Why did Enterprise Products Partners (EPD) have such a good year in 2012? Fourth quarter EPS came in $0.03 above analyst estimates, coming in at $0.68 compared to $0.65. But revenue came in much less at $11.01 billion verses $11.98 billion; that's a 8.8% less than anticipated. Still, it had record volumes in its fee-based business production growth in its Eagle Ford and Haynesville shale plays. It also recorded strong demand from domestic and international NGL's. Natural gas liquids ((NGLS))) are a collection of hydrocarbons, recovered as liquids such as ethane, propane, and butane. Its pipeline transported 4.3 million (bpd) NGLs per day, a record for the company, and 14.5 trillion Btus per day of natural gas. These records also attributed to another record financial year for the company. It set records in the following categories
- Net income of $2.4 billion
- Earnings per unit of $2.71 on a fully diluted basis
- Gross operating margin of $4.4 billion
- Distributable cash flow of $4.1 billion, which included $1.2 billion of cash proceeds from sales of assets.
Putting some numbers in perspective
It is true that the year was good but not every segment of the business was profitable through the whole year. The NGL pipeline segment brought in a lower gross operating margin for the second consecutive quarter that can be attributed to falling NGL prices and production - nothing new here. The fee-based processing volume increased enough (year over year) to bail the segment. The decline in natural gas volume was also the culprit here although oil did post slight gains. Still - this was not enough to stop an $18 million contraction (year over year). EPD was held up by good performances in its other segments. Onshore pipelines posted gains in natural gas volumes and its Texas region carried the team. Eagle Ford Shale was the most productive as the region boast a 9% gain. With the increase in volume, it should be no surprise that this segment doubled its 2011 performance and the pipeline volume increase by 32% (year over year).
As healthy company, there is no publicly traded partnership that has been able to increase its cash distribution rate ((CDR)) like Enterprise. It has increased for the last 34 consecutive quarters and in excess of 5% the last eight years alone. As a (non general partnership) the company does not have to pay out incentive distributions. This results in a lower cost of capital which in turn means a greater distribution to unitholders (in master limited partnerships, investors buy units instead of shares) and more cash investments for future projects.
Presently trading at 56.41, the stock is trading at 21.8 times its earnings.
If NGL prices continue to climb, EPD should show some impressive numbers again in the next few years. It has finished a number of projects intended to contribute new sources of gross operating margin and cash flow. Here are a couple of the projects that should benefit shareholders: its sixth NGL fractionator at Mont Belvieu, Texas and the expansion of its natural gas and NGL pipeline systems serving the Eagle Ford shale in South Texas. It also commissioned the third train at its natural gas processing plant near Yoakum, Texas, serving Eagle Ford shale producers.
What can investors expect this year?
- Continued growth and better margins from the following divisions: Fee-based natural gas processing activities, NGL pipelines, fractionators, and crude oil pipelines as operations begin in these areas.
- Natural gas processing margins should be lower in 2013 than 2012 because of lower ethane prices
- The transition to a fee-based processing structure for natural gas should lower the equity in NGL production also
In 2013 I would expect the same profitable segments at the end of 2012 to continue. With continued expansion in the Seaway pipeline and growth in the Eagle Ford region of Texas, I would expect another good year out of the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.