Enterprise Products Partners (NYSE:EPD) is the second big-name American midstream company to report first-quarter earnings, after Kinder Morgan reported its great quarter earlier this month. Analysts expected earnings of $0.65 per unit and revenue of $11.61 billion, and Enterprise blew past the EPS estimate, earning $0.73 per unit. It failed to meet on revenue, however, recording $11.38 billion. This was the third straight quarter the partnership missed on revenue.

There is always more to earnings than analysts' expectations, so let's take a closer look.

General rundown
Revenue was up slightly year over year, from $11.25 billion to $11.83 billion. Net income was also up, climbing from $655 million to $755 million. Distributable cash flow was down year over year on account of interest rate hedges and the 2012 insurance recoveries and asset sales that pumped DCF up by more than $900 million. If you back out the special items, DCF rose year over year. Regardless, 2013's $897 million in distributable cash flow provided a coverage ratio of 1.5 times distributions, which is excellent.

Q1: Digging deeper
Let's take a look at the good and the bad this quarter, segment by segment:

  • Natural gas liquids (NGL) pipelines and services declined year over year, as earnings fell $62 million to $593 million for the quarter. The losses came at the hands of Enterprise's natural gas processing and NGL marketing businesses. Volumes on the partnership's Rocky Mountain systems were down and natural gas processing margins were lower systemwide. 

    However, there is good news here as well, because fee-based volumes -- free from commodity risk -- increased significantly, especially in the Eagle Ford where they climbed 38% year over year. Management expects the shift toward fee-based contracts to continue, which means more stable income for Enterprise.
  • Earnings for the onshore pipelines and services segment declined as well, falling $15 million to $191 million. Gross operating margin was up on the Texas intrastate system, but declined nearly everywhere else. Total volumes held steady year over year.
  • Offshore pipelines and services earnings fell to $41 million, compared to $52 million a year ago. There are two sides to this story, as offshore natural gas volumes have dropped, but offshore oil volumes ticked upwards ever so slightly. Management explained that though drilling levels in the Gulf of Mexico have now reached pre-moratorium levels, it will be some time before that translates into growth in this segment.
  • Petrochemical and refined products earnings increased $73 million to reach $171 million for the first quarter. The partnership's propylene business was down, but octane enhancement, butane isomerization, refined products pipelines, and marine transportation were all up.
  • Finally, we have Enterprise's onshore crude oil pipelines and services. Segment earnings increased a whopping $197 million to $236 million, which is a first-quarter record. Pipeline volumes went from706,000 barrels per day to 981,000 bpd, also a new record. The growth is attributed to the extension of its crude oil pipeline in the Eagle Ford shale and the increased capacity on the Seaway pipeline it co-owns with Enbridge. Enterprise's share of Seaway income increased by $36 million.

The quarter was a mix of good and bad news as far as segment performance goes, and though the good vastly outweighed the bad, 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.

Additional notes
The fee-based business story continues to improve at Enterprise, and management says the gross margin on those projects is enough to offset commodity risk related to its natural gas processing and NGL marketing businesses.

Enterprise will bring $2.2 billion in projects online by the end of this year, including two NGL pipelines, two NGL fractionators, a crude oil lateral from the Seaway pipeline, and an Eagle Ford crude oil pipeline joint venture with Plains All American Pipeline.

Management is putting a lot of emphasis on the opportunity in waterborne transportation. As producers look to connect to the most lucrative markets, midstream companies are increasingly using barges to negotiate the Mississippi River and the Gulf of Mexico. This explains the partnership's most recent endeavor with Oiltanking Partners to expand its terminal on the Houston Ship Channel. I expect the marine transportation business to increase as this story continues to unfold.

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