This is my favorite energy store right now
Oil discoveries hit their lowest level since 1946 last year as energy companies diverted capital spending from new projects and exploration to their proven revenue streams. This resulted in the need to hold onto cash after the pandemic caused demand to drop dramatically.
It is not that there is no more oil to be found, but rather that the oil companies were unwilling to risk capital to find it. That is changing now that oil prices are rising and profits are soaring. ExxonMobil intends to fund between $20 billion and $25 billion in new projects this year, up from $16 billion last year, though that’s still below the $33 billion spent before the COVID outbreak.
The world still needs oil and gas to function because there are not enough alternative energy sources available to power businesses and consumers today. This means that the energy sector still has a long streak of growth ahead of it and investments in fossil fuel stocks remain an attractive target.
While I’ve made bets on integrated giants like Exxon and Chevron when they were beaten by falling prices and the belief that we were at peak oil, today I take a closer look at the space in between, which transports, processes, stores and exports oil, natural gas, liquefied natural gas (LNG) and other refined petroleum products.
I think they represent a unique opportunity to capitalize on the oil resurgence and thrive in an inflationary environment, and Enterprise Product Partners (EPD -1.41%) may be my favorite energy store in space right now.
Play the intermediary
Enterprise Products Partners is one of the largest publicly traded partnerships in the United States, with 50,000 miles of pipelines, 23 natural gas liquids (NGL) processing plants, 14 billion cubic feet of storage for the storage of natural gas and over 260 million barrels of storage capacity for NGLs, crude oil, refined products and petrochemicals.
Midstream energy stocks make excellent long-term investments because they most often generate steady cash flow from fees, which they return to investors through distributions. Energy Products Partners derives most of its revenue from long-term, fixed-price or take-out contracts, so it gets paid whether or not its customers accept delivery of the product. Its generous payout of 6.9% is particularly attractive, especially since it has increased the payout for 23 consecutive years.
Because it’s one of the main reasons investors love partnerships like Enterprise Products, it’s important to consider payment security, and with this middleman leader, there’s no worry.
The distribution coverage ratio, or the amount of cash flow available for distribution relative to what the company pays out to its shareholders, should not fall below 1, as this implies that the payout is not sustainable. With Enterprise Products Partners, the ratio rose to 1.8 in the first quarter from 1.7 at the end of December. Even during the pandemic rout of the industry in 2020, however, it never came close, ending the year at 1.6.
Satisfy a long-term need
With exposure to all major shale regions in the country, the midstream energy stock is well positioned to capitalize on production in the various regions. Significant consolidation has occurred in the space, particularly in the Permian Basin, giving enterprise product partners a competitive advantage due to its scale.
And while demand for alternative energy sources will undoubtedly increase in the future, leading to some decline in demand for fossil fuels, it probably won’t be as dramatic as many might assume.
The US Energy Information Administration estimates that oil consumption will drop from about 40% of the total of all energy sources to just 37% by 2040, while natural gas will drop from 17% to 18%. And oil for energy use will continue to grow, from 80 million barrels of oil equivalent per day to 90 million barrels of oil equivalent per day; it’s just that the total pie will get bigger, so its percentage of the total is less.
NGLs accounted for 33% of enterprise revenue in 2021, while crude was only 18%, and it accounted for half of its gross operating margins, two and a half times more than the second-largest segment. important, the gross. NGLs are also vital to the global economy and are found in everyday consumer products including clothing, cell phones and even diapers.
As the world’s largest exporter, Enterprise Products stands to benefit the most from growing demand for these products as economies continue to recover from the pandemic, not just in the United States but around the world.
With its enterprise value trading at almost 14 times EBITDA, it is slightly above the five-year average of around 12, but that includes the pandemic period which has dented valuations. Compared to the previous five-year period when EV/EBITDA averaged 16 times, Enterprise Products Partners seems like a good deal and is just one of the many reasons why it’s one of my favorite energy stocks today.