Enterprise Products Partners L.P. Show Why Being a First-Mover Matters

With Boardwalk Pipeline Partners, LP and Williams Companies, Inc. halting investment on the Bluegrass Pipeline project, Enterprise Products Partners emerges as the clear winner.

May 2, 2014 at 10:31AM
 Pipeline Construction Texas

Photo credit: Flickr/Ray Bodden

We typically don't think innovation when it comes to pipeline companies. Being a first-mover isn't always an advantage because the oil and gas play might not develop as expected, which could impact returns. That being said, Enterprise Products Partners (NYSE:EPD) has won big by being the first-mover on a number of innovative pipeline and logistic projects, which is turning out to be an enormous competitive advantage for the company.

Building while others watch
Enterprise Products Partners' was the first company to consider building a natural gas liquids pipeline from the Marcellus and Utica shale plays to the Gulf Coast petrochemical hub. The company completed its ATEX Express pipeline earlier this year and its now flowing liquids to the Gulf Coast.

Some of its competitors decided that Enterprise Products Partners had a pretty good idea and decided to follow with a similar project. Boardwalk Pipeline Partners (NYSE:BWP) and Williams Companies (NYSE:WMB) teamed up to form a joint venture to build the Bluegrass Pipeline project, which in theory was a great idea given the massive amount of natural gas liquids projected to be produced out of the liquids rich shale plays of Appalachia. Just take a look at the following chart showing the expected surge in NGL production over the next few years.

Boardwalk Pipeline Partners Ngl

Source: Boardwalk Pipeline Partners Investor Presentation (Link opens a PDF)

There's just one problem: Demand for the shipping capacity was weaker than expected. Williams Companies noted that it lacked the firm customer commitments needed to support the project. Because of that Boardwalk Pipeline Partners and Williams Companies decided to halt further investments on the Bluegrass Pipeline project.

This is just one of many examples where Enterprise Products Partners was the first to build what is likely to be a very lucrative project before anyone else can compete for customers. It did it with propane export facilities and now Enterprise Products Partners has single-handedly made America the world's top propane exporter. It's looking to do the same for ethane exports. Meanwhile, competitors like Boardwalk Pipeline Partners and Williams Companies are just trying match what Enterprise Products Partners has already done, but failing to keep up.

Why this matters to investors
By being first to market Enterprise Products Partners is already earning a return on its investment to build the ATEX Express Pipeline. Meanwhile Boardwalk Pipeline Partners and Williams Companies might never see a dime in return on what has already been spent on the Bluegrass Pipeline project. That incremental return, when compounded over the many projects where Enterprise Product Partners is the first mover adds up.

Pipeline Construction

Photo credit: Flickr/Vicki watkins

Not only that but Enterprise Products Partners will have already secured a longer duration relationship with its customers. Because of that, as these customers need additional pipeline takeaway capacity in the future they could choose to ask Enterprise Products Partners to expand the ATEX Express instead of signing on to join a competing project, such as the a project from Boardwalk Pipeline Partners and Williams Companies, knowing it might never be built. Further, if these companies need processing capacity or export capacity, the likelihood is that they'll ask Enterprise Products Partners to build that capacity, given the long-standing relationship already in place. That incremental revenue opportunity is what yields long-term outperformance. 

Investor takeaway
Boardwalk Pipeline Partners and Williams Companies could still build the Bluegrass Pipeline. But it will be a long time before either sees a return on that investment. Meanwhile, Enterprise Products Partners investors are already seeing the dividends from the company's decision to be a first-mover and could see incremental benefits as current customers ask Enterprise to keep building on their behalf.

The secret to the success of Enterprise Products Partners
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Matt DiLallo owns shares of Enterprise Products Partners L.P.. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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