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Enterprise Reports Higher Earnings

Zacks Equity Research

Enterprise Products Partners L.P. (EPD) reported first-quarter 2013 adjusted earnings per limited partner unit of 77 cents, which surpassed both the Zacks Consensus Estimate of 66 cents and year-ago quarterly earnings of 62 cents.

Transportation of more crude, natural gas and other commodities through its pipelines led to the improvement. Enterprise transported 4,492 thousand barrels per day of natural gas liquids (NGL), crude oil, refined products and petrochemical products, up 11.6% on a year-over-year basis. A drop in total costs and expenses (down more than 0.4% year over year) also supported growth in the quarter.

Quarterly distribution at Enterprise increased 6.8% year over year to 67 cents per common unit, or $2.68 per unit on an annualized basis. Distributable cash flow of $897 million provided coverage of 1.5x. The partnership retained $303 million in cash flow, thereby reducing its financing needs.

Revenues increased nearly 1.2% year over year to $11,383.1 million. This however came below the Zacks Consensus Estimate of $12,125.0 million.

First Quarter Segmental Performance

Gross operating income in the NGL Pipeline & Services segment dropped 9.5% year over year to $593.0 million. Gross operating income in the natural gas processing business plunged 36.0% mainly due to lower system-wide natural gas processing margins and lower NGL volumes. A decrease in equity NGL production from the Rocky Mountain natural gas processing plant also contributed to the decline. The partnership’s NGL pipeline and storage business’ gross operating margin increased 38% year over year. For the NGL fractionation business, gross income surged 40% year over year to $91 million, aided by higher revenues and volumes from its sixth NGL fractionator that came online in Oct 2012.

Onshore Natural Gas Pipeline and Services’ gross operating income decreased 7.3% year over year to $191.0 million. The pipeline systems benefited from Texas Intrastate. However, this was more than offset by lower operating income from the Acadian Gas System.

Gross operating income from the Onshore Crude Oil Pipelines & Services segment shot up significantly by almost six-fold year over year to $236.0 million in the reported quarter, primarily on higher crude oil marketing and volume growth in all major onshore crude oil pipelines of Enterprise. The segment also benefited from the South Texas crude oil pipeline system as well as the Seaway Crude Oil Pipeline and Cushing storage facility.

Gross operating income in the Petrochemical & Refined Product Services segment improved to $171.0 million in the quarter from the year-earlier level of $98.0 million.

However, Enterprise’s Offshore Pipelines & Services’ gross operating income was $41 million, lower than $52.0 million a year ago. The decrease was due to lower demand fee revenues and lower volumes.


During the quarter, the partnership spent $914 million, including $57 million of sustaining capital expenditures. Total debt principal outstanding at the end of the quarter was $17.5 billion. Enterprise expects about $2.2 billion of capital expenditures for 2013.


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 6.8% 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.

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 new projects under construction 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 operations from approximately 73% in 2012 to approximately 80% in 2013.

However, Enterprise remains vulnerable to macro conditions and unstable oil and gas prices, which in turn could hurt margins in NGL, natural gas and other businesses. Hence, Enterprise, which recently entered into a 50/50 joint venture with Plains All American Pipeline, L.P. (PAA) for a crude oil pipeline in South Texas, carries a Zacks Rank #3 (Hold). Other sector stocks like InterOil Corporation (IOC) and EPL Oil & Gas, Inc. (EPL) hold a Zacks Rank #1 (Strong Buy) and are expected to perform better in the near term.


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