EUR 850.00 For Business Accounts Only

Morningstar | Enterprise’s 4Q Continues to Break Records; Announces $2 Billion Buyback

Enterprise Products Partners reported another set of record results and announced a $2 billion unit buyback program, which we see as supporting our Exemplary stewardship rating, given the partnership’s deep undervaluation. The buyback has no set time frame and will be more opportunistic, as Enterprise bought back 1.2 million units in the fourth quarter at under $23 a unit, than systematic. We don’t expect material changes to our $35.50 fair value estimate or wide moat rating. Overall results benefited from strong volumes across natural gas liquids, gas, and oil, and just about every business unit contributed. For the quarter, adjusted EBITDA and distributable cash flow increased to $1.9 billion and $1.6 billion, respectively, from $1.5 billion and $1.3 billion, contributing to record annual results.

We continue to believe that investor apathy toward the master limited partnership structure and misplaced concerns over the effect of oil prices on its income stream are holding back Enterprise’s units. Enterprise has a bright fundamental outlook as we expect U.S. volumes across all three hydrocarbons to increase significantly over the next few years, earning Enterprise a fee for every barrel moved. This shift is a far more important driver of the business than its spread-based marketing efforts, which depends on differentials versus the absolute level of oil, gas, and NGL prices.

With $6 billion in annual distributable cash flow, the partnership actually achieved its goal of self-funding the equity portion of its growth capital expenditures a year early, and it is now positioned to do the same in 2019. Assuming a repeat performance of at least $6 billion in distributable cash flow in 2019, which we expect to occur, given net capital spending plans of around $2.5 billion to $3 billion, free cash flow (a metric Enterprise is now highlighting to appeal to more generalist investors) will be $3 billion-plus, up from 2018’s $2 billion.

The major driver for the quarter and year was, quite simply, volumes. For the quarter, NGL, crude, and petrochemical volumes increased 10%, natural gas and fractionation volumes 9%, and processing volumes improved 16%. The growth is from a combination of new projects in service and an ongoing recovery in others, such as natural gas volumes in Texas. Enterprise has another $6.7 billion of projects on deck stretching out to 2020, supporting ongoing growth.

Another significant driver was the wider differentials, which Enterprise’s marketing unit was able to capture, generating an incremental $400 million in EBITDA. While Permian spreads have collapsed recently, removing that profit pool, we think there are still incremental opportunities to be exploited by taking advantage of export spreads, whether it be oil, ethane, LPG spreads for international markets, or simple differentials available because of Enterprise’s newly started-up propane dehydrogenation facility. This ability will improve further once its isobutene dehydrogenation plant opens in the fourth quarter of 2019. Both plants will provide Enterprise with the ability to use cheap propane or butane to refine to higher-value purity products if profitable exporting opportunities are not available. Although, Enterprise is certainly pursuing ongoing export opportunities as well, with an ethylene export terminal under construction and is expanding its LPG export capacity.

From a permitting perspective, the recent government shutdown meant that Enterprise couldn’t submit its recent permit for its offshore export terminal, which will eventually be able to load a very large crude carrier (which carries 2 million barrels) a day, a significant advantage. With the reopening, the permit has now been submitted. The recent announcement by CME to launch a new West Texas Intermediate Houston crude future contract with three delivery points on Enterprise’s system will improve price transparency and make it easier to obtain volumes for the terminal.