The question for any company in the Texas Gulf Coast region this past quarter has been how much the flooding from Hurricane Harvey impacted the bottom line. Looking at Enterprise Products Partners' (NYSE:EPD) most recent result, it appears that impact was minimal.
The more important thing that happened in the third quarter was management's election to change its distribution policy for the foreseeable future. So let's take a look at the company's most recent results and what this change could mean for investors.
Enterprise Products Partners' earnings: The raw numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Gross operating margin||$1.31 billion||$1.38 billion||$1.31 billion|
|Net income||$621 million||$666 million||$643 billion|
|Distributable cash flow||$1.06 billion||$1.05 billion||$978 million|
There was an expectation that Enterprise's results would suffer somewhat from the effects of Hurricane Harvey -- the question was exactly how much. Fortunately, the storm did not cause any significant damage that required lengthy repairs, but Enterprise did have to shut down operations at several of its facilities for a week or so, and the storm also caused delays for some of Enterprise's customers. According to management, the hurricane's effects impacted earnings by about $0.02 per share.
One of the most significant impacts this past quarter was in the company's crude oil pipeline and services segment, which incurred a $45 million non-cash charge related to some mark-to-market losses on some derivative contracts. Enterprise and other companies will use these contracts to ensure stable revenue from any business that has exposure to commodity prices. They are a useful tool when oil and gas prices decline but typically lead to non-cash charges in a rising commodity price environment. So, all in all, it's not necessarily a bad thing to incur these kinds of costs.
What happened with Enterprise Products Partners this quarter?
- Enterprise has recently increased its capital spending. For the third quarter, capital expenditures came in at $1.0 billion. Management also raised its capital spending range for the year to $2.9 billion to $3.1 billion.
- The company's distribution coverage ratio for the quarter remained at 1.2 times for the quarter and retained $152 million in distributable cash flow for growth.
- Enterprise's propane dehydrogenation (PDH) facility was supposed to start operations in September, but Hurricane Harvey delayed commissioning activities by several weeks. Management now expects the plant come on line this month.
- The Midland-to-Sealy pipeline is now complete and should be in full service by the second quarter of 2018.
- The most headline-grabbing news from the quarter was management's announcement that it was reducing the company's payout growth rate. For the past several quarters, management has increased its payout each quarter by $0.005 per unit. Starting this quarter, though, the payout increase will be $0.0025 per unit. The reason for the decline is to retain more distributable cash flow over time to invest in growth rather than rely on equity issuances for growth.
What management had to say
Here's CEO Jim Teague on some of the accomplishments from this past quarter:
Many of our petrochemical and refining customers experienced extended downtime, which also negatively impacted our pipeline volumes. Highlights for the quarter included record volumes at our ethane export marine terminal, record volumes on our ATEX ethane pipeline, and near record volumes on our Acadian Gas System as a result of the resurgence of Haynesville shale production. We also had strong year-over-year performance at our octane enhancement facility, and from assets put into service in the Permian basin and NGL storage facility. Altogether, the partnership generated $1.1 billion of distributable cash flow, providing approximately 1.2 times coverage of our distribution declared for the third quarter of 2017 and $152 million of retained distributable cash flow to reinvest in the growth of our partnership.
The recent slew of hurricanes in the Gulf have had a noticeable impact on some companies' earnings, and Enterprise is one of those companies. That said, those delays and repairs don't appear to be significant enough to alter the company's business model or its investment thesis.
The one thing that will be worth watching in the coming quarters is if the company can reduce the amount of equity raised for capital. Management said the distribution growth rate reduction was explicitly designed to minimize shareholder dilution, so it will be worth seeing if that holds true.