While Enterprise Products Partners (EPD 0.18%) may not have suffered as much as other companies in the oil and gas industry lately, it did nonetheless suffer. For several quarters, the company has been able to keep its earnings steady by bringing new projects online to offset lower volumes and lower contract prices on some of its assets. With 2016 in the rearview mirror, management has a much brighter outlook for 2017. Here are several quotes that Enterprise investors should consider when looking at the midstream giant and what we can expect for the coming year and beyond.
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Building out the growth pipeline
Perhaps the biggest knock on Enterprise from an investor standpoint is that its announced growth pipeline always looks smaller than others' in the industry. Part of that is because the company only announces projects once they start construction rather than announcing everything it has in the works. As part of this strategy, CEO Jim Teague highlighted some of the new assets the company brought online over the past year, and announced some of its newer projects:
The area of growth projects during 2016, we successfully completed $2.2 billion of projects, including two new cryo plants in the Delaware Basin and our ethane export terminal on the Ship Channel. In addition, we were successful in developing organic growth projects throughout this part of the cycle. Including our isobutane dehydrogenation or iBDH project that we announced this morning, we now have approximately $6.7 billion of growth capital projects under construction that would be completed between now and 2019. Our largest project, PDH at our Mont Belvieu complex, is expected to begin commercial operations midyear. And due to the increase in activity and expected crude oil volume growth from the Permian, we have decided to commission our Midland ECHO pipeline at its full capacity of 450,000 barrels per day. We remain focused on organic projects, but more importantly, we remain focused on both the supply and demand side of the equations in order to enhance our entire value chain.
General outlook is improving
2016 was a tough year for everyone in the oil and gas business -- even the more stable parts of the business like logistics. While we haven't seen a complete turnaround, Teague was quick to point out that the industry as a whole has a lot more optimism behind it, as evidenced by some of the things happening in the oil patch today:
Today, industry sentiment is 180 degrees where it was this time last year. Crude oil, natural gas, and [natural gas liquids] prices have recovered substantially. Costs have followed. Rig counts and rig efficiencies continue to improve. Producers are increasing rather than decreasing their budgets and production is headed in the right direction. We believe the news is especially good for U.S. oil and gas.
Everyone is watching the U.S. because they understand that we are the growth barrel. As painful as it has been, this downturn has proved the special qualities of the U.S. oil and gas industry and proved its staying power. Now the news is either cautioning that U.S. shale might grow too quickly or questioning whether the U.S. can grow enough to meet growing global demand. Our resources are plentiful and they are competitively priced. They're extremely short cycle. And last but not least, they are risk-free in so many ways.
The Permian Basin isn't the only place where oil and gas activity is growing
All the talk about the return of shale drilling in the U.S. has been about the Permian Basin, and deservedly so. The economics of wells in this region coupled with the proximity to the U.S. Gulf Coast and its massive petrochemical infrastructure makes it an easy place to work. But this isn't the only place where oil and gas activity has picked back up. Senior Vice President Tony Chovanec went out of his way to highlight some of the trends happening in the Eagle Ford shale:
[W]e think the Eagle Ford is a sleeper that people aren't paying attention to. And I'll tell you what we like about what we see in the Eagle Ford. One is rig counts are up substantially and people don't realize that they've moved significantly off of their low and continue to add two to five a week. The other thing that's going on in the Eagle Ford that is missed on many people is it's beginning to participate in its own stacks. And what I mean by that is people aren't just drilling the Eagle Ford there anymore. They're also mostly drilling the Austin Chalk. So we like what we see with -- in the Eagle Ford. Our breakevens in the primaries in the Eagle Ford are competitive with the Permian as we run our half cycle economics. The other thing we're -- the last thing we're seeing in the Eagle Ford is we're seeing smaller players come in. So we think the Eagle Ford is going to be an area where you're going to go from a couple of handfuls of very large players to smaller players, which is really opposite of what's happening in the Permian.
It's worth noting that Enterprise may be a little biased in this regard since it has made some major capital investments into the Eagle Ford, so investors should take that statement with a grain of salt.
Expect a lag
All this optimism around the oil and gas industry is going to get some people interested in this part of the oil and gas value chain again. One thing that Teague wanted to remind everyone, though, is that they shouldn't expect an immediate upturn with the price of oil:
[I]n terms of are we optimistic about 2017, I don't know. What's the difference between optimistic and hopeful? We see the first half of 2017 as continuing to have its challenges. Even though rig count is going up, we're going to lag that from a throughput perspective. Overall though, I think we do feel more optimistic on 2017 definitely than 2016.
This is simply a matter of knowing the industry dynamic. It takes at least 15 to 20 days from when a drill is on site at a drilling location, then there is the work to tie that well into existing infrastructure. Investors need to consider those things in the timeline because it means all of this new drilling activity won't likely result in bottom-line results for Enterprise for a few quarters at a minimum.
Our model works
Imitation is the sincerest form of flattery, and several companies in this industry are complimenting Enterprise by replicating its corporate structure. One of the reasons other companies are doing this is to lower their cost of capital and be more competitive. When asked if other companies replicating Enterprise's structure is making it harder to do deals because it's more competitive, CFO Bryan Bulawa pointed out that it takes more than just the same corporate structure to be good in this business:
They're all, as you know, they're restructuring to get closer to us from a perspective of a cost of capital perspective so we remain very competitive. Probably you haven't seen us incredibly active in these last transactions as one of the key elements, but you know to our long-term success has been remaining disciplined, and we continue to do so.
Currently, Enterprise's weighted average cost of capital is 7.61%, the lowest among publicly traded MLPs. Some companies that have the general partner/limited partner corporate structures have a lower WACC at the parent level, but it's higher at subsidiary level where projects eventually end up. Part of this advantage goes back to the original gripe from investors that it doesn't have a massive project backlog. By remaining disciplined with its capital spend, it is able to hang onto many of these advantages.
