DEP Duncan Energy Partners L.P.

Enterprise Products Partners LP (EPD) reported solid first quarter 2011 results fueled by strong performances at the natural gas liquid (NGL) Pipeline and Services as well as Onshore Natural Gas Pipes segments. Earnings per limited unit of 49 cents surpassed the Zacks Consensus Estimate of 44 cents and grew a whopping 48% from 33 cents earnings a year ago.

Quarterly distribution at Enterprise increased 5.3% year over year to 59.75 cents per common unit, or $2.39 per unit on an annualized basis. Distributable cash flow of $694 million provided a solid coverage of 1.4x. The partnership retained $207 million of cash flow, which reduced its financing needs.

Revenues in the quarter increased 19% year over year to $10.2 billion, and trumped the Zacks Consensus Estimate of $9.0 billion.

Segmental Performance

Gross operating income in the NGL Pipeline & Services segment experienced a growth of more than 15% year over year to $504.4 million. Gross operating income in the natural gas processing business increased 7% attributable to greater demand for NGLs, and its NGL pipeline and storage business grew 20% year over year. For the NGL fractionation business, gross income surged 70% year over year to $46 million aided by higher revenues from the Mont Belvieu facility.

Gross operating income for the partnership's Onshore Natural Gas Pipeline and Services business increased 22% year over year to $159.2 million. The pipeline systems benefited from the acquired State Line and Fairplay natural gas gathering systems, the increase in volumes at the Texas Intrastate system as well as from the partnership’s natural gas marketing activities.

The gross operating income from the Onshore Crude Oil Pipelines & Services segment increased 19% year over year to $31.8 million in the reported quarter, primarily on higher crude oil marketing and volume growth on the Red River, South Texas and West Texas crude oil pipelines.

Enterprise’s Offshore Pipelines & Services’ gross operating income was $61.3 million in the quarter, substantially below the year-ago quarter’s level of $81.1 million. The decrease was due to suppressed exploration and development activity in the Gulf of Mexico related to federal regulatory issues.

Gross operating income in the Petrochemical & Refined Product Services segment dropped to $112.4 million in the quarter from the year-earlier level of $120 million.

Financials

During the quarter, the partnership spent $718 million, including $53 million in sustaining capital expenditures (capex). Interest expense was $184 million (up approximately 16.5% year over year) on average debt balance of $14.1 billion.

Management raised its full-year expansion capex budget to $3.5 billion, of which 80% is apportioned for Eagle Ford and Haynesville shale projects. The partnership maintained its 2011 maintenance capex guidance at $250–$260 million.

Outlook

We believe Enterprise Productsremains a core holding in a Master Limited Partnership (MLP) portfolio and focuses on projects that generate stable cash flow and contribute to its integrated value chain. While Enterprise increased its cash flow distribution by 5.3% in the reported quarter, it also deployed cash in various fee-based development projects that will likely generate operating cash flow to support its future distribution growth.

We are still optimistic on the partnership’s gas processing/NGL fractionation and expect higher profit margin from the petrochemical segment. Importantly, the integration of Duncan Energy Partners LP (DEP) along with the Acadian Gas system extension will likely prove beneficial for the partnership.

Given a broad and vertically-integrated asset base, steady cash flow generation ability and financial strength for strategic growth, we believe Enterprise is well positioned to deliver an impressive total return versus pipeline peers, Kinder Morgan Energy Partners L.P. (KMP), Enbridge Energy Partners (EEP) going forward.

However, all these positives are already reflected in its current valuation, leaving little room for further upside. We maintain our long-term Neutral recommendation on Enterprise Products.

 
DUNCAN ENERGY (DEP): Free Stock Analysis Report
 
ENBRIDGE EGY PT (EEP): Free Stock Analysis Report
 
ENTERPRISE PROD (EPD): Free Stock Analysis Report
 
KINDER MORG ENG (KMP): Free Stock Analysis Report
 
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