Enterprise Products Partners (NYSE:EPD) is the second-biggest name American midstream outfit to report third-quarter earnings, after Kinder Morgan (NYSE:KMI) reported last week. Analysts were expecting earnings of $0.60 per unit and revenue of $11.22 billion. Enterprise blew past the EPS estimate, earning $0.66 per unit. It failed to meet on revenue, however, recording $10.47 billion.
There is always more to earnings than analysts' expectations, so let's take a closer look.
The numbers are up! Year over year, Enterprise improved on gross operating margin, operating income, net income, and earnings per unit.
Volumes are up across the Enterprise network, some of them significantly. Natural gas pipeline volumes are up 12%, and natural gas liquids fractionation volumes are up a whopping 18% over last year. The most significant increase, however, is the 17% growth in fee-based natural gas processing. This is a record for the partnership, and demonstrates an unwavering commitment to increasing reliable income through fee-based contracts.
Volumes will continue to grow, as Enterprise has a long list of projects that have come online over the past 12 months, and another long list of projects -- $3.7 billion worth -- coming online between now and the end of 2013. The completed projects include natural gas processing trains, an NGL fractionator, construction of various natural gas, NGL, and crude oil pipelines, and the famous reversal of the Seaway pipeline it co-owns with Enbridge (NYSE:ENB). They were all completed on time and on, or under, budget.
Still to come from Enterprise are a crude oil terminal, another natural gas processing train, three more NGL fractionators, two NGL pipelines, and the expansion of both an NGL export terminal and the Seaway pipeline.
As these projects come online, Enterprise's fee-based revenue will continue to increase. The partnership expects 80% of its gross operating margin to come from its fee-based business by 2013, a number that will only climb higher in 2014. For perspective, as late as 2011 that percentage was only 73%.
If management only has good news to report, they're either lucky or lying. There were two key metrics that were down for Enterprise this quarter: revenue and distributable cash flow.
We'll start with distributable cash flow, as that is not as large of a concern as it may appear. Distributable cash flow in 2011 included $190 million in asset sales and investments. The $743 million Enterprise recorded this quarter provides 1.3 times coverage of its $0.65 per unit distribution. Last quarter Enterprise's ratio was 1.6, but the decline is nothing to worry about. Remember, any ratio over 1.0 is a good thing because it means the partnership has more cash than it needs to cover its payments.
Enterprise retained about $177 million of its distributable cash this quarter.
Revenue dropped from $11.3 billion in the third quarter of 2011 to $10.5 billion this quarter. The drop was mainly due to commodity pricing. One of the culprit commodities this time around was ethane, and it is a problem the whole midstream industry is battling, not just Enterprise. The partnership's natural gas processing plants in the Rocky Mountain region suffered a 22,000 barrel per day decrease because of lower volumes of ethane production. Again, as Enterprise increases the percentage of gross operating margin derived from fee-based income, this will become less and less of an issue.
The partnership also got dinged on lower NGL volumes fractionated in Texas and Louisiana, to the tune of a $6 million decrease in gross operating margin. The problem here was twofold. First, more NGLs are being fractionated at Mont Belvieu (where Enterprise is adding capacity). Second, Hurricane Isaac affected production and storage facilities in the Gulf, and ultimately Enterprise's fractionation volumes. All told, however, fractionation volumes were up systemwide.
Enterprise's petrochemical and refined products unit, as well as its offshore pipelines and services unit, also experienced declining volumes on certain systems. While the refined products segment still managed to record an overall $36 million increase in gross operating margin, the offshore unit suffered a $13 million decrease. Offshore volumes are down, but the outlook for recovery is positive as capacity continues to ramp up after the lifting of the Gulf of Mexico drilling moratorium.
All told, it was a good quarter for Enterprise Products Partners; some segments suffered, but others boomed, highlighting the importance of diversifying business mix in the midstream industry.