Cratering crude prices have had a devastating impact on the oil market this year. Most producers slashed their drilling budgets, while others have had to shut in unprofitable wells. That's hurting the volumes flowing through midstream systems like pipelines and processing plants. While no company in that space is immune to this impact, Enterprise Products Partners' (EPD 0.48%) scale and diversification are helping cushion the blow, which was evident in its first-quarter results.
Drilling down into Enterprise Products Partners' first-quarter earnings
|
Metric |
Q1 2020 |
Q1 2019 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA |
$1.979 billion |
$1.986 billion |
(0.4%) |
|
Distributable cash flow (DCF) |
$1.554 billion |
$1.628 billion |
(4.5%) |
|
DCF per unit |
$0.71 |
$0.74 |
(4.1%) |
|
Distribution coverage ratio |
1.6 times |
1.7 times |
(5.9%) |
Data source: Enterprise Products Partners.
Enterprise Products' earnings slipped less than 1% during the first quarter. The company noted that it began the period with good momentum as commodity prices held up until early March, enabling it to deliver solid operational and financial results during the period across most of its business segments:
Data source: Enterprise Products Partners. Chart by the author.
Earnings in the natural gas liquids (NGL) segment rose about 9% year over year. The company benefited from a 17% earnings increase within its pipeline and storage operations and a 25% increase from its fractionation operations, which separates raw NGLs into pure streams like propane and ethane. These positives more than offset weaker natural gas processing results due to lower pricing.
The crude oil segment delivered lower year-over-year results, mainly due to reduced hedging gains and marketing activities. Those factors overshadowed record volumes flowing through its systems as it transported an average of 2.4 million barrels of oil per day (BPD) during the quarter, up 7% year over year.
The natural gas segment grew its earnings by 7%. While volumes declined a bit year over year, the company benefited from hedging contracts and the start-up of new gas plants in the Permian Basin.
Finally, earnings from petrochemicals and refined products rose 15% during the quarter. While pipeline volumes declined, the company offset that with the positive impact from a new petrochemical plant that started up during the quarter.
Image source: Getty Images.
A look at what's ahead for Enterprise Products Partners
While Enterprise's results held up through most of the first quarter, it warned that conditions significantly deteriorated toward the end of the period. Dual system shocks from the collapse of OPEC's market support agreement with Russia and economic lockdowns from COVID-19 are causing a massive buildup of excess oil supplies. The company noted that the pandemic had destroyed 25 million BPD of oil demand since early March. While OPEC did eventually end its price war with Russia, that group is only reducing its output by 9.7 million BPD starting next month. Prices will likely remain under pressure for quite a while since it will take the economy time to burn off all the excess inventory as it slowly ramps back up.
Because of that, producers in the U.S. are reducing their drilling activities and shutting in wells, which will reduce volumes in the coming quarters. That's leading Enterprise Products to reduce its capital spending as well as operating expenses. Overall, the energy company will cut about $1 billion in capital projects, bringing its budget range down to between $2.5 billion and $3 billion. Further, it will reduce maintenance spending to $300 million, a $100 million cut.
These reductions will enable Enterprise to maintain its strong financial profile during this downturn. It was able to retain $574 million in cash during the first quarter after paying its distribution, which covered about half of its $1.1 billion in capital spending during the period. Meanwhile, it had about $8 billion of liquidity -- cash and borrowing capacity -- which provides it with tremendous financial flexibility. Because of that, and the fact that it entered this downturn from a position of strength, the company should be able to maintain its high-yielding payout.
Strength amid the storm
Enterprise Products Partners delivered solid first-quarter results despite weakening conditions in the energy market. While further deterioration in the coming months will weigh on earnings over the next few quarters, it has reduced spending to help mute that impact. Add those moves to its strong balance sheet, and Enterprise Products is in a strong position to weather this storm.
