Climate Agreement and he has been adamant about achieving a 100% clean energy economy and net-zero emissions by 2050. Recently the newly appointed U.S. Secretary of Energy Jennifer Granholm said “We need to get to 100% clean electricity by 2035.” The current leadership is adamant about 100% renewable as the Democrats in the House of Representatives published a 538-page report named Solving The Climate Crisis which outlined their plan to reach net-zero emissions by 2050 on June 30th 2020. Recently the Biden Administration announced their taking initial steps toward approving a massive wind farm off the New Jersey coast. This will be part of an effort to generate electricity for more than 10 million homes nationwide by 2030. President Biden has vowed to double offshore wind production by 2030. I absolutely applaud this effort, President Biden made renewable energy one of his platforms and he is delivering. My feelings are that it's incredibly improbable to meet the overall goal of 100% clean electricity by 2035 and net zero by 2050.
Above is a breakdown of which energy sources fuel U.S. electricity. Fossil fuels make up 60.3%, nuclear 19.7% and renewables 19.8%. Within renewables wind accounts for 8.4% and solar 2.3%. In 2020 the U.S. consumed 4,009 billion kWh of electricity, keep in mind this is just electricity and not the total energy demand of the U.S. Wind & solar accounted for 429 billion kWh which is 10.7% of the U.S.’s 2020 electricity generation. If the U.S. demand doesn’t increase from 2020 – 2030 and wind and solar can double their footprint they would account for 858 billion kWh which would account for 21.4% of the U.S electricity generation. The goal of 100% renewable energy generation for electricity is almost improbable by 2035. Just to displace coal renewables need to generate 774 additional billion kWh from where they are today. Wind and solar would need to increase by 180% just to displace coal by 2035 yet the Biden Administration has a “goal” of doubling wind capacity by 2030. For wind and solar to generate 4,009 billion kWh each would need to increase their generation by 941% by 2035. Keep in mind this is without a single kWh increase in the U.S energy demand for electricity.
In the EIA’s latest annual energy report for the U.S. which was released on 3/2/21 it indicates that wind and solar will account for 42% of the electricity generated in 2050. The EIA is also projecting that the amount of energy consumed from wind and solar will increase from roughly 7 quadrillion Btus to 17 quadrillion Btus, which is an increase of 142.86% by 2050. With the global energy demand set to increase by 50% by 2050 led by Asia I don’t see a path to eliminating natural gas, coal and nuclear in the U.S by 2035, 2040 or even 2050. Keep in mind even if the Biden Administration increases its efforts and doubles down or even triples down on their goals you still have market factors to consider. Every part needs to be manufactured and transported. You also need the bodies to install and connect all the turbines and solar panels to the grid. At some point there will be constraints in the supply chain as a maximum capacity will be reached on production and transportation. In addition there is no guarantee that there will be enough people interested in filling the additional positions created by the transition to green energy.
Putting electricity aside as that’s just one component of the energy mix how about the other use cases for fossil fuels? Oil and gas touch our lives indirectly more than you would think as they provide the foundation for many items used on a day-to-day basis. One of the things that’s overlooked by many is that plastic can be defined as polymers of long carbon chains. Two of the cheapest feedstocks to create the building blocks for plastic are crude oil and natural gas. Fossil fuels have an abundance of hydrocarbons which act as building blocks for long polymer molecules.
Oil and gas play a vital role in everything from our agricultural supply chain, to technology, petrochemicals, plastics and many other aspects of our lives. When you combine ethane, propane and butanes into the equation you would be surprised of the direct and indirect areas they touch. These fuels the advancements and quality of life possible. These fuels directly impact electricity, heating, cooking, fuel, petrochemical feedstock and refinery feedstock to name a few. Some of the end use case products which the hydrocarbons from these fuels help to make include fertilizer, paints, food packing, prosthetics, textiles, detergents, antifreeze, electronics, upholstery, lubricants, jet fuel, asphalt, and plastics. Still to this day I don’t see a world without oil, gas and other fossil fuels. I believe renewables will increase their position in the global energy mix and replace coal but how do you make all of the items that make the world function without fossil fuels?
Once again this isn’t political as I am for renewable energy. I am just looking at this logically. The human population is going to continue to increase and were on track to add 2.2 billion people to the population in 2057. We are going to need a lot more of everything from fertilizer to plastic and everything in-between. I am open minded and I am willing to listen and evaluate all points of view on this issue. For anyone who thinks I am incorrect I have the following questions:
- Starting with electricity how do we manufacture, deliver and install enough wind turbines and solar panels to go 100% renewable by 2035 or 2040? It's one thing to just say were going to do it but how long will it take to manufacture enough supply to meet the current demand let alone our growing energy needs? How long is it going to take for the U.S to create enough jobs and provide the proper training in these fields?
- If the end goal is to replace all fossil fuels what will the world use to make all the products that hydrocarbons touch?
The reason I am asking is I have never read a clear concise plan that makes sense. I am all for the evolution of the global energy mix but I want to understand how it's going to happen before I change my stance on fossil fuels. Until then I am a firm believer that companies such as EPD will play a critical role in transporting the fuels that make the world function.
I think EPD is one of the best midstream operators you can invest in. If you’re an income investor EPD should be on your radar. With 22 years of consecutive distribution increases, a yield that exceeds 8% and a 1.6x DCF coverage ratio those distributions will be flowing into your brokerage accounts for years to come. I believe EPD is undervalued and will continue making its way back to the high $20s by the end of 2021. Until I see evidence that fossil fuels won’t be needed in the next 2-3 decades my stance isn’t changing and EPD is a buy in my eyes.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fits into their portfolio parameters
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