Last quarter was the breakout quarter that Enterprise Products Partners' (EPD 1.08%) investors were waiting for. Through the commodity downturn, the company brought several billion dollars worth of projects on line, only to produce flat results as throughput volumes of existing assets declined. With oil and gas production back on the rebound -- for now -- Enterprise is benefiting immensely; and management wants investors to know there is much more to come.
Here is a selection of quotes from the company's most recent conference call that highlight how management is approaching the current market, where it sees its growth opportunities, and what investors can expect in the coming years.
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Big surge in demand on the horizon
Thanks to the development of shale gas in the U.S., there has been a wave of investments related to monetizing that stuff. Up until now, we haven't felt the impact of those investments because they have taken so long to build. A great example is Cheniere Energy's Sabine Pass LNG export terminal, which is still only halfway complete with phase one construction. According to Enterprise's CEO Jim Teague, many of those investments are coming on stream, and it will likely result in a massive uplift in demand.
As demand to oriented projects, such as ethylene plants, power generation and LNG exports began to come online, we believe the U.S. is entering into a period of strong demand growth. While many companies have been busy trying to weather the storm over the last 2 years, we positioned ourselves for the demand phase of the cycle, and are set to benefit from the demand increases that are coming for U.S. hydrocarbons.
You have to give Enterprise credit for its strategy during the downturn. Rather than scaling back investments to conserve capital, it continued to add new projects to the queue and has introduced new markets for U.S. hydrocarbons such as propane & ethane exports. As demand picks back up, Enterprise's system will be well suited to meet it.
The Permian Basin continues to be a powerhouse
It's no secret that the Permian Basin in West Texas continues to be the premier oil producing region in the U.S. At the same time, though, natural gas liquids (NGLs) have become a major drilling byproduct. NGLs are Enterprise's specialty, and the company is looking to use the Permian as its next phase of growth. Here's Teague on some of the recent investments in the region.
[W]e recently announced the major NGL pipeline, our Shin Oak pipeline. The pipeline will have an initial capacity of 250,000 barrels a day, but it's expandable to 600,000 barrels a day. We expect that in service in the first half of 2019. This pipe adds to our west to east NGL pipelines and moving NGLs to our fractionation storage distribution and export systems in Mont Belvieu. We recently added two new processing plants in the Permian, and have a third, our Orla plant, under construction. And frankly, we expect to add more processing in that basin, as our forecast indicate that additional gas processing will be needed. We have put them under construction to support all of these liquids, which is expected to be up and running in the first half of next year. Our Midland-to-Sealy crude pipeline is currently under construction, with an expected in-service date late this year, ramping up to full capacity early next year.
Buy or build?
One analyst followed up with management on Permian activity and wondered if the company was considering making some acquisitions in the area. After all, the Permian has been an oil producing region for close to 100 years, and there is a lot of infrastructures already there. According to Teague, though, the economics for Permian projects is still very much on the side of newbuilds and capacity expansion.
We've got a plenty of capacity to handle it without doing a heck of a lot in the Permian. We found that it's more economical to build than to get caught up in the frenzy of paying half premiums for existing assets.
Free upside in formerly struggling markets
Of course, the Permian Basin isn't the only place where Enterprise has assets. One worry is that assets in these slightly less economic regions such as the Haynesville shale or Eagle Ford may not be producing the returns some had hoped a few years ago. Looking to ease those concerns, Teague mentioned the progress they have seen in the Haynesville shale...
With this increased level of activity, volumes and our gathering systems are increasing rapidly. In fact, by year end, we project that our state line system in North Louisiana could exceed our peak volumes of 0.5 Bcf hit back in 2011.
... and in the Eagle Ford
While rig count increases won't instantaneously bring incremental volumes, we project that Eagle Ford production is now stabilizing and will soon begin to grow. As Eagle Ford production grows, we have the capacity in our existing assets, so increased production mean cash flows upside.
The key here is that, unlike the Permian where lots of additional construction is needed to meet growing demand, Enterprise already has significant assets in the region that are currently under-utilized. There aren't a lot of variable costs when it comes to operating pipelines, so bringing those assets back up to capacity should flow directly to the bottom line.
Feeding the beast
A couple of months ago, ExxonMobil announced a joint venture with Saudi Arabian chemical company SABIC to build an ethane steam cracker in Corpus Christi, Texas. This $10 billion new facility will produce about 1.8 million tons of ethylene -- a base product for manufacturing petrochemicals. According to Teague, Enterprise will want to be a supplier of this project.
If they build that monster, we're certainly going to be in there pitching the system to supply it. If you look at -- we say it a lot, but we're -- for NGLs, we're tied to every ethylene plant in the United States. We're very proud of that, and we're not going to let an ethylene plant come online that we don't have some kind of access to.
With sizable assets in the Eagle Ford shale already -- the closest oil and gas producing region to the plant -- Enterprise does have a leg up on supplying the facility. Based on its size, though, Teague said Enterprise would have to add some significant infrastructure to supply the facility adequately.
This is just another investment opportunity that Enterprise has in the Texas & broader Gulf Coast region. The company currently has $8.4 billion in projects under construction, and new ones like this are likely to add to that lot relatively soon. Teague even mentioned that it has lots of investment ideas in the hopper, but management has had to temper its expectations as it doesn't want to get ahead of itself with too much spending all at once.
