During the October 6 episode of Mad Money, a caller asked about Enterprise Products Partners L.P. (NYSE:EPD), highlighting its earnings multiple, income yield, and recent trading volume. Jim Cramer replied:
I think what you’re seeing is related to the fact that interest rates, the 30 year’s headed towards 6%, maybe 6.25%, which is what I can ultimately expect that it could happen, and that’s causing Enterprise Products Partners to be weaker than expected. I still like the business. It’s a great liquefied, you know, great LNG company… Actually, what it does is fractionates oil into all sorts of little pieces that are really important. It’s a really well-run company. I think you should own it. Don’t focus right now on the bond market; just focus on the business, which is very strong.
More precisely, Enterprise’s fractionation facilities separate mixed natural gas liquids into products including ethane, propane, and butane. This activity differs from producing liquefied natural gas, or LNG.
Enterprise Products Partners ranks #7 among the best energy infrastructure stocks to buy. See which six companies ranked higher on our list and why.
Export Infrastructure Adds to Cash Generation
Enterprise Products Partners L.P. reported record second-quarter operational distributable cash flow of approximately $2.3 billion, up 21% year over year. That covered its declared distribution 1.9x and left approximately $1.1 billion available for internally funded expansion and unit repurchases. The cash-flow story also depends on how Enterprise earns money from its processing and pipeline network. Its fee-based business offers some protection from commodity-price swings, but leaves other sources of exposure.
New infrastructure contributed to the results, including its fourteenth fractionator and terminal expansions. During the quarter, the company approved two additional Permian Basin processing plants and another fractionator, bringing organic growth projects under construction to approximately $6.5 billion. Its Houston Ship Channel liquefied petroleum gas export expansion was scheduled to begin operations by year-end. The declared quarterly distribution of $0.56 per unit represents $2.24 annualized, a distribution yield of approximately 6.1% as of October 8.
Exceptional Export Volumes May Not Persist
Some second-quarter strength reflected unusually high international demand during April and May. Management said marine terminal volumes returned to normal levels in June and July after the initial rush to replace supplies disrupted by Middle East hostilities. Continuing shipping disruptions and longer routes also complicate export activity. Cramer’s earlier description of Enterprise as a potential pipeline winner from the Hormuz disruption went beyond higher export volumes. He pointed to a change in product margins that helps explain his enthusiasm.
Valuation presents a mixed picture. Enterprise Products Partners L.P. trades at approximately 11.9x forward earnings versus Energy Transfer’s 12.4x. However, its enterprise-value-to-EBITDA multiple was higher, approximately 11.1x against 8.2x. Enterprise offers a modest earnings discount, but not a discount across both measures. A higher price target does not necessarily signal a bullish recommendation. Enterprise’s entry in an earlier natural-gas stock roundup showed that point through Morgan Stanley’s assessment.
Fund Participation Holds Steady
Insider Monkey recorded 32 hedge fund holders in both Q2 and Q1. The unchanged count does not establish whether those funds increased or reduced their individual stakes. Short interest stood at 2.40% of the float, suggesting relatively limited short positioning.
Cramer remains comfortable owning Enterprise Products Partners L.P. despite his concerns about competing bond yields. Distribution coverage and retained cash support that view. The more useful test from here is whether new projects keep adding cash flow as the exceptional export conditions of the second quarter fade.
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