onurdongel
Back in Dec 2019 Enterprise Products Partners (NYSE:EPD) provided investors with a slide presentation in which they emphasized that their backlog of projects when completed had the potential to lift EPD’s current $8.3 billion of EBITDA by 15%. In and of itself, that suggested EPD saw an upside to 2019 results of roughly $1.2 billion EBITDA if and when an environment enabled it to utilize the potential of its yet-to-be-completed projects. Given management’s stellar reputation, an investor rightly could assume that EPD saw future EBITDA reaching $9.5 billion when the assets under construction were fully utilized.
Fast forward to 2022 heading into 2023 and EPD has, since 2019, acquired Navitas with an expected EBITDA contribution of $450 million EBITDA. EPD has also added an additional $1.6 billion of yet-to-be-completed projects in 2022 and expects to invest another $2.0 billion in future projects in 2023. If we simply lump the construction projects completed in 2020 and 2021 in with the 2019 Slide but add the 2022 and 2023 projects as “additional” upside to EBITDA potential (earning a 12% ROI), then by the end of 2023 we could assume EPD earns (1.6 + 2.0) x .12 = $457 million EBITDA to which we add the $450 EBITDA from Navitas for a total potential growth of $457 + $450 = $907 million EBITDA potential.
From these numbers we could subtract roughly $80 million per year of depreciation and or obsolescence of assets or $80 x 4 years = $320 million.
Toss it all into our salad bowl and we get $8.3 + $1.2 + $907 – $320 = $10,087 EBITDA potential. In addition, along the way, EPD has reduced its debts and roughly maintained its share/unit count. Perhaps these last two actions have saved the company roughly $50 million annually (4.5% on the debt reductions and a wash on the buybacks versus units creeping higher with time). Rounding it all together we see EPD is approaching $10 billion in EBITDA potential by year-end 2023.
Our current hydrocarbon environment might be a bit too heated to project forward but we can see that EPD’s Q2 results of $2.4 billion ($9.6 billion run rate) is not really all that surprising. Much is determined by volume flows and only a bit by attractive margin levels. It is not inconceivable for EPD to see stronger future volume flows out of the Permian and Haynesville basins more than offsetting any commodity margin declines that one might assume going forward (??). Conservatively, one might assume 2022 EBITDA is heading toward $9.2 to $9.4 billion and conditions might allow EPD to keep marching towards its upper-end potential in 2023 or at least maintain some level likely above the $9.0 EBITDA level if economic weakness persists within a shallow recession.
The Navitas acquisition appears to be well digested while leverage remains near 3.1 Debt/EBITDA. Management expects this year to further reduce $350 million of Preferred paper and buy back an additional $300 million of units (on top of the $50 million of buybacks already done so far this year). These actions ought to save roughly 6% cash on cash on the total $700 million invested = $42+ million, roughly offsetting half of any annual asset obsolescence included within our assumptions (making it rather easy to calculate future growth by simply applying 12% returns to future growth capital expenditures).
Perhaps one benefit of conducting this exercise is to evaluate EPD’s potential excess cash flow capability:
2023 EBITDA of “perhaps” $9.4 billion less Interest expense of $1.7 billion = $7.7 billion, less $350 million in maintenance = $7.35 billion, less $2.0 billion for growth Capital Expenditures = $5.35 billion. Using 2.2 billion units, that provides EPD with $5.35/2.2 = $2.43 per unit/share of excess cash flow. If we assume EPD ends 2023 with the dividend distribution at a $2.00 run rate then we can roughly subtract $2.00 x 2.2 = $4.4 billion from the $5.35 billion cash flow number and have roughly $1.0 of truly excess cash flow after normal operations and distributions. Management has clearly shown an inclination for an “all of the above” approach to capital management, so the logical expectation then is to see half of the truly excess cash flow going toward debt reduction and perhaps the other half going toward unit buybacks. This suggests debt declining by $500 million and another $400 to $500 being used to buy back units (combined these actions continue to add roughly $50 million per year to bottom-line results).
A sloppy top-down examination suggests that EPD can and will continue to invest $2.0 billion per year in new projects earning roughly $250 million of new EBTIDA per year while it also reduces its debt and unit/share count enough to almost fully offset any asset obsolescence. Realistically, however, EPD has also shown it can and does opportunistically seek out acquisitions. Furthermore, the changes to the 45Q legislation that may soon be written into law may significantly boost up the size of future construction opportunities. Together, the likely acquisitions/consolidation opportunities plus the open ended nature of growth opportunities presented by CCUS and H2 suggest EPD can and will end up investing $3.0 billion per year in EBITDA accretive investments and acquisitions, some years being more lumpy than others. One might, therefore, imagine EPD being able to grow by roughly $3 billion x 12% ROI or $360 million per year, which currently suggests roughly 4% per year.
If a meaningful amount of future growth capital expenditures are in fact allocated toward CCUS and H2, then one might logically assume EPD will be recognized to be enhancing its long term survivability/durability. Plastics, NGLs, NG, LNG, and light sweet crude are products the world can’t seem to survive or prosper without. Add in more and more CCUS and H2 projects and EPD ought to attract a wider audience of investors over time. In my opinion, this suggests EPD currently provides us with 4% annual long-term growth, a 7.3% untaxed yield and a mix of assets rising in value (perhaps meaningfully to dramatically so over time as CCUS and H2 projects become more significant). Growth could be closer to 5% and the dividend distribution ought to be deemed highly attractive to future investors even as low as 5.5%, especially if CCUS and H2 projects start to gain in size and quantity. In just a few years, one could see EPD paying out $2.10 and yielding only 5.5%, indicating an upside target price of $38 per unit.
If you find such logic to be simply too aggressive or too simplistic, then apply your own assumptions and estimates, relying upon growth and yield estimates to achieve a target price is clearly simplistic, still, it is of some value. Apply your own numbers, I bet you still get well over $30 per unit. Perhaps one might assume EPD should/will only reach a yield of 6% as it has numerous times in the recent past? Under such a circumstance, the shares still reach roughly $34.
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