(Idea) Enterprise Products Partners - Top Energy Income Pick
Enterprise Products Partners, L.P. (EPD) is one of our favorite income equities for long-term holding. We’ve held it in our Energy Income Portfolio since we first covered the name in December 2020. The company’s high quality and diversified asset base, high distribution yield, distribution safety and growth, and undervalued equity make it an attractive choice as a core position in any energy equity portfolio.
EPD is a midstream oil and gas MLP with an enterprise value of $94.3 billion, making it the second-largest independent midstream operator after Energy Transfer LP (ET). In the first quarter, the company transported 12.3 million barrels of oil equivalent per day of crude oil, natural gas, NGLs, petrochemicals, and refined products. It fractionated 1.6 million barrels per day of NGLs while loading and exporting 2.3 million barrels per day of refined products and ethylene. Its vast operating footprint is shown in the map below.
Source: EPD 2024 Investor Update, April 3, 2024.
EPD’s activities span the entirety of the U.S. midstream value chain. Its integrated model is built to source hydrocarbons in shale basins and then transport, process, fractionate, store, and export them. It delivers hydrocarbon products directly to customers and provides petrochemical feedstock and petrochemicals to end users.
Source: Enterprise Products Partners, L.P., May 2024 Investor Presentation.
The company has been a leading beneficiary of the U.S. shale boom, which has required midstream services at an unprecedented scale. Rising throughput volumes from increasing domestic oil and natural gas production have translated to growing earning power over the past decade.
Going forward, EPD will continue to benefit from increasing domestic natural gas and NGL production. Approximately 80% of the company’s business is tied to products other than crude oil, so higher natural gas and NGL volumes will drive cash flow higher for at least the next several years.
Natural gas and NGL volumes will increase due to drilling for natural gas, but also due to increasing quantities of natural gas produced as a byproduct of oil production. This “associated” natural gas production is insensitive to price. As such, it is likely to increase as long as takeaway and processing capacity is ample. The chart below shows the increasing share of U.S. natural gas production comprised of associated gas.
Source: EIA, Dec. 6, 2023.
Another attractive feature of EPD is its insider ownership, which is among the highest in the energy sector despite the company’s massive size. A full 32.4% of EPD’s common units are owned by the heirs of Dan Duncan, who founded the firm as Enterprise Products in 1968 with two partners, two propane trucks, and $10,000. Today, the family’s 702 million units are valued at $21 billion. Its holdings increase the likelihood that EPD’s affairs will be managed conservatively and in the long-term interests of passive outside common unitholders.