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The Rise of Oil & Gas Stocks in 2021 | EPD Stock Review - YouTube
Channel: Dividend Data
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2020 has been the worst year in the
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history of the oil industry the sharp
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decline in the price of oil
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led to oil and gas stock prices hitting
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10 15
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and in some cases even 20-year lows this
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collapse compounded with existing
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negative sentiment around investing in
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fossil fuels making many investors not
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want to touch these stocks with a 10
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foot pole
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the oil market is insane we're in the
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death knell phase
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i'm done with fossil fuels they're done
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and that's how i feel about the oil and
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gas tux here i think that you
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these are the other side of history so
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to speak and that is
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just the tip of the iceberg if you've
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been following the channel then you know
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i've made significant investments into
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this area over the past few months
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in fact the energy sector now makes up
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23.8 percent of my long-term dividend
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stock portfolio
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i invested heavily in exxon mobil which
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i've discussed in previous videos but i
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started to realize i had a hidden gem in
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my portfolio i was neglecting
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this gem was enterprise product partners
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stock ticker epd
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which is an american midstream natural
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gas and crude oil pipeline company based
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in houston texas
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what caught my eye here is that the
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stock price saw a similar decline as
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other oil giants but the company's
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financials fared much
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better this was due to the company being
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far better diversified and having crude
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oil being a smaller part of the business
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in this video i'm going to provide a
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full stock review of epd
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and explain why the oil and gas sector
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will rise in 2021
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[Music]
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[Music]
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[Music]
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my name is zach and you should leave a
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like and subscribe to the channel if you
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enjoy the video
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you should never invest in a business
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you don't understand so in this video
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i'm going to provide a full picture look
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at the business and stock history of
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enterprise product partners
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the company was founded in 1968 as a
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wholesale marketer of natural gas
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liquids commonly referred to as
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ngls they first constructed pipelines in
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mount bellevue texas
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epd would continue to construct new
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pipelines and make acquisitions in the
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sector eventually spreading throughout
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much of the us
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by 1998 enterprise product partners went
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public on the new york stock exchange
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under the ticker symbol
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epd over the next two decades epd would
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make many more acquisitions and proved
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to be a serious player in the oil and
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gas
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sector on the company's website they
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have a very detailed history but i
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thought it would be boring to include
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for the purposes of this video
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i provided a link down below in the
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description if you're interested in
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learning more
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so what does epd's business look like
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today it's diversified across
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four main segments ngls crude oil
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petrochemicals and refined products and
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natural gas
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ngls make up 51 of epd's gross operating
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margin as of september 2020.
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ngls are components of natural gas that
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are separated from the gas state in the
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form of liquids
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these liquids are valuable as separate
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products with applications throughout
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the entire economy
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for example ethane has many uses direct
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applications include plastics production
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and petrochemical feedstock
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if you were wondering what petrochemical
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feedstock is it just means raw materials
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fed into an industrial production
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process to yield a different end product
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end-use products of ethane include food
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packaging prosthetics
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water pipers medical tubing insulation
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material
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textiles hygiene products detergents
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anti-freeze and much more
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propane is directly used for heating
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cooking crop drying
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vehicle fuel and petrochemical feedstock
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and used products of propane include
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consumer electronics
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strong packaging ppe pharmaceuticals
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molded parts
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carpets upholstery films helmets and
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diapers
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butanes are directly used for bottle
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fuels gasoline blending propellant
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refrigerants and petrochemical feedstock
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and used products include fuel additives
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lubricants and specialty additives
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c5 plus is another ngl that's directly
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used as a dilutant petrochemical
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feedstock
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and for gasoline blending the end use
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products of c5 plus include tires
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synthetic rubber
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paints textiles sporting goods products
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and specialty chemicals
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the primary growth driver of this
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segment is exporting ngls to emerging
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countries and petrochemical feedstocks
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additionally the customer quality in the
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segment is high with 80 percent being
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investment grade or backed by a line of
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credit
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ensuring customer quality is a large
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focus of enterprise product partners
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because this increases the reliability
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of cash flow
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since ngls are such a large part of
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epd's business
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this has allowed them to be less
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affected by the low 2020 oil prices i'll
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go into greater detail about this when i
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discuss the company's financials as a
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whole later in the video
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crude oil is the second largest segment
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of epd
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making up 24 of the gross operating
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margin
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as of september 2020. this is refined to
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produce gasoline
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heating oil kerosene jet fuel asphalt
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lubricants synthetic rubber plastics
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rayon
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nylon resins and much more specific
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growth drivers in epd's crude oil
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business is increased demand for low
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sulfur like crude
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this burns cleaner and produces lower
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sulfate emissions
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once again the customer quality is high
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with 85
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being investment grade or backed by a
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line of credit
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petrochemicals and refined products make
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up 13
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of epd's gross operating margin as of
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september 2020. this segment involves
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refining and processing
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of the end products which i described
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previously specific growth drivers
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include consumer behaviors which are
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leading to greater demand for
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petrochemical products
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over 70 percent of the customers in the
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segment are investment grade or backed
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by a line of credit
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making customer quality high once again
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the small segment of epd is natural gas
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which makes up 12
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of gross operating margin as of
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september 2020.
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this is used for electric generation
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heating cooking
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vehicle fuel and industrial fuel and
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used products include fertilizer
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paints coatings glue and more growth
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drivers include the transition away from
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coal to natural gas for stable electric
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generation and industrial fuel
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customer quality was a focus once again
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with over 65
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of customers being investment grade or
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backed by a line of credit
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alright so that should give you a good
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idea of enterprise product partners
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current operating
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segments but now let's take a look at
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the business as a whole
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in the long term energy demands are
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going to continue to increase
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the global population is expected to
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grow to 10 billion by 2057
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additionally much of the developing
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world will continue to advance
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this is best shown by the human
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development index which measures human
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progress
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in terms of health education and income
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a strong positive correlation exists
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between hdi and energy use per capita
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one clear example of this is high
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population nations such as
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china and india seeing significant
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increases in energy consumption per
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capita as their hdi
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increases this correlation is likely to
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continue as all nations advance
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overall energy consumption will increase
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dramatically over time
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according to the eia's 2020
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international energy outlook
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fossil fuels are still expected to
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dominate global end-use energy
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consumption by fuel in 2050.
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petroleum decreases from 42 to 37
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and natural gas increases from 20
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percent to 22 percent
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it's important to mention that this is
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based on percentage and leaves out the
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context
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of overall energy consumption growing
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37.5
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by 2050. even though petroleum's share
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of energy consumption decreases
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its raw numbers still significantly
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increase since the overall pie has grown
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so much
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this is one area that i think people
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often overlook or misunderstand when
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they analyze the future of fossil fuel
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now i know that climate change is a big
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factor for many investors and some would
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invest in fossil fuel companies under
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any circumstances however we need to be
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realistic that these fuel sources are
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not going anywhere
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anytime soon how dare you they are the
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backbone of our modern society and
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frankly the economy is heavily reliant
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on them just think back to all the uses
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i mentioned earlier i could honestly
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make a 30-minute video
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just detailing the long-term future of
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fossil fuels but that's not my goal here
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if you want to learn more about the
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sustainability of enterprise product
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partners then i suggest you read their
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2019-2020 sustainability report
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i will provide a link to this in the
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description below all right let's dive
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into the short-term problems of the
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crude oil business
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in 2020 the price of oil tanked even
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going negative for a brief period of
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time
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demand plummeted as much of the world
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entered into an economic shutdown
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causing a massive oversupply of oil
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thus driving the price down on top of
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this russia and saudi arabia entered an
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oil
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price war as both countries refused to
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lower oil production exacerbating
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oversupply and lowering prices even more
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since june the price of oil has been
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hovering around 40 dollars a barrel and
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more recently growing to 45
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oil is a commodity business and thus its
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performance is reliant on price
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the price is purely determined by supply
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and demand how much oil is produced
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and how much is consumed throughout this
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year oil companies have made significant
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production cuts but these take a long
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time to realize on the market
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additionally demand is still recovering
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from the economic shutdowns and
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won't fully recover until vaccines are
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widely distributed
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luckily this vaccination will largely
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occur in 2021
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and demand should return to higher
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levels the production decreases will
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kick
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in and with decreased supply and
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increased demand prices will rise
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this is not even taking into account the
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factor of inflation which many think
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could be significant from the wild money
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printing that's happened during this
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year
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i think oil prices will return to
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profitable levels in 2021
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and could even hit relatively high
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prices over the next few years
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i can't tell you exactly when the price
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will recover but i know it will
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just look at the price of oil
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historically every time there's a large
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downswing the price eventually rebounds
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to profitable levels
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global oil producers always move
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production levels to sustain business
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let's take a look into epd's crude oil
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business specifically
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this chart shows the break-even prices
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for their various locations the
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break-even price changes depending on
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the location and the quality of the well
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for high-grade wells the break-even
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price ranges between 20 and 40 dollars a
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barrel
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for average quality wells the break-even
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price ranges between 30 and 55 dollars a
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barrel
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based on these prices it looks like
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epd's crude oil business should return
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to profitability in 2021
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however if you remember from earlier in
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the video this segment is only 24
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of epd's gross operating margin this
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means that they are far
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less dependent on oil prices to be
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successful as a company this becomes
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obvious when you look at the company's
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financials over the past year gross
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profit
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operating income net income and earnings
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per share
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are all in line with 2019 numbers
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however the stock price still saw a
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major decline like other oil stocks
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in my eyes the market was valuing epd as
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though they were suffering as much as
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oil dependent companies
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this was not the case though enterprise
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product partners is a
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very diversified business and has proved
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to be resilient to oil price
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fluctuations
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this is shown through their historical
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data over the last 10 years the
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company's gross profit has grown from
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2.29 billion to 5.73 billion dollars
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giving it a 9.6
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compound annual growth rate this trend
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is similar for both
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operating and net income in this same
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time the earnings per share has
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increased from 58 cents to 2.09
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giving it a 13.6 compound annual growth
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rate
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according to epd's q3 quarterly report
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the company has averaged a 12
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return on invested capital over the last
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10 years
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at the current stock price of 20.76
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the p e ratio is 9.59 which is
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incredibly low in this historically
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highly valued market the epd dividend
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has seen 21 years of consecutive
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dividend growth with a 4.18 percent
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five-year compound annual growth rate
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and a current 8.85
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dividend yield its payout ratio is
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currently 84.88 percent which is
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quite good given the conditions of their
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industry i actually have no concern over
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epd lowering their dividend and expect
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them to continue
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increasing it barring some unforeseen
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circumstances
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epd will soon become a dividend
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aristocrat meaning that they have
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increased their dividend for 25 plus
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years
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an investment in epd right now locks in
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an incredibly high
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and stable dividend yield and provides
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potential for capital appreciation as
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recovery play in 2021.
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another positive aspect of enterprise
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product partners is their leadership
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the management of the company owns 32 of
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the common units which is significant
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this means that the management's
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interests are in line with the
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shareholders
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if you're planning on investing it's
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important to mention that epd is an mlp
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which stands for master limited
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partnership an mlp is a limited
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partnership whose interests known as
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units are traded on public exchanges
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just like corporate stock
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owning units in an mlp is different from
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owning corporate stock in a number of
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ways most notably their taxation
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an mlp like all partnerships is a
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pass-through entity which pays no tax
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itself
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it is treated by the tax code not as a
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separate entity but as a collection of
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partners
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each unit holder is allocated on paper a
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proportionate share of the mlp's income
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gain deductions losses and credits this
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is reported annually on the k1 forum
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now i'm no expert in mlps and i'm still
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learning about it myself i've heard both
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positive and negative takes on how it
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can impact your taxes
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so be sure to talk to a tax professional
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if you have any questions
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also i will provide a link in the
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description of this video to a resource
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that describes mlps in detail
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epd is one of my holdings in my
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long-term dividend stock portfolio
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currently i have 75.25 shares with a
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compounded dividend yield of 9.35
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percent and a cost per share of 19.89
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my plan is to pick up more shares
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whenever the price is below my cost per
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share
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in fact i've already put orders in
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during the making of this video
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i think epd is a great opportunity in
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the energy sector and offers a fantastic
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yield on cost in the long term and
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capital appreciation in the short term
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however don't take my advice blindly and
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be sure to do your own research before
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making any
[887]
investment decisions thank you for
[889]
watching dividend data i greatly
[891]
appreciate if you could leave a like and
[892]
subscribe to the channel
[894]
if you follow me on twitter link in the
[895]
description you can get real-time
[897]
updates on my buys and dividends coming
[899]
in
[899]
you can support the channel over on
[901]
patreon and be a part of making these
[903]
videos happen
[904]
the link is in the description please
[906]
leave a comment below and thank you for
[910]
watching
[919]
you
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