GEL Genesis Energy, L.P.

For full year 2011, Enterprise Products registered earnings per limited unit of $2.38 compared with $1.15 per unit in 2010. Earnings per limited unit also beat the Zacks Consensus Estimate of $2.11.

 

Quarterly distribution at Enterprise increased 5.1% year over year to 62 cents per common unit, or $2.48 per unit on an annualized basis. Distributable cash flow of $1,400 million provided a solid coverage of 2.7x. The partnership retained $879 million in cash flow, thereby reducing its financing needs.

 

Revenues in the quarter increased 21% year over year to $11,586 million. In 2011, total revenues increased 31% to $44,313 million from the prior year.

 

 

Gross operating income in the NGL Pipeline & Services segment climbed nearly 39% year over year to $634.5 million. Gross operating income in the natural gas processing business increased 66% attributable to higher margins for NGLs and natural gas processing margins, and its NGL pipeline and storage business grew nearly 6% year over year. For the NGL fractionation business, gross income surged 82% year over year to $69 million aided by higher revenues from the Mont Belvieu facility.

 

Onshore Natural Gas Pipeline and Services’ gross operating income increased 46% year over year to $199.0 million. The pipeline systems benefited from Texas Intrastate and Acadian Gas System.

 

The gross operating income from the Onshore Crude Oil Pipelines & Services segment shot up nearly 157% year over year to $67.0 million in the reported quarter, primarily on higher crude oil marketing and volume growth on all major onshore crude oil pipelines of Enterprise but for the Seaway pipeline.

 

However, Enterprise’s Offshore Pipelines & Services’ gross operating income was $59.6 million in the quarter, substantially lower than the year-ago quarter’s level of $65.6 million. The decrease was due to suppressed offshore crude oil pipeline volumes as a result of maintenance in some of the upstream third party platforms and producing wells.

 

Gross operating income in the Petrochemical & Refined Product Services segment dropped to $137.4 million in the quarter from the year-earlier level of $140.2 million.

 

 

During the quarter, the partnership spent $1.1 billion, including $79 million in sustaining capital expenditures. Interest expense was $183 million (down nearly 14% year over year) on average debt balance of $14.5 billion.

 

 

We believe Enterprise Products remains a core holding in a master limited partnership 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 5.1% 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. Enterprise Products has received adequate transportation commitments to progress with the development of its 1,230-mile pipeline, which extends from Appalachia to Texas, also known as ATEX Express.

 

The pipeline will provide shippers with access to the partnership’s storage facility in Mont Belvieu, Texas that will offer indirect and direct access to the U.S. ethylene plants and thus position the partnership favorably.

 

Further, Enterprise and Genesis Energy L.P. (GEL) have executed the crude oil transportation agreement with a group of six producer companies to build the SEKCO pipeline, which is expected to come online by mid-2014. It will also provide a reliable source of uninterrupted crude oil supplies to the Gulf Coast refineries. 

 

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 going forward.

 

We maintain our long-term Outperform recommendation on Enterprise Products. However, Enterprise Products holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.