Enterprise Products Partners (EPD) reported earnings per limited units of 46 cents, exceeding the Zacks Consensus Estimate of 44 cents as well as the year-ago quarter earnings of 32 cents. The partnership restated its 2009 figures to reflect the merger of TEPPCO Partners L.P., which was completed on October 26, 2009.
The quarter results mainly reflect strong volumes across the midstream system, improvement in domestic and global economic activity, increased demand for natural gas liquid (NGLs) and propylene by the petrochemical industry, NGL production growth in the Rockies and natural gas volume growth from shale plays in Texas and Louisiana.
Additionally, quarterly distribution of Enterprise increased 5.5% year over year to 57.50 cents per common unit, or $2.30 per unit on an annualized basis. Distribution coverage was solid at 1.3x, providing $100 million of retained cash flow, which reduces financing needs.
Revenue in the quarter increased about 38.9% to $7.5 billion from $5.4 billion in the comparable quarter last year, driven by increased sales volumes and energy prices. However, second-quarter revenue fell short of the Zacks Consensus Estimate of $8.1 billion.
Segmental Performance
Gross operating margin in the NGL Pipeline & Services segment increased 21% year over year to $441 million. Gross operating margin in the natural gas processing business shot up 22% to $268 million, driven mainly by the contribution from Rocky Mountain natural gas processing plants. Gross margin for the partnership’s NGL pipeline and storage business leaped by 31% year over year to $139 million.
For the NGL fractionation business, gross margin was down approximately 11% year over year to $34 million due to the decrease in revenues from the Norco facility as well as by the scheduled downtime in June 2010 at the Shoup NGL fractionator in South Texas owing to construction activities intended to increase the capacity of this facility.
Gross operating margin for the partnership’s Onshore Natural Gas Pipeline and Services business decreased nearly 12% year over year to $107 million.
The gross operating margin of Onshore Crude Oil Pipelines & Services segment plunged approximately 38% year over year to $25.9 million in the reported quarter.
Enterprise’s Offshore Pipelines & Services’ gross operating margin was $83 million in the second quarter, compared with the loss of $1 million in the year-ago quarter.
Gross operating margin in the Petrochemical & Refined Product Services segment improved by 65% year over year to a record $158 million in the second quarter.
During the quarter, the partnership spent $1.6 billion on capital expenditures, which included $73 million in sustaining capital expenditures and $1.2 billion for the acquisition of natural gas gathering assets in the Haynesville Shale region of North Louisiana and East Texas from subsidiaries M2 Midstream LLC. Interest expense in the quarter was $169 million (up approximately 6% year over year) on an average debt balance of $11.9 billion (down 0.8% year over year).
Our Take
Enterprise recently announced that it is undertaking several new construction projects to extend and expand its natural gas and NGLs infrastructure in South Texas and Mont Belvieu, Texas as well as a fifth 75,000 BPD NGL (barrels per day, natural gas liquid) fractionator at the Mont Belvieu complex to accommodate growing production volumes from the Eagle Ford Shale play.
The plan mainly includes installation of 350 miles of pipeline, building a new natural gas processing facility, and adding a new natural gas liquids fractionator at the Mont Belvieu complex near the Houston Ship Channel. Overall, the partnership should enjoy significant value as these projects come online by early 2012.
We believe the partnership’s premium valuation is supported by its solid organic as well as inorganic growth profile. Its impressive financial position also will likely open up new organic growth opportunities that will expand its integrated system.
Most importantly, a 5.5% year-over-year increase in quarterly distribution also implies its successful completion of organic growth projects. However, all these positives are already priced in, leaving little room for further upside. Consequently, Enterprise is currently rated as Zacks #3 Rank (Hold).
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