We have downgraded our recommendation for EnterpriseProducts Partners, L.P. (EPD) to Neutral from Outperform following its first quarter earnings release. In spite of reporting decent numbers, the decrease in segmental gross margin and macro risks compelled the downgrade.
Enterprise started the year on a positive note relating to all its segments, but for Petrochemical & Refined Product Services and Offshore Pipelines & Services. The gross margin of its Petrochemical & Refined Products segment decreased almost 13% year over year in the first quarter, primarily due to downtime and maintenance expenses along with operational issues at the octane enhancement facility.
Again, Offshore Pipelines & Services also saw a decrease in gross margin in the first quarter. The segment continues to be adversely effected by an overall decrease in offshore natural gas and crude oil pipeline volumes owing to lesser exploration and development operations in the Gulf of Mexico region. This was mainly because of the ongoing federal regulatory issues regarding offshore drilling.
Enterprise Products Partners also remains susceptible to a number of global macro issues, which include sovereign debt risks, defaults on sovereign credits, and changes in U.S. monetary and fiscal policies as well as tax policy. Importantly, an economic slowdown could impact demand and the price of crude oil, which in turn could hurt Enterprise's margins in its natural gas liquid (NGL), natural gas and other businesses.
However, the partnership registered an impressive first quarter on the back of strong natural gas processing margins due to increased sales in the NGL Pipelines & Services and Onshore Natural Gas Pipelines & Services segments. It also hiked its first quarter cash distribution rate by 5.0% year over year to $0.6275 per common unit, or $2.51 per unit on an annualized basis, marking the partnership’s 31st consecutive quarterly increase. With its diverse set of NGL, natural gas, crude oil and refined products midstream infrastructure assets, we believe the partnership possesses fundamental strengths that will continue to support distribution growth.
Enterprise has more than $7.5 billion worth of expansion projects in the coming years, which include $3.0 billion of investments that are expected to come online in 2012. The key projects are Seaway crude pipe reversal, The Texas Express Pipeline, Mid-America Pipeline NGL pipe expansion, Appalachia to Texas project and Front Range. Successful execution of these projects will be value accretive to future cash flows.
Hence, considering the above mentioned discussions, we prefer to remain on the sidelines. The partnership, which competes with Sunoco Logistics Partners (SXL), currently holds a Zacks #3 Rank that translates to a Hold rating for a period of one to three months.
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