Enterprise Products Partners Backfires (NYSE:EPD) - Seeking Alpha

Enterprise Products Partners Backfires (NYSE:EPD) | Seeking Alpha

Enterprise Products Partners Backfires
Enterprise Products Partners L.P. (EPD) 84 Comments

Summary

- Enterprise Products Partners L.P. had a negative Q2 quarterly comparison (a backfire).
- The time to consider buying a well-run company is when some unfavorable news comes out.
- The fee structure combined with the minimum volume requirements does protect against a lot, but not all, earnings volatility.
- Oftentimes, investors waiting for a bargain are afraid to invest when that bargain happens because they worry about still more bad news.
- The current quarterly comparison was caused by a combination of a large downward commodity price move and the expiration of some minimum volume commitments (for starters).
- This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

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Okay, here is that "missed" quarter that a whole lot of investors claim they are waiting for. Enterprise Products Partners L.P. (NYSE: EPD) posted a negative Q2 earnings comparison. What usually happens here is all those investors that said they wanted a "missed" quarter or negative earnings comparison before they would invest are now fearful of still more negative quarters and have lowered their buy price still more as a result. But the result for the investor is that they never get the chance to invest in a great company because the common unit price is always too high.

Second Quarter Results

This comparison was always going to be a rough one because commodity prices are so much lower than they were last fiscal year in the same quarter.

Enterprise Products Partners Summary Of Second Quarter Results (Enterprise Products Partners Earnings Press Release Second Quarter 2023)

Enterprise Products Partners will protect its income with fee income whenever possible. However, when commodity prices drop significantly over the next twelve months, it will affect operations.

The thing to note was that the first quarter showed a positive comparison, and positive comparisons are likely to resume as the company did make an acquisition that came online (not that long ago), and there are capital expansion projects underway. Still, an occasional backfire is to be expected.

Revenue Earning Structure

The major way that the company earns revenue is through a fee. That fee is protected with minimum volume commitments as a general rule. However, it is not possible for many of these companies to have a 100% fee structure, nor is it possible for the minimum volume commitments to cover the whole business.

Enterprise Products Partners Source Of Revenue By Type (Enterprise Products Partners Earnings Conference Call Slides Second Quarter 2023)

Even though the earnings are largely insulated from commodity price and volume variations, it clearly is not completely insulated. It can be seen from the slide above that the way the company earns revenue should keep earnings far less volatile than most upstream companies. But those earnings still will have some variations.

That is especially true when the difference in commodity prices between the quarters compared is as large as it was this time. Furthermore, management mentioned that some minimum volume commitments expired in the current time period for the acquired pipeline. That, again, can happen.

In the case of the expiration of pipeline volume commitments, the location of the pipeline is important. A pipeline located in a very profitable area will have no problems taking care of any volume shortfalls in the near future. Enterprise Products Partners has always been well located. Therefore, any shortfalls caused by a volume issue or even the end of a contract should be promptly addressed in the near future.

Growth Projects

Furthermore, the business cycle is getting to the point where customers are willing to commitment (one way or another) more volumes or acreage to help finance more capacity. Therefore, growth will be yet another way that there are some positive quarterly comparisons in the future.

Enterprise Products Partners Growth Project Summary (Enterprise Products Partners Earnings Call Slide Presentation Second Quarter 2023)

Already, management has more projects underway than was the case just a few years back. Typically, requests for more capacity or even new items lag the upstream recovery cycle.

In fact, midstream companies often complete capital projects well into the beginning of an upstream cyclical downturn. The new project completion combined with the minimum volume commitments that then "kick in" help many midstream partnerships cushion that upstream cyclical downturn. This is in addition to the commitments for the existing business before the capital projects come online.

The result is that even though many equities follow the upstream business cycle, the midstream business results turn out to be very steady.

Even this quarter, the shortfall for the common units of Enterprise Products Partners is in the 10% range. The upstream companies that I follow have far greater declines with a couple reporting essentially no positive earnings.

This is why the midstream segment of the business is known as the utility part of the oil and gas business. It has relatively low earnings volatility. The results are therefore more visible and dependable.

Enterprise Products Partners Breakdown Of NGL Segment Shortfall (Enterprise Products Partners Earnings Conference Call Slides Second Quarter 2023)

The main culprit in the shortfall was the NGL Segment with the breakdown shown above. The thing to note was that it took a major upheaval in commodity prices for this to happen.

While there was a weak quarter, the partnership remains well positioned to participate in the growing ability of North America to export natural gas. That means there is likely to be some good news down the road as the future unfolds.

Common Unit Repurchases

Management has a common unit repurchase program that also helps to cushion those weak quarterly comparisons (when they happen).

Enterprise Products Partners Share Purchasing Progress Update (Enterprise Products Partners Earnings Press Release Second Quarter 2023)

Management has long had a robust common unit repurchase program. The repurchase program ensures a distribution increase because less shares outstanding lowers the amount of cash needed for the current distribution.

As a side issue, the conference call indicated that management purchased stock for the compensation programs that the company runs. This is a far more conservative treatment of management compensation than many companies do. Many companies would just issue stock for that part of management compensation.

Now as the need for capital projects increases, this program will likely shrink to accommodate cash needs to capital expansion projects. That makes this program one of the true countercyclical programs available.

So many times, managements repurchase stock at or near market tops and then have little to no cash to repurchase shares when the price of the common units is truly cheap. That is generally not the case in the midstream business. During cyclical upstream downturns, the cash requirements for expansion projects often rapidly declines. The steady earnings of this segment often allow free cash flow to climb considerably. So, the cash becomes available to purchase units at a time when the common unit price is weak.

Key Takeaways

This weak second quarter comparison will likely happen again in the future (sooner or later). But it takes a major commodity price adjustment for this to happen to the extent it did.

Well-run companies like this one are rarely "on sale." But the time to get in is when many fear to get in. That often takes a high level of concentration and persistence.

Enterprise Products Partners Common Unit History And Key Valuation Measures (Seeking Alpha Website August 1, 2023)

Nonetheless, the distribution is still historically very high. That yield shown above is about equal to what most investors report for a long-term profit on their investments. Any growth from capital projects will be "icing on the cake."

The risk of a well-run midstream company like this one (with that rare investment grade rating of the debt) is much lower than upstream. Management has a long history of raising the dividend on an annual basis.

The time to consider purchasing a well-run midstream company is after the release of "bad news" like the current earnings report. Investors can then hang on to the common units (which issue a K-1) until the story changes. The total return from the current price is likely to be in the teens on average for years to come.

I analyze oil and gas companies and related companies like Enterprise Products Partners in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by
Oil & Gas Value Research

Occassionally write articles for Rida Morwa''s High Dividend Opportunities https://seekingalpha.com/author/rida-morwa/research

Occassionally write articles on Tag Oil for the Panick High Yield Report

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of EPD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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