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Enterprise Products Partners Keeps Its Earnings Steady in a Weak Energy Market

By Tyler Crowe - Apr 28, 2016 at 5:27PM

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Enterprise Products first-quarter earnings stood up against lower oil and gas prices thanks to new projects coming online.

Image source: Enterprise products partners corporate website.

Enterprise Products Partners' (EPD 2.02%) business model is the same as the moral of the story of the tortoise and the hare: Slow and steady wins the race. This most-recent quarter was another example of this approach, as the company was able to stave off the threat of lower oil and gas prices by continually investing in its pipeline and logistics network through the cycles of the industry.

Let's take a quick look at the numbers for Enterprise's recent quarter, and learn how the company tries to maintain this kind of performance while the energy market remains downtrodden. 

Enterprise Products Partners results: The raw numbers

Results (in millions, except per share data) Q1 2016 Q4 2015 Q1 2015
Gross operating margin $1,319 $1,353 $1,335
Net income $670 $694 $651
EPS $0.32 $0.34 $0.32
distributable cash flow $1,054 $1,089 $1,030

Source: Enterprise Products partners earnings releases.

Instead of giving revenue in its headline results, Enterprise elects to use gross operating margin instead. This is similar to what we all know as gross income -- revenue minus cost of goods sold. Gross operating margin is a better metric to use because revenue for the company can be highly variable thanks to commodity prices. However, the contracts that Enterprise has with its customers ensure a fixed fee that is more accurately reflected in gross operating margin. 

Overall, Enterprise's results weren't what you would call a blow-out quarter, as weak commodity prices had some minor effects on earnings. At the same time, though, they have held up relatively well considering price declines in both oil and gas.

The largest reason why results have remained steady during the past several quarters has been that completed projects have offset any declines related to lower volumes and lower commodity prices in its existing system. Here's how Enterprise's business performed by segment.

Image source: Enterprise Products partners earnings release, author's chart.

It should be noted that Enterprise sold all of its offshore pipeline assets in the third quarter of 2015; in the coming quarters, this business segment will no longer be reported. 

What happened with Enterprise this quarter?

  • Total pipeline volumes -- NGL, natural gas, crude, and refined products -- grew by 14% year over year, and is not at an all-time high of 5.2 million barrels per day. Most of the gains across the system are mostly attributed to bringing several NGL pipelines into service, such as its Aegis pipeline from the Marcellus shale formation in Pennsylvania to the Gulf Coast.
  • Total capital spending in the quarter was $1.1 billion; $300 million in new projects were brought into service in the quarter alone. Most of these were smaller-scale projects.
  • The company raised its distribution by 5.3% compared to the same quarter last year while maintaining a distribuution coverage ratio of 1.3 times. This left $229 million in excess distributable cash flow that can be used to reinvest in development projects.
  • Newly issued notes from the company in April were given an investment grade rating of Baa1. 

What management had to say
Very rarely does Enterprise's CEO give anything more than a matter-of-fact statement at the earnings release, and James A. Teague's comments about this past quarter were no different. He did give some indications about the company's capital spending plans during the next couple of years that should give investors some clarity about possible future distribution increases

We successfully completed $300 million of organic growth projects in the first quarter of 2016 and are on schedule to complete and begin commercial service on another $2.2 billion of growth projects during the remainder of 2016. This includes two natural gas processing plants and related infrastructure serving the Permian basin; our ethane export terminal on the Houston Ship Channel; and additional crude oil storage infrastructure in the Houston and Beaumont areas. We have a total of $4.2 billion of growth projects scheduled to be completed in 2017 and 2018. Our commercial team continues to progress on several projects that are still in the development phase.

With its investment-grade rating still intact, and the ability to generate a decent amount of cash internally to support growth, Enterprise should be well positioned to execute on these projects, even during this downturn. That bodes well when we start to see an eventual recovery in the oil and gas space.

Enterprise Products Partners has been able to weather the storms in the energy market much better than others. Much of that has to do with its more-conservative approach prior to the crash, as management kept a pretty-large cushion between the amount of cash coming in the door, and how much it paid to shareholders. This quarter was further evidence that this approach is working rather well for the company, and should position it to do even better once oil and gas activity across the U.S. picks back up again.

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