Enterprise Still Attractive While Waiting for Recovery

Enterprise Products Partners EPD reported solid third-quarter results, with gross operating margin remaining essentially flat sequentially at $2 billion. Petrochemicals was, in our view, the bright spot this quarter, as gross operating margin increased to $315 million from $192 million sequentially, thanks to wider propylene spreads and refined products contango opportunities captured by storage. Record natural gas liquids fractionation volumes, benefiting from the startup of two fractionators during 2020 also helped offset lower volumes and margins from gathering and processing assets in the Rockies, South Texas, and Haynesville, as well as crude oil pipelines.

We have slightly increased our 2020 and 2021 forecasts to reflect a better-than-expected recovery to current volume and margin levels. However, we think further volume and margin improvement from current levels is challenging, as U.S. producers are pledging to either hold supply flat or very small increases. The increase was not enough to change our fair value estimate, and our fair value estimate of $25.50 and wide moat ratings are unchanged.

Enterprise is not quite benefiting from the 50% surge in Rockies volumes from second-quarter lows to October 2020 averages, that peer Oneok did, given Enterprise's far more diversified footprint. Total pipeline volumes on an equivalent basis were 9.5 million bpd in the third quarter compared with 9.6 million bpd last quarter, and still below pre-COVID-19 volumes of 10.4 million bpd reported in the fourth quarter of 2019. However, the partnership's efforts in terms of reducing costs (year-to-date operating costs are $260 million below management's budget), capital reductions ($1.5 billion eliminated from 2020 and 2021 forecasts), and contributions from its spread-based storage businesses have helped keep financial results fairly steady.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.