Enterprise Products Partners ($EPD) - Q3 2023

Enterprise Products Partners L.P. (EPD, previously) reported results this morning. Highlights:

• Net income attributable to common unitholders of $1.3 billion, or $0.60 per common unit on a fully diluted basis for the third quarter of 2023, compared to $1.4 billion, or $0.62 per common unit on a fully diluted basis, for the third quarter of 2022.
• Distributable Cash Flow (“DCF”) was $1.9 billion for the third quarters of 2023 and 2022.  Distributions declared with respect to the third quarter of 2023 increased 5.3 percent to $0.50 per common unit, or $2.00 per common unit annualized, compared to distributions declared for the third quarter of 2022.  DCF provided 1.7 times coverage of the distribution declared with respect to the third quarter of 2023.  Enterprise retained $773 million of DCF for the third quarter of 2023, and $3.2 billion for the twelve months ended September 30, 2023.
• Capital investments were $826 million in the third quarter of 2023, which included $727 million of organic growth capital expenditures and $99 million for sustaining capital expenditures.  For the first nine months of 2023, capital investments were $2.3 billion, comprised of $2.0 billion of organic growth capital expenditures and $284 million for sustaining capital expenditures.
• This morning, we announced $3.1 billion of new growth capital projects in our NGL Pipelines & Services segment, our largest business.  In addition to these projects directly integrating with and complementing our entire NGL value chain, these investments also facilitate continued crude oil and natural gas production growth in the basin that will provide benefits to our crude oil and natural gas businesses.  In total, we now have $6.8 billion of organic growth projects under construction. 

The current market capitalization of Enterprise is $56.5 billion and the enterprise value is approximately $87 billion. The third quarter's $1.9 billion of distributable cash flow annualizes to $7.6 billion (compared with $7.8 billion for all of 2022) which implies a shareholder yield of 13.5% on the current market capitalization. Units are trading for 11 times this quarter's (annualized) net income. The actual distribution ($2 per unit annualized) is a 7.7% yield on the current unit price. 

Enterprise has been investing quite a bit in "growth" capital expenditures. It would be nice if these substantial outlays would translate into growth in earnings and shareholder distributions. Last year, Enterprise spent $3.2 billion to acquire Navitas Midstream, plus an additional $1.6 billion for growth capital projects. In 2021, the partnership spent $1.8 billion on growth capital projects. If you add the figures for this year-to-date, it is a total of $8.9 billion spent on growth.

Buying back $8.9 billion of the partnership's own units instead of making growth investments might have allowed the partnership to reduce units outstanding by 15%-20%. Have the acquisitions and capital expenditures done better than this? 

The real test is the same calculation we did earlier this year: free cash flow per unit, over time. Let's look at some income statement, balance sheet, and cash flow statement items for the first nine months of 2023 compared with the first nine months of 2018, which gives a five year comparison:

Revenue ($MM)
2023: $35,093
2018: $27,352

Net income ($MM, common unitholders)
2023: $3,961
2018: $2,888

Net income+depreciation-capex ("FCF," $MM)
2023: $3,439
2018: $1,043

Unit count
2023: 2,182,661,550
2018: 2,194,000,000

Net income/unit
2023: $1.81
2018: $1.32

FCF/unit
2023: $1.58
2018: $0.48

Total liabilities less current assets
2023: $30,363.62
2018: $26,560

It is always tough to tell what is going on as an outsider. Altria's "growth outlays" on Juul and NJOY were really desperate attempts to patch their leaky cigarette boat. The Juul money was thrown away for no increase in earnings, and it is possible that the NJOY acquisition will have the same result.

In contrast, the free cash flow per unit of Enterprise has grown substantially (3.3x) over the past five years. And there are no illicit Chinese competitors offering to move the same shipments of oil, natural gas liquids, and natural gas for half of what Enterprise is charging.