Williams Companies Inc (NYSE:WMB) sees a once-in-a-generation opportunity to participate in building infrastructure to support what it sees as a natural gas industry supercycle. That said, the cycle hasn't exactly been growing in a straight line as supplies, in many cases, are outpacing demand. However, this is creating unique situations to capture value by taking advantage of that disconnect in the market. One area where Williams sees a unique opportunity is in Canada, where a current over supply of propane is causing it to sell at a distressed level. Here's how the company plans to profit from this opportunity.
From distress to high-value
At a recent investor conference, CFO Don Chappel went through the growth opportunities the company saw on the horizon. One opportunity that the company is looking to capture is in Canada, where it has a unique asset footprint it wants to expand. Chappel noted this footprint by pointing out the that company's...
[...] Canadian operation consists of; gas processing operations and NGL and Olefins Pipeline from Fort McMurray down to the Edmonton market and then we have a very large fractionator complex where we take these products, separate them and take them to market. We also have an ethane sales contract with Nova where we sell ethane that comes out of this gas frame and we sell it under a long-term contract that has a floor price and some upside. So, again, very attractive business and contract there [...]
We can see these assets on the following map.
While Canada is a small part of the company's current asset base, it sees a unique opportunity to leverage its asset footprint and take advantage of a compelling opportunity it sees in the marketplace. The opportunity it sees is to build a Propane Dehydrogenation, or PDH, facility. Chappel then went on to explain this opportunity:
This is a proposed Canadian PDH facility that would really take full advantage of the fact that Canadian propane is under distress, it's oversupplied relative to the market needs and it has to be transported very great distances which makes it deeply discounted relative to U.S. propane supplies and we expect that situation to go on for a very long time.
As we see on the slide below, Williams is proposing a first of its kind PDH facility in Canada to take advantage of distressed propane prices by converting that propane into a higher valued product.
Chappel then expaned upon why this project is such a compelling opportunity:
So the opportunity we see is to take the propane that we control as a result of our gas processing operation as well as to buy additional propane at a deep discount in the Canadian market and turn that into propylene and then also to attract a derivatives plant to be [adjacent] to this PDH facility to immediately turn it into derivates and to move those to market and eliminate some excess freight costs that would otherwise be occurring. We're intending, we're focused on doing this with a partner to ensure that that derivatives plant is built timely [and] adjacent to the PDH facility and we're also looking to make this a fee-based deal or largely a fee-based deal by contractual arrangements with that derivatives player.
What the company envisions is building a PDH facility to turn propane it controls, as well as discounted propane it would buy into a petrochemical feedstock called propylene. Propylene is the second most important feedstock for the petrochemical industry, and about two-thirds of it is consumed by manufacturers of plastic polypropylene, which is used for films, packaging, caps, and closures, as well as a variety of other applications.
Williams isn't the only company that sees profit potential from turning propane into propylene. Fellow midstream company Enterprise Products Partners LP (NYSE:EPD) is doing the same thing in the U.S. Gulf Coast to take advantage of the abundant propane supplies in that region and turn it into propylene, which will then be sold to petrochemical plants in the Gulf. However, what's different about Williams' project is that it is looking for a partner to build a propylene consuming plant right next door to turn its propylene into a higher valued end product, as there aren't any propylene consumers nearby. It views this partnership as ideal since it would save on shipping costs and make it a much more economically viable project.
Williams sees a big disconnect between the price of propane in Canada and its value once upgraded. The company is planning to seize this opportunity by finding a partner that can turn the petrochemical feedstock it could create into a valuable end product. It's a unique situation that could create a lot of value for Williams out of what is a very distressed situation for propane in Canada.
Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. 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.