Enterprise Products Partners (NYSE:EPD) is the second big-name American midstream company to report fourth-quarter and annual earnings, after Kinder Morgan knocked it out of the park earlier this month. Analysts were expecting earnings of $0.66 per unit and revenue of $11.93 billion. Enterprise blew past the EPS estimate, earning $0.68 per unit. It failed to meet on revenue, however, recording $11 billion. This was the second-straight quarter the partnership missed on revenue.
There is always more to earnings than analysts' expectations, so let's take a closer look.
Fourth-quarter revenue fell to $11.01 billion from $11.59 billion last year. Net income followed a similar path, dropping from $721.1 million last year, to $615.5 million this year. Distributable cash flow was $886 million, of which the partnership retained $308 million.
For the year, Enterprise actually set several partnership records, including the following:
- $2.4 billion in net income
- $2.71 earnings per unit
- $4.4 billion in gross operating margin
- $4.1 billion in distributable cash flow ($1.2 billion via asset sales)
That makes for a very strong year, and contributes to the fact that even though Enterprise "missed" estimates, units rose a little over 1% after reporting.
Q4: Digging deeper
We'll address the good and the bad segment by segment:
- The natural gas liquids (NGL) pipelines and services segment was troublesome in the third quarter, and that didn't change in the fourth, as gross operating margin was $3 million lower than last year, coming in at $632 million. Enterprise watched natural gas processing and NGL marketing lose $66 million in gross margin compared to last year. Much of the decrease can once again be blamed on falling NGL prices, and a drop in equity NGL production. One bright spot for the segment -- and it's important -- was that there was a 15% increase in fee-based processing volumes. NGL pipeline volumes and fractionating volumes both increased year over year, more or less bailing out the segment.
- Offshore pipelines and services was the next segment to suffer a decline, as gross operating margin contracted $18 million year over year. Declining natural gas volumes are the culprit here, though oil volumes did post slight gains.
- On the flip side of things, onshore pipelines and services posted a gain in natural gas volumes compared to last year, and gross operating margin increased by $11 million to $210 million for the quarter. Volumes were up 9% on its Texas intrastate system, receiving a boost from the Eagle Ford Shale.
- Petrochemical and refined products services also posted a gain over 2011's numbers, as gross operating margin rose to $143 million. While a $6 million gain is nothing to write home about, its impressive in this case because three of the five businesses that make up this segment -- propylene, butane isomerization, octane enhancement, and high-purity isobutylene -- all fell year over year. Enterprise's refined products pipelines and marine transportation businesses carried the weight this quarter, posting gains of $35 million and $2 million respectively.
- It should come as no surprise that the final segment, onshore crude oil pipelines and services, was the best-performing segment this quarter. Registering $67 million in the fourth quarter of 2011, this unit more than doubled its performance to post gross operating margin of $135 million this quarter. Pipeline volumes gained 32%, largely on the strength of the Seaway pipeline, and production in the Eagle Ford Shale.
The quarter was a mix of good news and bad news as far as segment performance goes, but this does really hammer home the point that diversity in your business model is essential to success. Even within these segments, particularly the petrochemical and refined products segment, that pattern is clear.
Expect Enterprises' best-performing segment to continue on that path. The Seaway pipeline, which it co-owns with Enbridge, recently completed its first expansion, which more than doubled its capacity to 400,000 barrels per day. Another expansion is coming, and production in the Eagle Ford will continue to grow, which means this segment will continue to outshine the others, at least in the near future.
As stated earlier, Enterprise generated an outstanding $4.1 billion in distributable cash flow in 2012, allowing the partnership to continue to increase its distributions to unit holders. It has now done so for 34 straight quarters, increasing its Q4 payment to $0.66 per unit, which brings its 2012 payout to $2.64 per unit.
Remember that Enterprise has no general partner, and does not pay incentive distributions, which gives it a lower cost of capital and allows it, at least theoretically, to distribute more money to unitholders and to retain more cash for development. This structure, combined with its commitment to developing its fee-based business, means the above trend in distribution growth is something investors can count on quarter after quarter.
All told, it was a good quarter, and a great year for Enterprise Products Partners. Some segments suffered, but others boomed, highlighting the importance of diversifying business mix in the midstream industry.