Enterprise Resilient in a Brutal Environment
Diversity of operations cushions results.
Enterprise Products Partners (EPD) reported a solid second quarter in a brutal energy environment. After updating our model, we will maintain our $25.50 fair value estimate and wide moat rating. The diversity of Enterprise's operations across basins, hydrocarbons, and the midstream value chain helped cushion the partnership's results, as gross operating margin fell only $50 million sequentially to $2 billion. Similarly, EBITDA fell by a bit more—over $100 million—to $1.96 billion, but this was within our expectations, as our full-year forecast of $7.75 billion remains unchanged after our updates.
The focus remains on protecting the balance sheet, while prudently allocating capital. Current liquidity is $7.3 billion, made up of a $6 billion credit facility and $1.3 billion in cash on hand, and adjusted debt/EBITDA is about 3.4 times, which we consider prudent. Capital spending forecasts continued to decline for 2021 and 2022, falling to $3.3 billion from $4 billion in the prior quarter, as projects are deferred and canceled due to weak economics. The bulk of the spending is just three projects: PDH 2, Midland-to-ECHO 4, and a natural gas pipeline. We still consider the units to be deeply undervalued and note that Enterprise has expressed a willingness to devote more than 2% of its operating cash flow to buybacks this year if opportunities arise. Eighty-eight percent of the business remains fee-based.
Enterprise has already seen some recovery in volumes across its operations. U.S. refining is operating at about 80% utilization, up from 68% in April, helping Enterprise's petrochemical operations. Natural gas processing and natural gas liquids are between 88% and 98% of March 2020 activity levels, while fractionation and NGL pipelines have already exceeded March lows. Crude-oil volume remains the weakest area, as crude pipeline volumes are about 20% below March levels.
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Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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