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Enterprise Products Partners L.P. (EPD - Analyst Report) reported fourth-quarter 2012 adjusted earnings per limited partner unit of 71 cents, which surpassed the Zacks Consensus Estimate of 66 cents and were a cent higher than the year-ago quarter.

For full-year 2012, adjusted earnings per limited partner unit was $2.69, which beat the Zacks Consensus Estimate of $2.62 and increased 20.6% from $2.23 in the prior year.

Transportation of more crude, natural gas and other commodities through its pipelines led to the improvement. Enterprise transported 4,505 thousand barrels per day of natural gas liquids (NGL), crude oil, refined products and petrochemical products, up 12.7% on a year-over-year basis. A drop in total costs and expenses (down more than 4% year over year) also supported growth in the quarter.

Quarterly distribution at Enterprise increased 6.5% year over year to 66 cents per common unit, or $2.64 per unit on an annualized basis. Distributable cash flow of $886 million provided coverage of 1.5x. The partnership retained $308 million in cash flow, thereby reducing its financing needs.

However, revenues in the quarter decreased nearly 5% year over year to $11,013.9 million and failed to meet the Zacks Consensus Estimate of $11,835.0 million. The underperformance was mainly due to lower natural gas liquids production and prices.

In 2012, revenues decreased 4% year over year to $42,524.9 million from $44,313.0 million in 2011 and came in below the Zacks Consensus Estimate of $44,019 million.

Fourth Quarter Segmental Performance

Gross operating income in the NGL Pipeline & Services segment dropped 0.5% year over year to $632.0 million. Gross operating income in the natural gas processing business plunged 16.7% mainly due to lower NGL prices as well as lower natural gas processing margins. A decrease in equity NGL production from Rocky Mountain, Permian Basin and East Texas natural gas processing plants also contributed to the decline. The partnership’s NGL pipeline and storage business’ gross operating margin increased 29.4% year over year. For the NGL fractionation business, gross income surged 18.8% year over year to $82 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 increased 5.5% year over year to $210.0 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 significantly by 101.5% year over year to $135.0 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 $142.7 million in the quarter from the year-earlier level of $137.4 million.

However, Enterprise’s Offshore Pipelines & Services’ gross operating income was $42 million in the quarter, lower than $59.6 million a year ago. The decrease was due to lower demand fee revenues and lower volumes.

Financials

During the quarter, the partnership spent $1.2 billion, including $84 million of sustaining capital expenditures. Total debt principal outstanding at the end of the quarter was $16,179.3 million (up 11.7% year over year).

Enterprise expects about $350 million sustaining capital expenditures for 2013.

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 6.5% 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 around $3 billion. The projects completed during the fourth quarter include the sixth NGL fractionator at Mont Belvieu and the expansion of the natural gas and NGL pipeline systems serving the Eagle Ford shale. The Eagle Ford natural gas, NGL and crude oil pipelines are expected to increase volumes over the coming years. Recently, the partnership commissioned the third processing train at its Yoakum natural gas plant. These projects are likely to boost cash flow in the coming years. Seaway Crude Oil Pipeline Company LLC – a 50/50 joint venture between the affiliates of Enterprise Products Partners and Enbridge Inc (ENB - Snapshot Report) – manages the Seaway crude oil pipeline.

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 Rank #3 (Hold). Total SA (TOT - Analyst Report) is another company in the oil and gas sector, which holds a Zacks Rank #1 (Strong Buy) and is expected to perform better.
 

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