EPD Can Offer Strong Upside with Limited Downside Risk



Total return

Enterprise Products Partners (EPD), the largest US midstream energy company in terms of market cap, has generated a total return of 85.1% over the past seven years. It has outperformed both the Alerian MLP ETF (AMLP) and the Energy Select Sector SPDR ETF (XLE).

EPD has generated a lower return than some of its peers, but it’s seen lower volatility over the period.

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Enterprise Products Partners was trading at a forward EV-to-EBITDA (enterprise value-to-EBITDA) multiple of 13.0x on June 26, lower than its historical five-year and three-year averages of 14.4x and 13.4x, respectively. The partnership posted 19.3% EBITDA growth in the first quarter. Analysts expect the partnership to post ~24% EBITDA growth by the end of this year.

EPD also offers an attractive distribution yield of 6.2%. The partnership’s current distribution yield is higher than its five-year average of 5.4%. EPD’s current valuation looks very attractive considering its strong presence in major US basins (including the prolific Permian Basin), its strong focus on the NGLs (natural gas liquids) logistics business, its low commodity price exposure, its low leverage, its massive expansion plans, and its impressive distribution coverage (1.5x as of March 31).

With that said, EPD could continue to generate steady returns with limited downside risk.

Analysts’ recommendations

A total of 100% of analysts have rated EPD as a “buy.” EPD is the only constituent of AMLP that has “buy” ratings from 100% of analysts. Deutsche Bank last initiated coverage on EPD with a “buy” rating—the only rating update EPD has seen in 2018 so far. EPD is currently trading below the low range ($29) of analysts’ target prices. Its average target price of $31.7 implies a ~14% upside potential from its current price level.

For more coverage on midstream companies, check out Market Realist’s Energy MLPs page.


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