Closer Look At Enterprise Products Partners' Distributable Cash Flow

On November 1, 2012, Enterprise Products Partners L.P. (EPD) reported results of operations for 3Q 2012. Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses (EBITDA) for 3Q 2012 and for the trailing 12 months (“TTM”) are summarized in Table 1:

Fluctuations in revenues and cost of sales amounts are explained in large part by changes in energy commodity prices, especially those for NGLs, natural gas and crude oil. With the exception of crude oil, energy commodity prices during the nine months ended 9/30/12 have been lower when compared to the same period in 2011. Therefore, with one exception, segment revenues were down vs. the prior year periods, as seen in Table 2:

However, lower revenues resulting from decreases in NGL, natural gas, crude oil and petrochemical prices were more than offset by lower costs of sales attributable to these decreases, hence the significant and impressive improvement in gross operating margins, as seen in Table 3 below:

Total segment gross operating margin in Table 3 above is defined by EPD as operating income before: (i) depreciation, amortization and accretion expenses; (ii) non−cash asset impairment charges; (iii) operating lease expenses for which it did not have the payment obligation; (iv) gains and losses from sales of assets and investments; and (v) general and administrative costs.

Given quarterly fluctuations in revenues, working capital needs and other items, it makes sense to review TTM numbers rather than quarterly numbers for the purpose of analyzing changes in reported and sustainable distributable cash flows. In an article titled prior article that I expect to see additional units issued by the end of 2012 in light of the increase in capital expenditure in 2012 and what’s coming up in 2013. I noted that even if EPD were to issue 15 million units, it would amount to only a 1.7% dilution to existing holders. In September 2012, EOD issued 10.4 million units at $53.07 per unit, which generated total net cash proceeds of $473.3 million. Of course, I was pleased that the number of units issued was lower. \

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Overall, EPD has ~$8 billion of growth projects under construction that are scheduled to begin service in the second half of 2012 through 2015. These investments in new natural gas, natural gas liquids (“NGLs”) and crude oil infrastructure are being made to support development of shale plays (Haynesville / Bossier, Eagle Ford, Rockies, Permian Basin/Avalon Shale/Bone Spring, Marcellus/Utica) in anticipation of growing demand for NGLs vs. crude oil derivatives by the U.S. petrochemical industry and by international markets.

EPD recently announced its 33rd consecutive quarterly cash distribution increase to $0.65 per unit ($2.60 per annum), a 6% increase over the distribution declared with respect to the second quarter of 2011. EPD’s current yield is at the high end of the MLPs I follow:

I think the premium is justified on a risk-reward basis given EPD’s size, breadth of operations, strong management team, portfolio of growth projects, structure (no general partner incentive distributions), excess cash from operations, history of minimizing limited partner dilution and performance track record. In my view, the recent price drop presents a buying opportunity.

Written By: Ron Hiram