Jim Teague, the CEO of Enterprise Products Partners (EPD -0.41%), has been through his share of downturns over the years, and he says he's not concerned about the current economic uncertainty. That's because his company built its operations around delivering certainty in any market condition.
On his company's recent third-quarter conference call, he discussed why Enterprise sees a recession not as a reason to worry but as an opportunity.
Built to deliver certainty
Teague has had a long career, first in the petrochemicals sector with Dow Inc. (DOW -0.95%) -- an industry that is very cyclical as demand rises and falls with the global economy -- and now in the energy midstream industry with Enterprise. Because of that, he's seen his share of downturns. He commented on that topic on the call:
Thinking back on my career, first with Dow and here in Enterprise, I can't count the number of downturns I've been through. At Dow, the downturns were always painful. But here in Enterprise, they always bring opportunity. In the current environment, while the uncertainties are real, the certainty that Enterprise will always deliver is real, too.
We'll get to the opportunity in a moment. First, let's dive into why Teague believes Enterprise delivers certainty in an uncertain environment.
A big driving factor of that belief is the overall stability of its business model. Enterprise operates a diversified portfolio of energy midstream and petrochemical businesses that primarily generate predictable cash flow backed by long-term, fee-based contracts. While it might experience lower volumes on some of its assets during a downturn, it doesn't face pricing risk. Because of that, there's a lot of certainty about its future cash flows.
The company complements its stable cash flow with a top-notch financial profile. It pays a conservative amount of its cash flow to support its high-yielding dividend (56% of its adjusted cash flow from operations over the last 12 months), enabling it to retain lots of cash to fund expansion projects. Enterprise Products Partners also has a strong investment-grade balance sheet, with leverage currently below its target area. That gives it lots of financial flexibility.
The company also has visible growth ahead. It currently has $5.5 billion of expansion projects under construction that should be completed over the next few years. And it has secured long-term contracts to back these projects. Because of that, these expansions will grow its cash flow as they come on line. That should give Enterprise the fuel to continue growing its cash distribution to investors, which it has done annually for 24 straight years. That's one of the top streaks in the energy sector. And its forward dividend yield is a generous 7.6%.
The flexibility to capitalize on opportunities
Teague also believes downturns can provide his company with attractive investment opportunities. For example, recessions often lead financially struggling companies to consider selling assets to bolster their balance sheets, or bringing on partners to fund expansions. They also lead companies to seek ways to reduce costs, which they can accomplish through a merger that eliminates redundancies and increases scale.
Enterprise Products Partners has a long history of capitalizing on opportunities that emerge during a downturn. For example, during the oil market downturn that started in 2014, it took advantage of the opportunity to acquire Oiltanking Partners for around $6 billion. The merger expanded Enterprise's marine business while providing new growth opportunities it has captured over the years.
A future downturn could provide the company with similar investment opportunities. It's in an excellent position to capitalize on whatever might emerge, thanks to its strong balance sheet. That significant financial flexibility gives it a competitive advantage because it can go on the offensive when other companies need to play defense.
Built for times like these
Enterprise's CEO knows that recessions can be painful for some companies, especially those in cyclical industries. But his company built its business to deliver certainty in times of uncertainty. That allows it to pounce on opportunities that might emerge if we experience a recession.
Enterprise's ability to thrive no matter the market conditions makes it a great stock to buy if you're worried about a recession because it can be a shelter amid that storm.
