Should You Book Profit in This Midstream Stock – EPD

Feb 03, 2022 12:00 AM PST | Team Kalkine
Should You Book Profit in This Midstream Stock – EPD

Enterprise Products Partners LP

EPD Details

Enterprise Products Partners LP (NYSE: EPD): Enterprise Products Partners L.P. provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products. The company operates through four segments: NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services. The NGL Pipelines & Services segment offers natural gas processing and related NGL marketing services. The company was founded in 1968 and is headquartered in Houston, Texas.   

Why the investors should exit?

  • Year-end results: On February 1, 2022, the company declared its results for the last quarter of the year ending 2021, stating the rise in Net Income to USD 4.6 billion compared to USD 3.8 billion in the previous year’s ending quarter of 2020. Further, the earnings per share on full dilution stood at USD 2.1 for 4QFY21 as compared to the 4QFY20 of USD 1.71.
  • Impairment charges: The Net Income for the years 2021 and 2020, suffered because of the impairment charges of USD 233 million for FY21 and USD 891 million for FY20. This was related to the marine transportation business unit and the sale of coal bed natural gas in the San Juan Basin. 
  • Acquisition plans: On January 10, 2022, the company announced its affiliate entered into a definitive agreement to acquire Navitas Midstream Partners, LLC from an affiliate of Warburg Pincus LLC in a debt-free transaction for $3.25 billion in cash consideration. The synergies from this acquisition are estimated in terms of the Enterprise’s Natural gas processing and NGL business entry into Midland Basin in the US.

Key Risks:

  • Demand cross-firing at supply chain & more than better Q4FY21 results: The company’s bottom line is susceptible to the fluctuating demand and the bottleneck of the supply chain which was witnessed recently. The demand for its products is correlated on a positive side of how the economy flares, which puts the earnings at risk during slowdowns. Further, the results were more than decent but the price reaction to the earnings was not that appreciable. This further raises the eyebrow, that there some bits and pieces which are getting discounted at current levels.

Valuation Methodology: Price/Sales Per-share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

EPD's stock price displayed volatility in recent times and somehow managed to stay above the 50 DMA and 200 DMA after getting beaten up heavily. The price action showed good strength after bouncing from the lows of USD 20.42 and a steep vertical rally very close to print USD 25 on the tape. Looking at the market capitalization of the company and observing such wild swings in its prices, makes the investors feel uncomfortable at the time. The results were applauded but the reaction of the prices are again hinting at something which isn’t very much clear in the results, hence it gives a red flag at such levels.   

We have valued the stock using the Price/Sale per share based on relative valuation methodology and arrived at a target price of USD 19.21. The current price of USD 23.62, makes the valuation and price unsustainable at such levels and encourages the investors to book some profit or sit on the sidelines for some time. The rising interest rates and high inflation will curb consumer spending and will indirectly impact the demand of services of EDP in near to medium on a worst-case scenario. Hence, we recommend a "Sell" rating on the stock at the price of USD 23.74, down by 0.17% as of February 2, 2022, at 02:54 PM ET.

1-Year Technical Price Chart (as on February 2, 2022, at 02:54 PM ET). Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.