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Enterprise Reports Record Crude, Liquids Volumes

Record volumes of crude oil and natural gas liquids (NGLs) drove operating and financial results for Enterprise Products Partners LP (EPD) in the first quarter of 2018, CEO Jim Teague said Monday.

Total crude oil pipeline volumes hit 2.0 million b/d for the first quarter of 2018, compared to 1.4 million b/d for the first quarter of 2017, Teague said on a call to discuss first quarter earnings. NGLs and natural gas pipelines had volumes of 6.2 million b/d and 13 trillion Btu/day, respectively. The record volumes came from growth in the Permian Basin as well as the resurgence of the Rocky Mountains and Haynesville Shale regions, EPD said.

During the quarter, EPD’s Midland-to-ECHO crude oil system had 400,000 b/d of transportation volumes, net to the company’s expected 80% ownership interest. A third party has exercised its option to acquire a 20% interest in the Midland-to-Sealy segment of the Midland-to-ECHO crude oil pipeline and its related commercial activities for approximately $200 million.

Under terms of the transaction, expected to be completed in mid-2018 subject to the execution of definitive agreements, the buyer will be credited at closing for 20% of the pipeline’s earnings since it was placed into service in November 2017, Teague said. The 405,000 b/d Midland-Sealy pipeline is part of EPD’s larger Midland-ECHO crude oil pipeline system in the Permian Basin.

Earlier in April, the Midland-to-ECHO crude pipeline moved into full service for the expanded capacity of up to 575,000 b/d. This is over 25%, or approximately 125,000 b/d, more than originally expected. “Based on this performance, we will continue to evaluate whether or not we would still need to repurpose an NGL pipeline into crude oil service to meet the growing demand to transport barrels from Midland to Houston,” Teague said.

Supporting the Midland-to-ECHO pipeline are several strategic supplier aggregation projects, Teague said, including a new 140-mile pipeline from Loving County, TX, to Midland that is expected in service this quarter.

“Pipeline, rail and trucking capacity out of the Permian appears to be very tight for at least the next year and with no significant additional takeaway expected until the second half of ‘19. The timing of our new pipeline could have been better,” Teague said.

Indeed, gross operating margin from EPD’s Midland-to-ECHO pipeline system and related marketing activities was a combined loss of $60 million in the first quarter of 2018, including a $24 million reduction in connection with the pending agreement.

The loss also includes $114 million of non-cash, mark-to-market losses on financial instruments executed to hedge the basis spread between Midland and Houston crude oil prices on approximately 75 thousand b/d of uncommitted capacity. These hedges represent approximately 56% of the pipeline’s expected uncommitted capacity through 2019 at an average value of $2.58/bbl. These non-cash, mark-to-market losses were due to the recent widening of Midland to Houston basis spreads to an average of $5.86/bbl through 2019 as observed on March 31, 2018.

“In the first quarter of 2017, we initiated a program to hedge a portion of our uncommitted capacity on the Midland-to-ECHO pipeline at spreads well in excess of our long-term contracted rates to enhance our return on investment," Teague said. "While these hedges have resulted in temporary non-cash, mark-to-market losses, which will be reversed as the hedges are settled and the physical volumes have been delivered, we expect the return on investment from this project to significantly exceed our original expectations assisted by these hedges and the indicative value of the remaining uncommitted capacity that has not been hedged."

Also during the quarter, EPD completed the commissioning of its propane dehydration facility at Mont Belvieu and began commercial service in April. It also began commissioning activities at its Orla I natural gas processing plant in the Permian basin during the month. EPD plans to a second natural gas processing plant at its Orla complex in the Delaware sub-basin of the Permian later this year, with work continuing on a third plant to be in service in 2019.

Meanwhile, the company expects its ninth NGL fractionator to begin operations later in the second quarter of 2018. With regard to business development, “while we do not have any new projects to announce, we are seeing a noticeable pick up in discussions and negotiations and expect to announce new organic growth projects later this year,” Teague said.

As for quarterly financials, EPD reported a net income of $901 million (41 cents/share), compared to $761 million (36 cents) for the first quarter of 2017. Enterprise increased its cash distribution with respect to the first quarter of 2018 by 3.0% to 42.75 cents/share, or $1.71/share annualized, compared to 41.5 cents/share in the first quarter of 2017.

Enterprise generated a 23% increase in distributable cash flow to a record $1.4 billion for the first quarter of 2018. Total capital spending in the first quarter was $1.1 billion, which included $66 million of sustaining capital expenditures (capex). For 2018, EPD currently expects to invest approximately $3.2-3.4 billion for growth capex and $315 million for sustaining capex.

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