Why Credit Suisse Sees Big Upside in Enterprise Products Upgrade

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From a six-month high of near $30 per common unit, Enterprise Products Partners L.P. (NYSE: EPD) shares had dropped about $4 as of Friday’s close. The last peak (over $27) came just a week ago, on news that the company had been holding discussions with the Williams Companies Inc. (NYSE: WMB) about a possible merger.

Activist investor Keith Meister of Corvex Management has released a letter he had written to the three new directors at Williams, urging them to be more responsive to merger talks, both with Enterprise and other potential suitors.

And while Meister’s letter may have had little or no impact on Williams, one of its unintended consequences has been to put more air under Enterprise stock. Credit Suisse analyst J. Edwards said Monday morning that the firm lifting its rating on Enterprise from Neutral to Outperform and maintained the price target of $34 per common unit.

Edwards does not expect Enterprise aggressively to seek a merger with Williams or any other company:

While management has been increasingly vocal towards looking at M&A to drive growth, in our view, EPD management is unlikely to chase Williams or any other deal. Specifically on Williams, while both sides have issued press releases indicating that talks have ended, certain Williams investors continue to advocate for a deal. It appears the market is still pricing in the possibility of EPD acquiring Williams at an aggressive price. We believe if talks resume EPD is unlikely to consider terms which would be value destructive or dilutive. Further, as we have highlighted in our analysis of an EPD / WPZ / WMB merger, EPD has lot of legroom before a prospective deal becomes dilutive, suggesting that investor concerns on this topic are overblown.

The Credit Suisse report also notes Enterprise’s $5.6 billion of growth projects that are expected to run through 2018. In Edwards’ view:

This provides solid visibility to our 5-yr distribution CAGR of 5.5%, which is impressive for an MLP [master limited partnership] with an EV [enterprise value] of $77B. Their suite of interconnected assets (including the ~$0.7-$0.8b newly built ethane export terminal) provides stable cash flows. Additional upside would come from smaller opportunistic M&A as well as additional opportunities from on the crude / condensate side.

The key risk to his call, Edwards said, is that Enterprise won’t be able to lift its EV to EBITDA ratio to trade at 1.5 to 2.0 times higher compared with its historical performance. But Enterprise’s common units have now dropped far enough to warrant the upgrade to Outperform, Edwards said.

Enterprise common units traded up about 3.1% Monday morning, at $26.82 in a 52-week range of $19.00 to $30.11. The 12-month consensus price target is $32.65 per common unit.