Enterprise Products Partners (NYSE: EPD) entered this year as a screaming bargain. That's after units of the MLP slumped 7% last year, even though it generated record cash flow that rocketed 33% from 2017's level. That disconnect between the company's unit price and underlying value led Enterprise to authorize a $2 billion repurchase program.
That buyback, as well as an improvement in the oil market, have ignited units of Enterprise this year. It's already up more than 15% year to date and 20% from its bottom in late 2018. That big rebound probably has investors wondering if Enterprise Product Partners is still a good buy.
A look at the valuation
The sharp rise in Enterprise Products' unit price has helped improve the company's valuation, which had fallen to an insanely cheap level toward the end of last year. However, a quick look at the numbers suggests that it still trades at an attractive value.
Given that Enterprise Products Partners generated $2.74 per unit of distributable cash flow during 2018, and with units currently trading at $28.50 apiece, the company sells for around 10.4 times cash flow. While that's up from 9.7 times at the beginning of the year, it's well below the mid-teens historical average of midstream companies and much cheaper than some rivals.
Meanwhile, the company's valuation is even more attractive when considering its anticipated earnings for 2019. Enterprise should set another record this year as the expansion projects it finished last year, as well as those it should complete in 2019, provide a further boost to its bottom line.
Shifting the focus to growing value per unit
Enterprise Products Partners has undergone a notable shift in how it funds growth projects. The company used to issue more units to finance expansions but has stopped doing so, since it would significantly dilute existing investors given how cheaply the company trades for these days. Instead, it has opted to slow its distribution growth rate so that it can retain more cash to fund expansions. This approach should enable the company to grow cash flow per unit at a faster pace in the future, which should help boost total returns for shareholders.
The company has lots of growth lined up since it currently has $5.1 billion of expansion projects under construction, which sets it up to grow cash flow per unit at a healthy rate through 2020. Meanwhile, the company has a long list of new projects under development, which could fuel meaningful growth beyond next year. Because of that, the company's unit price should have plenty of upside over the coming years, even more so since Enterprise aims to grow cash flow on a per-unit basis.
About that buyback
Enterprise Products Partners is one of a growing number of midstream companies that have authorized a repurchase program to provide a further boost to per-unit growth. In Enterprise's case, its $2 billion buyback could retire around 3% of its outstanding units at the current price.
As the company starts gobbling up its units, those repurchases would incrementally expand cash flow on a per-unit basis. Further, the buyback should help nudge the company's valuation up closer to its historical average.
Verdict: Enterprise Products Partners is still a buy
While Enterprise Products Partners isn't the ridiculously cheap bargain it was earlier in the year, it's still trading at a relatively attractive valuation. Add in its growth prospects and buyback -- not to mention its 6.1% yielding distribution -- and Enterprise Products Partners remains an attractive buy for the long term, especially for investors seeking low-risk income growth.
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