At this point, the only thing that would be remarkable about Enterprise Products Partners (NYSE: EPD) quarterly results would be if something changed, because the company produced third quarter results that were yet again surprisingly similar to prior quarters. The only thing that was a bit of a surprise, though, was the rather rosy outlook that management gave for the upcoming year. Let's take a look at Enterprise's results and why management is in a good mood about the coming quarters.
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Enterprise Product Partners earnings: The raw numbers
|Results*||Q3 2016||Q2 2016||Q3 2015|
|Gross operating margin||$1,312||$1,353||$1,349|
|Earnings per share||$0.30||$0.34||$0.32|
|Distributable cash flow||$978||$1,089||$2,501|
*In millions, except per share data, source: Enterprise Products partners investor presentation.
Enterprise's earnings results over the past several quarters have had a wash, rinse, and repeat sort of feel to them. Even though transportation, processing, and storage volumes declined across every aspect of the business as well as price declines, overall results have stayed within shooting distance of the prior quarters as new projects continue to come online and offset any losses.
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One thing that really sticks out among those numbers is what seems to be a huge decline in distributable cash flow from the same time last year. Keep in mind, though, that Enterprise netted a little more than $1.5 billion in cash from the sale of its offshore pipeline business in July of 2015. On a continuing operations basis, Q2 2015's distributable cash flow was $970. It doesn't show up in the earnings results because at the same time, management announced a $2 billion acquisition of onshore natural gas assets that more or less resulted in a non-taxable asset swap.
Data source: Enterprise Products Partners earnings releases, author's chart.
The deal to sell Enterprise's offshore pipeline business took place a few days into the third quarter of last year, so this is the last time we will likely see any more reporting of these results.
What happened with Enterprise Products Partners this quarter?
- Total capital spending for the quarter was $621 million, a noticeable decline from the $884 million in the prior quarter. Part of the reason for that is the company is putting the finishing touches on several projects this year. Of the $2.3 billion in projects set to be put in service in 2016, $2.1 billion of them have been completed so far.
- Management yet again raised its distribution by 5.2% compared to the same quarter last year. This was the 49th consecutive quarter with a distribution increase.
- The company's distribution coverage ratio for the quarter slipped to 1.15 times -- one of the lowest levels in years -- and retained $124 million in cash. That makes for $551 million in excess cash that wasn't needed for distributions and was used on capital spending.
What management had to say
Typically, Enterprise's management is pretty mum when it comes to speaking about the business and its outlook during earnings releases. This time around, CEO Jim Teague was much more colorful than normal with some of the things he and the rest of management is seeing in the energy market, particularly in the next year.
We are optimistic that the energy industry has weathered the harshest part of this cycle and very proud of how our businesses continued to perform. While the industry may still experience bouts of commodity price weakness and volatility, we believe it has a firmer foundation going into 2017 as the gap between supply and demand has narrowed and should continue to do so. We are seeing significant 'green shoots' of producer activity as a result of the opportunity to hedge future sales of crude, NGLs and natural gas at economic levels. In addition to the acceleration of investment in thePermian Basin, we are seeing activity attributable to new discoveries, deployment of new technology, including in well-established areas such as the Eagle Ford and Haynesville; and changes in ownership of acreage as some producers emerge from restructuring.
From the perspective of consumers of energy, a substantial increase in demand for natural gas and NGLs is expected from new domestic petrochemical, natural gas-fired power plants and LNG facilities under construction and scheduled to begin operations over the next one to three years. Through the end of 2017, five new ethylene facilities on theU.S. Gulf Coastare scheduled to begin operations that represent 333,000 barrels per day, or 30 percent increase in demand for ethane. In addition, certain refining and petrochemical customers are evaluating new facilities or modifications to existing facilities that will require additional midstream energy infrastructure.
Seeing Enterprise's results remain so mind-numbingly similar from quarter to quarter can make one think that the company isn't doing much lately. On the contrary, it has done quite a bit to maintain similar profitability levels as oil and gas activity across the U.S. is still on the decline. Since the beginning of 2015, the company has put $4.8 billion in new assets to work to offset the declines in its existing portfolio. When we do start to see an uptick in activity -- and according to Teague, it is coming -- then we might see some pretty impressive upticks in Enterprise's results.
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