Enterprise Beats Bottom Line

Zacks

Enterprise Products Partners L.P. (EPD) reported second quarter 2012 earnings per limited unit of 64 cents, which surpassed the Zacks Consensus Estimate of 59 cents and grew more than 25% from 51 cents a year ago.

Transportation of more crude, natural gas and other commodities through its pipelines led to the improvement. Enterprise transported 4,046 thousand barrels per day of natural gas liquids (NGL), crude oil, refined products and petrochemical products, representing an almost 3% increase from the year-ago period. Its natural gas pipeline volumes also increased almost 14% in the second quarter. A drop in total costs and expenses (down 14.5% year over year) also supported the quarter’s growth.

Quarterly distribution at Enterprise increased 5.0% year over year to 63.5 cents per common unit, or $2.54 per unit on an annualized basis. Distributable cash flow of $876 million provided coverage of 1.6x. The partnership retained $331 million in cash flow, thereby reducing its financing needs.

However, revenues in the quarter declined nearly 13% year over year to $9,789.8 million and failed to meet the Zacks Consensus Estimate of $11,954.0 million. The underperformance was mainly due to lower commodity prices and lower sales for petroleum products, partly compensated by higher overall volumes.

Segmental Performance

Gross operating income in the NGL Pipeline & Services segment climbed 13.7% year over year to $565.8 million. Gross operating income in the natural gas processing business increased almost 12% on the back of higher margins for NGLs and higher fee-based natural gas processing volumes. The partnership’s NGL pipeline and storage business’ gross operating margin improved 10.5% year over year. For the NGL fractionation business, gross income surged 88.5% year over year to $69 million aided by higher revenues and volumes from its fifth NGL fractionator that came online in October last year.

Onshore Natural Gas Pipeline and Services’ gross operating income increased 9.3% year over year to $175.8 million. The pipeline systems benefited from Texas Intrastate and Acadian Gas System.

The gross operating income from the Onshore Crude Oil Pipelines & Services segment grew 41% year over year to $95.8 million in the reported quarter, primarily on higher crude oil marketing and volume growth in all major onshore crude oil pipelines of Enterprise.

Gross operating income in the Petrochemical & Refined Product Services segment improved to $157.3 million in the quarter from the year-earlier level of $139.8 million.

However, Enterprise’s Offshore Pipelines & Services’ gross operating income was $38.3 million in the quarter, substantially lower than $53.4 million a year ago. The decrease was due to lower demand fee revenues and lower volumes.

Financials

During the quarter, the partnership spent $927 million, including $90 million of sustaining capital expenditures. Total debt principal outstanding at the end of the quarter was $15,009.7 million (up 5.0% year over year).

Outlook

We believe Enterprise Products remains a core holding in a master limited partnership portfolio and focuses on projects that generate stable cash flow and contribute to its integrated value chain. While Enterprise increased its cash flow distribution by 5.0% in the reported quarter, it also deployed cash in various fee-based development projects that will likely generate operating cash flow to support its future distribution growth.

Enterprise completed major construction projects during the quarter, like the first of three 300 million cubic feet per day processing units at its Yoakum natural gas plant. The unit serves producers in the Eagle Ford Shale in South Texas.

Moreover, its venture to expand the Cushing-to-Houston Seaway crude oil pipeline from 150,000 barrels per day (:BPD) to 400,000 BPD is on track for completion in the first quarter of 2013. The Seaway pipeline is jointly owned with Enbridge Inc. (ENB) and the pipeline companies recently completed their reversal operation of the line, enabling the flow of crude oil from Oklahoma storage hub to the Gulf Coast refining hub. It is one of the pipeline projects aimed at clearing a bottleneck at the pipeline hub.

Upon completion of the construction, Enterprise will bring online organic growth projects worth $3 billion. These projects are likely to boost cash flow in the coming years and remain associated with the Eagle Ford Shale development.

Given a broad and vertically integrated asset base, steady cash flow generation ability and financial strength for strategic growth, we believe Enterprise is well positioned to deliver an impressive total return going forward. The partnership believes that the projects will generate new sources of fee-based cash flow that are expected to increase the percentage of its gross operating margin attributable to fee-based activities from approximately 73% in 2011 to approximately 80% in 2013.

However, Enterprise remains vulnerable to macro conditions and unstable oil and gas prices, which in turn could hurt its margins in NGL, natural gas and other businesses. Hence, we prefer to remain on the sidelines and maintain our long-term Neutral recommendation for Enterprise Products Partners.
 

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