George Soros’s Most Undervalued Holding Is Surprising

For instance, the former Wall Street speculator isn’t just a major donor to several non-profit organizations; he’s also funded numerous research projects, including the Center for Climate Change Law at Columbia University and the Climate and Development Knowledge Network.

Moreover, the founder of the Open Society Foundations provides significant financial support for various grassroots campaigns that encourage young people to take action on global warming.

And yet, given these impressive antecedents, it might come as a shock to find that the man who recently claimed that “urgent action” is needed to avoid a climate calamity is heavily invested in the oil and gas industry himself.

Indeed, Soros is a shareholder in Enterprise Products Partners, a Houston-headquartered midstream oil and gas company.

However, what’s most bizarre about his stake in EPD is that, based on a discounted cash flow forecast analysis, the organization represents one of his investment vehicle’s most undervalued positions.

But what is it about Enterprise Products that’s caused Soros to ditch his long-held principles? And, more importantly, is it a wise move to follow suit?

Enterprise Products Partners L.P. is a large, publicly traded midstream energy company that operates a vast network of pipelines and storage facilities that transports natural gas, crude oil, and various other refined products around the country.

Indeed, as a midstream operation, EPD facilitates the activities and processes between the upstream production of oil and natural gas and the downstream refining and distribution of petroleum products.

Hence, one of the key responsibilities of Enterprise Products is to expedite the movement of fossil fuels from production sites to processing facilities and then on to end-users such as refineries, pipelines, or terminals.

In addition to its transportation and storage capabilities, EPD is also involved in the petrochemicals space. The company manages several processing plants that extract so-called intermediate products, allowing it to gain exposure to the growing second-level hydrocarbon market both within the United States and elsewhere around the world.

Why Is Enterprise Products Partners A Top Buy?

Due to its relatively low-risk profile compared with other segments in the oil and gas business, the midstream sector is often seen as the most reliable in the industry.

In fact, upstream exploration, drilling, and production is a capital-intensive undertaking that is significantly exposed to fluctuations in commodity prices.

Midstream, on the other hand, is generally less prone to price volatility. It focuses on transportation, storage, and other infrastructure services that are less affected by market changes, with a large portion of its income derived from long-term, fee-based contracts.

Moreover, midstream companies like Enterprise Products tend to be more diversified and have a larger asset base, allowing them to spread risk across multiple projects and investments.

This aspect of midstream operations means that firms can often generate sizable cash flows from their businesses.

And that is certainly the case with EPD. To demonstrate this, the company reported it had increased its distributable cash flow for 2022 by 17% to $7.8 billion, while net income also rose from $4.6 billion to $5.5 billion.

With such predictable revenue sources, Enterprise Products can return a massive fraction of its FCF to investors. Indeed, in the fourth quarter of 2022, EPD stated that it had achieved a 71% adjusted FCF payout ratio, with a large portion of that spent on organic growth opportunities in the Permian Basin.

An Outstanding EPD Dividend

Unlike many other big-name energy companies over the last year, EPD has been a poor stock pick for investors seeking capital appreciation. The firm’s shares have risen just 9% in the previous twelve months, which, when set against Exxon Mobil’s 49% or Occidental Petroleum’s 57%, appears pretty paltry in comparison.

However, to compensate for this, Enterprise Products Partners offers a best-in-class dividend almost unrivaled in the industry.

To begin with, while the firm’s 10-year compound annual dividend growth rate is modest at 4.0%, it makes up for this with a solid forward yield of 7.4%.

Furthermore, EPD has paid a dividend for 24 consecutive years and has never failed to increase its annual distribution once. This is an astonishing achievement, not least because its rivals in the Oil and Gas Storage and Transportation sector don’t get anywhere near this. Energy Transfer, for example, has one year of dividend growth under its belt, whereas TC Energy Corporation doesn’t even have that.

Hazards Ahead?

While a company like EPD is generally safer than other businesses in the oil and gas industry, that doesn’t mean no potential dangers are lying in wait.

Indeed, price uncertainty can still threaten midstream companies since these ventures ultimately depend on the gross volume of the commodities they transport. Therefore, if prices increase too fast, it could lead to lower demand, whereas if prices drop precipitously, the hit to revenues and earnings could be catastrophic.

However, Enterprise Products may face operational hazards associated with its infrastructure and equipment too. These can include mechanical failures, natural disasters, or other unforeseeable events that could disrupt operations and cause losses.

Conclusion

It’s easy to see why George Soros is happy to weather accusations of being a climate hypocrite.

For one thing, EPD has the ability to generate stellar cash flows – and isn’t shy of giving back to investors, either.

Moreover, where the Hungarian philanthropist is concerned, the climate change agenda can take a back seat so long as Enterprise Products Partners remains on top.

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