Enterprise Product Partners Gross Profits Increase Marginally Thanks to Stable Ship-or-Pay Contracts

The master limited partnership’s distribution coverage ratio remains intact at 1.3 times as long-term, fee-based contracts prove to be the savior in the wake of low energy prices.

Isac Simon
Isac Simon
Oct 30, 2015 at 8:00AM
Energy, Materials, and Utilities

Image source: Wikimedia Commons.

Diversified oil and gas midstream major Enterprise Products Partners L.P. (NYSE:EPD) reported a fully diluted earnings per unit of $0.32 for the third quarter of 2015, missing consensus estimates by $0.01.

However, the master limited partnership recorded a modest 0.4% increase in gross operating profit -- a non-GAAP figure -- from last year's third quarter to $1.3 billion. Despite revenue slipping 49% to $6.3 billion, gross operating profits remained stable thanks to ship-or-pay contracts from customers (usually oil producers and refiners) that shields Enterprise from the natural volatility of the energy business. Distributable cash flow, as a result -- adjusted for divestments in the Gulf of Mexico -- remained virtually unchanged at $970 million providing a coverage of 1.3 times for the next quarterly cash distribution.

Segment breakup
Below is segmental breakup of Enterprise's gross operating profits:


Q3 2015


Q3 2014


Change (%)

NGL Pipelines & Services




Crude Oil Pipelines & Services




Natural Gas Pipelines & Services




Petrochemical & Refined Products Services




Offshore Pipelines & Services




Total Gross Operating Profit




Data source: Enterprise Products Partners Q3 2015 earnings release.

Fixed-fee contracts sustains NGL and crude oil transportation
Natural gas fee-based processing volumes showed no change from year-ago numbers and remained constant at 5.0 billion cubic feet, or Bcf, per day. However, processing margins themselves were lower by $99 million offset by a $12 million increase in natural gas liquids, or NGLs, marketing activity, which primarily explains the lower earnings in the NGL pipelines and services segment. However, NGL equity production itself increased a solid 25% to 129,000 barrels per day.

Additionally, NGL transportation volumes increased to a record 3.2 million bpd, attesting to the fact that the company's fixed-fee contracts have protected transportation volumes so far despite falling U.S production. As a result, the pipeline and storage business saw gross operating profits increase a solid 32% to $366 million.

Crude oil pipelines and services, on the other hand, reported a handsome 33% increase in gross profit to a "record $255 million." Crude oil transportation volumes showed a corresponding 21% increase to an all-time high 1.5 million bpd. Enterprise's acquisition of Oiltanking L.P. and EFS Midstream did the trick as the combined acquisitions contributed to a fantastic $77 million increase in gross profit. However, the South Texas pipeline witnessed an $18 million drop in profits thanks to a 32,000 bpd decrease in crude transportation volumes.

The new Seaway loop line that came online in December 2014 helped overall Seaway pipeline transportation volumes, net to the company, to increase by 161,000 bpd. This contributed to a $17 million jump in gross profits.

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Natural gas volumes drop but refined products make up
The natural gas pipelines segment recorded 1.5% drop in profits mainly due to lower natural gas transportation volumes, which fell 1%. Additionally, average fee from contracts also fell since this particular part of the business has contracts where fees are indexed to natural gas prices, whose market has been dismal. However, petrochemical and refined products transportation volumes increased 12% year on year to 904,000 bpd. Again acquisition of Oiltanking assets, via the Houston Ship Channel Terminal and the Beaumont Marine West Terminal, helped boost volumes.

Net capital expenditures increased to $989 million from $687 million a year back. In addition, Enterprise spent $1.04 billion to fund its acquisition of EFS Midstream. Cash flow from operations for the third quarter came in at $670 million.

By the end of the year, Enterprise expects to bring $1.8 billion worth of projects into commercial operations. Two projects of note are its Aegis natural gas liquids pipeline that will move NGLs from the Marcellus/Utica gas formations to the Gulf Coast as well as expansion of its LPG export terminal in the Houston ship channel. As these projects ramp up, they should help pad the company's distributable cash flow even further.

Foolish bottom line
As an MLP, Enterprise's distributable cash flow looks safe. Above and beyond the cash that'll be distributed to unitholders for the third quarter, Enterprise will retain $209 million of distributable cash flow -- a drop from $238 million retained cash from the previous quarter. Of course, the worst downturn in the oil market is bound to have some detrimental effects on the company. Nevertheless, the cushion provided is sizable and is testament to Enterprise's rock-solid business model.