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Mixed Results for Enterprise in 3Q

EPD PAA

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Enterprise Products Partners L.P. (EPD - Analyst Report) reported third quarter 2012 adjusted earnings per limited partner unit of 68 cents, which surpassed the Zacks Consensus Estimate of 60 cents and were 23.6% higher than 55 cents a year ago.

Transportation of more crude, natural gas and other commodities through its pipelines led to the improvement. Enterprise transported 4,299 thousand barrels per day of natural gas liquids (NGL), crude oil, refined products and petrochemical products, representing a 6% increase on a year-over-year basis. Natural gas pipeline volumes also increased almost 12% in the third quarter. A drop in total costs and expenses (down almost 9% year over year) also supported growth in the quarter.

Quarterly distribution at Enterprise upped 6.1% year over year to 65 cents per common unit, or $2.60 per unit on an annualized basis. Distributable cash flow of $743 million provided coverage of 1.3x. The partnership retained $177 million in cash flow, thereby reducing its financing needs.

However, revenues in the quarter declined nearly 8% year over year to $10,468.7 million and failed to meet the Zacks Consensus Estimate of $11,409.0 million. The underperformance was mainly due to lower commodity prices, partly compensated by higher overall volumes.

Segmental Performance

Gross operating income in the NGL Pipeline & Services segment climbed 12.5% year over year to $615.8 million. Gross operating income in the natural gas processing business improved 1.1% 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 spiked 33.6% year over year. For the NGL fractionation business, gross income surged 27.8% 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 17.6% year over year to $183.5 million. The pipeline systems benefited from Texas Intrastate and Acadian Gas System.

Gross operating income from the Onshore Crude Oil Pipelines & Services segment shot up 74.5% year over year to $117.6 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 South Texas crude oil pipeline system and the Seaway Crude Oil Pipeline.

Gross operating income in the Petrochemical & Refined Product Services segment improved to $182.1 million in the quarter from the year-earlier level of $145.6 million.

However, Enterprise’s Offshore Pipelines & Services’ gross operating income was $41 million in the quarter, substantially lower than $54 million a year ago. The decrease was due to lower demand fee revenues and lower volumes.

Financials

During the quarter, the partnership spent $1.1 billion, including $102 million of sustaining capital expenditures. Total debt principal outstanding at the end of the quarter was $15,917.7 million (up 5.7% 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 6.1% 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.

Over the last one year, the partnership has commissioned several projects worth over $4 billion.  These projects include - the first two processing trains at its Yoakum natural gas plant, the fifth NGL fractionator at Mont Belvieu, the extension of the Acadian Haynesville and the Seaway crude oil pipeline reversal. The Eagle Ford natural gas, NGL and crude oil pipelines are expected to have increased volumes over the coming years. These projects are likely to boost cash flow in the coming years.

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 operations 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 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 - Analyst Report) for a crude oil pipeline in South Texas, carries a Zacks#3 Rank for the short term, which is equivalent to a Hold rating and we maintain our long-term Neutral recommendation for Enterprise Products Partners.
 

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