Enterprise Products Partners L.P.
) reported second quarter 2012 earnings per limited unit of 64
cents, which surpassed the Zacks Consensus Estimate of 59 cents and
grew more than 25% from 51 cents a year ago.
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Transportation of more crude, natural gas and other commodities
through its pipelines led to the improvement. Enterprise
transported 4,046 thousand barrels per day of natural gas liquids
(NGL), crude oil, refined products and petrochemical products,
representing an almost 3% increase from the year-ago period. Its
natural gas pipeline volumes also increased almost 14% in the
second quarter. A drop in total costs and expenses (down 14.5% year
over year) also supported the quarter's growth.
Quarterly distribution at Enterprise increased 5.0% year over year
to 63.5 cents per common unit, or $2.54 per unit on an annualized
basis. Distributable cash flow of $876 million provided coverage of
1.6x. The partnership retained $331 million in cash flow, thereby
reducing its financing needs.
However, revenues in the quarter declined nearly 13% year over year
to $9,789.8 million and failed to meet the Zacks Consensus Estimate
of $11,954.0 million. The underperformance was mainly due to lower
commodity prices and lower sales for petroleum products, partly
compensated by higher overall volumes.
Gross operating income in the NGL Pipeline & Services segment
climbed 13.7% year over year to $565.8 million. Gross operating
income in the natural gas processing business increased almost 12%
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 improved 10.5% year over year. For
the NGL fractionation business, gross income surged 88.5% 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 9.3% year over year to $175.8 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 41% year over year to $95.8 million in
the reported quarter, primarily on higher crude oil marketing and
volume growth in all major onshore crude oil pipelines of
Gross operating income in the Petrochemical & Refined Product
Services segment improved to $157.3 million in the quarter from the
year-earlier level of $139.8 million.
However, Enterprise's Offshore Pipelines & Services' gross
operating income was $38.3 million in the quarter, substantially
lower than $53.4 million a year ago. The decrease was due to lower
demand fee revenues and lower volumes.
During the quarter, the partnership spent $927 million, including
$90 million of sustaining capital expenditures. Total debt
principal outstanding at the end of the quarter was $15,009.7
million (up 5.0% year over year).
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.
Enterprise completed major construction projects during the
quarter, like the first of three 300 million cubic feet per day
processing units at its Yoakum natural gas plant. The unit serves
producers in the Eagle Ford Shale in South Texas.
Moreover, its venture to expand the Cushing-to-Houston Seaway crude
oil pipeline from 150,000 barrels per day (BPD) to 400,000 BPD is
on track for completion in the first quarter of 2013. The Seaway
pipeline is jointly owned with
) and the pipeline companies recently completed their reversal
operation of the line, enabling the flow of crude oil from Oklahoma
storage hub to the Gulf Coast refining hub. It is one of the
pipeline projects aimed at clearing a bottleneck at the pipeline
Upon completion of the construction, Enterprise will bring online
organic growth projects worth $3 billion. These projects are likely
to boost cash flow in the coming years and remain associated with
the Eagle Ford Shale development.
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 activities 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 its margins
in NGL, natural gas and other businesses. Hence, we prefer to
remain on the sidelines and maintain our long-term Neutral
recommendation for Enterprise Products Partners.