DEP Duncan Energy Partners L.P.

Enterprise Products Partners LP (EPD) reported record second quarter 2011 results, fueled by natural gas, natural gas liquid (NGL) and crude oil production growth in the shale regions as well as strong demand for NGLs in the U.S. petrochemical industry and international markets. Earnings per limited unit of 51 cents surpassed the Zacks Consensus Estimate of 47 cents and grew a whopping 96% from 26 cents earnings a year ago.

Quarterly distribution at Enterprise increased 5.2% year over year to 60.5 cents per common unit, or $2.42 per unit on an annualized basis. Distributable cash flow of $778 million provided a solid coverage of 1.6x. The partnership retained $284 million in cash flow, thereby reducing its financing needs.

Revenues in the quarter increased nearly 49% year over year to $11.2 billion.

Segmental Performance

Gross operating income in the NGL Pipeline & Services segment experienced a growth of nearly 13% year over year to $497.7 million. Gross operating income in the natural gas processing business increased 13% attributable to higher margins for NGLs and fee-based natural gas processing revenues, and its NGL pipeline and storage business grew nearly 3% year over year.

For the NGL fractionation business, gross income surged 53% year over year to $52 million aided by higher revenues from the Mont Belvieu facility.

Onshore Natural Gas Pipeline and Services’ gross operating income increased 51% year over year to $161.1 million. The pipeline systems benefited from Texas Intrastate, San Juan and Haynesville Shale natural gas gathering pipeline systems.

The gross operating income from the Onshore Crude Oil Pipelines & Services segment increased 162% year over year to $67.8 million in the reported quarter, primarily on higher crude oil marketing and volume growth on all of Enterprise’s major onshore crude oil pipelines, with the exception of the Seaway pipeline.

However, Enterprise’s Offshore Pipelines & Services’ gross operating income was $53.4 million in the quarter, substantially below the year-ago quarter’s level of $82.8 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 $139.8 million in the quarter from the year-earlier level of $158.1 million.

Financials

During the quarter, the partnership spent $1 billion, including $84 million in sustaining capital expenditures (capex). Interest expense was $188 million (up approximately 5% year over year) on average debt balance of $14.2 billion.

Outlook

We believe Enterprise Products remains 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 5.2% 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.

Enterprise Products also plans to construct a sixth fractionator at its Mont Belvieu facility that will accommodate continued growth of liquids-rich natural gas production from the prolific Eagle Ford Shale basin in South Texas.

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) and Enbridge Energy Partners (EEP) going forward.

However, all these positives are already reflected in its current valuation, leaving little room for further upside. Hence, 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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