Enterprise Products

Enterprise announced several new capital projects meant to serve growing rich gas production coming from the Permian. Three new processing expansions, adding to two previously announced, and a new fractionation facility will be built through 2029.

Why it matters: As producers target gassier acreage, enabled by more gas pipeline capacity out of the basin, Enterprise is building to process and extract NGLs. We have revised our forecast to include the new projects. Management is guiding for two new gas processing plants per year, which will result in faster filling of downstream capacity and new investment to ease bottlenecks. This could set up another NGL pipeline announcement for 2029-30 later this year or early next year. Volumes are growing quickly, with transport up nearly 300 mb/d year over year. This will ultimately depend on how producers see their development plans into the 2030s.

The bottom line: We are raising our fair value estimate to $38 per share from $37 after incorporating the quarter's results and refreshing our model. Units remain fairly valued, trading in 3-star territory. Our wide moat rating, Medium Uncertainty Rating, and Exemplary Capital Allocation Rating remain unchanged.

Big picture: Management had guided to accelerated capital returns once the current development program was completed. We don't see the increased investment as substantially derailing that direction, but it will result in a lower inflection. The new investment program is spread out with smaller projects, rather than a major investment cycle. We don't see annual spending meaningfully exceeding $3 billion after 2026, much lower than the $5 billion-plus per year in 2024 and 2025.

We are increasing our fair value estimate to $38 from $37 after incorporating the most recent results and newly announced projects.

We expect EBITDA to rise to $11.5 billion by 2027, up from $10.8 billion in 2025, after the current capital program is mostly completed in 2026. Management has guided to a higher cadence of growth capital, as opposed to a maintenance plan, driven by ever growing natural gas and NGL volumes. As a result, new investment in processing, fractionation, and pipeline infrastructure will be needed to ease constraints.

Fundamentally, Enterprise's earnings are driven by two levers: volume and pricing. Existing capacity is largely fixed fee, with pipeline and export activity supported by multiyear contracts.

Further growth comes from new projects entering service. Generally, growth capital expenditure is about 6 to 8 times the resulting EBITDA. Enterprise proceeds with projects only after securing anchor agreements that guarantee payback and returns on the asset. In doing so, investors can have high confidence in project returns. Together, the existing portfolio can support a higher dividend, with new projects boosting the business overall through greater volumes.

We assign a wide moat to Enterprise Products Partners through efficient scale. Overall, Enterprise is a North American midstream firm that provides services from wellhead to end user, be they domestic or overseas, thanks to its export capabilities. Advantageous contracts also protect the firm from commodity volatility, with most revenue including a fixed fee. Further, new projects do not progress unless there are strong anchor counterparties who make up over 80% of the expected capacity, allowing the firm to recoup the cost of investment, generally 6-8 times EBITDA depending on the project type. Together, these factors contribute to resilient ROICs that have not dipped below cost of capital, even during 2020.

The NGL Pipeline and Services segment earns a wide moat off the back of strong contracts and infrastructure. More than half of the segment’s gross margin is derived from pipelines, storage, and terminals. These activities are secured by long contracts, which also support the fractionation activities. Once a molecule enters the value chain it is generally difficult for it to escape and the range of services offered gives little reason for a producer to divert it. For this reason, we don’t necessarily see the gathering and processing operations as a justification for a narrow moat. Gathering and processing require constant reinvestment on short contract terms. These contracts are also subject to frequent modification prior to expiration. So, we usually assign no moat to gathering and processing. Unlike crude gathering, NGLs generate additional fees throughout the value chain (long haul pipe, fractionation, storage, and delivery) which are generally under more advantageous and generous terms. Crucially, this activity contributes a fifth of the segment’s operating margin, with the remainder being generated by its moaty movement (about 50%), fractionation (about 20%), and no-moat marketing (about 5%) operations.

Underpinning the segment’s wide, rather than narrow, moat is its access to international markets through marine terminals. Marine terminals provide direct access to global markets. NGLs are important fuel and industrial feedstocks needed globally. With international markets directly accessible, producers of NGLs have a great reason to sign up and stick with Enterprise’s suite of services since they can generally realize higher prices in international markets.

It is also important to touch on the strength of the NGL segment relative to the rest. After crude oil, NGLs are the second most valuable product for producers. Midstream NGL processing and marketing is far more value add to a producer than midstream crude oil. NGLs enter as raw feed, or Y-Grade, which is then separated and delivered to end users or stored. Enterprise can also direct the processed material to its own petrochemical refiners, adding further value to the network.

Crude Oil Pipelines and Services earns a narrow moat. Historically, this segment could justify a stand-alone wide moat, as it possesses some of the most crucial crude oil pipelines, connecting the Permian and Cushing to export terminals and refiners on the Gulf Coast. Shipping agreements are generally secured by minimum capacity and fixed fee commitments with inflation escalators. We see little danger in volumes evaporating from the network, but 2028 brings anchor agreements' expiry in the Midland-Echo expansion. Since this connects the Permian to the Gulf Coast, a route that today has excess capacity, there will be increased competition in renegotiation that could further erode margins. These factors likely all contributed to a proposed expansion of the Echo pipeline being canceled and not revived even after oil prices rebounded from 2020 levels. This illustrates the difficulties midstream firms and crude assets will face as existing infrastructure becomes redundant.

Robust export capacity offers some protection, averaging 25% of the segment's barrels since 2019. Contracted export capacity usually has advantageous terms as well. Terms are in the seven-10-year range with minimum volume commitments and fixed fees. Customers of the export terminal are also utilizing Enterprise’s pipeline and storage services. Should crude production decline and competition heat up to maintain utilization, controlling export capacity gives us enough confidence that the segment deserves a narrow moat. As with NGLs, crude consistently demands a higher price overseas.

Natural Gas Pipelines and Services earns no moat. All the segment’s assets are intrastate, carrying gas within the states of Texas and Louisiana. The business is primarily fixed-fee and designed to deliver to industrial and power generation customers. Despite the attractive margins and fixed fee revenue, we don’t see it as particularly moaty. Contracts aren’t strong or long. Since there are no interstate assets, there is also limited regulatory protection. We generally would like to see these to assign a moat.

Petrochemical and Refined Products earns no moat. This business benefits from the rest, enabling the firm to divert crude and NGLs from the rest of the network to refining and processing activities for industrial use and export when market dynamics make it attractive. Assets within the segment range from none to wide moat, as pipelines that deliver refined products are difficult to disrupt and require only incremental investment, while there are activities fully dependent on selling commoditized products at a market price. Only a third of gross margin is linked to the moaty pipeline and export, while the rest comes from processing and selling refined feedstock products, either on fee arrangements or non-fee. Unlike other operations, a substantial but minority portion of its gross margin is exposed to commodity prices, namely, butane.

Enterprise’s control of the value chain makes it a premier player in the NGL space.

The firm’s marine terminal capability places it in an elite position when compared with peers.

Enterprise possesses one of the strongest balance sheets in the midstream industry, with investment-grade credit ratings.

A maintained slowdown in US oil production could substantially impact the profitability of the firm creating stranded assets in the industry.

The liquids-heavy portfolio means there may be materially fewer investment opportunities if US liquids production peaks.

Weakness in its crude segment is a warning sign for the NGL segment, which has benefited from more than a decade of growth.