Enterprise Products Partners' Earnings Went Exactly According to Plan

Growth across Enterprise's business segments helped to offset the small blips from slightly weaker pricing, as has happened for several quarters now.

Tyler Crowe
Tyler Crowe
Oct 30, 2015 at 10:48AM
Energy, Materials, and Utilities

Photo Source: Enterprise Products partners investor presentation

Enterprise Products Partners (NYSE:EPD) rarely makes headlines when it reports its earnings every quarter. When you have earnings as consistent as theirs, though, it's hard to get excited. However, with the market for oil and gas in the dumps, the company's consistent results were a welcome comfort for those that may have seen their other energy investments get devastated so far this year. Let's take a look at Enterprises' results for the quarter and figure out why the company continues to do well in such a rough market. 

By the numbers
There is something comforting about a company that can post consistent results time and time again, and Enterprise did exactly that this past quarter. Fully diluted earnings per unit fell by 13% compared to this time last year to $0.32, but there were some non-cash charges baked into those results. 

The two numbers that are more important to Enterprise investors are gross margin and distributable cash flow, and in these two areas the company shined. Gross margin for the quarter gained a few million to end at $1.34 billion, driven mostly from increasing margins from its crude oil pipelines & services segment. The chart below breaks down the company's gross margin by business segment.

Source: Enterprise Products Partners earnings release, author's chart

The results across its NGL, natural gas, and refined products pipelines & services were pretty much par for the course. NGLs saw a big decline in profits from processing, fractionation, and marketing; but increased storage and export volumes helped to make up the difference. Similar results happened with its natural gas and refined products segments where slightly lower prices were offset by increased volumes.

The big gains in its crude oil segment also came from increased volumes in its Seaway pipeline as well as from its recently acquired gathering network in the Eagle Ford shale formation. By contrast, Enterprise's offshore segment saw declines because it was sold off and the deal wasn't closed until seven days into the quarter. 

In terms of distributable cash flow. Enterprise ended the quarter with a whopping $2.5 billion in cash. That needs to be put into context, though, as $1.5 billion of that came from the sale of those aforementioned offshore pipelines. Taking out the dale, distributable cash flow from continuing operations was down only $5 million from this time last year to $970 million. That was more than enough to support the company raising its quarterly distribution while still generating more than $200 million in excess cash that can be reinvested in the business. 

The big picture: Keeping flexibility with retained cash
Enterprise Products is a unique beast when it comes to pipeline companies and master limited partnerships. Many companies in this space pay out all of the cash it has available each quarter to investors after expenses such as interest and maintenance capital spending. When the time comes to fund a new project, these companies tap either the debt or equity markets. When the cost of capital is low -- low interest rates and high stock prices -- it works out pretty well. 

There are two shortfalls to this technique: The first is that when the cost of capital does rise, it makes it harder to grow and impacts the amount that can be paid to shareholders. The other is that even though pipeline companies are pretty well insulated from oil and gas prices, they are not completely immune. So when we experience a time of weak prices like now, a company may be forced to either slow its distribution growth or potentially cut it depending on how much oil and gas prices have declined.

We saw a perfect example of this a couple weeks ago when Kinder Morgan (NYSE:KMI) cut its distribution outlook. Even though the company is 96% protected from oil and gas prices through futures contracts and fee based revenue, the company's penchant for paying out close to all of its available cash every quarter means that 4% of variable margin can impact its distribution.

This is where Enterprise has set itself apart. Management has deliberately kept its distribution payments to shareholders lower than the amount of cash coming in the door by a pretty comfortable margin. Not only does this provide the company the flexibility to continually raise its distribution each quarter even when cash coming in remains flat, but it also gives the company an additional source of capital to reinvest in new projects. That retained cash means Enterprise isn't tapping the equity and debt markets as frequently for new sources of capital. 

When the market is great, it can make some investors rambunctious to see that additional cash not go in their pockets. When times are a little tougher like they are today, though, it gives Enterprise a huge advantage over its peers.

What a Fool believes
Enterprises' quarter wasn't anything special, but that's the beauty of it. The company has been able to maintain pretty consistent margins and cash flow throughout the crash in oil and gas prices. Looking ahead into the near future, the company expects to bring $1.8 billion in new projects online by the end of 2015. One of those projects is the more than tripling of its LPG export capacity in the Gulf of Mexico. With those projects coming online, investors can expect a decent jump in cash flows in the coming quarters and the continued comfort of cash being well spent for future distribution growth.