The United States has certainly enjoyed the spoils of technological know-how and robust national energy infrastructure in the last decade or so. In a virtually overnight transformation, the country went from being the world's largest energy importer in 2005 to on the brink of becoming a net energy exporter. The expectation is for the incredible rise to continue for the foreseeable future, with booming crude oil production from the Permian Basin in West Texas suffocating pipelines, and natural gas production in the Appalachian region of the Northeast doubling in the next five years.
Yet, while crude oil and natural gas get all the headlines and glory, they're not the only products spawned from the shale energy revolution that will alter global trade flows. Less-appreciated natural gas liquids (NGLs) are quietly becoming the go-to inputs for world-class chemical manufacturing facilities right here in the United States. That creates significant growth opportunities up and down the industry's value chain -- and Enterprise Products Partners LP (EPD 0.40%) is uniquely positioned to capitalize both upstream and downstream.
American chemical production is about to soar
Natural gas is a mixture of various chemicals. The sought-after component of natural gas is methane (with one carbon atom), although several others -- ethane (two carbon atoms), propane (three carbon atoms), butane (four carbon atoms), and so on -- are present in lesser quantities. These are natural gas liquids.
While NGLs can be upgraded in petrochemical facilities to various building-block chemicals that power modern society (many everyday plastics and polymers are made from ethylene and propylene), they've historically been produced in such small quantities with such erratic prices that it never made much economic sense. Thus, petrochemical manufacturing is typically based on a petroleum byproduct called naphtha.
But booming American natural gas production has changed the calculus. The United States now pulls so much natural gas out of the ground that there's a steady and low-cost supply of NGLs, especially ethane. Because there's so little infrastructure to handle the byproduct, what can be exported is, and the rest -- up to 40% in 2016 -- simply gets sent through pipelines as dry natural gas for heating and power generation (called "ethane rejection" in industry jargon).
That's all about to change, as the global petrochemical manufacturing industry is finally catching up to the opportunity. According to the American Chemistry Council, since 2010 capital investments totaling around $181 billion have been announced for new petrochemical manufacturing capacity in the United States -- all of which plan to use low-cost ethane, propane, and butane as inputs. Over 62% of the financing is from a foreign company or includes a foreign partner, and many foreign companies worry that American NGLs will steal market share from more expensive naphtha, the global standard.
They might be right to be worried. Consider the expected growth in U.S. ethylene manufacturing facilities alone over the next five years or so:
Ethane Consumption (in barrels per day)
Annual Ethylene Production (billion pounds)
By end of 2019
Enterprise Products Partners will be all over the opportunity. 53% of the company's $5.2 billion in capital investments this year and next is slated for NGL projects. That includes processing facilities that will separate NGLs from natural gas, dedicated NGL pipelines with long-term contracts, and storage and export terminals for both NGLs and upgraded chemicals such as ethylene.
The opportunity will begin with the existing Aegis pipeline in Texas. While it boasts an ethane capacity of 425,000 barrels per day (BPD), the slow start of the American chemical manufacturing industry means it will only see 297,000 BPD of contracted volumes by the end of 2018. But that'll grow to 362,000 BPD in 2019.
In the second quarter of 2019 Aegis will be joined by the Shin Oak NGL pipeline, which will boast an initial capacity of 550,000 BPD. Enterprise Products Partners already has a deal in place to take 100% of NGL production from Apache's Alpine High acreage in West Texas, with minimum volumes of 205,000 BPD. The expansion of the Orla gas processing center, also expected to be completed by June 2019, will boost Enterprise Product Partners' Delaware Basin NGL production from just 50,000 BPD today to 200,000 BPD.
The combination of Aegis, Shin Oak, and Orla will allow Enterprise Products Partners to produce and supply NGLs, but those assets will be part of a larger network that gives the company an unprecedented advantage in America's budding petrochemical industry.
In 2019 a combination of storage assets, pipelines, and a massive export terminal will be connected for the first time. The system will aid the manufacture of over 12 billion pounds of ethylene per year and export up to 2.2 billion pounds of ethylene each year -- a healthy chunk of the domestic industry's excess production.
NGLs will grow this company's earnings and distribution
Put it all together, and Enterprise Products Partners is quietly poised to exploit one of the most under-discussed growth opportunities in American energy: the overnight rise of a state-of-the-art, low-cost petrochemical manufacturing base. That bodes well for unitholders relying on the stock's 5.9% payout, and for the business's ability to grow the distribution above and beyond its 3% year-over-year increase ($0.01 per unit) in 2018.
Management is expecting the increased earnings from growth projects to deliver enough free cash flow to self-fund 50% of growth capital expenditures in 2019, and potentially more in the future. Given that, this $63 billion company might be on the cusp of record financial flexibility. The ability to produce, supply, transport, and export NGLs and chemical products further down the value chain will play a major role.