Energy Transfer Partners' (NYSE: ETP ) stock hasn't done too well in recent years. In fact, over the past three years, it has returned next to nothing. Not surprisingly, the partnership hasn't raised its distribution since 2008.
But, the company appears poised for a dramatic turnaround. As recent acquisitions and growth projects starts to become accretive to cash flow, ETP should finally be able to raise its distribution and the company's stock should follow suit.
One play in particular – the Eagle Ford Shale, a highly prolific oil and gas play in western Texas – should prove to be especially beneficial for the company. Recently, both ETP and its partner Regency Energy Partners (NYSE: RGP ) have focused intensely on expanding capacity in the play, which continues to see high demand.
As the effect of new capacity coming online in the play is felt, cash flow from ETP's natural gas liquids, or NGL, transportation and services business should rise substantially. Let's take a closer look.
The Eagle Ford
The Eagle Ford Shale is an oil and gas play within the Texas Maverick basin that is estimated to contain some 3.35 billion barrels of technically recoverable reserves. While production in the Eagle Ford currently trails production in the Bakken, some expect its output to grow faster than the Bakken's because of the comparative ease in adding takeaway pipeline capacity to transport the play's crude oil to refineries in Texas and Louisiana.
The Eagle Ford, which benefits from some of the best economics available among onshore plays, boasts a high carbonate content that is well-suited for hydraulic fracturing. Average well costs, at around $8 million per horizontal well during 2010-2011, are also markedly lower than well costs in the Bakken.
In the third quarter of this year, Eagle Ford output nearly doubled, reaching 40,000 net barrels of oil equivalent per day, up from 21,000 in the second quarter. Much of the production volume – roughly 65% – consisted of crude oil and condensate, which are much more profitable than dry natural gas in the current environment. According to projections by Citigroup analysts, Eagle Ford output could soar to as high as 1 million barrels per day before the close of the decade.
Eagle Ford in high demand
This has drawn a bevy of energy producers into the region. For instance, Marathon Oil (NYSE: MRO ) recently announced its plans to devote a significant portion of its $5.2 billion capital budget for next year to expanding its operations in the Eagle Ford.
Some of the largest leaseholders in the play include heavyweights like Chesapeake Energy (NYSE: CHK ) , EOG Resources (NYSE: EOG ) , and Apache Corp (NYSE: APA ) , as well as smaller operators like Newfield Exploration (NYSE: NFX ) and Pioneer Natural Resources (NYSE: PXD ) .
In addition, several energy companies are rushing to start production in the area in order to protect their leases. Mineral leases in the Eagle Ford, many of which were signed in 2009 and 2010, typically expire within three years. Hence, if companies don't start drilling soon, they may lose their right to do so.
ETP's projects serving the Eagle Ford
Back in February, ETP announced plans to expand its main pipeline – the Rich Eagle Ford Mainline, or REM – that serves the region. The company also announced that, in concert with Regency Energy Partners through their partnership Lone Star NGL, it is building an additional fractionation facility at Mont Belvieu in Texas. The facility, expected to cost about $350 million, will service operations in the Eagle Ford Shale, the Permian Basin, and the Woodford Shale.
In the company's most recent conference call, management indicated that phase 2 of the REM went into service in the third quarter and that the West Texas Gateway Pipeline and the first Mont Belvieu fractionator should go into service this month, ahead of the previously announced time line.
The Mont Belvieu fractionator should have a 100,000 barrel per day capacity and is intended to serve growing demand from liquids plays in Texas and Oklahoma. An additional fractionation plant is also in the works and should be wrapped up by early 2014. The new facility has already secured long-term contracts and is part of a growing effort to support energy production in the prolific Eagle Ford region.
ETP has invested a substantial amount of capital in Eagle Ford-related projects as part of a major effort toward improving takeaway capacity in the prolific play. For instance, the bulk of the company's growth capital expenditures in the third quarter, which totaled $583 million, went toward projects servicing the Eagle Ford, as well as NGL pipeline and fractionation ventures undertaken by Lone Star.
The benefits of increased production from the Eagle Ford were clearly evident in the company's third-quarter results. For instance, increased production from the Eagle Ford, which resulted in higher unit volumes at the company's La Grange and Chisholm plants, contributed to a $20 million increase in ETP's fee-based margin over the prior year.
Growing production in the Eagle Ford Shale was also chiefly responsible for a substantial improvement in the company's NGL volumes. In its NGL transportation and services segments, NGL transportation volumes averaged 174,000 barrels per day, representing a 31% increase from the year-earlier period. Looking ahead, ETP's exposure to this in-demand play should continue to result in higher volumes and cash flow, which should allow the partnership to finally raise its distribution next year.
The surge in oil and natural gas production from hydraulic fracturing and horizontal drilling is creating massive bottlenecks in takeaway capacity. However, this problem for producers creates a massive and immensely profitable opportunity for midstream companies. Energy Transfer Partners helps alleviate the gluts in supply with 23,500 miles of transformational pipelines. To see if ETP and its industry-leading yield will be a fit for you, click on this detailed premium report, which will supply you with a thorough analysis of this attractive midstream.