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Morningstar | Enterprise's 2Q Surge in NGL and Oil Volumes Reaffirms Export Leadership Opportunity

For all of the investor angst over the master limited partnership structure, Enterprise Products Partners' second quarter should be a pointed reminder that midstream fundamentals are very strong and Enterprise Products Partners remains best in class. The partnership reported a strong second quarter amid a significant surge in natural gas liquids and oil volumes and set a variety of operational and financial records. NGL volumes were up 11% to 3.4 million barrels per day, crude oil volumes increased 40% to 2.1 million bpd, and crude oil marine terminal volumes leaped 64% to 802,000 bpd. Overall EBITDA improved 32% to $1.8 billion. We plan to boost our 2018 estimates modestly, but don't expect a material change in our recently raised $32.50 fair value estimate or wide moat rating. We still consider units to be undervalued as investors continue to underappreciate the significant increase in U.S. NGL production and exports over the next few years.

We are very pleased with Enterprise's NGL segment performance where gross operating margin increased 20% to $914 million. Higher NGL volumes certainly contributed, thanks to contributions from Permian pipelines, improved processing volumes, higher ethane volumes on the ATEX pipeline, and a more than doubling of ethane export volumes to 169,000 bpd from Enterprise's Morgan Point ethane export terminal. Presently, we believe Enterprise Products Partners has the only major ethane export terminal active on the Gulf Coast and has more capacity under construction. We expect U.S. ethane export volumes to increase to nearly 1 million bpd by 2022, and Enterprise could export more than 600,000 bpd, representing a more than tripling of volumes.

The crude oil segment also did very well, with adjusted gross operating margin by our estimates up to $391 million from $252 million. Unadjusted results were affected by mark-to-market losses based on hedges for the Midland-to-ECHO pipeline, which were affected by the widening of the spreads between Midland to Houston. These losses will reverse as the physical volumes are delivered. The segment benefited from significantly higher crude oil volumes, which we believe was due to higher production from the Permian, as well as an increase in marine terminal export volumes.

Enterprise remains the leader in the crude oil export opportunity, in our view. By the end of July, the Seaway terminal loaded its first two very large crude carrier vessels, or VLCCs. The ability to load the more efficient VLCCs (capacity of up to 2 million barrels) at Seaway is a meaningful differentiator. For example, Magellan's recent Seabrook Logistics expansion will only be able to handle Suezmax-class vessels (about 1 million barrels) when complete in 2019, making Enterprise's terminal much more economically attractive. Even some of the most aggressive projects under consideration by 2022 only have around 45 feet in water depth versus the 72 feet required for VLCCs. Enterprise also recently added fueling capabilities to its Houston Ship Channel export facility, allowing ships to fuel as they load and offload product, saving time and money.

Finally, the partnership announced that it plans to develop an offshore crude oil export terminal with the capacity to export 2 million bpd that would also be able to handle VLCCs given water depths of over 100 feet. Currently, there is only one offshore terminal, LOOP, able to handle VLCCs, but it has limited connection opportunities to the Permian, whereas the underdevelopment terminal would be more likely to have direct connections to the Permian. Enterprise's Houston-area asset base can aggregate over 4 million bpd of crude oil, meaning it can easily supply the bulk of the export barrels needed for new facility.

We're also happy to see the long-delayed propane dehydrogenation plant finally start up in April 2018. The plant start-up contributed to a more than doubling of gross operating margin to $127 million for the petrochemicals segment. We think the plant provides a natural hedge against its NGL operations by letting it take advantage of low-price U.S. propane sourced by its asset network.

From a financial perspective, investors should have few complaints. Distributable cash flow was $1.4 billion, up from $1.05 billion last year, providing a coverage ratio of 1.5 times, and nearly $500 million in available cash for funding capital efforts. Somewhat unusually, the Duncan family has indicated that they plan to purchase $106 million of Enterprise units with the August distribution, whereas in the recent past, they had only purchased units as part of the fourth-quarter distribution, which we think demonstrates that the Duncan family sees the units as undervalued. Annualized debt/EBITDA is about 3.7 times by our estimates, providing the partnership with plenty of funding options for existing $5.2 billion in growth projects under construction.

For more on our NGL forecast, please see our July Energy Observer "The Natural Gas Liquids Rubik's Cube Solved."