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Enterprise Products to Grow on Fee-Based Deals, Debts High

Zacks Equity Research

On Jun 20, we issued an updated research report on Enterprise Products Partners L.P. EPD. The partnership has an extensive pipeline of growth projects that can fetch stable fee-based revenues. However, high dependence on debt financing could hurt Enterprise Products.

The partnership currently carries a Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Enterprise Products’ pipeline network spreads over almost 50,000 miles. The pipelines carry natural gas, NGL, crude oil and refined products. Most importantly, the partnership’s midstream properties are linked to all prospective shale plays in the U.S.

It is to be noted that for the 12 months ended Mar 2017, total gross operating margin for the partnership came in at $5.4 billion. Of the total, 57% of the profits came from NGL pipeline, while 17% came from crude pipelines. Natural gas pipelines accounted for 13% of the earnings, while another 13% came from midstream assets related to petrochemicals and refined products. This shows that the partnership is generating fee-based revenues from diversified midstream assets.

Moreover, the partnership raised its cash distributions for 51 successive quarters, reflecting stable fee-based cash flow from extensive midstream infrastructures. We also expect Enterprise Products to maintain the trend as the partnership has a backlog of over $8.4 billion fee-based growth projects.

However, since 2012, long-term debt at Enterprise Products has been on the rise at an exponential rate. As of Mar 31, 2017, total long-term debt stands at $21.1 billion, while its cash and equivalents was only $107 million reflecting balance sheet weakness.

On top of that, the ongoing and persistent commodity pricing weaknesses could hurt the company’s exploration and production activities. This might get translated into lower demand for Enterprise Products’ offerings. Also, the one-year pricing chart clearly shows that Enterprise Products has underperformed the Zacks categorized Oil/Gas Production Pipeline Mlp industry. During the aforesaid period, the partnership lost 9.2%, as compared with the 6.1% decline of the broader industry.

Stocks to Consider

Better-ranked players in the energy sector include Canadian Natural Resources Limited CNQ, McDermott International Inc. MDR and W&T Offshore Inc. WTI. Canadian Natural and McDermott sport a Zacks Rank #1 (Strong Buy), while W&T Offshore carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We expect year-over-year earnings growth of almost 725% in 2017 for Canadian Natural.  

McDermott beat the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 387.50%.   

W&T Offshore had an average positive earnings surprise of 69.21% for the last four quarters.

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