Enterprise Products Partners Is Compelling and Undervalued

Stephen Ellis: Enterprise Products Partners is a wide-moat midstream partnership that we see as undervalued. We think the firm has a generally good outlook, as its earnings should benefit from $5.4 billion in projects placed in service last year, and should also benefit from another nearly $8 billion in backlog that should come online by 2023. It was also important to note that roughly 86% of Enterprise's gross operating margin is fee-based.

On the capital allocation front, Enterprise is making improvements there as well. Growth capital spending is expected to decline to a midpoint of $2.5 billion in 2021, from $3.5 billion in 2020 and $4.3 billion in 2019. This frees up cash for unit buybacks, which we think is a great idea given the stock's undervaluation. Enterprise has initially targeted about $130 million in buybacks. However, we think that it could buy conceivably up to $1 billion this year if it uses debt to fund its buyback. Alternatively, it could buy up to $2 billion in units by 2023 using excess cash after distributions and stock.

Finally, Randy Fowler was upgraded to co-CEO alongside Jim Teague. We don't think this is necessarily a huge deal, as it merely formalizes the relationship between the two. They've been working together for over 20 years. This also provides visibility if Teague were to step down, although we don't necessarily see that as a near-term event either. Overall, I think Enterprise is in a great position, it's undervalued, and we think it's a compelling idea.