The first quarter of 2018 was a strangely quiet one for oil and gas midstream operator Enterprise Products Partners (NYSE: EPD). Typically, the company announces at least a couple of new projects each quarter to grow the business and fuel its distribution to shareholders. Apparently, it was saving most of its project announcements for this past quarter as management added $600 million to its capital expenditure guidance for the year.
Let’s take a look at Enterprise’s most recent earnings results and some of the new projects that management found too compelling to turn down.
Enterprise Products Partners’ results: The raw numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Gross operating margin||$1.48 billion||$1.59 billion||$1.38 billion|
|Net income||$687 million||$912 million||$666 million|
|Distributable cash flow||$1.43 billion||$1.39 billion||$1.05 billion|
For a company that has a reputation as a slow-growing business, Enterprise’s growth over the past year or so has been off the charts, with its reported 36% year-over-year jump in distributable cash flow. That increase is a result of several new projects starting commercial operations this past quarter including its propane dehydrogenation (PDH) petrochemical plant, a natural gas processing facility in the Permian Basin, and a natural gas liquids fractionator facility. As these facilities ramp up to full capacity, we should expect even better results.
The one stain on its earnings report was a $322 million, or $0.15 per share, noncash loss related to some crude oil futures contracts. Those mark-to-market losses, part of fair value accounting practices, are why its crude oil services segment posted a significant decline compared to the prior quarter. Absent those charges, all four of its business segments posted considerable gains.
What happened with Enterprise Products Partners this quarter?
- Total capital expenditures were $983 million for the quarter, which was down slightly compared to the first quarter. That is to be expected, though, as Enterprise brought $1.4 billion in projects into service in the first half of the year. However, management increased its capital spending guidance to $3.8 billion to $4.0 billion for growth projects, up from $3.2 to $3.4 billion in the third quarter.
- The increase in capital spending came after several new project announcements. The most recent string of investments have been heavily weighted toward processing and export facilities, but this past quarter management announced a slew of new projects to expand pipeline capacity for several of its existing projects.
- It announced a 100,000-barrel-per-day expansion of its Front Range and Texas Express pipelines to deliver growing natural gas liquid production from the Denver-Julesburg shale basin in Colorado to its storage and petrochemical manufacturing hub in Mont Belvieu, Texas. It intends to reactivate a previously idle natural gas pipe that will deliver from the Barnett shale formation to a supply hub in Sweeney, Texas. Also, it plans to develop an offshore crude oil export terminal that will be able to fuel Very Large Crude Carriers (VLCCs).
- Increased distributable cash flow resulted in a distribution coverage ratio of 1.5 times and produced $491 million in excess cash, which Enterprise intends to use to fund a significant portion of this massive capital spending program over the next 18 months.
What management had to say
As part of the company’s press release statement, CEO Jim Teague highlighted a couple of the major capital projects recently brought into service and the impact of it had on the bottom line.
Our PDH facility, which completed commissioning activities and began commercial service in the second quarter, operated at full capacity. The Midland-to-ECHO crude oil pipeline averaged 545 thousand barrels per day of gross transportation volumes from the Permian Basin. In total, our liquid pipeline volumes were a record 6.2 million barrels per day and our marine terminal volumes were a record 1.7 million barrels per day.
This operational performance generated record distributable cash flow, excluding proceeds from asset sales, of $1.4 billion, which provided 1.5 times coverage of our distribution for the quarter. We retained $491 million of distributable cash flow to reinvest in the growth of the partnership, which supports our goal of self-funding the equity portion of our growth capital investment.
You can read a full transcript of Enterprise’s conference call here.
Ready for the next round
Back at the end of last year, Enterprise’s management announced that it was slowing down its distribution growth rate. The aim of the decision was to free up more excess cash to reinvest in the business and become less reliant on issuing equity as a source of funding. This past quarter shows why this was a good decision. The company now has a backlog of construction projects totaling $5.2 billion it expects to complete by the end of 2019. It goes to show the immense investment opportunities in U.S. energy infrastructure over the next several years. With all that retained cash, don’t be surprised if we see even more projects get added to the mix over the next several months.
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