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Enterprise Products Partners L.P. (NYSE:EPD) is expected to experience organic growth due to its ongoing projects. The stock is trading at fair valuations as compared to its peers, and is offering a dividend yield of 4.8%. The company reported above expectations earnings in the last quarter due to higher volumes and new projects coming online.

We have a bullish view on the stock in the long term, and advise accumulation of the stock on corrections in the near term.

Introduction

Enterprise Products Partners L.P. is among the largest publicly traded partnerships, with a market cap of $46.9 billion, and is headquartered in Houston, Texas. EPD is a leading provider of midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products and petrochemicals in North America.

EPD has ownership interests in about 50,700 miles of onshore and offshore pipelines, 14 billion cubic feet of natural gas storage capacity and 190 million barrels of storage capacity for NGLs, refined products, petrochemicals and crude oil.

Earning Review

EPD reported revenues of $9.8 billion for the second quarter of 2012, showing a decrease of 12.7% as compared to revenues of $11.2 billion in the same period last year. The decrease in revenues was due to the low commodity prices prevailing in the outgoing quarter. The reported revenues missed mean analyst estimates by 16.4%.

The reported EPS of $0.64 for the second quarter of 2012 witnessed an increase of 25.5% as compared to the second quarter of 2011, and beat mean analyst estimates by 10.5%. The increase in earnings was due to two main factors, 1) the low commodity prices reduced the cost of sales, and 2) the company witnessed volumetric growth in almost all areas of the company's operations, except offshore pipelines and services, equity NGL production, and transportation of refined products and petrochemicals.

EPD reported distributable cash flows of $876 million for the second quarter of 2012, which provided 1.6 times coverage of the $0.635 per unit cash distribution paid to common unit holders, and increased 12.6% as compared to the distributable cash flow for the same period last year. Excluding the revenues from asset sales, distributable cash flow for the second quarter of 2012 would be $745 million, and would provide 1.4 times coverage of the cash distribution declared with respect to the outgoing quarter. EPD retained $331 million of the distributable cash flows for the outgoing quarter.

EPD incurred capital expenditures of $927 million ($90 million was sustaining capital expenditures), as compared to $1,008 million in the same period last year.

Operating Data

2Q2012

2Q2011

% change

NGL Pipelines & Services, net:

NGL transportation volumes (MBPD)

2,440

2,253

8%

NGL fractionation volumes (MBPD)

654

545

20%

Equity NGL production (MBPD)

96

120

-20%

Fee-based natural gas processing (MMcf/d)

4,232

3,687

15%

Onshore Natural Gas Pipelines & Services, net:

Natural gas transportation volumes (BBtus/d)

13,793

11,891

16%

Onshore Crude Oil Pipelines & Services, net:

Crude oil transportation volumes (MBPD)

725

642

13%

Offshore Pipelines & Services, net:

Natural gas transportation volumes (BBtus/d)

907

1,039

-13%

Crude oil transportation volumes (MBPD)

285

279

2%

Platform natural gas processing (MMcf/d)

326

417

-22%

Platform crude oil processing (MBPD)

18

19

-5%

Petrochemical & Refined Products Services, net:

Butane isomerization volumes (MBPD)

100

103

-3%

Propylene fractionation volumes (MBPD)

73

68

7%

Octane additive and other plant production volumes (MBPD)

22

19

16%

Transportation volumes, primarily refined products and petrochemical (MBPD)

596

761

-22%

Total, net:

NGL, crude oil, refined products and petrochemical transportation volume (MBPD)

4,046

3,935

3%

Natural gas transportation volumes (BBtus/d)

14,700

12,930

14%

Equivalent transportation volumes (MBPD)

7,914

7,338

8%

Source: 10Q and Qineqt calculations

Natural Gas Liquid ((NYSE:NGL)) Price Trends and Future

The first half of 2012 witnessed extensive downtime for ethylene crackers for turnarounds, and the low propane prices decreasing the demand for ethane. The downtime of ethylene crackers had reduced the demand for ethane by 120,000 barrels per day. As per the information provided by the company's management, most of the crackers have resumed operations after the downtime, and the demand for ethane increased by one million barrels per day in July. The prices of ethane will adjust according to demand and supply, and if the prices are low, then producers may choose not to extract ethane from natural gas going forward.

The increased cracking of propane as a feedstock, completion of the export facility in the fourth quarter, and a normal winter should aid propane to normal levels by next year, as inventory levels were high due to last year's warm winters. The company has also announced intentions to build a propane hydrogenation ((NYSE:PDH)) unit, which will be highly beneficial for the company since it enjoys synergies through its NGL and propylene businesses, and its excellent upstream and downstream business.

Natural Gas Liquid Pipelines

EPD is building NGL pipelines from various plays all the way from the Rockies to the Appalachia. These NGL lines, including Rocky, MAPL, Texas Express, Mountain Expansion, ATEX and Front Range, are on schedule and will be operational between 2013-2014.

The above-mentioned projects are backed through firm demand fees, and can be expanded as per requirements in the market.

Crude Oil Segment and its Future

The crude oil segment is expected to continue to perform well in the future due to the high crude oil prices, which has led to increased drilling activity in the U.S., increasing the demand for transportation and storage facilities.

The first processing train of the Eagle Ford pipeline is online, and is exceeding the company's throughput expectations. The second and third trains are expected to come online in the ongoing quarter and the first quarter of 2013.

The Eagle Ford pipeline is expected to move up to 350,000 BPD of crude oil for the Gulf refining complex, and will connect the new ECHO crude oil terminal of EPD in Houston. The company has existing long term contracts for 90% of the capacity of the new pipeline.

EPD is aiming for oil to play a more significant role in its business, as crude oil production booms in North America due to shale oil.

Another growth opportunity for EPD is the fact the its Seaway Pipeline is the first pipeline to be reversed to transport heavy and light crude oil south to the Texas Gulf Coast, from Cushing, Oklahoma and Canada. The pipeline is expected to be completely reversed and looped by 2014, with a total capacity of 850,000 barrels a day.

Outlook

The factors mentioned above, which include the new NGL pipelines being built, the complete reversal of the Seaway pipeline, second and third train of the Eagle Ford pipeline coming online, the PDH plant being built, a higher reliance on crude oil by the company to generate revenue given the shale oil boom in the U.S., all warrant a positive stance for the stock.

However, a continuation of depressed prices of natural gas and natural gas liquids are a potential threat to the business in the future.

The stock is trading at a cheaper P/E, P/B and P/S multiples of 20.5x, 3.8x and 1.1x, as compared to KMP, and in line with NGLS; the stock also offers a dividend yield of 4.8%, which is slightly below both KMP and NGLS. The stock is trading at an expensive EV/EBITDA and PEG as compared to both KMP and NGLS.

This could be because the stock has appreciated by 14.21%, outperforming the S&P 500 (+5.9%), the Dow Jones (+6.7%), and its peers Targa Resources Partners L.P (+7.3%) and Kinder Morgan Energy Partners L.P (NYSE:KMP) (-2.4%).

We believe the stock will outperform in the long term, and advise accumulating the stock as it witnesses corrections.

Name

P/E

EV/EBITDA

Dividend Yield

PEG

P/B

P/S

Enterprise Products Partners L.P.

20.5x

14.9x

4.8%

3.3

3.8x

1.1x

Targa Resources Partners

21x

8.9x

6.3%

1.8

2.5x

0.5x

Kinder Morgan Energy Partners L.P.

32.4x

13.8x

5.9%

1.6

4x

3.6x

For detailed reports on Targa Resources Partners and Kinder Morgan Energy Partners L.P. , please review the following reports:

Source: Enterprise Products Partners: This 4.8% Dividend Stock Has Tremendous Growth Potential