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How This Company Could Profit From the Hidden Side of Natural Gas

Did you know that cheap natural gas could mean you will spend a small fortune for outdoor carpeting? Yes, it's hard to conceptualize, but our manufacturing system connects in ways we can barely imagine. But companies that can see these types of connections can earn big profits -- and that is exactly what Enterprise Products Partners (NYSE: EPD  ) hopes to do in the plastics industry.

Six degrees of manufacturing
The connection between carpets and natural gas is not as convoluted as you might think. The chemical industry relies heavily on many natural-gas liquids as feedstock for finished products like ammonia (used in fertilizers) and ethylene (a building block for plastics and the most widely produced organic compound). Ethylene can also be made from a chemical found in crude oil. When producing ethylene from crude oil, it creates a byproduct called propylene, which is used in paints, detergents, lubricants, foam insulation, and fibers for things like -- you guessed it -- outdoor carpeting.

Because natural gas is so cheap right now, several companies are producing ethylene via natural gas, rather than crude oil. In 2005, ethylene production via natural gas cost about $0.40 per pound. In August of this year, that price had dropped to $0.15. Here are just a few companies that want to take advantage of this and plan to make big moves in ethylene production via natural gas:

  • ExxonMobil (NYSE: XOM  ) recently filed permits to expand its Baytown, Texas ethylene complex. The project hopes to increase production at the facility by around 1.5 million tonnes per year.
  • Westlake Chemical (NYSE: WLK  ) plans to expand the capacity of its ethane-to-ethylene production facility by more than 105,000 tonnes per year. Its expanded facility near Lake Charles, La., will be up to its new capacity in early 2013.
  • LyondellBasell (NYSE: LYB  ) plans to spend more than $500 million on multiple projects to increase ethylene production. The company anticipates it will see an increase of about $250 million to 500 million in EBITDA thanks to both increased production and the cost savings associated with using natural gas.
  • Dow Chemical (NYSE: DOW  ) is investing $4 billion to build a 1.5 million tonne-per-year ethylene plant in Freeport, Texas.

What goes up must come down
The problem with ethylene produced using natural gas is that it yields a much lower amount of propylene. So if we see a huge transition to ethylene production via natural gas, the price of propylene will go up. So, with so many companies looking to make a better profit on ethylene, propylene production is lagging. The United States uses about 33 billion pounds per year of propylene, while domestic supply has shrunk from around 15.2 billion pounds per year in 2006 to 9.4 billion pounds per year in 2012.

This is where Enterprise comes into play. Enterprise is building a propane dehydration plant on Texas' Gulf Coast near Mont Belvieu. Once completed, this plant will be one of the world's largest plants of its kind. Propane dehydration is a chemical process used to directly convert propane to propylene. Not only will the facility help to meet the increasing supply gap for propylene, but it is also strategically located near a major natural-gas-line hub and several other chemical-processing facilities that may have need for propylene. The company expects the facility to come online in Q3 2015.

What a Fool believes
The move toward propylene production could be a lucrative move for the company. Dow Chemical also has plans to build a new direct propylene production plant along the Gulf Coast as well. Clearly, U.S. demand for the product is enough that these new plants will not have to compete in the market.

Some investors in Enterprise may be concerned with additional debt for an already highly leveraged company. To ease those concerns, the company plans to support most of the construction through long-term fee contracts for its other operations. Since the fees are locked in for as much as 15 years, the company can rely on a steady flow of cash without worrying about commodity price risk.

An increase in chemical refining and a focus on products that use petroleum products is, according to Motley Fool analysts Aimee Duffy and Joel South, possibly one of the most lucrative ventures for a company like Enterprise. These two have teamed up on a report outlining how the company has positioned itself to profit from three major upcoming trends in the world of oil, gas, and chemicals. To get your own copy of this report, click here.

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  • Report this Comment On December 05, 2012, at 2:33 PM, TheHeadhunter wrote:

    So what do you make of the steady drop in EPD's price? I've ridden it up over 50%, now my gains are at 37. Considering cashing out and getting back in later to protect my profits. Long term, I agree with you. So what would you do? (I also hold ETE for same reasons -- thinking about shifting to that for the time being.) Thanks!

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