The beautiful thing about the middle space is that there is an opportunity for strong and steadily growing cash flow over an extended period of time. A company that has recently achieved outstanding results on this front is Enterprise Product Partners (NYSE:EPD). The company, which operates as a fully integrated network of midstream energy assets that connects producers of natural gas, natural gas liquids and crude oil to domestic consumers and international markets, recently released financial results covering the second quarter of its fiscal year 2022. During this quarter, the company showed tremendous upside from a revenue perspective. But more importantly, it showed continued improvement in its cash numbers. If current estimates for fiscal 2022 hold true, the company’s shares, while not the cheapest in the industry, could provide an additional upside for investors going forward. For this reason, I have decided to retain my Strong Buy rating on the company, reflecting my belief that it should continue to significantly outperform the market for the foreseeable future.
EPD’s recent performance has been strong
The last time I wrote an article dedicated to Enterprise Products Partners was in June 2020. At that time, I had recognized that the company’s shares had been volatile for a few months. However, the overall fundamental condition of the company remained strong and I felt the company’s stock was significantly undervalued. This led me to call the company a “solid buy”. And since then, things have gone pretty well. While the S&P 500 returned 29.3%, shares of Enterprise Products Partners returned 46.2%.
This increase was not without cause. In fact, it was driven by steady and improving cash numbers for the business. Consider the company’s performance from 2020 to 2021. Net profit, for starters, went from $3.78 billion to $4.63 billion. Operating cash flow increased from $5.89 billion to $8.51 billion. True free cash flow, which excludes capital expenditures to sustain operating cash flow, increased from $5.60 billion to $8.08 billion. DCF, or distributable cash flow, increased from $6.41 billion to $6.61 billion. And the company’s EBITDA went from $8.06 billion to $8.38 billion.
The company’s growth has continued even in the current fiscal year. In the last trimestre, for example, which management just reported on August 3, the company reported net income of $1.41 billion. This is 26.9% more than the $1.11 billion generated a year earlier. Cash flow from operations increased by 6.3%, more modestly, from $1.99 billion to $2.12 billion. True free cash flow increased from $1.88 billion to $2.04 billion. The DCF increased from $1.60 billion to $2.02 billion. And the company’s EBITDA went from $2.01 billion to $2.42 billion. All of this data can be seen in the graph above. And in the chart below, you can see the same metrics but covering the first half of fiscal 2022 versus the first half of fiscal 2021. This period showed a similar year-over-year increase. for the company.
As a large, complicated company with many moving parts, it’s really hard to distill into a few words precisely what contributed to these improvements. So I’m going to focus on a few key areas instead. Above all, the company benefited from an increase in the volume processed through its network. In the NGL Pipelines & Services segment, for example, the company saw volumes increase almost everywhere. NGL pipeline transportation volumes, for example, were up 7.2% year over year in the last quarter. NGL marine terminal volumes increased by 12.3%. NGL fractionation volumes jumped 7.3%. And natural gas paid processing volumes increased by 22.6%. Only NGL equivalent production volumes in shares fell, falling 1.5% year-on-year. The company also saw improvements in other categories. Crude oil pipeline volumes, for example, increased 7.6%, while natural gas pipeline volumes jumped 18.7%. Other aspects of the business also added to the image. The awards also certainly contributed to the improvement in the company’s results. Tied to some of these changes is the fact that the company has also committed to some purchases over the years. In February of this year, for example, the company bought Navitas Midstream for $3.2 billion. In addition, the company continues to invest in growth. In the last quarter alone, it allocated $576 million to organic growth capital projects, in addition to $157 million for sustaining capital expenditures. And for the full year, the company plans to allocate about $1.6 billion to growth projects.
It’s hard to know what to expect for the rest of the year. But if the first part of the year is any indication, we should expect operating cash flow of around $9.04 billion and true free cash flow of $8.84 billion. DCF is expected to be around $7.57 billion, while EBITDA is expected to be around $9.21 billion. This makes valuing the business quite easy. Based on price to adjusted operating cash flow, which excludes non-controlling interests and preferred distributions, the company is trading at a multiple of 6.4. This compares to the 6.8 multiple we get if we use 2021 results. Over the two years, the price to true free cash flow multiple is 6.5, while the price to at the DCF multiple should go from 8.6 using last year’s results to 7.5 using this year’s results. At the same time, the EV/EBITDA multiples should drop from 10.3 to 9.4. To put that into perspective, I also compared the company to five similar companies. On a price/operating cash flow basis, these companies ranged from a low of 4.2 to a high of 10.5. Only one of the five companies is cheaper than our prospect. Using the EV to EBITDA approach, we get a range between 7.6 and 14.9. In this case, two of the five companies were cheaper than Enterprise Products Partners.
|Company||Price / Operating Cash||EV / EBITDA|
|Enterprise Product Partners||6.8||10.3|
|TC Energy (TRP)||10.5||14.0|
|Kinder Morgan (KMI)||8.0||12.3|
|The Williams Companies (WMB)||9.6||14.9|
|Cheniere Energy (LNG)||9.1||7.6|
|Energy Transfer (TE)||4.2||9.8|
To put the company’s advantages into context, I calculated the average of the trading multiples of the five comparable companies, including the highly undervalued Energy Transfer. Using the price to operating cash flow approach, if we were to assume that Enterprise Products Partners warrants trade at the average of these five companies, the upside potential from today today would be 31.9%. And if we do that using the EV/EBITDA approach, the upside would increase to 37.8%.
Based on all the data provided, it seems to me that Enterprise Products Partners continues to be an intriguing prospect with good upside potential. To be clear, it still takes a secondary place in my book on energy transfer. But still, it still seems to offer investors some interesting opportunities. So much so that I would feel comfortable keeping my strong buy rating on the company for the time being.