EPD stock is undervalued, trading at a 10.73x trailing 12-month EV/EBITDA, below industry average of 12.57x.
A discounted valuation may present investors with an opportunity for significant returns.
Data centers and gas-fired power plants are expected to drive demand for natural gas, benefitting EPD.
Enterprise Products Partners LP EPD is currently considered undervalued, trading at a 10.73x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is below the broader industry average of 12.57x.
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A discounted valuation presents investors with an opportunity for significant returns. However, it becomes imperative to delve deeper and evaluate whether the partnership is navigating any internal challenges. A comprehensive analysis is essential to determine if EPD's lower valuation reflects its robust fundamentals, promising growth prospects and prevailing market dynamics.
EPD’s Long-Term Growth Backed by Strategic Projects
Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. This includes more than 50,000 miles of pipelines and a storage capacity of 300 million barrels. Shippers utilize these assets in long-term contracts to transport and store natural gas liquids, crude oil, refined products and petrochemicals. The partnership also has 14 billion cubic feet of natural gas storage capacity, securing stable fee-based revenues.
EPD is set to generate additional fee-based earnings with $6.9 billion worth of major capital projects either currently in service or under construction. These project backlogs will not only secure stable cashflows but will also generate handsome unit-holder returns.
Supported by its stable and resilient business model, Enterprise Products has achieved 26 consecutive years of distribution hikes. The current distribution yield of the partnership stands at 6.2%, higher than 5.5% of the composite stocks belonging to the industry.
Distribution Yield
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EPD’s Efficiency Path: Cleaning Sour Gas & Leveraging Big Data
EPD has acquired Piñon Midstream, strengthening its ability to process natural gas in the Permian – the most prolific basin in the United States. This includes adding special equipment to clean "sour" natural gas (gas with impurities like sulfur) and safely handle unwanted byproducts like acid gas. These new facilities will fit into EPD's existing system for handling natural gas liquids (NGLs), making its operations more efficient and comprehensive.
Also, the partnership uses advanced technology to make its pipelines run more efficiently and profitably. It analyzes massive amounts of data in real-time to predict issues, plan maintenance and optimize operations.
EPD to Capitalize on Promising Market Opportunities
Data centers and gas-fired power plants are expected to drive demand for natural gas, supported by initiatives like the Texas Energy Fund. Enterprise Products is among the few midstream players with the infrastructure—such as pipelines and storage facilities—to meet this demand efficiently. This makes the partnership uniquely capable of tapping into this growing market.
Ethylene is a critical component in many industrial applications. U.S. production is highly competitive because it uses ethane (a byproduct of natural gas) as feedstock, which is cheaper than the naphtha used in Europe. Enterprise Products anticipates growing opportunities to export ethylene, especially to Europe, where some smaller and less efficient chemical plants may shut down. This could increase demand for U.S. exports.
Evaluating the Potential in EPD’s Discounted Valuation
Despite advancements, the partnership faces certain uncertainties in its operations. It is currently in a phase of elevated capital expenditures for 2025, following similar heightened spending levels in 2024. These increased investments could constrain cash flow available for distributions and buybacks in the near term.
Also, the midstream major has significant exposure to debt capital. Although the majority of the partnership’s debt is fixed-rate, the high overall debt levels could be a concern for investors prioritizing lower leverage.
The challenges are reflected in EPD’s price chart. Over the past year, its units have gained 35.5%, underperforming the industry's composite stock growth of 47.6%. Among notable midstream companies, Kinder Morgan Inc KMI and Enbridge Inc ENB outpaced EPD, delivering gains of 103.9% and 37.4%, respectively.
One-Year Price Chart
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Despite facing challenges, the partnership’s resilient business model, backed by stable fee-based revenues and attractive valuation, might seem appealing. However, investors may prefer to wait for greater clarity on the partnership's outlook before considering a purchase.
Those who already own the stock should retain it. The stock carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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