While some in the energy business are talking pullback, Enterprise Products Partners (EPP) is looking toward 2009 as potentially offering opportunities for acquisitions with realistic price tags, as rivals struggle with the impact of fallen credit and equity markets, and expected multiples drop.
While EPP is not actually looking at specific acquisitions right now, next year "we do think that companies are going to get more rational in valuing acquisitions. Certainly, the proliferation of MLPs that had access to easy capital in the past are not going to be as big players," Enterprise CEO Michael A. Creel told analysts in an earnings conference call last Thursday.
Creel said that rather than the 10 to 12, or even 14 times EBITDA (earnings before interest taxes depreciation and amortization) that has prevailed in the past, "right now in today's capital market you might be looking at five times EBITDA. When the markets come back and you might reasonably have access to the capital market, it might be something like eight times.
"This could be the kind of market opportunity we haven't seen in a number of years," Creel said, indicating the company has seen signs last week and this week of some life in the capital markets. Enterprise's balance sheet and revenue stream puts it in a more favorable position than some of the potential competition for acquisitions.
As an MLP the company has "financial flexibility" since it can retain some cash flow and not rely on the capital markets, where other companies may have difficulty funding growth. Creel stressed they would only consider something "that has benefit to the company's value chain, not just something that makes us bigger." Enterprise also has internally developing projects in all its business segments, which it can pursue if it seems appropriate.
"If the capital markets come back in 2009, which we fully expect they will...in fact, we've already seen signs of that...we frankly have several billion dollars worth of projects in the wings that we can select from. So we have the ability to ramp up our capital spending, but we want to do it within the bounds of our financial means." Creel said the company is committed to $700 to $750 million in capital spending for on-going projects. "We can slow down some of those if we need to, but frankly we have the resources to handle that with no problem."
EPP reported strong third quarter results with a 72% increase in net income to $203 million in third quarter 2008, and despite hurricane effects increased the partnership's quarterly cash distribution rate to $0.5225 per unit, a 6.6% increase over the $0.49/unite rate for the same period last year. Quarterly cash flow was 1.2 times coverage of the distribution to limited partners.
"Enterprise's broad geographic and business diversification was highlighted by the partnership's strong operating and earnings performance in the third quarter of 2008 despite two major hurricanes impacting our Gulf of Mexico and Gulf Coast operations. The partnership's results were driven by our diversified NGL [natural gas liquids] and natural gas pipeline and storage businesses," Creel said.
Going forward the company is looking to increased revenues from three large capital growth projects, which are expected to be completed in the next four months. Company executives also stressed that because of the protections in their gathering and processing contract structure they expect revenues from current operations to continue apace.
The new projects are the 750 MMcf/d expansion of its Meeker natural gas processing plant and the completion of the 200 MMcf/d Exxon central treating facility in the growing Piceance Basin and the 1.1 Bcf/d Sherman Extension expansion to its Texas Intrastate natural gas pipeline system serving the Barnett Shale area.
"We have also taken actions to lock in the costs for a significant amount of the steel and the pumps and turbines for the Texas Offshore Port and Pipeline System. We currently expect our growth capital expenditure program for 2009 to be approximately $700 to $800 million for committed projects,said Creel.
Creel said that in prioritizing the development of growth capital projects based on relative return and business risk, the company had withdrawn from the Pathfinder natural gas pipeline project. "While we believe the Pathfinder pipeline may be an attractive pipeline solution out of the Rockies, we have several other projects under consideration that we believe could provide better returns on investment along with additional value chain profit opportunities."
Enterprise and Quicksilver Gas Services initially had signed a memorandum of understanding with TransCanada Corp. to develop and take capacity in the Pathfinder Pipeline with service from Meeker, CO, to the Northern Border Pipeline Co. system in North Dakota (see NGI, May 19). TransCanada subsequently bought the Bison Pipeline project, which has a similar route and would potentially connect with Pathfinder, from Northern Border (see NGI, Sept. 8). A spokesperson said Enterprise opted not to continue with the project, opting for other development projects offering it better returns.
Enterprise's revenue for 3Q2008 increased 53% to $6.3 billion from $4.1 billion in the same quarter of 2007. Gross operating margin increased 32% to $479 million compared to $364 million for the third quarter of last year. Operating income was $319 million for the third quarter of 2008, a 51% increase over the $211 million of operating income in 3Q2007. EBITDA for 3Q2008 increased 33% to a record $454 million from $341 million a year ago. Gross operating margin, operating income and EBITDA for the third quarter of 2008 were each reduced by the approximately $89 million from the charges and estimated lost business associated with hurricanes Gustav and Ike.
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