If you build it, they will come. At least that's what Enterprise Product Partners (EPD 0.48%)would say about its ability to line up customers for its new propane dehydrogenation (PDH) facility. The company recently announced it had sold out its capacity and is looking at building second facility.
The first facility is scheduled to begin operations on the third quarter of 2015. It will consume up to 35,000 barrels per day of propane to produce 1.65 billion pounds of polymer grade propylene per year. Enterprise was able to secure fee-based contracts which have an average term of over 15 years for the facility.
The company sees potential for more as demand for the remaining capacity was strong. That demand, according to COO A.J. "Jim" Teague, is "[being] driven by the combination of a 38 percent decrease in propylene supplies since 2006 due to additional ethane consumption by U.S. petrochemical companies and the growing supplies of domestic propane from the U.S. shale plays."
Investors should take note that Enterprises' PDH unit could be part of the new trend in petrochemicals to have the assets owned by a limited partnership. Back in October the IRS ruled to allow companies that convert ethane and other natural gas liquids into olefins to be classified into partnerships. This could provide a boost to companies like Westlake Chemical (WLK 0.36%) and Dow Chemical (DOW) which could convert olefin units into partnerships. Not only would those companies enjoy the tax benefits, but such a restructuring would unlock value as investors typically assign higher equity valuations to MLP's.
Petrochemical industry profits should keep climbing as ethylene demand is expected to continue to outpace supply through 2016. That's one reason why Dow Chemical is investing billions of dollars to build an ethane cracker to take advantage of cheap domestic feedstock from shale gas. While the company is less likely to create an MLP structure, it is something to watch.
Westlake on the other hand is more likely to pursue an MLP-type structure. The company derives a majority of its earnings from U.S.-based ethylene cracking. However, it'll be a while before the company makes a decision on the matter. On the company's third-quarter conference call CEO Albert Chao said:
We look for avenues to grow our business and enhance our shareholders' value, and the consideration of an MLP structure is no exception. This is a complex area. It'll take some time to evaluate the merits of an MLP structure for some of our assets. We'll certainly assess the merits of an MLP structure, along with other activities that we see will create shareholder value.
This is a longer-term trend to keep an eye on. In the near term, we're not likely not see a petrochemical company convert into a partnership, and it's a stretch that we ever will. Instead, midstream partnerships like Enterprise have found another avenue to grow. While the company has stated that it's not likely to build its own ethane cracker, it is looking to earn more revenue from the demand side and another PDH unit is another important step for the company. More growth will likely mean higher distributions for its unit holders, which makes this trend all the more interesting as it continues to unfold.
