Despite risks from regulatory changes and renewable energy adoption, EPD's robust asset network and operational efficiency make it a compelling investment for income and capital appreciation.

In an environment where the SPDR S&P 500 Trust (SPY) has increased by 81.30% over the past 5-years some investors may wonder why so many investors are bullish on a company that is only up 1.8% in the same period. Enterprise Products Partners (NYSE:EPD) isn't grabbing headlines or being talked about on financial news networks on a continuous basis, but it's a company that continues to intrigue income investors. Energy Infrastructure isn't exciting based on what investors are gravitating toward in 2024, EPD is synonymous with recurring income and larger than average yields. EPD is finally back to its pre-pandemic levels after years of grinding its way higher. I think that EPD is undervalued at these levels and will become a lot more attractive in the coming weeks as its high single-digit yield stands out from the crowd. There is a lot to be excited about, and while I don't discuss politics, the discussion around traditional sources of energy being phased out is almost non-existent in this election cycle. EPD is a well-run energy infrastructure company with 26 years of consecutive distribution increases, an asset map that is next to impossible to replicate, and an insider ownership level that exceeds 30%. In an environment where more energy is required, there is a real possibility that more oil and gas will be produced in the lower 48 states in the years to come, and that should correlate to higher utilization levels throughout EPD's network. I am very bullish on EPD going forward and think there is an opportunity to generate income and recognize capital appreciation in this investment.

In my previous article about EPD (can be read here) I had discussed why I was excited that EPD had been awarded a license for the Sea Port oil export terminal. As the demand for energy grows on a global scale, I believe that the companies with the largest export capabilities in the U.S. will become more valuable. The Sea Port terminal will provide vessels of different sizes with the ability to load 85,000 barrels per hour and will be staffed on a 24-hour basis. Since June 21 when the article was published, EPD has appreciated by 0.70% while the S&P 500 has declined by -1.07%. When the distributions are factored in, EPD's total return over this period is 2.52%. Now that we have more economic data and clear direction from the Fed, I think that EPD will continue to increase as it could become a proxy for risk-free assets in a lower-yield environment.

No matter what type of investment someone is making, there are always risk factors. When it comes to energy infrastructure companies that focus on traditional sources of energy, there are additional risks that other types of companies do not have to worry about. We are seeing the price of oil drop as OPEC+ postpones its plan to increase production levels. If we see an economic slowdown then oil production in the U.S. could decline and negatively impact companies such as EPD that rely on increased levels of upstream production to facilitate their growth. There is also a tremendous amount of capital being allocated toward renewable energy sources, and if breakthroughs are made that reduce the cost of energy, we could see a larger rate of adoption of renewable sources. EPD also faces different regulation and environmental risk factors than other types of companies. If the political landscape changes, we could see an emphasis on renewables and more mandates that negatively impact traditional energy companies. While I am bullish on EPD, and the distribution yield is attractive, there are several risk factors to consider.

Anyone interested in EPD should understand that EPD is an MLP and issues a K-1 tax package. If you are unaware of how a K-1 package will impact you, my recommendation is that you talk to your accountant.

There is no shortage of companies, ETFs or CEFs that pay an attractive dividend or distribution in the market. Fed Chair Powell addressed the nation from Jackson Hole in August and set the stage for the first rate cut. He discussed that the labor market was slowing and that it would be appropriate to adjust policy pertaining to rates. CME Group is projecting that there is only a 9.2% chance that we see 75 bps of rate cuts for the remainder of 2024 and that the most likely scenario is that we get a reduction of 125 bps. By the end of 2025, there is more than a 50% chance that rates will be under 300 bps, and we will have incurred at least 250 bps of rate cuts. There is more than $6.4 trillion sitting in money market accounts according to the St. Louis Fed, and at some point, it won't be as enticing to stay in cash. As the Fed cuts rats, capital will likely flow into the capital markets, and I think that EPD will be a strong candidate for income investors.

When it comes to income investments, there are several factors that set companies apart. Outside of the traditional business metrics, the yield, distribution/dividend coverage ratio, and history become important factors. EPD has never reduced it's quarterly distribution, and they have grown it for 26 consecutive years. Over the past 2 ½ decades we have gone through many economic events that include the dot-com bust, 911, the financial crisis, the oil crisis, the pandemic, periods of inflation, and rising rate environments. Throughout all these events, EPD has increased the distribution and many times more than once per year. Over the past year, investors have received 2 distribution increases, and prior to the pandemic, it was normal for EPD to increase the distribution on a quarterly basis. Today, EPD is paying a distribution of $2.10, which is a 7.23% yield. During Q2, EPD generated $1.8 billion in distributable cash flow (DCF) and retained $661 million of DCF after the distributions were declared, providing a 1.6x coverage ratio.

I believe that investors will look to recreate the amount of income they are creating by sitting on the sidelines as rate cuts occur. This could happen sooner rather than later as investors look to front-run an increase in value companies and lock in a higher yield on cost. EPD checks off all of the boxes as their business infrastructure is critical to the global economy directly and indirectly, they offer a yield that exceeds the risk-free rate of return, and investors have gotten increases for more than 2 decades. When someone looks into the quality of the distribution, EPD has maintained at least a 1.5x DCF coverage ratio on the distribution since 2018, and over the trailing twelve months (TTM) the DCF coverage ratio is 1.7x. I think that this will make EPD stand out to income investors, and we could see an increased level of investment over the next 6-12 months.

EPD's growth capital has been put to good use over the years as their network capacity has continuously expanded to meet the energy demands of tomorrow. The utilization rates across EPDs system continued to increase in Q2 as their NGL Transportation volumes increased by 354 MBPD (9.05%), and the fee-based natural gas processing volumes increased by 837 MMCF/d (14.74%) YoY. EPD has also seen increases in NGL Marine terminal volumes, crude oil pipeline transportation volumes, and natural gas pipeline transportation volumes YoY. EPD still has $6.7 billion being allocated to major growth projects over the next 2 ½ years, which should lead to cash flow growth for unitholders going forward. I expect 2025 and 2026 to be big years for EPD because there are 9 projects coming online in their NGL, natural gas, and petrochemical segments. Q2 is traditionally a weak quarter for volumes, yet EPD handled 12.6 million bpd of crude equivalent volumes and 2.2 million bpd of marine terminal volumes. EPD set a record in their record natural gas processing, NGL pipeline, and fractionation volumes. The demand for energy is growing, and what use to be a weaker quarter is turning out to be a quarter that sets the tone for the remainder of the year.

It comes down to dollars, and EPD recorded an increase of $2.83 billion (26.59%) in revenue, which they generated $13.48 billion in Q2. This led to increased levels of profitability across the board as operating income, net income, Adjusted EBITDA, and DCF increased YoY. The big metrics that I look at are Adjusted EBITDA and DCF because these are the more important metrics for MLPs. EPD's Adjusted EBITDA increased by 10% ($218 million) YoY to $2.39 billion, while its DCF increased by 4.44% ($77 million) YoY to $1.81 billion. EPD has a long history of organically growing its infrastructure and producing more DCF per unit. This allows their return of capital to expand while putting EPD in a position to invest for the future. EPD continues to deploy capital into projects that have a history of producing positive results. Over the next several years, the demand for energy will continue to grow, and EPD is bringing more capabilities online to facilitate the demand while continuing its upward trend in DCF per share.

I don't believe that the market is giving EPD the respect it deserves. EPD is still trading sideways, and investors can lock in a 7.23% yield on cost before the Fed starts its cutting cycle. I haven't changed my opinion on energy infrastructure companies, and I have been bullish when everyone was scared during the pandemic. The demand for energy continues to increase as the global population increases and more data centers are built to power the AI boom. When the Fed starts to cut rates, I think a new segment of investors will be looking for opportunities outside of technology to produce income. EPD owns and operates a network of assets that is next to impossible to replace, and should continue to generate increased levels of DCF when growth assets are put into service over the next several years. EPD has provided investors with 26 years of distribution growth and is in a position to continue their increases going forward. If a shift to value does occur, I think EPD will be a clear winner, and there is an opportunity to generate income with capital appreciation.