Enterprise Products Earnings: Petrochemicals Outperforms Amid Softness Elsewhere

Enterprise’s EPD first-quarter results largely met our expectations, as unexpected strength in the petrochemicals unit was offset by weak natural gas liquids marketing contributions. The weaker marketing profits were anticipated as the spreads materially narrowed beginning in late 2022. Overall EBITDA was up slightly to $2.3 billion from $2.26 billion last year. With the partnership still on track to meet our full-year expectations of $9.2 billion in EBITDA, we will leave our $27.50 fair value estimate and wide moat rating unchanged.

The petrochemicals outperformance was unexpected, as we expected the LPG market to be weaker in the first half of 2023. The primary factors driving this forecast were faster-than-expected supply growth in the U.S., weaker Chinese demand due to COVID-19 lockdowns, and general inventory destocking among petrochemicals players amid a more uncertain economic environment. Enterprise had previously flagged a six- to nine-month timeframe before the market would recover perhaps in the second half of 2023. Part of the difference appears to be reduced supply, as several propane dehydrogenation plants were unexpectedly offline during the quarter. On the demand side, China appears to have recovered quicker than expected on the LPG demand front by starting up several plants and running them hard, though it may very well be a timing issue with future quarterly demand dropping off a bit.

Enterprise has left the days of very modest distribution increases in the past, as its business and excess cash flow has increased over the past few years. Instead of relatively small 2%-3% increases, investors should be prepared to see more increases of 5%-6% regularly, like this quarter’s 5.4% increase. We think this is supportable given the substantial cash thrown off the business after paying capital spending and distributions.