Enterprise Products Partners (NYSE:EPD) has laid out a significant growth trajectory in the Permian Basin as they bring online their new gathering and processing systems in the Midland and Delaware Basins. Though the near-term outlook for the hydrocarbons industry looks flat for 2024, production growth in the basin creates a bright spot for firms that operate in the Permian. Looking at Enterprise Products’ growth forecast of 1.2MMbbl/d of NGLs and 8.8Bcf/d of gas in the Permian by 2030, I believe holding EPD units will bring both passive income as well as strong unit growth during this period. I provide EPD units a BUY recommendation with a price target of $32.04/share.
Enterprise added 400MMcf/d of capacity at their Acadian Gas System, PDH 2 facility, Frac 12, and their Poseidon gas processing plant in q3’23 and placed the Mentone 2 gas processing plant into service in October 2023. Management anticipates closing FY23 with $3b in growth capex and $400mm in sustaining capex. FY24 is going to look very much the same with guidance suggesting $3-3.5b in growth capex with a primary focus in the Permian Basin across the Delaware and Midland Basins. This includes gas gathering expansion projects and the Mentone 3 and Leonidas gas processing facilities being placed in 2024. Longer term, management has $6.8b in growth capital projects through 1h26.
Starting with revenue, Enterprise Products experienced a $3.5b decline in revenue for q3’23 when compared to q3’22 as a result of the challenging commodities market. Revenue for NGLs and petrochemicals experienced a decline of $3.2b due to lower selling prices, with $2.9b as a result of prices and $265mm as a result of volumes. Natural gas marketing also declined by $1b due to lower gas prices. Crude oil offset some of the decline with a $613mm increase due to higher volumes (+$1.4b) offset by lower oil prices (-$837mm). Despite the revenue decline, costs also declined by $3.5b in the quarter as a result of lower costs and volumes.
Midstream services experienced an upswing due to higher volume demand in NGLs, natural gas, and petrochemicals. Petrochemicals experienced higher volumes with the help of the new propylene processing facility in Chambers County, TX, PDH 2, resulting in a revenue increase of $38mm. Similarly, the new Poseidon facility allowed for more natural gas processing volumes in q3’23, resulting in a revenue increase of $27mm. Costs proportionally increased for crude marketing by $641mm due to higher volumes which were offset by lower purchase prices. Part of the volume increase was at the Poseidon facility with an increase of 212MMcf/d.
Sequentially, total revenue declined by 7% using TTM figures. The biggest revenue decline was in Enterprise’s natural gas segment, falling -18% on a TTM basis. The only positive factor in the firm’s revenue breakdown was in crude, resulting in a y/y revenue increase of 4%.
Gross operating margins in turn declined by $192mm on a Y/Y basis in q3’23. Part of the decline was due to hedging activity across NGL and gas as well as higher opex on higher volumes at lower prices. Enterprise experienced lower volumes at their gas processing facility in the Delaware Basin with NGL-equivalent production volumes declining by 2Mbbl/d and natural gas processing volumes declining 14MMcf/d. Their South Texas facilities experienced a similar volume decline with NGLs down by 6Mbbl/d; however, fee-based natural gas processing volumes improved by 181MMcf/d.
Gross operating margin for NGL pipelines, storage, and terminaling increased by $93mm in q3’23 as a result of higher transportation fees. Volumes on their pipeline systems increased by 191Mbbl/d. Export volumes also increased incrementally with LPG export volumes up 9Mbbl/d and ethane up 15Mbbl/d. Fractionation volumes increased by 114Mbbl/d as a result of Frac 12 coming online in q2’23; however, lower fractionation fees resulted in a slight decline in revenue generation.
Despite the topline decline, management has managed to maintain operating margins. Looking into the final quarter of the year, I anticipate a continued decline due to a soft commodities market.
I do anticipate production to persist, if not to pick up in the Permian as producers, such as Devon Energy (DVN) and Exxon (XOM) have each suggested in their q3’23 earnings that they will be either holding flat or increasing production in 2024, depending on the price of the commodity. At the very least, Enterprise should be able to benefit from volume growth as price catches back up in the latter half of 2024. Management’s expectations for the basin are 1.2MMbbl/d of NGLs and 8.8Bcf/d of natural gas to be added through 2030 which will demand 8 new fractionators and 50 new gas processing plants, respectively.
Enterprise Products is a long-term income strategy with a robust buyback and distribution program. EPD units currently yield 7.50% at an annualized rate of $2.00/share.
Comparing EPD to its peers, EPD can be seen as undervalued and has room for unit appreciation.
Using a weighted average of a peer cohort, EPD units are significantly undervalued. Using a single-stage DDM model with a 3% distribution growth rate and 10% discount rate, we can come up with a similar figure of $32.04/unit. I believe there may be some significant upside to owning Enterprise Products, especially with their growth trajectory in the Permian Basin. With this, I provide EPD a BUY recommendation with a price target of $32.04/unit.