Enterprise Tops Earnings, Lags Rev

Zacks Equity Research

Enterprise Products Partners LP (EPD) reported first quarter 2012 earnings per limited unit (excluding special items) of 62 cents, which surpassed the Zacks Consensus Estimate of 59 cents and grew nearly 27% from 49 cents a year ago.

The growth was driven by the strong natural gas processing margins recorded on increased sales in the NGL Pipelines & Services and Onshore Natural Gas Pipelines & Services segments. This was accompanied by the record fee-based natural gas processing and NGL fractionation volumes and volume augmentation in the natural gas pipeline from the Haynesville and Eagle Ford shale areas. These were partially offset by the problems faced in the octane enhancement facility.

Quarterly distribution at Enterprise increased 5.0% year over year to 62.75 cents per common unit, or $2.51 per unit on an annualized basis. Distributable cash flow of $1,629 million provided a solid coverage of 3.0x. The partnership retained $1,100 million in cash flow, thereby reducing its financing needs.

Revenues in the quarter increased nearly 11% year over year to $11,252.5 million but failed to meet the Zacks Consensus Estimate of $11,498 million.

Segmental Performance

Gross operating income in the NGL Pipeline & Services segment climbed nearly 30% year over year to $654.9 million. Gross operating income in the natural gas processing business increased 52% on the back of higher margins for NGLs and natural gas processing margins, though its NGL pipeline and storage business declined nearly 7% year over year. For the NGL fractionation business, gross income surged 38% year over year to $65 million aided by higher revenues from the Mont Belvieu facility.

Onshore Natural Gas Pipeline and Services’ gross operating income increased nearly 30% year over year to $206.2 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 nearly 24% year over year to $39.3 million in the reported quarter, primarily on higher crude oil marketing and volume growth on all major onshore crude oil pipelines of Enterprise.

However, Enterprise’s Offshore Pipelines & Services’ gross operating income was $52.1 million in the quarter, substantially lower than $61.3 million a year ago. The decrease was due to suppressed offshore crude oil pipeline volumes as a result of maintenance in some of the upstream third party platforms and producing wells.

Gross operating income in the Petrochemical & Refined Product Services segment dropped to $97.8 million in the quarter from the year-earlier level of $112.4 million.


During the quarter, the partnership spent $1,000 million, including $90 million of sustaining capital expenditures. Interest expense was $186.5 million (up 1.5% year over year) on average debt balance of $1,460 million.


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.

We are still optimistic on the partnership’s gas processing/NGL fractionation and expect a higher profit margin from the petrochemical segment. During 2012, Enterprise Products expects to complete construction and bring online organic growth projects worth $3 billion. These projects are likely to boost cash flow in the coming years.

Some of the projects scheduled to be commissioned in 2012 are two 300 million cubic feet per day trains at its Yoakum natural gas processing plant in the Eagle Ford area, and the related natural gas and NGL pipelines as well as storage facilities. Further, the reversal of the Seaway Crude Oil Pipeline from Cushing, Oklahoma to the Texas Gulf Coast is also expected to start operations in May 2012.

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 versus pipeline peers Kinder Morgan Energy Partners L.P. (KMP) and Enbridge Energy Partners (EEP) going forward.

We maintain our long-term Outperform recommendation on Enterprise Products. However, Enterprise Products holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.

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