Units of Enterprise Products Partners LP EPD declined 2.7% over the past three months compared with the 3.8% fall of the composite stocks belonging to the industry. With limited capital expenditure flexibility and oil price sensitivity to hurt its business, should investors avoid EPD stock? To answer this billion-dollar question, let's delve into the partnership’s fundamentals and business outlook before coming to the investment conclusion.

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EPD’s High Capital Commitments With Limited Flexibility

Enterprise Products is spending $7.6 billion on growth midstream projects, comprising building new pipelines, gas processing plants and export facilities that are currently under construction. However, on its first-quarter earnings call, the partnership disclosed that a large portion of its planned 2026 spending, between $1.8 billion and $1.9 billion, is already allocated to completing projects that have been formally approved. These projects have passed the Final Investment Decision (FID) stage, indicating that construction is in progress and the company is firmly committed to moving forward with them.

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Because of this, even if Enterprise Products’ business market environment gets worse, it can’t easily reduce or delay this spending, which is a big risk to the midstream energy giant’s operations. This is because EPD may end up with lower-than-expected returns on these major investments if the economy weakens.

Oil Price Sensitivity May Hurt Enterprise Products' Business

Enterprise Products relies heavily on oil prices since it has a strong presence in the Permian. Shippers utilize EPD’s pipeline networks to transport crude from the most prolific basin of the United States to the end market or refineries. This confirms that Enterprise Products’ midstream business is sensitive to oil prices. For the long term, EPD generally expects the price of West Texas Intermediate (WTI) to hover around $65 per barrel.

However, on the earnings call for first-quarter 2025, the partnership expressed a more cautious outlook that oil will trade at $55 or even $60 per barrel in the next three to five years. The partnership mentioned that at $55 to $60 per barrel, producers are generally capable of maintaining current production levels and mostly stop investing in new drilling. 

Thus, it seems that EPD expects oil production to slow down due to declining oil prices. Once there is a slowdown in volumes, there will be lower demand for the partnership’s pipeline network, which could hurt its revenue generation in the coming years.

Should Investors Get Rid Of EPD Stock?

Although EPD generates stable fee-based revenues like Kinder Morgan KMI and Enbridge ENB, investors should stay away from the stock, given the business challenges.

Considering KMI’s business, it operates an extensive network of pipelines spanning 79,000 miles, transporting natural gas, gasoline, crude oil and carbon dioxide. In addition, the company owns 139 terminals that store a variety of products, including renewable fuels, petroleum products, chemicals and vegetable oils.

As a leading midstream service provider, Kinder Morgan’s pipeline and storage assets are secured under long-term take-or-pay contracts, generating almost two-thirds of its EBITDA. These contracts ensure the stability of Kinder Morgan’s business.

Similarly, Enbridge benefits from the long-term, fee-based nature of its midstream operations. Its pipelines transport 20% of the total natural gas consumed in the United States. The company generates stable, fee-based revenues from these midstream assets, as they are booked by shippers on a long-term basis, minimizing commodity price volatility and volume risks.

Adding to its stability, ENB will generate incremental cash flows from its C$28 billion backlog of secured capital projects, which include liquids pipelines, gas transmission, gas distribution and storage, and renewables. The maximum in-service date is 2029.

Coming back to EPD’s valuation story, the partnership is currently trading at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 10.27x. This represents a discount compared with the broader industry average of 11.63x and midstream giants like Kinder Morgan and Enbridge, which trade at 14.25x and 15.39x, respectively.

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To conclude, although Enterprise Products’ business model is backed by long-term contracts and the stock is currently undervalued, considering the ongoing business challenges, investors should get rid of the stock, which may witness further decline in unit prices. The partnership currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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