We have downgraded our recommendation for
Enterprise
Products 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 31
st
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.
ENTERPRISE PROD (EPD): Free Stock Analysis
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SUNOCO LOGISTIC (SXL): Free Stock Analysis
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