25 Apr

Did Commodity Prices Affect Enterprise Products’ Q1 Results?

WRITTEN BY Rekha Khandelwal, CFA

EPD’s commodity price exposure

In 2018, 86% of Enterprise Products Partners’ (EPD) gross operating margin was derived from fee-based contracts. Such contracts have no exposure to commodity prices, especially short-term price fluctuations.

Around 6% of Enterprise Products Partners’ gross operating margin was commodity based in the period. The company’s commodity-based activities include gas-processing percentage-of-proceeds contracts, condensate sales, and certain gas-gathering and marketing activity.

Did Commodity Prices Affect Enterprise Products’ Q1 Results?

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Under percentage-of-proceeds contracts, a company gathers and processes natural gas on behalf of producer customers. The residual gas and NGLs (natural gas liquids) produced from the processing are sold on the market. The midstream company then remits an agreed-upon percentage of these proceeds to the producer and retains the remaining proceeds. The midstream company is therefore exposed to commodity price risk under such contracts.

Commodity prices in the first quarter

Natural gas prices averaged $2.92 per MMBtu (million British thermal units) in the first quarter compared to $3.77 per MMBtu in the fourth quarter of 2018 and $3.08 per MMBtu in the first quarter of 2018. Similarly, even though crude oil prices rose ~32% in the first quarter, they averaged lower during the quarter than in the fourth quarter of 2018 and the first quarter of 2018. Enterprise Products Partners’ commodity-price-sensitive earnings likely fell during the quarter. However, because these earnings form a very small percentage of the company’s total earnings, the fall is likely to be more than offset by a rise in its fee-based earnings from higher volumes.

Around 8% of Enterprise Products’ 2018 margin was differential based. Differential-based margins include margins earned based on location, time, or product spreads. These may vary based on the changes in differentials.

ONEOK (OKE) is scheduled to report its earnings results on April 30, and Plains All American Pipeline (PAA) is scheduled to release its earnings results on May 7. Magellan Midstream Partners (MMP) is scheduled to report its results on May 1.

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