When commodity prices are low and volatile, there are still money-making opportunities in the midstream sector; they're just different, Enterprise Products Partners COO Jim Teague said Thursday.
"In a volatile environment like we're in today, opportunity still knocks; it's just a different opportunity than what we saw at this time last year," Teague said during the company's first quarter earnings conference call.
"While we prefer higher prices, low natural gas prices aren't all bad for Enterprise. Cheaper natural gas lowers our feedstock cost in processing and gives us access to cheaper fuel in our plants, and it lowers our power costs. Most of our natural gas transportation contracts have demand fees, so our transportation revenues are largely sheltered from low prices.
"Ethane is down 15 cents a gallon, or 44% from this time last year when it was already low. That does hurt some of our processing margins in plants where we still have some exposure, and it can impact volumes and revenues of some of our NGL [natural gas liquids] pipelines. However, over the last few years we've converted our processing...to fees instead of percent of proceeds, including going to fees on all of our new agreements, like those in the Eagle Ford."
Enterprise first quarter revenues were down 41% to $7.5 million, Chief Administrative Officer Randy Fowler conceded, but he quickly added that costs and expenses were also down -- by 44%. "This is why we believe gross operating margin and distributable cash flow (DCF) are better performance-based measures. Oh, by the way, DCF was up by 4%," he told analysts.
Distributable cash flow for the first quarter provided 1.4 times coverage of the cash distribution to be paid on May 7.
Net income for the first quarter was $651 million compared to $807 million for the first quarter of 2014. On a fully diluted basis, net income was 32 cents/unit compared to 43 cents/unit for the first quarter of 2014. Results for the first quarter of 2014 included $90 million (5 cents/unit) of net gains from asset sales and insurance recoveries. The first quarters of 2015 and 2014 included noncash asset impairment charges of $33 million (2 cents/unit) and $9 million (less than 1 cent/unit), respectively.
CEO Mike Creel was asked by an analyst about merger and acquisition opportunities. Competition for assets/companies will be tough as private equity and other master limited partnerships will be looking for deals by which they can grow, he said. Any deal would have to work from a strategic standpoint, he added. Buying an entire company would be difficult due to antitrust issues and the challenge of finding a portfolio of attractive assets.
Also on Thursday, Enterprise said it and an affiliate of Occidental Petroleum Corp. plan to develop a 150 MMcf/d cryogenic natural gas processing plant to accommodate growing production of NGL-rich gas in the Delaware Basin. The plant will be owned by Delaware Basin Gas Processing LLC, which will be owned 50/50 by Enterprise and Occidental. The plant, which is supported by long-term, firm contracts, is expected to begin operations in mid-2016. Enterprise will serve as the construction manager and operator.
In addition to the processing plant, Enterprise will construct, own and operate a 12-inch diameter pipeline to transport NGLs from the new facility to one of Enterprise's NGL pipelines, which will provide customers with access to Enterprise's NGL fractionation and storage complex in Mont Belvieu, TX. The partnership's Texas Intrastate pipeline system will provide gas at the tailgate of the plant with access to multiple markets.
"This new facility, combined with Enterprise's recently announced 200 MMcf/d cryogenic processing plant being built in Eddy County, NM, reflects the company's commitment to providing producers in the Permian Basin with flow assurance and market choices," Teague said. "When completed, the two plants will increase Enterprise's net natural gas processing capacity in the Permian Basin to more than 600 MMcf/d."
During the conference call, Teague said Enterprise has "significant capability for ethane rejection and re-injection. Also, some of our units can burn natural gas, ethane, or even a combination, whichever is cheaper. We can and do make these types of changes daily if that's what the market gives us.
"Further, with our connectivity with supplies and markets across the country, and our infrastructure, we're able to participate in arbing regional price discrepancies, which during periods of high volatility are increasingly significant.
"Low ethane prices are caused by having too much, which is why we're now building an ethane export facility. Propane producers enjoyed a windfall last winter again because of the cold winter. However...the U.S. is now dealing with an inventory overhang that is some 25 million bbl above average. Different than ethane, propane rejection back into the gas stream is not an option. So this low-price propane still moves in our pipes and fractionators, is stored in our caverns and moved through our distribution pipelines to petrochemical markets, for example, where demand generally picks up with low prices."