Yesterday, Enterprise Products Partners LP EPD announced third-quarter 2024 earnings that fell short of expectations due to reduced margins at its South Texas natural gas processing facilities. Despite this setback, the partnership’s broader business outlook remains strong. Before exploring the factors supporting this positive outlook and discussing strategic approaches for investors, let's first examine the third-quarter results.

EPD’s Q3 Earnings Snapshot

Enterprise Products’ adjusted earnings per limited partner unit of 65 cents missed the Zacks Consensus Estimate by a penny. However, the bottom line increased from the year-ago quarter’s 60 cents.

Total quarterly revenues of $13.8 billion beat the Zacks Consensus Estimate of $13.7 billion. The top line improved from $11.9 billion reported in the prior-year quarter, thanks to higher fee-based natural gas processing volumes.

Kinder Morgan Inc. KMI and Enbridge Inc. ENB are two other prominent midstream energy companies. Kinder Morgan has already released third-quarter earnings, while Enbridge has yet to report results.

EPD’s $7B Key Projects & Handsome Distribution Yield

Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. This includes more than 50,000 miles of pipelines and a storage capacity of 300 million barrels. These assets are utilized by shippers on long-term contracts to transport and store natural gas liquids, crude oil, refined products and petrochemicals. The partnership also has 14 billion cubic feet of natural gas storage capacity, securing stable fee-based revenues.

EPD is set to generate additional fee-based earnings with $6.9 billion worth of major capital projects currently in service or under construction. These project backlogs will not only secure stable cashflows but will also generate handsome unit-holder returns.

Image Source: Enterprise Products Partners LP

Supported by its stable and resilient business model, Enterprise Products has achieved 26 consecutive years of distribution hikes. The current distribution yield of the partnership stands at 7.2%, higher than 6.5% of the composite stocks belonging to the industry.

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Solid Coverage & Growth Prospects of EPD With Data Centers

The partnership boasts a robust 1.7x coverage along with an attractive distribution yield. A distributable cash flow of 1.7 times coverage means that the midstream energy giant made 1.7 times the cash needed to pay its quarterly distribution to investors. Thus, EPD’s payouts to investors are well-protected and are likely sustainable, even if the company’s earnings fluctuate.

With its extensive pipeline network, especially in Texas, EPD is well-placed to meet the rising energy needs of data centers in the region. This growing demand presents an opportunity for EPD to boost organic growth, largely utilizing existing infrastructure. Consequently, EPD can expand its services to data centers without requiring substantial new capital investments.

EPD’s Pinon Buyout to Secure Additional Fee-Based Earnings

On Oct. 28, Enterprise Products announced the completion of its acquisition of Piñon Midstream for $950 million in an all-cash transaction. Piñon, a key player in gas gathering, compression and treating, operates in the Delaware Basin, a sub-basin of the Permian.

Enterprise Products has thus secured additional fee-based earnings. This is because Piñon’s assets, comprising 50 miles of natural gas gathering pipelines, compressor stations and treating facilities with plans for significant capacity expansion, are backed by long-term fee-based contracts, minimizing exposure to commodity price fluctuations and reducing volume risks.

Piñon operates a premier sour gas treatment system in the Delaware Basin, an area with significant untapped potential. With the acquisition, EPD has established a significant presence in the basin much faster.

What Should Investors Stance Be Toward EPD Stock?

Despite these positive developments, the partnership's stock is lagging behind the broader industry, as reflected in its price chart. Year to date, its units have jumped 16.5% compared with the industry's growth of 23.8%.

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Thus, it seems that there are some concerns surrounding the stock. EPD’s current distributions are secure. However, future distribution growth could be modest as the company allocates more funds to new capital projects, particularly in areas like data center energy solutions and carbon capture. This focus on reinvestment may result in slower income growth for unit holders.

Moreover, while EPD’s move into data centers and carbon capture aligns well with market trends, these projects could encounter delays and face hurdles related to regulation and execution. Moreover, the profitability of these ventures over the long term will likely be influenced by market conditions and competition from other energy providers.

Also, Enterprise Products is currently considered overvalued, trading at a 9.77x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is above the broader sector average of 3.31x.

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Hence, investors are probably better off not buying the overvalued stock until there is greater clarity on the partnership's future. Those who already own the stock should hold on to it. The stock carries a Zacks Rank #3 (Hold) at present.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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