The energy sector had a lackluster year in 2025. The average energy stock in the S&P 500 was up less than 5%. That significantly underperformed the nearly 19% rise in that broader market index.
While energy stocks delivered underwhelming returns last year, several have catalysts that could fuel higher returns in 2026, including Enterprise Products Partners (EPD 1.64%). Here's why I plan to make the midstream giant the first energy stock I buy in the new year.
Image source: Getty Images.
The end of an era
In 2022, Enterprise Products Partners embarked on a considerable capital investment cycle to build out the necessary infrastructure to support its customers' growing production volumes in the Permian and Haynesville basins. These investments included building large-scale pipeline and marine terminal facilities, such as the Bahia NGL Pipeline and Neches River Terminal (NRT). The company also made acquisitions to expand its capabilities, including the purchase of Pinon Midstream for $950 million in 2024.
Last year represented the peak of capital spending. Enterprise Products Partners was on pace to invest $4.5 billion in 2025, up from $1.6 billion when it started this phase in 2022. That allowed the company to place $6 billion of growth capital projects into commercial service in the second half of the year, including two new gas processing plants, the first phase of service at NRT, Bahia, and a 14th NGL fractionator at its Mont Belvieu complex.
NYSE: EPD
Key Data Points
As a result, the company anticipates its capital spending will decrease considerably in 2026. It currently expects it to be in the range of $2.2 billion to $2.5 billion. That investment rate will enable it to finish NRT (first half of 2026), build two more gas processing plants (Mentone West 2 in the first half and Athena in the fourth quarter), and complete an expansion of the Enterprise Hydrocarbons Terminal (year-end).
The company currently has only one project in its backlog with an in-service date beyond the end of 2026. It recently unveiled plans to expand Bahia's capacity from 600,000 barrels per day to 1 million barrels per day, while also building a 92-mile extension to ExxonMobil's Cowboy gas processing plant, which it expects to complete by the end of 2027. Exxon is acquiring a 40% interest in the pipeline as part of this expansion. It will repay Enterprise for 40% of the pipeline's construction costs to date while funding that percentage of its future expansion expenses.
Starting the next chapter
The wave of expansion project completions in the second half of 2025 will give Enterprise Products Partners a lot of momentum as it enters 2026. They should supply the company with significant incremental cash flow in the coming year. Meanwhile, NRT phase 2 and the Mentone West 2 gas processing plant will provide additional sources of incremental cash flow as they come online in the first half of the year.
In addition to the increased cash flows from its growth projects, Enterprise Products Partners' capital spending reduction will free up $2 billion of additional cash that it can allocate toward other initiatives. As a result, the company will produce a considerable amount of surplus cash in the coming year.
That should provide the master limited partnership (which sends investors a Schedule K-1 Federal tax form each year) with ample fuel to continue increasing its high-yielding distribution (currently yielding 6.8%). Enterprise Products Partners has raised its payment for 27 consecutive years, including by 3.8% over the past year. It could grow the payout at an even faster rate in 2026 and beyond.
Additionally, Enterprise Products Partners appears poised to increase its unit repurchase rate. The company recently increased its buyback capacity from $2 billion to $5 billion, with $3.6 billion remaining under the new authorization. It repurchased $80 million of its units in the third quarter of 2025 and $170 million during the first half of the year. It now has the financial flexibility and buyback capacity to meaningfully increase its repurchase rate in 2026.
The MLP also has the financial flexibility to strengthen its industry-leading balance sheet, make acquisitions, and approve additional expansion projects. Enterprise Products Partners ended the third quarter with a low 3.3 times leverage ratio and strong A-/A3 bond ratings. It could use some of its excess financial capacity to repay debt, lowering its leverage level and annual interest expense. That would put the company in an even stronger position to capitalize on future acquisition opportunities. The company most recently acquired a gas gathering affiliate of Occidental Petroleum for $580 million in a deal that included a natural gas processing agreement supporting the construction of the Athena gas processing plant. Future acquisitions and organic expansion project approvals would further enhance and extend the visibility of its earnings growth.
Reaching an inflection point in 2026
Enterprise Products Partners should produce significantly more free cash flow in the coming year. It can use those funds to boost its distribution, repurchase more units, and allocate capital in other ways that will grow value for investors. This catalyst is why Enterprise Products Partners is the first energy stock I plan to buy in the new year.
