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Whenever someone speaks on fossil fuels or oil, undoubtedly someone pipes up with how they are a thing of the past! The future is renewable energy and Electric Vehicles. Yet, we often forget something: hydrocarbons are a vital part of our daily life. They are essential feedstock for a wide range of consumer goods. Oil in Everyday Life Let us discuss Wall Street’s favorite topics:
Electric Vehicles: EVs are among the most discussed transformations today. Polymers are instrumental in the EV revolution. They are lightweight, inexpensive, easy to shape, durable, and flame retardant. Today, plastics make up to 50% of a vehicle’s volume but only 10% of its weight, an essential factor for EVs since the battery is one of the heaviest components of the car.
Renewable energy is a significant socio-political issue today. The current administration supports the transition to clean energy, and S&P Global Market Intelligence projects a record 2022 for wind and solar energy deployments. We need more wind turbines, solar panels, battery insulators, coatings, insulation, and other related materials.
Ironically, more EVs and renewable energy mean greater demand for plastics and polymers made from petrochemicals . Overall, the outlook for petrochemicals and their derivatives is vital, if not accelerated by modern transformations. Today, we make a bullish case for Enterprise Products Partners ( EPD ), one of the largest midstream pipeline companies in North America and a leader in the transportation and storage of these vital commodities – NGLs, refined products, natural gas, and crude oil.
Note: EPD is a Master Limited Partnership that issues a Schedule K-1. EPD’s earnings report is scheduled for the morning of February 1st. Vital Assets In A Booming Industry
EPD owns and operates over 50,000 miles of pipelines, ~260 MMBbls of liquid storage and 14 Bcf of natural gas storage capacity, 19 natural gas processing facilities, 25 fractionators, 11 condensate distillation facilities, and 19 deepwater docks. In short, the partnership owns vital assets that are extremely difficult to replace, making it a significant moat that can be monetized for decades.
EPD’s revenue mix shows Petrochemicals and NGLs to constitute ~62% of the revenue mix, making it more of an opportunity in petrochemical bi-products like plastics than an energy midstream company, hence the name Enterprise Products Partners. Data Source: 10-Q SEC filing EPD operates the world’s largest propylene and ethylene systems and is the world’s largest exporter of Liquified Petroleum Gas (‘LPG’), a cleaner & high energy density, and easily transportable fuel for residential purposes.
EPD’s liquids pipeline throughput has strongly recovered to near pre-pandemic levels at 6.3 million barrels a day. The partnership’s natural gas pipeline and transportation volume for Q3 exceeded pre-pandemic levels at a record 14.6 Bcf/day. EPD’s distribution today is 4.4% above early 2020 levels, and despite the robust performance, EPD trades 17% below pre-pandemic levels. Y-Charts EPD ended the Q3 with over $2.2 billion cash on their balance sheet and over $6.1 billion in accounts receivable. Let us now look at a recent acquisition made by the firm. All-Cash Navitas Acquisition
EPD recently announced the acquisition of Navitas, a West Texas-based midstream operator with natural gas assets. EPD is spending $3.25 billion to acquire Navitas, and the transaction is being made using cash on hand.
The acquisition brings the following to EPD’s asset base: ~1,750 miles of pipeline assets.
Over 1 Bcf/d of processing capacity.
~10,000 drilling locations on dedicated acreage
Long-term contracts with over 40 E&P customers
Importantly, Navitas has no exposure to federal lands, a dead asset under the current administration’s policies. The Navitas acquisition provides EPD with an attractive position in the Midland Basin, and the transaction is expected to be immediately accretive to the partnership’s distributable cash flow (‘DCF’). Management is guiding $0.18 to $0.22 per unit in DCF increase in 2023.
This transaction increases the firm’s moat incrementally, and investors will reap the rewards through growing distributions. Speaking of growing distributions, let us review another exciting announcement from the firm. 24 Years of Growing Distributions
That is quite an impressive feat that not many companies can boast about. EPD recently increased its distribution by 3.33% to $0.465/share. This calculates to a 7.6% annualized yield. The partnership is just one more distribution increase away from achieving the coveted Dividend Aristocrat status, which will put it on the radar for even more dividend growth investors.
Most Dividend Aristocrats have yields far below 5%. The ProShares S&P 500 Dividend Aristocrats ETF ( NOBL ) yields a paltry 2%. […]
source Invest Like A Billionaire With 7.6% Yield: Enterprise Products Partners
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