Analyst Note| Stephen Ellis |
Enterprise Products Partners reported a solid second quarter, as key volume metrics are now approaching 2019 levels in many cases and are already at record volumes elsewhere. Liquids pipelines, natural gas pipelines, natural gas liquids fractionation, and liquids marine terminal volumes are very close to or at 2019 volume levels, while petrochemical volumes are at record levels. After updating our model, we are maintaining our $25.50 fair value estimate and wide moat rating.
The drivers of Enterprise’s business have shifted from storage profits to volumes with petrochemicals leading the way. Gross operating margins only increased slightly to $2.1 billion from $2 billion last year, primarily due to ongoing strength in the propylene business offset mainly by lower marketing contributions. Materially lower marketing contributions due to the absence of Winter Uri contributions also led to the quarter-over quarter decline. With the volume recoveries, Enterprise is now considering new projects, and while none of them have been sanctioned yet, 2022 growth capital spending is likely to increase from the current projected $800 million to between $1 billion and $1.4 billion by our estimates. Medium- and long-term growth capital spending is now expected be at a midpoint of $1.75 billion.
We estimate free cash flow after distributions to unitholders to be around $735 million so far this year, putting the partnership on track to generate over $1 billion in excess cash flows this year. At least part of that is now expected to be allocated toward unit buybacks, as management expects to buy back $200 million in units in the second half of the year. With the expected increase in growth capital spending next year, free cash flow after distributions should decline. However, as Enterprise’s leverage is at very reasonable levels, we still forecast there could be over $1 billion in cash available for further unit buybacks.